Exhibit 10.6 to Electromed, Inc. Form S1



Exhibit 10.6


SECURITY
AGREEMENT


          THIS
SECURITY AGREEMENT, dated as of December 9, 2009, is made and given by
ELECTROMED FINANCIAL, LLC, a limited liability company organized under the laws
of the State of Minnesota (the “Grantor”), to U.S. BANK NATIONAL ASSOCIATION, a
national banking association (the “Secured Party”).


RECITALS


          A.         Electromed,
Inc., a Minnesota corporation (the “Debtor”), and the Secured Party have
entered into a Credit Agreement dated as of December 9, 2009 (as the same may hereafter
be amended, restated, or otherwise modified from time to time, the “Credit
Agreement”) pursuant to which the Secured Party has agreed to extend to the
Debtor certain credit accommodations consisting of a revolving facility and two
term loan facilities.


          B.         It
is a condition precedent to the obligation of the Secured Party to extend
credit accommodations pursuant to the terms of the Credit Agreement that this
Agreement be executed and delivered by the Grantor.


          C.         The
Grantor is a majority-owned subsidiary of the Debtor.


          D.         The
Grantor expects to derive benefits from the extension of credit accommodations
to the Debtor by the Secured Party and finds it advantageous, desirable and in
its best interests to execute and deliver this Security Agreement to the
Secured Party.


          NOW,
THEREFORE, in consideration of the premises and in order to induce the Secured
Party to extend or continue credit accommodations to the Debtor, the Grantor
hereby agrees with the Secured Party for the Secured Party’s benefit as
follows:


          Section
1.          Defined Terms.


	
  

 	
  

 	
  

 
	
  

 	
           1(a)        As used in this Agreement, the following terms shall have the meanings
 indicated:

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
               “Account”
 means a right to payment of a monetary obligation, whether or not earned by
 performance, (i) for property that has been or is to be sold, leased,
 licensed, assigned, or otherwise disposed of, (ii) for services rendered or
 to be rendered, (iii) for a policy of insurance issued or to be issued, (iv)
 for a secondary obligation incurred or to be incurred, (v) for energy
 provided or to be provided, (vi) for the use or hire of a vessel under a
 charter or other contract, (vii) arising out of the use of a credit or charge
 card or information contained on or for use with the card, or (viii) as
 winnings in a lottery or other game of chance operated, sponsored, licensed
 or authorized by a State or governmental unit of a State, or person licensed
 or authorized to operate the game by a State or governmental unit of a State.
 The term includes health-care insurance receivables.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
               “Account
 Debtor” shall mean a Person who is obligated on or under any Account,
 Chattel Paper, Instrument or General Intangible.

 


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           “Chattel
 Paper” shall mean a record or records that evidence both a monetary
 obligation and a security interest in specific goods, a security interest in
 specific goods and software used in the goods, a security interest in
 specific goods and license of software used in the goods, a lease of specific
 goods, or a lease of specific goods and license of software used in the
 goods.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Collateral”
 shall mean all property and rights in property now owned or hereafter at any
 time acquired by the Grantor in or upon which a Security Interest is granted
 to the Secured Party by the Grantor under this Agreement.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Deposit
 Account” shall mean any demand, time, savings, passbook or similar
 account maintained with a bank.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Document”
 shall mean a document of title or a warehouse receipt.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Equipment”
 shall mean all machinery, equipment, motor vehicles, furniture, furnishings
 and fixtures, including all accessions, accessories and attachments thereto,
 and any guaranties, warranties, indemnities and other agreements of
 manufacturers, vendors and others with respect to such Equipment.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Event
 of Default” shall have the meaning given to such term in Section 18
 hereof.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Financing
 Statement” shall have the meaning given to such term in Section 4 hereof.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Fixtures”
 shall mean goods that have become so related to particular real property that
 an interest in them arises under real property law.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “General
 Intangibles” shall mean any personal property (other than goods,
 Accounts, Chattel Paper, Deposit Accounts, Documents, Instruments, Investment
 Property, Letter of Credit Rights and money) including things in action,
 contract rights, payment intangibles, software, corporate and other business
 records, inventions, designs, patents, patent applications, service marks,
 trademarks, tradenames, trade secrets, internet domain names, engineering
 drawings, good will, registrations, copyrights, licenses, franchises,
 customer lists, tax refund claims, royalties, licensing and product rights,
 rights to the retrieval from third parties of electronically processed and
 recorded data and all rights to payment resulting from an order of any court.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Instrument”
 shall mean a negotiable instrument or any other writing which evidences a
 right to the payment of a monetary obligation and is not itself a security
 agreement or lease and is of a type which is transferred in the ordinary
 course of business by delivery with any necessary endorsement or assignment.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Inventory”
 shall mean goods, other than farm products, which are leased by a person as
 lessor, are held by a person for sale or lease or to be furnished under a
 contract of service, are furnished by a person under a contract of service,

 


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 or consist of raw materials, work in process, or
 materials used or consumed in a business or incorporated or consumed in the
 production of any of the foregoing and supplies, in each case wherever the
 same shall be located, whether in transit, on consignment, in retail outlets,
 warehouses, terminals or otherwise, and all property the sale, lease or other
 disposition of which has given rise to an Account and which has been returned
 to the Grantor or repossessed by the Grantor or stopped in transit.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Investment
 Property” shall mean a security, whether certificated or uncertificated,
 a security entitlement, a securities account and all financial assets
 therein, a commodity contract or a commodity account.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Letter
 of Credit Right” shall mean a right to payment or performance under a
 letter of credit, whether or not the beneficiary has demanded or is at the
 time entitled to demand payment or performance.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Lien”
 shall mean any security interest, mortgage, pledge, lien, charge,
 encumbrance, title retention agreement or analogous instrument or device
 (including the interest of the lessors under capitalized leases), in, of or
 on any assets or properties of the Person referred to.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Obligations”
 shall mean (a) all indebtedness, liabilities and obligations of the Debtor to
 the Secured Party of every kind, nature or description under the Credit
 Agreement, including the Debtor’s obligation on any promissory note or notes
 under the Credit Agreement and any note or notes hereafter issued in
 substitution or replacement thereof, (b) any and all other liabilities and
 obligations of the Debtor to the Secured Party of every kind, nature and
 description, whether direct or indirect or hereafter acquired by the Secured
 Party from any Person, absolute or contingent, regardless of how such
 liabilities arise or by what agreement or instrument they may be evidenced,
 and (c) all liabilities of the Grantor under this Agreement, and in all of
 the foregoing cases whether due or to become due, and whether now existing or
 hereafter arising or incurred.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Person”
 shall mean any individual, corporation, partnership, limited partnership,
 limited liability company, joint venture, firm, association, trust,
 unincorporated organization, government or governmental agency or political
 subdivision or any other entity, whether acting in an individual, fiduciary
 or other capacity.

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           “Security
 Interest” shall have the meaning given such term in Section 2 hereof.

 
	
  

 	
  

 	
  

 
	
  

 	
            l(b)      All
 other terms used in this Agreement which are not specifically defined herein
 shall have the meaning assigned to such terms in Article 9 of the Uniform
 Commercial Code as in effect in the State of Minnesota

 
	
  

 	
  

 	
  

 
	
  

 	
            1(c)       Unless
 the context of this Agreement otherwise clearly requires, references to the
 plural include the singular, the singular, the plural and “or” has the

 


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 inclusive meaning represented by the phrase
 “and/or.” The words “include,” “includes” and “including” shall be deemed to
 be followed by the phrase “without limitation.” The words “hereof,” “herein,”
 “hereunder” and similar terms in this Agreement refer to this Agreement as a
 whole and not to any particular provision of this Agreement. References to
 Sections are references to Sections in this Security Agreement unless
 otherwise provided.

 
	
  

 	
  

 
	
           Section
 2.         Grant of
 Security Interest. As security for the payment and performance of all of
 the Obligations, the Grantor hereby grants to the Secured Party a security
 interest (the “Security Interest”) in all of the Grantor’s right, title, and
 interest in and to the following, whether now or hereafter owned, existing,
 arising or acquired and wherever located:

 






	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(a)

 	
 All Accounts.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(b)

 	
 All Chattel Paper.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(c)

 	
 All Deposit Accounts

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(d)

 	
 All Documents.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(e)

 	
 All Equipment.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(f)

 	
 All Fixtures

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(g)

 	
 All General Intangibles.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(h)

 	
 All Instruments.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(i)

 	
 All Inventory.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(j)

 	
 All Investment Property

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(k)

 	
 All Letter of Credit Rights

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(l)        To the
 extent not otherwise included in the foregoing, all other rights to the
 payment of money, including rents and other sums payable to the Grantor under
 leases, rental agreements and other Chattel Paper; all books, correspondence,
 credit files, records, invoices, bills of lading, and other documents
 relating to any of the foregoing, including, without limitation, all tapes,
 cards, disks, computer software, computer runs, and other papers and
 documents in the possession or control of the Grantor or any computer bureau
 from time to time acting for the Grantor; all rights in, to and under all
 policies insuring the life of any manager, governor, member or employee of
 the Grantor, the proceeds of which are payable to the Grantor; all accessions
 and additions to, parts and appurtenances of, substitutions for and
 replacements of any of the foregoing; and all proceeds (including insurance
 proceeds) and products thereof.

 



          Sections.          Grantor
Remains Liable. Anything herein to the contrary notwithstanding, (a) the
Grantor shall remain liable under the Accounts, Chattel Paper, General
Intangibles and


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other items included in the Collateral to the extent
set forth therein to perform all of its duties and obligations thereunder to
the same extent as if this Agreement had not been executed, (b) the exercise by
the Secured Party of any of the rights hereunder shall not release the Grantor
from any of its duties or obligations under the Accounts or any other items
included in the Collateral, and (c) the Secured Party shall have no obligation
or liability under Accounts, Chattel Paper, General Intangibles and other items
included in the Collateral by reason of this Agreement, nor shall the Secured
Party be obligated to perform any of the obligations or duties of the Grantor
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder.


          Section
4.          Title to
Collateral. The Grantor has (or will have at the time it acquires rights in
Collateral hereafter acquired or arising) and will maintain so long as the
Security Interest may remain outstanding, title to each item of Collateral
(including the proceeds and products thereof), free and clear of all Liens
except the Security Interest and except Liens permitted by the Credit
Agreement. The Grantor will not license any Collateral. The Grantor will defend
the Collateral against all claims or demands of all Persons (other than the
Secured Party) claiming the Collateral or any interest therein. As of the date
of execution of this Security Agreement, no effective financing statement or
other similar document used to perfect and preserve a security interest under
the laws of any jurisdiction (a “Financing Statement”) covering all or any part
of the Collateral is on file in any recording office, except such as may have
been filed (a) in favor of the Secured Party relating to this Agreement, or (b)
to perfect Liens permitted by the Credit Agreement.


          Section
5.          Disposition of
Collateral. The Grantor will not sell, lease or otherwise dispose of, or
discount or factor with or without recourse, any Collateral, except for sales
of items of Inventory in the ordinary course of business and dispositions of
Equipment which are immediately replaced with comparable replacement equipment.


          Section
6.          Names,
Offices, Locations, Jurisdiction of Organization. The Grantor’s legal name
(as set forth in its constituent documents filed with the appropriate
governmental official or agency) is as set forth in the opening paragraph
hereof. The jurisdiction of organization of the Grantor is the state of
Minnesota, and the organizational number of the Grantor is set forth on the
signature page of this Agreement. The Grantor will from time to time at the
request of the Secured Party provide the Secured Party with current good
standing certificates and/or state-certified constituent documents from the
appropriate governmental officials. The chief place of business and chief
executive office of Grantor are located at his address set forth on the
signature page hereof. The Grantor will not locate or relocate any item of Collateral
into any jurisdiction in which an additional Financing Statement would be
required to be filed to maintain the Secured Party’s perfected security
interest in such Collateral. The Grantor will not change his name, the location
of his chief place of business and chief executive office or its corporate
structure (including without limitation, its jurisdiction of organization)
unless the Secured Party has been given at least 30 days prior written notice
thereof and the Grantor has executed and delivered to the Secured Party such
Financing Statements and other instruments required or appropriate to continue
the perfection of the Security Interest.


          Section
7.          Rights to
Payment. Except as the Grantor may otherwise advise the Secured Party in
writing, each Account, Chattel Paper, Document, General Intangible and
Instrument constituting or evidencing Collateral is (or, in the case of all
future Collateral, will be


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when arising or issued) the valid, genuine and legally
enforceable obligation of the Account Debtor or other obligor named therein or
in the Grantor’s records pertaining thereto as being obligated to pay or
perform such obligation. Without the Secured Party’s prior written consent, the
Grantor will not agree to any modifications, amendments, subordinations,
cancellations or terminations of the obligations of any such Account Debtors or
other obligors except in the ordinary course of business and in amounts not
exceeding $25,000 per Account debtor or other obligor in any calendar year. The
Grantor will perform and comply in all material respects with all its
obligations under any items included in the Collateral and exercise promptly
and diligently its rights thereunder.


	
  

 	
  

 
	
  

 	
 Section
 8.           Further
 Assurances; Attorney-in-Fact.

 
	
  

 	
  

 
	
  

 	
           8(a)          The
 Grantor agrees that from time to time, at his expense, it will promptly
 execute and deliver all further instruments and documents, and take all
 further action, that may be necessary or that the Secured Party may
 reasonably request, in order to perfect and protect the Security Interest
 granted or purported to be granted hereby or to enable the Secured Party to
 exercise and enforce its rights and remedies hereunder with respect to any
 Collateral (but any failure to request or assure that the Grantor execute and
 deliver such instrument or documents or to take such action shall not affect
 or impair the validity, sufficiency or enforceability of this Agreement and
 the Security Interest, regardless of whether any such item was or was not
 executed and delivered or action taken in a similar context or on a prior
 occasion). Without limiting the generality of the foregoing, the Grantor
 will, promptly and from time to time at the request of the Secured Party: (i)
 execute and file such Financing Statements or continuation statements in
 respect thereof, or amendments thereto, and such other instruments or notices
 (including fixture filings with any necessary legal descriptions as to any
 goods included in the Collateral which the Secured Party determines might be
 deemed to be fixtures, and instruments and notices with respect to vehicle
 titles), as may be necessary or desirable, or as the Secured Party may
 request, in order to perfect, preserve, and enhance the Security Interest
 granted or purported to be granted hereby; (ii) obtain from any bailee
 holding any item of Collateral an acknowledgement, in form satisfactory to
 the Secured Party that such bailee holds such collateral for the benefit of
 the Secured Party; (iii) obtain from any securities intermediary, or other
 party holding any item of Collateral, control agreements in form satisfactory
 to the Secured Party (iv) and deliver and pledge to the Secured Party, all
 Instruments and Documents, duly indorsed or accompanied by duly executed instruments
 of transfer or assignment, with full recourse to the Grantor, all in form and
 substance satisfactory to the Secured Party; (v) obtain waivers, in form
 satisfactory to the Secured Party, of any claim to any Collateral from any
 landlords or mortgagees of any property where any Inventory or Equipment is
 located.

 
	
  

 	
  

 
	
  

 	
           8(b)          The
 Grantor hereby authorizes the Secured Party to file one or more Financing
 Statements or continuation statements in respect thereof, and amendments
 thereto, relating to all or any part of the Collateral without the signature
 of the Grantor where permitted by law. The Grantor irrevocably waives any
 right to notice of any such filing. A photocopy or other reproduction of this
 Agreement or any Financing Statement covering the Collateral or any part
 thereof shall be sufficient as a Financing Statement where permitted by law.

 


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           8(c)            The
 Grantor will furnish to the Secured Party from time to time statements and
 schedules further identifying and describing the Collateral and such other
 reports in connection with the Collateral as the Secured Party may reasonably
 request, all in reasonable detail and in form and substance reasonably
 satisfactory to the Secured Party.

 
	
  

 	
  

 
	
  

 	
           8(d)            In
 furtherance, and not in limitation, of the other rights, powers and remedies
 granted to the Secured Party in this Agreement, the Grantor hereby appoints
 the Secured Party the Grantor’s attorney-in-fact, with full authority in the
 place and stead of Grantor and in the name of Grantor or otherwise, from time
 to time in the Secured Party’s good faith discretion, to take any action
 (including the right to collect on any Collateral) and to execute any
 instrument that the Secured Party may reasonably believe is necessary or
 advisable to accomplish the purposes of this Agreement, in a manner
 consistent with the terms hereof.

 



          Section
9.            Taxes and
Claims. The Grantor will promptly pay all taxes and other governmental
charges levied or assessed upon or against any Collateral or upon or against
the creation, perfection or continuance of the Security Interest, as well as
all other claims of any kind (including claims for labor, material and
supplies) against or with respect to the Collateral, except to the extent (a)
such taxes, charges or claims are being contested in good faith by appropriate
proceedings, (b) such proceedings do not involve any material danger of the
sale, forfeiture or loss of any of the Collateral or any interest therein and
(c) such taxes, charges or claims are adequately reserved against on the
Grantor’s books in accordance with generally accepted accounting principles.


          Section
10.          Books and
Records. The Grantor will keep and maintain at its own cost and expense
satisfactory and complete records of the Collateral, including a record of all
payments received and credits granted with respect to all Accounts, Chattel
Paper and other items included in the Collateral.


          Section
11.          Inspection,
Reports, Verifications. The Grantor will at all reasonable times permit the
Secured Party or its representatives to examine or inspect any Collateral, any
evidence of Collateral and the Grantor’s books and records concerning the
Collateral, wherever located. The Grantor will from time to time when requested
by the Secured Party furnish to the Secured Party a report on his Accounts,
Chattel Paper, General Intangibles and Instruments, naming the Account Debtors
or other obligors thereon, the amount due and the aging thereof. The Secured
Party or its designee is authorized to contact Account Debtors and other
Persons obligated on any such Collateral from time to time to verify the
existence, amount and/or terms of such Collateral.


          Section
12.          Notice of
Loss. The Grantor will promptly notify the Secured Party of any loss of or
material damage to any material item of Collateral or of any substantial
adverse change, known to Grantor, in any material item of Collateral or the
prospect of payment or performance thereof.


          Section
13.          Insurance.
The Grantor will keep the Inventory and Equipment insured against “all risks”
for the full replacement cost thereof subject to a deductible not exceeding
$100,000 and with an insurance company or companies satisfactory to the Secured
Party, the


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policies to protect the Secured Party as its interests
may appear, with such policies or certificates with respect thereto to be
delivered to the Secured Party at its request. Each such policy or the
certificate with respect thereto shall provide that such policy shall not be
canceled or allowed to lapse unless at least 30 days prior written notice is
given to the Secured Party.


          Section
14.          Lawful Use;
Fair Labor Standards Act. The Grantor will use and keep the Collateral, and
will require that others use and keep the Collateral, only for lawful purposes,
without violation of any federal, state or local law, statute or ordinance. All
Inventory of the Grantor as of the date of this Agreement that was produced by
the Grantor or with respect to which the Grantor performed any manufacturing or
assembly process was produced by the Grantor (or such manufacturing or assembly
process was conducted) in compliance in all material respects with all
requirements of the Fair Labor Standards Act, and all Inventory produced,
manufactured or assembled by the Grantor after the date of this Agreement will
be so produced, manufactured or assembled, as the case may be.


          Section
15.          Action by the
Secured Party. If the Grantor at any time fails to perform or observe any
of the foregoing agreements, the Secured Party shall have (and the Grantor
hereby grants to the Secured Party) the right, power and authority (but not the
duty) to perform or observe such agreement on behalf and in the name, place and
stead of the Grantor (or, at the Secured Party’s option, in the Secured Party’s
name) and to take any and all other actions which the Secured Party may
reasonably deem necessary to cure or correct such failure (including, without
limitation, the payment of taxes, the satisfaction of Liens, the procurement
and maintenance of insurance, the execution of assignments, security agreements
and Financing Statements, and the indorsement of instruments); and the Grantor
shall thereupon pay to the Secured Party on demand the amount of all monies
expended and all costs and expenses (including reasonable attorneys’ fees and
legal expenses) incurred by the Secured Party in connection with or as a result
of the performance or observance of such agreements or the taking of such
action by the Secured Party, together with interest thereon from the date
expended or incurred at the highest lawful rate then applicable to any of the
Obligations, and all such monies expended, costs and expenses and interest
thereon shall be part of the Obligations secured by the Security Interest.


          Section
16.          Insurance
Claims. As additional security for the payment and performance of the
Obligations, the Grantor hereby assigns to the Secured Party any and all monies
(including proceeds of insurance and refunds of unearned premiums) due or to
become due under, and all other rights of the Grantor with respect to, any and
all policies of insurance now or at any time hereafter covering the Collateral
or any evidence thereof or any business records or valuable papers pertaining
thereto. At any time, whether before or after the occurrence of any Event of
Default, the Secured Party may (but need not), in the Secured Party’s name or
in Grantor’s name, execute and deliver proofs of claim, receive all such
monies, indorse checks and other instruments representing payment of such
monies, and adjust, litigate, compromise or release any claim against the
issuer of any such policy. Notwithstanding any of the foregoing, so long as no
Event of Default exists the Grantor shall be entitled to all insurance proceeds
with respect to Equipment or Inventory provided that such proceeds are applied
to the cost of replacement Equipment or Inventory.


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          Section
17.          The Secured
Party’s Duties. The powers conferred on the Secured Party hereunder are
solely to protect its interest in the Collateral and shall not impose any duty
upon it to exercise any such powers. The Secured Party shall be deemed to have
exercised reasonable care in the safekeeping of any Collateral in its
possession if such Collateral is accorded treatment substantially equal to the
safekeeping which the Secured Party accords its own property of like kind.
Except for the safekeeping of any Collateral in its possession and the
accounting for monies and for other properties actually received by it
hereunder, the Secured Party shall have no duty, as to any Collateral, as to
ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders or other matters relative to any Collateral, whether or not
the Secured Party has or is deemed to have knowledge of such matters, or as to
the taking of any necessary steps to preserve rights against any Persons or any
other rights pertaining to any Collateral. The Secured Party will take action
in the nature of exchanges, conversions, redemptions, tenders and the like
requested in writing by the Grantor with respect to the Collateral in the
Secured Party’s possession if the Secured Party in its reasonable judgment
determines that such action will not impair the Security Interest or the value
of the Collateral, but a failure of the Secured Party to comply with any such
request shall not of itself be deemed a failure to exercise reasonable care
with respect to the taking of any necessary steps to preserve rights against
any Persons or any other rights pertaining to any Collateral.


          Section
18.          Default.
Each of the following occurrences shall constitute an “Event of Default” under
this Agreement: (a) the Grantor shall fail to observe or perform any covenant
or agreement applicable to the Grantor under this Agreement; or (b) any
representation or warranty made by the Grantor in this Agreement or any
schedule, exhibit, supplement or attachment hereto or in any financial
statements, or reports or certificates heretofore or at any time hereafter
submitted by or on behalf of the Grantor to the Secured Party shall prove to
have been false or materially misleading when made; or (c) any Event of Default
shall occur under the Credit Agreement. 


          Section
19.          Remedies on
Default. Upon the occurrence of an Event of Default and at any time
thereafter:


	
  

 	
  

 
	
  

 	
           19(a)          The
 Secured Party may exercise and enforce any and all rights and remedies
 available upon default to a secured party under Article 9 of the Uniform
 Commercial Code as in effect in the State of Minnesota

 
	
  

 	
  

 
	
  

 	
           19(b)          The
 Secured Party shall have the right to enter upon and into and take possession
 of all or such part or parts of the properties of the Grantor, including
 lands, plants, buildings, Equipment, Inventory and other property as may be
 necessary or appropriate in the judgment of the Secured Party to permit or
 enable the Secured Party to manufacture, produce, process, store or sell or
 complete the manufacture, production, processing, storing or sale of all or
 any part of the Collateral, as the Secured Party may elect, and to use and
 operate said properties for said purposes and for such length of time as the
 Secured Party may deem necessary or appropriate for said purposes without the
 payment of any compensation to Grantor therefor. The Secured Party may
 require the Grantor to, and the Grantor hereby agrees that it will, at his
 expense and upon request of the Secured Party forthwith, assemble all or part
 of the Collateral as directed by the

 


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 Secured Party and make it available to the Secured
 Party at a place or places to be designated by the Secured Party.

 
	
  

 	
  

 
	
  

 	
           19(c)          Any
 disposition of Collateral may be in one or more parcels at public or private
 sale, at any of the Secured Party’s offices or elsewhere, for cash, on
 credit, or for future delivery, and upon such other terms as the Secured
 Party may reasonably believe are commercially reasonable. The Secured Party
 shall not be obligated to dispose of Collateral regardless of notice of sale
 having been given, and the Secured Party may adjourn any public or private
 sale from time to time by announcement made at the time and place fixed
 therefor, and such disposition may, without further notice, be made at the
 time and place to which it was so adjourned.

 
	
  

 	
  

 
	
  

 	
           19(d)          The
 Secured Party is hereby granted a license or other right to use, without
 charge, all of the Grantor’s property, including, without limitation, all of
 the Grantor’s labels, trademarks, copyrights, patents and advertising matter,
 or any property of a similar nature, as it pertains to the Collateral, in
 completing production of, advertising for sale and selling any Collateral,
 and the Grantor’s rights under all licenses and all franchise agreements
 shall inure to the Secured Party’s benefit until the Obligations are paid in
 full.

 
	
  

 	
  

 
	
  

 	
           19(e)          If
 notice to the Grantor of any intended disposition of Collateral or any other
 intended action is required by law in a particular instance, such notice
 shall be deemed commercially reasonable if given in the manner specified for
 the giving of notice in Section 19 hereof at least ten calendar days prior to
 the date of intended disposition or other action, and the Secured Party may
 exercise or enforce any and all other rights or remedies available by law or
 agreement against the Collateral, against the Grantor, or against any other
 Person or property. The Secured Party (i) may dispose of the Collateral in
 its then present condition or following such preparation and processing as
 the Secured Party deems commercially reasonable, (ii) shall have no duty to
 prepare or process the Collateral prior to sale, (iii) may disclaim
 warranties of title, possession, quiet enjoyment and the like, and (iv) may
 comply with any applicable state or federal law requirements in connection
 with a disposition of the Collateral and none of the foregoing actions shall
 be deemed to adversely affect the commercial reasonableness of the
 disposition of the Collateral.

 



          Section
20.          Remedies as
to Certain Rights to Payment. Upon the occurrence of an Event of Default
and at any time thereafter the Secured Party may notify any Account Debtor or
other Person obligated on any Accounts or other Collateral that the same have
been assigned or transferred to the Secured Party and that the same should be
performed as requested by, or paid directly to, the Secured Party, as the case
may be. The Grantor shall join in giving such notice, if the Secured Party so
requests. The Secured Party may, in the Secured Party’s name or in the
Grantor’s name, demand, sue for, collect or receive any money or property at
any time payable or receivable on account of, or securing, any such Collateral
or grant any extension to, make any compromise or settlement with or otherwise
agree to waive, modify, amend or change the obligation of any such Account
Debtor or other Person. If any payments on any such Collateral are received by
the Grantor after an Event of Default has occurred, such payments shall be held
in trust by the Grantor as the property of the Secured Party and shall not be
commingled with any


10





funds or property of the Grantor and shall be forthwith
remitted to the Secured Party for application on the Obligations.


          Section
21.          Application
of Proceeds. All cash proceeds received by the Secured Party in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Secured Party, be held by the Secured
Party as collateral for, or then or at any time thereafter be applied in whole
or in part by the Secured Party against, all or any part of the Obligations
(including, without limitation, any expenses of the Secured Party payable
pursuant to Section 22 hereof).


          Section
22.          Costs and
Expenses; Indemnity. The Grantor will pay or reimburse the Secured Party on
demand for all reasonable out-of-pocket expenses paid or incurred by the
Secured Party, including in each case all filing and recording costs and fees,
taxes, charges and disbursements of outside counsel to the Secured Party
(determined on the basis of such counsel’s generally applicable rates, which
may be higher than the rates such counsel charges the Secured Party in certain
matters) and/or the allocated costs of in-house counsel incurred from time to
time, in connection with the creation, perfection, protection, satisfaction,
foreclosure, collection or enforcement of the Security Interest and the
preparation, administration, continuance, amendment or enforcement of this
Agreement, and all such costs and expenses shall be part of the Obligations
secured by the Security Interest. The Grantor shall indemnify and hold the
Secured Party harmless from and against any and all claims, losses and
liabilities (including reasonable attorneys’ fees) growing out of or resulting
from this Agreement and the Security Interest hereby created (including enforcement
of this Agreement) or the Secured Party’s actions pursuant hereto, except
claims, losses or liabilities resulting from the Secured Party’s gross
negligence or willful misconduct as determined by a final judgment of a court
of competent jurisdiction. Any liability of the Grantor to indemnify and hold
the Secured Party harmless pursuant to the preceding sentence shall be part of
the Obligations secured by the Security Interest. The obligations of the
Grantor under this Section shall survive any termination of this Agreement.


          Section
23.          Waivers;
Remedies; Marshalling. This Agreement can be waived, modified, amended,
terminated or discharged, and the Security Interest can be released, only
explicitly in a writing signed by the Secured Party. A waiver so signed shall
be effective only in the specific instance and for the specific purpose given.
Mere delay or failure to act shall not preclude the exercise or enforcement of
any rights and remedies available to the Secured Party. All rights and remedies
of the Secured Party shall be cumulative and may be exercised singly in any
order or sequence, or concurrently, at the Secured Party’s option, and the
exercise or enforcement of any such right or remedy shall neither be a
condition to nor bar the exercise or enforcement of any other. The Grantor
hereby waives all requirements of law, if any, relating to the marshalling of
assets which would be applicable in connection with the enforcement by the
Secured Party of its remedies hereunder, absent this waiver.


          Section
24.          Waiver of
Defenses. The Grantor waives the benefit of any and all defenses and
discharges available to a guarantor, surety, indorser or accommodation party,
dependent on its character as such. Without limiting the generality of the
foregoing, the Grantor (in such capacity) waives presentment, demand for
payment, and notice of nonpayment or protest of any note or any other
instrument evidencing any of the Obligations; and the Grantor


11





agrees that his liability hereunder and the Security
Interest hereby created shall not be affected or impaired in any way by any of
the following acts and things (which the Secured Party may do from time to time
without notice to the Grantor): (a) by any sale, pledge, surrender, compromise,
settlement, release, renewal, extension, indulgence, alteration, substitution,
exchange, change in, modification, or other disposition of any of the
Obligations or any evidence thereof or any collateral therefor, (b) by any
acceptance or release of collateral for or guarantors of any of the
Obligations, (c) by any failure, neglect or omission to realize upon or protect
any of the Obligations, or to obtain, perfect, enforce or realize upon any
collateral therefor, or to exercise any Lien upon or right of appropriation of
any moneys, credits or property toward the liquidation of any of the
Obligations, or (d) by any application of payments or credits upon any of the
Obligations. The Secured Party shall not be required, before exercising its
rights under this Agreement, to first resort for payment of any of the
Obligations to the Debtor or any other Persons, its or their properties or
estates, or any collateral, property, Liens or other rights or remedies
whatsoever. The Grantor agrees not to exercise any right of contribution,
recourse, subrogation or reimbursement available to the Grantor against the
Debtor or any other Person or property, unless and until all Obligations and
all other debts, liabilities and obligations owed by the Debtor and the Grantor
to the Secured Party have been paid and discharged. The Grantor expects to
derive benefits from the transactions resulting in the creation of the
Obligations. The Secured Party may rely conclusively on the continuing
warranty, hereby made, that the Grantor continues to be benefited by the
Secured Party’s extension of credit accommodations to the Debtor and the
Secured Party shall have no duty to inquire into or confirm the receipt of any
such benefits, and this Agreement shall be effective and enforceable by the
Secured Party without regard to the receipt, nature or value of any such
benefits.


          Section
25.          Notices.
Any notice or other communication to any party in connection with this
Agreement shall be in writing and shall be sent by manual delivery, facsimile
transmission, overnight courier or United States mail (postage prepaid)
addressed to such party at the address specified on the signature page hereof,
or at such other address as such party shall have specified to the other party
hereto in writing. All periods of notice shall be measured from the date of
delivery thereof if manually delivered, from the date of sending thereof if
sent by facsimile transmission, from the first business day after the date of
sending if sent by overnight courier, or from four days after the date of
mailing if mailed.


          Section
26.          Grantor
Acknowledgments. The Grantor hereby acknowledges that (a) it has been
advised by counsel in the negotiation, execution and delivery of this
Agreement, (b) the Secured Party has no fiduciary relationship to the Grantor,
the relationship being solely that of debtor and creditor, and (c) no joint
venture exists between the Grantor and the Secured Party.


          Section
27.          Representations
and Warranties. The Grantor hereby represents and warrants to the Secured
Party that:


	
  

 	
  

 
	
  

 	
           27(a)          The
 Grantor is a limited liability company duly organized, validly existing and
 in good standing under the laws of the jurisdiction of its organization and
 has the corporate power and authority and the legal right to own and operate
 its properties and to conduct the business in which it is currently engaged.

 


12









	
  

 	
  

 
	
  

 	
           27(b)          The
 Grantor has the power and authority and the legal right to execute and
 deliver, and to perform its obligations under, this Agreement and has taken
 all necessary action to authorize such execution, delivery and performance.

 
	
  

 	
  

 
	
  

 	
           27(c)          This
 Agreement constitutes a legal, valid and binding obligation of the Grantor
 enforceable in accordance with its terms, except as enforceability may be
 limited by applicable bankruptcy, insolvency, reorganization, moratorium or
 similar laws affecting the enforcement of creditors’ rights generally and by
 general equitable principles (whether enforcement is sought by proceedings in
 equity or at law).

 
	
  

 	
  

 
	
  

 	
           27(d)          The
 execution, delivery and performance of this Agreement will not (i) violate
 any provision of any law, statute, rale or regulation or any order, writ,
 judgment, injunction, decree, determination or award of any court,
 governmental agency or arbitrator presently in effect having applicability to
 the Grantor, (ii) violate or contravene any provision of the articles of
 organization of the Grantor, or (iii) result in a breach of or constitute a
 default under any indenture, loan or credit agreement or any other agreement,
 lease or instrument to which the Grantor is a party or by which it or any of
 its properties may be bound or result in the creation of any Lien thereunder.
 The Grantor is not in default under or in violation of any such law, statute,
 rule or regulation, order, writ, judgment, injunction, decree, determination
 or award or any such indenture, loan or credit agreement or other agreement,
 lease or instrument in any case in which the consequences of such default or
 violation could have a material adverse effect on the business, operations,
 properties, assets or condition (financial or otherwise) of the Grantor.

 
	
  

 	
  

 
	
  

 	
           27(e)          Except
 for filings, recordings and registrations to perfect the Security Interest,
 no order, consent, approval, license, authorization or validation of, or
 filing, recording or registration with, or exemption by, any governmental or
 public body or authority is required on the part of the Grantor to authorize,
 or is required in connection with the execution, delivery and performance of,
 or the legality, validity, binding effect or enforceability of, this
 Agreement.

 
	
  

 	
  

 
	
  

 	
           27(f)          There
 are no actions, suits or proceedings pending or, to the knowledge of the
 Grantor, threatened against or affecting the Grantor or any of its properties
 before any court or arbitrator, or any governmental department, board, agency
 or other instrumentality which, if determined adversely to the Grantor, would
 have a material adverse effect on the business, operations, property or
 condition (financial or otherwise) of the Grantor or on the ability of the
 Grantor to perform its obligations hereunder.

 



          Section
28.          Continuing
Security Interest; Assignments under Credit Agreement. This Agreement shall
(a) create a continuing security interest in the Collateral and shall remain in
full force and effect until payment in full of the Obligations and the expiration
of the obligations, if any, of the Secured Party to extend credit
accommodations to the Debtor, (b) be binding upon the Grantor, its successors
and assigns, and (c) inure to the benefit of, and be enforceable by, the
Secured Party and its successors, transferees, and assigns. Without limiting
the generality of the foregoing clause (c), the Secured Party may assign or
otherwise transfer all or any portion of its rights and obligations under the
Credit Agreement to any other Persons to the extent and in the


13





manner provided in the Credit Agreement and may
similarly transfer all or any portion of its rights under this Security
Agreement to such Persons.


          Section
29.          Termination
of Security Interest. Upon payment in full of the Obligations and the
expiration of any obligation of the Secured Party to extend credit
accommodations to the Debtor, the Security Interest granted hereby shall
terminate. Upon any such termination, the Secured Party will return to the
Grantor such of the Collateral then in the possession of the Secured Party as
shall not have been sold or otherwise applied pursuant to the terms hereof and
execute and deliver to the Grantor such documents as the Grantor shall
reasonably request to evidence such termination. Any reversion or return of
Collateral upon termination of this Agreement and any instruments of transfer
or termination shall be at the expense of the Grantor and shall be without
warranty by, or recourse on, the Secured Party. As used in this Section, “Grantor”
includes any assigns of Grantor, any Person holding a subordinate security
interest in any of the Collateral or whoever else may be lawfully entitled to
any part of the Collateral.


          Section
30.          Governing Law and Construction. THE VALIDITY,
CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES
THEREOF, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY
INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR
COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN
THE STATE OF MINNESOTA. Whenever possible, each provision of this Agreement
and any other statement, instrument or transaction contemplated hereby or
relating hereto shall be interpreted in such manner as to be effective and
valid under such applicable law, but, if any provision of this Agreement or any
other statement, instrument or transaction contemplated hereby or relating
hereto shall be held to be prohibited or invalid under such applicable law,
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement or any other statement, instrument or
transaction contemplated hereby or relating hereto.


          Section
31.          Consent to Jurisdiction. AT THE OPTION OF
THE SECURED PARTY, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA
STATE COURT SITTING IN HENNEPIN COUNTY; AND THE GRANTOR CONSENTS TO THE
JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN
SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE GRANTOR COMMENCES ANY ACTION IN
ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING
DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE
SECURED PARTY AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO
ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT
BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE.


14





          Section
32.          Waiver of Notice and Hearing. THE GRANTOR
HEREBY WAIVES ALL RIGHTS TO A JUDICIAL HEARING OF ANY KIND PRIOR TO THE
EXERCISE BY THE SECURED PARTY OF ITS RIGHTS TO POSSESSION OF THE COLLATERAL
WITHOUT JUDICIAL PROCESS OR OF ITS RIGHTS TO REPLEVY, ATTACH, OR LEVY UPON THE
COLLATERAL WITHOUT PRIOR NOTICE OR HEARING. THE GRANTOR ACKNOWLEDGES THAT IT
HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS PROVISION AND
THIS AGREEMENT.


          Section
33.          Waiver
of Jury Trial. EACH OF THE GRANTOR AND THE SECURED PARTY, BY ITS ACCEPTANCE
OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.


          Section
34.          Counterparts.
This Agreement may be executed in any number of counterparts, each of which
when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.


          Section
35.          General.
All representations and warranties contained in this Agreement or in any other
agreement between the Grantor and the Secured Party shall survive the
execution, delivery and performance of this Agreement and the creation and
payment of the Obligations. The Grantor waives notice of the acceptance of this
Agreement by the Secured Party. Captions in this Agreement are for reference
and convenience only and shall not affect the interpretation or meaning of any
provision of this Agreement.


[The remainder of this page has been left blank intentionally.]


15





          IN
WITNESS WHEREOF, the Grantor has caused this Security Agreement to be duly
executed and delivered by its manager thereunto duly authorized as of the date
first above written.


	
  

 	
  

 	
  

 
	
  

 	
 ELECTROMED FINANCIAL, LLC

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
  

 
	
  

 	
 By

 	
 



 
	
  

 	
 Name: Robert D. Hansen

 
	
  

 	
 Title:   Chief Manager and Chief
 Executive Officer

 






	
  

 
	
 Address:

 
	
  

 
	
 500 Sixth Avenue NW

 
	
 New Prague, MN 56071

 
	
 ATTN: Robert D. Hansen

 
	
 Fax Number: 952-758-1941 

 
	
  

 
	
 Address for the Lender: 

 
	
  

 
	
 U.S. Bank National Association

 
	
 BC-MN-H03W

 
	
 800 Nicollet Mall 

 
	
 Minneapolis, MN 55402-4302 

 
	
 ATTN: Daniel J. Miller 

 
	
 Fax Number: 612-303-2252 

 


[Signature Page to Security Agreement (Guarantor)]