**EXHIBIT 10.3**

 

**SECURITYAGREEMENT**

 

 

**DATE:**    January17, 2003

 
| **PARTIES:** | PKM Properties, LLC   c/o Gracon Contracting, Inc.606 24th Avenue South, Suite B12Minneapolis, MN 55454Attention:  Paul K. Miller |   | (“Secured Party”) |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|
|         |                                                                                                                                   |   |                        |
|         | MedicalCV, Inc.   9725 South Robert Trail   Inver Grove Heights, MN  55077  Organizational Identification Number:   7J-436   |   | (“Debtor”)        |

 

 

**AGREEMENTS:**

 

IN CONSIDERATION of one dollar and other goodand valuable consideration, the receipt and sufficiency of which are herebyacknowledged, the parties agree as follows:

 

**1.             Grant of Security Interest andCollateral.**  In order tosecure payment and performance of each and every debt, liability and obligationof every type and description which Debtor may now or at any time hereafter oweto Secured Party whether such debt, liability or obligation now exists or ishereafter created or incurred, whether it arises under or is evidenced by thisSecurity Agreement or any other present or future instrument or agreement or byoperation of law, and whether it is or may be direct or indirect, due or tobecome due, absolute or contingent, primary or secondary, liquidated orunliquidated, or sole, joint, several or joint and several (all such debts,liabilities and obligations and any amendments, extensions, renewals orreplacements thereof are herein collectively referred to as the “Obligations”),Debtor hereby grants Secured Party a security interest (the “SecurityInterest”) in all of Debtor’s property (the “Collateral”), includingwithout limitation the following:

 

(a)           Inventory and Goods:  All inventory of Debtor, whether now owned or hereafter acquiredand wherever located and other tangible personal property held for sale orlease or furnished or to be furnished under contracts of service or consumed inDebtor’s business, and all goods of Debtor, whether now owned or hereafteracquired and wherever located, including without limitation all computerprograms embedded in goods;

 

(b)           Equipment: All equipment of Debtor, whether now owned or hereafter acquired andwherever located, including but not limited to all present and futureequipment, machinery, tools, motor vehicles, trade fixtures, furniture,furnishings, office and recordkeeping equipment and all goods for use inDebtor’s business, together with all parts, equipment and attachments relatingto any of the foregoing;

 

(c)           Accounts, Contract Rights and Other Rights to Payment:  Each and every right of Debtor to thepayment of money, whether such right to payment now exists or hereafter arises,

 

 

 

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whethersuch right to payment arises out of a sale, lease, license, assignment or otherdisposition of goods or other property by Debtor, out of a rendering ofservices by Debtor, out of a loan by Debtor, out of the overpayment of taxes orother liabilities of Debtor, or otherwise arises under any contract oragreement, whether such right to payment is or is not already earned byperformance, and howsoever such right to payment may be evidenced, togetherwith all other rights and interests (including all liens and securityinterests) which Debtor may at any time have by law or agreement against anyaccount debtor or other obligor obligated to make any such payment or againstany of the property of such account debtor or other obligor; all including butnot limited to all present and future debt instruments, chattel papers,accounts, license fees, contract rights, loans and obligations receivable andtax refunds;

 

(d)           Instruments: All instruments, chattel paper, letters of credit or other documents ofDebtor, whether now owned or hereafter acquired, including but not limited topromissory notes, drafts, bills of exchange and trade acceptances; all rightsand interests of Debtor, whether now existing or hereafter created or arising,under leases, licenses or other contracts;

 

(e)           Deposit Accounts and Investment Property:  All right, title and interest of Debtor inall deposit and investment accounts maintained with any bank, savings and loanassociation, broker, brokerage, or any other financial institution, togetherwith all monies and other property deposited or held therein, including,without limitation, any checking account, savings account, escrow account,savings certificate and margin account, and all securities, whethercertificated or uncertificated, security entitlements, securities accounts,commodity contracts, and commodity accounts; and

 

(f)            General Intangibles:  All general intangibles of Debtor, whether now owned or hereafteracquired, including, but not limited to, applications for patents, patents,copyrights, trademarks, trade secrets, good will, tradenames, customer lists,permits and franchises, software, and the right to use Debtor’s name, and anyand all membership interests, governance rights, and financial rights in eachand every limited liability company, and all payment intangibles;

 

together with allsubstitutions and replacements for and products of any of the foregoingproperty and proceeds of any and all of the foregoing property and, in the caseof all tangible Collateral, together with (i) all accessories,attachments, parts, equipment, accessions and repairs now or hereafter attachedor affixed to or used in connection with any such goods, (ii) allwarehouse receipts, bills of lading and other documents of title now or hereaftercovering such goods, and (iii) all books and records of Debtor.

 

**2.             Representations,Warranties and Agreements.**  Debtor represents, warrants and agrees that:

 

(a)           Debtor is acorporation duly organized, validly existing and in good standing under thelaws of the state of Minnesota.  ThisSecurity Agreement has been duly and validly authorized by all necessarycorporate action.  Debtor has full powerand authority to execute this Agreement, to perform Debtor’s obligationshereunder and to subject the Collateral to the Security Interest.  Debtor’s organizational identificationnumber is the number shown at the beginning of this Agreement.

 

(b)           The Collateral will be used primarily for businesspurposes.

 

 

 

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(c)           Debtor’s chief place of business is located at the addressshown at the beginning of this Agreement. Debtor’s records concerning its accounts and contract rights are kept atsuch address.  The Collateral is locatedat the address shown at the beginning of this Agreement.  Debtor will give at least 30 days’ advancewritten notice to Secured Party of any change in Debtor’s jurisdiction oforganization or chief place of business and any change in or addition of anyCollateral location.

 

(d)           Except as otherwise provided in that certain DiscretionaryCredit Agreement, dated as of the date hereof, as amended from time to time,between the Debtor and the Secured Party (the “Credit Agreement”),Debtor has (or will have at the time Debtor acquires rights in Collateralhereafter arising) and will maintain absolute title to each item of Collateralfree and clear of all security interests, liens and encumbrances, except theSecurity Interest, and will defend the Collateral against all claims or demandsof all persons other than Secured Party.

 

(e)           Except as otherwise provided in the Credit Agreement,Debtor will not sell or otherwise transfer or dispose of the Collateral or anyinterest therein.

 

(f)            Debtor will not permit any tangible Collateral to belocated in any state (and, if a county filing is required, in any county) inwhich a financing statement covering such Collateral is required to be, but hasnot in fact been, filed.

 

(g)           All rights to payment and all instruments, documents,chattel papers and other agreements constituting or evidencing Collateral are(or will be when arising or issued) the valid, genuine and legally enforceableobligation, subject to no defense, set-off or counterclaim (other than thosearising in the ordinary course of business) of each account debtor or otherobligor named therein or in Debtor’s records pertaining thereto as beingobligated to pay such obligation. Debtor will not agree to any modification, amendment or cancellation ofany such obligation without Secured Party’s prior written consent exceptdiscounts provided by Debtor in the ordinary course of business, and will notsubordinate any such right to payment to claims of other creditors of suchaccount debtor or other obligor.

 

(h)           Debtor will keep all tangible Collateral in good repair,working order and condition, normal depreciation excepted, and will, from timeto time, replace any worn, broken or defective parts thereof.

 

(i)            Except as otherwise provided in the Credit Agreement,Debtor will promptly pay all taxes and other governmental charges levied orassessed upon or against any Collateral or upon or against the creation,perfection or continuance of the Security Interest.

 

(j)            Debtor will promptly notify Secured Party of any materialloss of or damage to any Collateral or of any adverse change in the prospect ofpayment of any material sums due on or under any instrument, chattel paper,account or contract right constituting Collateral.

 

(k)           Debtor will if Secured Party at any time so requests(whether the request is made before or after the occurrence of an Event ofDefault), promptly deliver to Secured Party any instrument, document or chattelpaper constituting Collateral, duly endorsed or assigned by Debtor to SecuredParty.

 

 

 

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(l)            Debtor will at all times keep all tangible Collateralinsured against risks of fire (including so-called extended coverage), theft,and such other risks and in such amounts as Secured Party may reasonablyrequest, with any loss payable to Secured Party to the extent of its interest.

 

(m)          If any Collateral is covered by a certificate of title,Debtor will from time to time execute such documents as may be required to havethe Security Interest properly noted on a certificate of title.  Debtor authorizes Secured Party to file fromtime to time such financing statements against the Collateral described as “allassets” or the like as Secured Party deems necessary or useful to perfect theSecurity Interest.

 

(n)           Debtor will pay when due or reimburse Secured Party ondemand for all costs of collection of any of the Obligations and all otherout-of-pocket expenses (including in each case all reasonable attorneys’ fees)incurred by Secured Party in connection with the creation, perfection,satisfaction or enforcement of the Security Interest or the execution orcreation, continuance or enforcement of this Security Agreement or any or allof the Obligations.

 

(o)           Debtor will execute, deliver or endorse any and allinstruments, documents, assignments, security agreements and other agreementsand writings which Secured Party may at any time reasonably request in order tosecure, protect, perfect or enforce the Security Interest and Secured Party’srights under this Security Agreement.

 

(p)           Debtor will not use or keep any Collateral, or permit itto be used or kept, for any unlawful purpose or in violation of any federal,state or local law, statute or ordinance.

 

If Debtor at any time failsto perform or observe any agreement contained in Sections 2(h) through 2(o),immediately upon the occurrence of such failure, without notice or lapse of time,Secured Party may (but need not) perform or observe such agreement on behalfand in the name, place and stead of Debtor (or, at Secured Party’s option, inSecured Party’s own name) and may (but need not) take any and all other actionswhich Secured Party may reasonably deem necessary to cure or correct suchfailure (including, without limitation, the payment of taxes, the satisfactionof security interests, liens, or encumbrances, the performance of obligationsunder contracts or agreements with account debtors or other obligors, theprocurement and maintenance of insurance, the execution of financingstatements, the endorsement of instruments, and the procurement of repairs,transportation or insurance); and, except to the extent that the effect of suchpayment would be to render any loan or forbearance of money usurious orotherwise illegal under any applicable law, Debtor shall thereupon pay SecuredParty on demand the amount of all moneys expended and all costs and expenses(including reasonable attorneys’ fees) incurred by Secured Party in connectionwith or as a result of Secured Party’s performing or observing such agreementsor taking such actions, together with interest thereon from the date expendedor incurred by Secured Party at the highest rate then applicable to any of theObligations.  To facilitate theperformance or observance by Secured Party of such agreements of Debtor, Debtorhereby irrevocably appoints (which appointment is coupled with an interest)Secured Party, or its delegate, as the attorney-in-fact of Debtor with theright (but not the duty) from time to time to create, prepare, complete,execute, deliver, endorse or file, in the name and on behalf of Debtor, any andall instruments, documents, financing statements, applications for insuranceand other agreements and writings required to be obtained, executed, deliveredor endorsed by Debtor under this Section 2.

 

 

 

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**3.             Lock Box; Collateral Account.**  If Secured Party so requests at any timeafter the occurrence of an Event of Default (as defined in Section 7 of thisAgreement), Debtor will direct each of its account debtors to make payments dueunder the relevant account or chattel paper directly to a special lock box tobe under the control of Secured Party (the “Lock Box”).  Debtor hereby authorizes and directs SecuredParty to deposit into a special collateral account to be established andmaintained with Secured Party (the “Collateral Account”) all checks,drafts, and cash payments received in the Lock Box.  All deposits in the Collateral Account shall constitute proceedsof Collateral and shall not constitute payment of any Obligation.  At its option, Secured Party shall, at anytime, apply finally collected funds on deposit in the Collateral Account to thepayment of the Obligations in such order of application as Secured Party maydetermine, or permit Debtor to withdraw all or any part of the balance.  If a Lock Box is so established, Debtoragrees that it will promptly deliver to Secured Party, for deposit into theLock Box, all payments on accounts and chattel paper received by it.  All such payments shall be delivered toSecured Party in the form received (except for Debtor’s endorsement wherenecessary).  Until so deposited, allsuch payments on accounts and chattel paper received by Debtor shall be held intrust by Debtor for and as the property of Secured Party and shall not becommingled with any funds or property of Debtor.

 

**4.             Account Verification andCollection Rights of Secured Party**.  Secured Party shall have the right to verify any accounts in thename of Debtor or in Secured Party’s own name; and Debtor, whenever requested,shall furnish Secured Party with duplicate statements of the accounts, whichstatements may be mailed or delivered by Secured Party for that purpose.  Whether or not Secured Party exercises itsrights under Section 3 of this Agreement, Secured Party may at any time(whether before or after the occurrence of an Event of Default) notify anyaccount debtor or any other person obligated to pay any amount due, that suchchattel paper, account or other right to payment has been assigned ortransferred to Secured Party for security and shall be paid directly to SecuredParty.  If Secured Party so requests atany time (whether before or after the occurrence of an Event of Default),Debtor will so notify such account debtors and other obligors in writing andwill indicate on all invoices to such account debtors or other obligors thatthe amount due is payable directly to Secured Party.  At any time after Secured Party or Debtor gives such notice to anaccount debtor or other obligor, Secured Party may (but need not), in SecuredParty’s own name or in Debtor’s name, demand, sue for, collect or receive anymoney or property at any time payable or receivable on account of, or securing,any such chattel paper, account or other right to payment, or grant anyextension to, make any compromise or settlement with or otherwise agree towaive, modify, amend or change the obligations (including collateralobligations) of any such account debtor or other obligor.

 

**5.             Assignment of Insurance.**  Debtor hereby assigns to Secured Party, asadditional security for the payment of the Obligations, any and all moneys(including but not limited to proceeds of insurance and refunds of unearnedpremiums) due or to become due under, and all other rights of Debtor under orwith respect to, any and all policies of insurance covering the Collateral, andDebtor hereby directs the issuer of any such policy to pay any such moneysdirectly to Secured Party.  Both beforeand after the occurrence of an Event of Default, Secured Party may (but neednot), in Secured Party’s own name or in Debtor’s name, execute and deliverproofs of claim, receive all such moneys, endorse checks and other instrumentsrepresenting payment of such moneys, and adjust, litigate, compromise orrelease any claim against the issuer of any such policy.

 

**6.             Right to Offset.**  Nothing in this Agreement shall be deemed awaiver or prohibition of Secured Party’s right of banker’s lien, offset, orcounterclaim, which right Debtor hereby grants to Secured Party.

 

 

 

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**7.             Events of Default.**  The occurrence of any Event of Default, asdefined in Section 10.1 of the Credit Agreement, shall constitute an Eventof Default hereunder.

 

**8.             Remedies Upon Event of Default.**  Upon the occurrence of an Event of Defaultand at any time thereafter until such Event of Default is cured to the writtensatisfaction of Secured Party, Secured Party may exercise any one or more ofthe rights or remedies set forth in Section 10.2 of the Credit Agreement.  All rights and remedies of Secured Partyshall be cumulative and may be exercised singularly or concurrently, at SecuredParty’s option, and the exercise or enforcement of any one such right or remedyshall neither be a condition to nor bar the exercise or enforcement of anyother.

 

**9.             Other Personal Property**.  If at the time Secured Party takespossession of any tangible Collateral, any goods, papers or other properties ofDebtor, not affixed to or constituting a part of such Collateral, are locatedor to be found upon or within such Collateral, Debtor agrees to notify SecuredParty in writing of that fact, describing the property so located or to befound, within 7 calendar days after the date on which Secured Party tookpossession. Unless and until Secured Party receives such notice from Debtor,Secured Party shall not be responsible or liable to Debtor for any action takenor omitted by or on behalf of Secured Party with respect to such property withoutactual knowledge of the existence of any such property or without actualknowledge of the fact that it was located or to be found upon such Collateral.

 

**10.          Amendment; Waivers**.  This Agreement can be waived, modified,amended, terminated or discharged, and the Security Interest can be released,only explicitly in a writing signed by Secured Party and Debtor.  A waiver shall be effective only in thespecific instance and for the specific purpose given.  Mere delay or failure to act shall not preclude the exercise orenforcement of any of Secured Party’s rights or remedies.

 

**11.          Notices.**  All notices to be given to Debtor shall bedeemed sufficiently given if mailed by registered or certified mail, postageprepaid, or delivered to Debtor at Debtor’s address set forth above or at themost recent address shown on Secured Party’s records.

 

**12.          Miscellaneous.**  Secured Party’s duty of care with respect toCollateral in its possession (as imposed by law) shall be deemed fulfilled ifSecured Party exercises reasonable care in physically safekeeping suchCollateral or, in the case of Collateral in the custody or possession of abailee or other third person, exercises reasonable care in the selection of thebailee or other third person, and Secured Party need not otherwise preserve,protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Debtor mayhave against prior parties, to realize on the Collateral at all or in anyparticular manner or order, or to apply any cash proceeds of Collateral in anyparticular order of application.  ThisAgreement shall be binding upon and inure to the benefit of Debtor and SecuredParty and their respective representatives, successors and assigns and shalltake effect when signed by Debtor and delivered to Secured Party, and Debtorwaives notice of Secured Party’s acceptance hereof.  Secured Party may execute this Agreement if appropriate for thepurpose of filing, but the failure of Secured Party to execute this Agreementshall not affect or impair the validity or effectiveness of this Agreement.

 

**(The signature page follows.)**

** **

 

 

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THEPARTIES have executed this Security Agreement the day and year first abovewritten.

 

 
| Secured Party: | PKM PROPERTIES, LLC                           |
|----------------|-----------------------------------------------|
|           |                                          |
|           |                                          |
|           | By:                                           | /s/ Paul K. Miller |
|           | Paul K. Miller,  Its Chief Executive Officer  |
|           |                                          |
|           |                                          |
| Debtor:        | MEDICALCV, INC.                               |
|           |                                          |
|           |                                          |   |
|           | By:                                           | /s/ Blair P. Mowery |
|           | Blair P. Mowery,  Its Chief Executive Officer |

 

 

 

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