EXHIBIT 10.3 


SECURITY AGREEMENT


          THIS
SECURITY AGREEMENT (the “Agreement”) is made as of June 28, 2013, by and
between UROLOGIX, INC., a Minnesota corporation (the “Debtor”), and MEDTRONIC,
INC., a Minnesota corporation (the “Lender”). 


BACKGROUND


          A.
The Lender is making certain financial accommodations pursuant to that certain
Promissory Note (the “Note”) dated as of the date hereof made by the Debtor in
favor of the Lender in the original principal amount of $5,332,537.72 and is
entering into certain restructuring arrangements with the Debtor provided in
that certain Restructuring Agreement dated as of the date hereof between the
Lender and the Debtor (the “Restructuring Agreement”). 


          B.
It is a condition precedent to the Lender making the financial accommodations
evidenced by the Note available to the Debtor that the Debtor execute and
deliver this Agreement. 


          C.
The Debtor wishes to grant security interests in favor of the Lender as herein
provided. 


          NOW,
THEREFORE, in consideration of the foregoing and the mutual promises set forth
below, the parties agree as follows: 


          1.
Definitions. As used in this Agreement, the capitalized terms set forth in this
Section 1 have the meanings indicated in this Section 1. Further, all terms
defined in the UCC and used in this Agreement have the same definitions in this
Agreement as specified in the UCC. 


	
  

 	
  

 
	
  

 	
           1.1 “Account Debtor” means “account debtor” as
 defined in the UCC with such additions to such term as may hereafter be made.
 

 
	
  

 	
  

 
	
  

 	
           1.2 “Accounts” means any “account” as defined
 in the UCC with such additions to such term as may hereafter be made, and
 includes, without limitation, all accounts receivable and other sums owing to
 Debtor. 

 
	
  

 	
  

 
	
  

 	
           1.3 “Copyrights” means any and all copyright
 rights, copyright applications, copyright registrations, and like protections
 in each work or authorship and derivative work thereof, whether published or
 unpublished and whether or not the same also constitutes a trade secret. 

 
	
  

 	
  

 
	
  

 	
           1.4 “Debtor’s Books” means all Debtor’s books
 and records including ledgers, federal and state tax returns, records
 regarding Debtor’s assets or liabilities, the Collateral, business operations
 or financial condition and all computer programs or storage or any Equipment
 containing such information. 

 
	
  

 	
  

 
	
  

 	
           1.5 “Equipment” means all “equipment” as
 defined in the UCC with such additions to such terms as may hereafter be made
 and includes, without limitation, all 

 













	
  

 	
  

 
	
  

 	
 machinery, fixtures, goods, vehicles (including
 motor vehicles and trailers), and any interest in any of the foregoing.

 
	
  

 	
  

 
	
  

 	
           1.6
 “General Intangibles” means all “general intangibles” as defined in the UCC
 in effect on the date hereof with such additions to such term as may
 hereafter be made and includes, without limitation, all Intellectual
 Property, claims, income and other tax refunds, security and other deposits,
 payment intangibles, contract rights, options to purchase or sell real or
 personal property, rights in all litigation presently or hereafter pending
 (whether in contract, tort or otherwise), insurance policies (including,
 without limitation, key man, property damage, and business interruption
 insurance), payments of insurance, and rights to payment of any kind. 

 
	
  

 	
  

 
	
  

 	
           1.7
 “Intellectual Property” means all of Debtor’s right, title, and interest in
 and to the following: 

 






	
  

 	
  

 
	
  

 	
           (a)
 its Copyrights, Trademarks, and Patents;

 
	
  

 	
  

 
	
  

 	
           (b)
 any and all trade secrets and trade secret rights, including, without
 limitation, any rights to unpatented inventions, know-how, operating manuals;
 

 
	
  

 	
  

 
	
  

 	
           (c)
 any and all source code;

 
	
  

 	
  

 
	
  

 	
           (d)
 any and all design rights which may be available to a Debtor;

 
	
  

 	
  

 
	
  

 	
           (e)
 any and all claims for damages by way of past, present, and future
 infringement of any of the foregoing, with the right, but not the obligation,
 to sue for and collect such damages for said use or infringement of the
 Intellectual Property rights identified above; and 

 
	
  

 	
  

 
	
  

 	
           (f)
 all amendments, renewals, and extensions of any of the Copyrights,
 Trademarks, or Patents.

 
	
  

 	
  

 






	
  

 	
  

 
	
  

 	
           1.8
 “Inventory” means all “inventory” as defined in the UCC in effect on the date
 hereof with such additions to such terms as may hereafter be made and
 includes, without limitation, all merchandise, raw materials, parts,
 supplies, packing and shipping materials, work in process, and finished
 products, including, without limitation, such inventory as is temporarily out
 of Debtor’s custody or possession or in transit and including any returned
 goods and any documents of title representing any of the above.

 
	
  

 	
 
          1.9
 “Lien” means any lien, pledge, hypothecation, charge, mortgage, deed of
 trust, levy, pledge, security interest, claim, encumbrance of any kind, or
 restriction of any nature, whether voluntarily incurred or arising by
 operation of law or otherwise against any property. 

 
	
  

 	
 
          1.10
 “Obligations” means all of the obligations of the Debtor to pay when due any
 principal, interest, expenses, fees, or other amounts due and owing to the
 Lender under the Note. 

 


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           1.11
 “Patents” means all patents, patent applications, and like protections,
 including, without limitation, improvements, divisions, continuations,
 renewals, reissues, extensions, and continuations-in-part of the same. 

 
	
  

 	
  

 
	
  

 	
           1.12
 “Permitted Liens” shall have the meaning set forth in Section 6(h) of the
 Restructuring Agreement. 

 
	
  

 	
  

 
	
  

 	
           1.13 “Trademarks” means any trademark and
 servicemark rights, whether registered or not, applications to register and
 registrations of the same and like protections, and the entire goodwill of
 the business of Debtor connected with and symbolized by such trademarks. 

 
	
  

 	
  

 
	
  

 	
           1.14 “UCC” means the Uniform Commercial Code as
 the same may, from time to time, be in effect in the State of Minnesota. 

 


          2. Grant of Security Interest. The
Debtor grants to the Lender, to secure the prompt payment and performance in full
of all of the Obligations, a security interest in the following properties,
assets, and rights of the Debtor, wherever located, whether now owned or
hereafter acquired or arising, and all proceeds and products thereof (all of
the same being hereinafter called the “Collateral”): 


	
  

 	
  

 	
  

 
	
  

 	
 All personal and
 fixture property of every kind and nature including all of Debtor’s right,
 title and interest in and to the following: all goods, Accounts (including
 health-care-insurance receivables), Equipment, Inventory, contract rights or
 rights to payment of money, leases, license agreements, franchise agreements,
 General Intangibles (except as provided below), commercial tort claims,
 documents, instruments (including any promissory notes), chattel paper
 (whether tangible or electronic), cash, deposit accounts, letter-of-credit
 rights (whether or not the letter of credit is evidenced by a writing),
 commercial tort claims, securities and all other investment property,
 supporting obligations, financial assets, whether now owned or hereafter
 acquired, wherever located. 

 	
  

 
	
  

 	
  

 	
  

 
	
  

 	
 All of Debtor’s Books
 relating to the foregoing and any and all claims, rights and interests in any
 of the above and all substitutions for, additions, attachments, accessories,
 accessions and improvements to and replacements, products, proceeds and
 insurance proceeds to any or all of the foregoing. 

 	
  

 
	
  

 	
  

 	
  

 
	
  

 	
 Notwithstanding the
 foregoing, the Collateral does not include the Intellectual Property;
 provided, however, the Collateral shall include all Accounts and all proceeds
 of Intellectual Property. If a judicial authority (including a U.S.
 Bankruptcy Court) in an action to enforce this Agreement would hold that a
 security interest in the underlying Intellectual Property is necessary to
 have a security interest in such Accounts and such property that are proceeds
 of Intellectual Property, then the Collateral shall automatically, and
 effective as of June 28, 2013, 

 	
  

 


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  include the Intellectual Property to the
 extent necessary to permit perfection of the Lender’s security interest in
 such Accounts and such other property of Borrower that are proceeds to
 Intellectual Property. 

 	
  

 
	
  

 	
  

 	
  

 
	
  

 	
 Pursuant to the terms
 of a certain negative pledge arrangement with the Lender, Debtor has agreed
 not to encumber any of its Intellectual Property without the Lender’s prior
 written consent. All other terms provided above, unless otherwise indicated,
 shall have the meaning provided by the UCC to the extent such terms are
 defined in the UCC. 

 	
  

 


          3. Authorization to File Financing
Statements. The Debtor irrevocably authorizes the Lender at any time and
from time to time to file in any jurisdiction financing statements and
amendments thereto that indicate the Collateral (a) as all assets of the Debtor
(except for the Intellectual Property as set forth in Section 2 above) or words
of similar effect, regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the Uniform Commercial Code
of such jurisdiction, or (b) as being of an equal or lesser scope or with
greater detail, in the Lender’s discretion. The Debtor agrees to furnish any
such information to the Lender promptly upon request. The Debtor also ratifies
its authorization for the Lender to have filed in any jurisdiction any similar
initial financing statements or amendments thereto if filed prior to the date
hereof. 


          4.
Other Actions. To further ensure the attachment, perfection, and
priority of, and the ability of the Lender to enforce, the Lender’s security
interest in the Collateral, the Debtor agrees, at the Debtor’s own expense, to
take any action reasonably requested by the Lender to ensure the attachment,
perfection, and priority of, and the ability of the Lender to enforce, the
Lender’s security interest in any and all of the Collateral. 


          5.
Intercreditor Agreement. This Agreement and the Lender’s rights and
remedies hereunder are subject to the terms of that certain Intercreditor
Agreement, dated as of June 28, 2013, between Silicon Valley Bank (the “Senior
Lender”) and the Lender. 


          6.
Representations and Warranties. The Debtor hereby represents and warrants
to the Lender that: 


	
  

 	
  

 
	
  

 	
           6.1
 Incorporation; Authorization. The Debtor is a duly incorporated and
 validly existing corporation and in good standing under the laws of the State
 of Minnesota and has all requisite corporate power and corporate authority
 for the ownership and operations of its properties and for the carrying on of
 its business as now conducted and as now proposed to be conducted. The
 execution, delivery, and performance by the Debtor of this Agreement (as
 amended, modified, or supplemented, from time to time) has been duly
 authorized by all necessary action and do not and will not (i) require any
 additional consent or approval of the shareholders or partners of any entity,
 or the consent of any governmental entity or others, violate any provision of
 any charter, bylaws, law, governmental regulation, court decree, indenture,
 contract, agreement, or instrument to which the Debtor is a party or by which
 the Debtor is bound, except for those violations of law or agreements and
 instruments that, individually or in the aggregate, do not have, or are not
 reasonably expected to have, a Material Adverse 

 


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 Effect (as such term is
 defined in Section 6(a) of the Restructuring Agreement) or adversely affect
 the consummation of the transactions contemplated hereby, or result in the
 imposition or creation of any Lien or encumbrance upon or with respect to any
 material assets or properties owned by the Debtor (except for the security
 interests created under this Agreement and Permitted Liens). This Agreement
 is a legal, valid, and binding obligation of the Debtor, enforceable in
 accordance with its terms, except as limited by applicable bankruptcy,
 insolvency, reorganization, moratorium, other laws of general application
 affecting enforcement of creditors’ rights generally, and as limited by laws
 relating to the availability of specific performance, injunctive relief, or
 other equitable remedies. 

 
	
  

 	
  

 
	
  

 	
           6.2 Title to Collateral. The Debtor is
 the sole owner of each item of the Collateral. The Debtor has good and
 marketable title to all of the Collateral and none of the Collateral is
 subject to any Liens, except for the security interests created under this
 Agreement and Permitted Liens. 

 
	
  

 	
  

 
	
  

 	
           6.3 No Financing Statements. No
 effective security agreement, financing statement, equivalent security or
 Lien instrument or continuation statement covering all or any part of the
 Collateral is on file or of record in any public office, except for Permitted
 Liens or such other liens as may have been filed in favor of the Lender
 pursuant to this Agreement. 

 
	
  

 	
  

 
	
  

 	
           6.4 Validity of Security Interest. This
 Agreement is effective to create a valid and continuing security interest on
 and, upon the filing of the appropriate financing statements or mortgages, a
 perfected security interest in favor of the Lender on the Collateral with
 respect to which a security interest may be perfected by filing pursuant to
 the UCC. 

 
	
  

 	
  

 
	
  

 	
           6.5 Locations of Business. The Debtor’s
 chief executive office, principal place of business, corporate offices, and
 premises where Collateral is stored or located, and the locations of all of
 its books and records concerning the Collateral are set forth in Schedule
 7.4. 

 
	
  

 	
  

 
	
  

 	
           6.6 Validity of Receivables and Contracts.
 All Accounts and contracts are bona fide existing obligations created by or
 relating to the sale and actual delivery of goods or the rendition of
 services to clients and customers in the ordinary course of business and are
 not evidenced by a judgment, instrument, or chattel paper. There are no
 setoffs, claims, or disputes existing or asserted with respect thereto and
 the Debtor has not made any agreement with any Account Debtor for any
 extension of time for the payment thereof, any compromise or settlement for
 less than the full amount thereof, any release of any Account Debtor from
 liability therefor, or any deduction therefrom except a discount or allowance
 allowed by the Debtor in the ordinary course of its business for prompt
 payment, (i) to the knowledge of the Debtor, there are no facts, events or
 occurrences which in any way impair the validity or enforceability thereof or
 could reasonably be expected to reduce the amount payable thereunder as shown
 on the Debtor’s books and records and any invoices, statements and collateral
 reports delivered to the Lender with respect thereto, (ii) the Debtor has not
 received any notice of

 






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 proceedings or actions
 which are threatened or pending against any Account Debtor which might result
 in any adverse change in such Account Debtor’s financial condition, and (iii)
 the Debtor has no knowledge that any Account Debtor is unable generally to
 pay its debts as they become due. Further with respect to the Accounts, (x)
 other than amounts that are inaccurately denoted due to clerical errors in
 the accounting and administration of the Accounts, the amounts shown on such
 records and all invoices, statements and other documents or reports regarding
 Collateral which may be delivered to the Lender with respect thereto are
 actually and absolutely owing to the Debtor as indicated thereon and are not
 in any way contingent, except for non-material contingencies, and (y) to the
 Debtor’s knowledge, all Account Debtors have the capacity to contract.

 
	
  

 	
  

 
	
  

 	
 7. Covenants.

 
	
  

 	
 
          7.1 Debtor’s Legal Status. The Debtor
 covenants that (i) without providing at least 30 days prior written notice to
 the Lender, the Debtor will not change its name, places of business, chief
 executive office, mailing address, or incorporation identification number,
 (ii) if the Debtor does not have an incorporation identification number and
 later obtains one, the Debtor will promptly notify the Lender of such
 incorporation identification number, and (iii) the Debtor will not change its
 status as a corporation, jurisdiction of incorporation, or other legal
 structure. 

 
	
  

 	
  

 
	
  

 	
           7.2 Covenants Concerning Collateral.
 The Debtor covenants that (i) except for the security interest herein granted
 and the Permitted Liens, the Debtor will be the owner of the Collateral free
 from any Lien, and the Debtor will defend the Collateral against all claims
 and demands of all persons at any time claiming the Collateral or any
 interests therein adverse to the Lender, (ii) the Debtor will not pledge,
 mortgage or create, or suffer to exist a Lien on the Collateral in favor of
 any person, except for the Permitted Liens, (iii) the Debtor will keep the
 Collateral in good order and repair (ordinary wear and tear excepted) and
 will not use the Collateral in violation of law or any policy of insurance
 thereon, (iv) the Debtor will pay promptly when due all taxes, assessments,
 governmental charges and levies upon the Collateral or incurred in connection
 with the use or operation of such Collateral or incurred in connection with
 this Agreement, (v) the Debtor will operate its business in compliance with
 all applicable provisions of federal, state and local statutes and
 ordinances, and (vi) the Debtor will not sell or otherwise dispose, or offer
 to sell or otherwise dispose, of the Collateral or any interest therein
 except for sales of inventory in the ordinary course of business or sales of
 obsolete or worn out equipment. 

 
	
  

 	
  

 
	
  

 	
           7.3 Disposition or Encumbrance of
 Collateral. Other than Permitted Liens or Liens granted to a new lender
 (the “New Lender”) that provides refinancing of the indebtedness currently
 existing in favor of the Senior Lender with substantially the same terms in
 all material respects up to the capped amount set forth in Section 2 of the
 Subordination Agreement between Holder and Silicon Valley Bank, dated June
 28, 2013 (the “Capped Amount”), and dispositions of worn-out or obsolete
 Equipment, the Debtor will not encumber, sell, or otherwise transfer or
 dispose of any material Collateral, individually or in the aggregate, other
 than in the ordinary course of business without the 

 
			


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 prior written consent of the Lender. In addition to the foregoing,
 other than Permitted Liens and Lien in favor of New Lender, the Debtor shall
 keep free from all Liens and shall not encumber, sell, or otherwise transfer
 or dispose of any Copyright, Copyright license, Patent, Patent license,
 Trademark, Trademark license (other than granting non-exclusive licenses in
 connection with a joint venture or similar transaction in the ordinary course
 of business), or any other Intellectual Property without the prior written
 consent of the Lender. Debtor shall remove any such Lien or encumbrance on
 the Intellectual Property if it should arise. 

 
	
  

 	
  

 
	
  

 	
           7.4 Maintenance
 of Equipment and Inventory; Location. The Debtor will maintain the
 Equipment and Inventory or cause the Equipment and Inventory to be maintained
 in good condition and repair in all respects, reasonable wear and tear
 excepted. The security interest of the Lender attaches to all of the
 Collateral wherever located and the Debtor’s failure to inform the Lender of
 the location of any item or items of collateral shall not impair the Lender’s
 security interest therein. 

 
	
  

 	
  

 
	
  

 	
           7.5 Protection
 of Collateral. The Debtor will defend the right, title, and interest of
 the Lender in and to any of the Debtor’s rights under the Collateral against
 the claims and demands of all persons whomsoever other than with respect to
 Permitted Liens. All expenses of protecting, storing, warehousing, insuring,
 handling, and shipping the Collateral, all costs of keeping the Collateral
 free of any Liens prohibited by this Agreement and of removing the same if
 they should arise, and any and all excise, property, sales, and use taxes
 imposed by any state, federal, or local authority on any of the Collateral or
 in respect of the sale thereof, shall be borne and paid by the Debtor. In the
 event that the Debtor fails to promptly pay such expenses when due, the
 Lender may, at its option, but shall not be required to, pay such expenses,
 whereupon the Lender shall be entitled to reimbursement thereof, and such
 expenses shall become part of the Obligations. 

 
	
  

 	
  

 
	
  

 	
           7.6 Compliance
 with Law. The Debtor will not use the Collateral, or permit the
 Collateral to be used, for any unlawful purpose or in violation in any
 material respects of any applicable federal, state, or municipal law. 

 
	
  

 	
  

 
	
  

 	
           7.7 Notice
 of Default. Immediately upon becoming aware of the existence of any Event
 of Default or the existence of circumstances which, through the passage of
 time, is likely to become an Event of Default, the Debtor will give written
 notice to the Lender that such circumstances or such Event of Default exists,
 stating the nature thereof, the period of existence thereof, and what action
 the Debtor proposes to take with respect thereto. 

 
	
  

 	
  

 
	
  

 	
           7.8 Additional
 Documentation. The Debtor will execute, from time to time, such
 assignments and other documents covering the Collateral and relating to the
 Obligations, including proceeds, as the Lender may reasonably request in
 order to create, evidence, perfect, maintain, or continue its security
 interest in the Collateral as a first priority interest as to all other
 interests (including additional Collateral acquired by the Debtor after the
 date hereof) other than Permitted Liens, and the Debtor will pay the cost of
 filing the same or reimburse the Lender for filing costs in all public
 offices in which 

 


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 the Lender
 may reasonably deem filing to be appropriate as well as the costs of any Lien
 searches which the Lender may reasonably request. Upon the occurrence and
 during the continuance of an Event of Default, the Debtor shall provide the
 Lender with originals of all documentary evidence, including, but not limited
 to, negotiable warehouse receipts and negotiable bills of lading, as
 applicable, reflecting the Debtor’s ownership of or interest in any of the
 Collateral sufficient to secure and perfect the Lender’s security interest
 therein, and the acknowledgment and agreement of any person holding Inventory
 or other assets of the Debtor of the Lender’s security interest in such
 assets. In addition, upon the occurrence and during the continuance of an
 Event of Default, to the extent any Collateral is located in premises leased
 by the Debtor, upon the reasonable request of Lender, Debtor shall use
 commercially reasonable efforts to cause such landlord to execute and deliver
 to Lender a commercially reasonable landlord’s agreement whereby any such
 landlord agrees to allow Lender access to the leased premises, without
 charge, to inspect or to remove the Collateral, and to enforce its Liens and
 remedies with respect to the Collateral, during the term of the lease and for
 a period of up to sixty (60) days thereafter if Debtor is no longer in
 possession of the leased premises.

 
	
  

 	
  

 
	
  

 	
           7.9 Notices.
 As soon as possible, but in no event later than five (5) business days after
 obtaining knowledge thereof, the Debtor shall give written notice to the
 Lender of: 

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           (a) Any
 legal actions pending or threatened against Debtor or any of its subsidiaries
 that could result in damages or costs to Debtor or its subsidiaries of Two
 Hundred Fifty Thousand Dollars ($250,000) or more. 

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           (b) The
 commencement of any material arbitration or material governmental proceeding
 or investigation which has been instituted or is threatened against the
 Debtor or its property that would, or would reasonably be likely to, have a
 material adverse effect on Borrower’s ability to pay or perform Borrower’s
 obligations under the Note. 

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
           (c) Any
 Event of Default or other material default under this Agreement, the
 Restructuring Agreement, the Note, or any of the Transaction Documents (as
 defined in the Restructuring Agreement); provided, however, that such notice
 shall in no event be construed as delaying the occurrence of any Event of
 Default or changing the rights and remedies of the Lender with respect
 thereto. 

 
	
  

 	
  

 	
  

 
	
  

 	
           7.10 Prompt
 Performance. The Debtor shall promptly perform in all material respects
 each and every term and condition of this Agreement and of each document
 delivered in connection herewith, time being of the essence. 

 
	
  

 	
  

 
	
  

 	
           7.11 Maintenance
 of Records. The Debtor shall keep and maintain, at the locations listed
 on Schedule 7.4 hereto or such other location as Debtor shall have notified
 Lender in writing, at its own cost and expense, satisfactory and complete
 records of the Collateral, including a record of any and all payments
 received and any and all credits granted with respect to the Collateral and
 all other dealings with the Collateral. 

 


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 The Debtor
 shall mark its general ledger books pertaining to the Collateral to evidence
 this Agreement and the security interests granted hereby. 

 
	
  

 	
 
          7.12 Delivery
 of Certificated Securities. To the extent permitted by the Intercreditor
 Agreement, all Collateral comprised of certificated securities shall be
 delivered to and held by or on behalf of the Lender pursuant hereto, shall be
 in suitable form for transfer by delivery, and shall be accompanied by all
 necessary instruments of transfer or assignment, duly executed in blank. 

 
	
  

 	
  

 
	
  

 	
           7.13 Dividends
 on Securities. In the event that any dividend or distribution is to be
 paid on any security that constitutes Collateral when no Event of Default has
 occurred and is continuing or would result therefrom, such dividend or
 distribution may be paid directly to the Debtor. If any such Event of Default
 has occurred and is continuing, then any such dividend or distribution shall
 be paid directly to the Lender to be held as Collateral. 

 


          8. Collateral
Protection Expenses; Preservation of Collateral. 


	
  

 	
  

 
	
  

 	
           8.1 Expenses
 Incurred by Lender. If, at any time, the Debtor fails to discharge taxes
 and other encumbrances at any time levied or placed on any of the Collateral,
 make repairs thereto, and pay any necessary filing fees or insurance
 premiums, in each case as and to the extent the Debtor is otherwise required
 to so discharge, make or pay in accordance with the Restructuring Agreement
 or any Ancillary Document, the Lender may provide the Debtor with written
 notice of a reasonable request to so discharge such taxes or encumbrances,
 make such repairs or pay such fees or insurance premiums. To the extent the
 Debtor fails, within five (5) business days of such notice, to do any of the
 foregoing, the Lender may, in its sole discretion, discharge such taxes or
 encumbrances, make such repairs, or pay such fees or insurance premiums. The
 Debtor agrees to reimburse the Lender on demand for any and all expenditures
 so made. The Lender will have no obligation to the Debtor to make any such
 expenditures, nor will the making thereof relieve the Debtor of any default. 

 
	
  

 	
  

 
	
  

 	
           8.2 Lender’s
 Obligations and Duties. Anything herein to the contrary notwithstanding,
 the Debtor will remain liable under each contract or agreement included
 within the Collateral to be observed or performed by the Debtor thereunder.
 The Lender will not have any obligation or liability under any such contract
 or agreement by reason of or arising out of this Agreement or the receipt by
 the Lender of any payment relating to any of the Collateral, nor will the
 Lender be obligated in any manner to perform any of the obligations of the
 Debtor under or pursuant to any such contract or agreement, to make inquiry
 as to the nature or sufficiency of any payment received by the Lender in
 respect of the Collateral or as to the sufficiency of any performance by any
 party under any such contract or agreement. The Lender will not have any
 obligation to present or file any claim or to take any action to enforce any
 performance or to collect the payment of any amounts which may have been
 assigned to the Lender or to which the Lender may be entitled at any time or
 times. The Lender’s sole duty with respect to the custody, safekeeping, and
 physical preservation of the Collateral in its possession, under 

 


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 Section
 9-207 of the UCC or otherwise, will be to deal with such Collateral in the
 same manner as the Lender deals with similar property for its own account. 

 


         9. Power of
Attorney. Upon an Event of Default, the Debtor irrevocably constitutes and
appoints the Lender and any officer or agent thereof, with full power of
substitution, as its true and lawful attorneys-in-fact with full irrevocable
power and authority in the place and stead of the Debtor or in the Lender’s own
name, for the purpose of carrying out the terms of this Agreement, to take any
and all appropriate action, and to execute any and all documents and instruments
that may be necessary or desirable to accomplish the purposes of this
Agreement, including, without limitation, to sign its name on any invoice,
billing memorandum, bill of lading, or warehouse receipt relating to any
Collateral, on drafts against clients or customers, on schedules and
confirmatory assignments of Accounts or other Collateral, on notices of
assignment, on financing statements and other public records, on verification
of Accounts, and on notices to clients and customers, to notify the post office
to change the address for delivery of the Debtor’s mail to the address
designated by the Lender to receive and open all mail addressed to Debtor, to
send requests for verification of Accounts or other Collateral to customers, to
file financing statements with respect hereto, with or without the Debtor’s
signature, or a photocopy of this Agreement in substitution for a financing
statement, as the Lender may deem appropriate, to execute in the Debtor’s name
such financing statements and amendments thereto and continuation statements
which may require the Debtor’s signature, and to do all things necessary to
carry out the intent of this Agreement. This power of attorney is a power
coupled with an interest and is irrevocable. The powers conferred on the Lender
hereunder are solely to protect its interests in the Collateral and do not
impose any duty upon it to exercise any such powers. The Debtor hereby ratifies
and approves all acts of the attorney taken within the scope of the authority
granted hereunder. Neither the Lender nor the attorney will be liable for any
acts of commission or omission nor for any error in judgment or mistake of fact
or law. 


          10. Event
of Default. The term “Event of Default” as used herein shall have the
meanings ascribed to such term in Section 4 of the Note. 


          11. Remedies.



	
  

 	
  

 
	
  

 	
           11.1 If
 an Event of Default occurs and is continuing, the Lender may, without demand
 of performance or other demand, advertisement, or notice of any kind (except
 as specified below of time and place of public or private sale) upon the
 Debtor, declare this Agreement to be in default, and the Lender will
 thereafter have in any jurisdiction in which enforcement hereof is sought, in
 addition to all other rights and remedies, the rights and remedies of a
 secured party under the UCC or the Uniform Commercial Code of any
 jurisdiction in which the Collateral is located, including, without
 limitation, the right to take possession of the Collateral through self-help,
 without judicial process, without first obtaining a final judgment or giving
 the Debtor or any third party notice and opportunity for a hearing on the
 Lender’s claim or action, and may collect, receive, assemble, process,
 appropriate, and realize upon the Collateral, or any part thereof, and may
 forthwith sell, lease, assign, give an option or options to purchase, or sell
 or otherwise dispose of and deliver such Collateral (or contract to do so),
 or any part thereof, in one or more parcels at a public or private sale or
 sales, at any exchange at such prices as it may deem acceptable, for cash or
 on credit or for future delivery without 

 


10









	
  

 	
  

 
	
  

 	
 assumption of any credit risk. The Lender shall have the right upon
 any such public sale or sales and, to the extent permitted by law, upon any
 such private sale or sales, to purchase the whole or any part of such
 Collateral so sold, free of any right or equity of redemption, which equity
 of redemption the Debtor hereby releases. Such sales may be adjourned and
 continued from time to time with or without notice. The Lender shall have the
 right to conduct such sales on the Debtor’s premises or elsewhere and shall
 have the right to use such premises without charge for such time or times as
 the Lender deems necessary or advisable. The Debtor hereby agrees that ten
 (10) business days prior written notice by the Lender of the time and place
 of any public sale or of the time after which a private sale may take place
 is reasonable notification of such matters. The Lender may in its discretion
 require the Debtor to assemble all or any part of the Collateral at such
 location or locations within the jurisdictions of the Debtor’s principal
 office or at such other locations as the Lender may reasonably designate. In
 addition, the Debtor waives any and all rights that it may have to a judicial
 hearing in advance of the enforcement of any of the Lender’s rights
 hereunder, including, without limitation, the right following an Event of
 Default to take immediate possession of the Collateral and to exercise its
 rights with respect thereto. 

 
	
  

 	
  

 
	
  

 	
           11.2
 Until the Lender is able to effect a sale, lease, or other disposition of
 Collateral, the Lender shall have the right to hold or use Collateral, or any
 part thereof, to the extent that it deems appropriate for the purpose of
 preserving Collateral or its value or for any other purpose deemed
 appropriate by the Lender. The Lender shall have no obligation to the Debtor
 to maintain or preserve the rights of the Debtor as against third parties
 with respect to Collateral while Collateral is in the possession of the
 Lender. 

 
	
  

 	
  

 
	
  

 	
           11.3 The
 Lender may, if it so elects, seek the appointment of a receiver or keeper to
 take possession of Collateral and to enforce any of the Lender’s remedies
 with respect to such appointment without prior notice or hearing as to such
 appointment. 

 
	
  

 	
  

 
	
           12. Marshaling.
 The Lender will not be required to marshal any present or future collateral
 security (including, but not limited to, this Agreement and the Collateral) for,
 or other assurances of payment of, the Obligations or any of them or to
 resort to such collateral security or other assurances of payment in any
 particular order, and all of its rights hereunder and in respect of such
 collateral security and other assurances of payment will be cumulative and in
 addition to all other rights, however existing or arising. 

 
	
  

 
	
           13. Proceeds
 of Dispositions; Expenses. The Debtor will pay to the Lender on demand
 any and all expenses, including reasonable fees of outside counsel and
 disbursements, a one-page summary of which will be provided to Debtor,
 incurred or paid by the Lender in protecting, preserving or enforcing the
 Lender’s rights under or in respect of any of the Obligations or any of the
 Collateral. After deducting all of such expenses, the residue of any proceeds
 of collection or sale of the Obligations or Collateral will, to the extent
 actually received in cash, be applied to the payment of the Obligations in
 such order or preference as the Lender may determine, proper allowance and
 provision being made for any Obligations not then due. Upon the final payment
 and satisfaction in full of all of the Obligations and after making any
 payments required by Section 9-608(a)(1)(C) or 9-615(a)(3) of the UCC, any excess
 will be 

 


11





returned to
the Debtor, and the Debtor will remain liable for any deficiency in the payment
of the Obligations. 


          14. Overdue
Amounts. Until paid, all amounts due and payable by the Debtor hereunder
will be a debt secured by the Collateral and will bear, whether before or after
judgment, interest at the rate of interest set forth in the Note. 


          15. Waiver;
Additional Rights and Remedies. 


	
  

 	
  

 
	
  

 	
           15.1 To
 the maximum extent permitted by applicable law, the Debtor hereby waives all
 claims, damages, and demands against the Lender arising out of the
 repossession, retention, or sale of the Collateral except such as arise
 solely out of the gross negligence or willful misconduct of the Lender as
 finally determined by a court of competent jurisdiction. 

 
	
  

 	
  

 
	
  

 	
           15.2 The
 Debtor shall, and shall cause its officers, personnel, and agents to,
 cooperate fully with the Lender and provide the Lender with all information,
 support, and assistance requested by the Lender to facilitate the foregoing,
 including full and complete access to Debtor’s properties, books, and
 records. 

 
	
  

 	
  

 
	
  

 	
           15.3 The
 Lender or its designee may exercise any and all other rights and remedies
 available to it by law, in equity, or by agreement, including rights and
 remedies under the UCC or any other applicable law, or under the
 Restructuring Agreement or any other agreements in existence between the
 parties. 

 


          16. Acceleration
of Obligations. Upon the occurrence of any of the Events of Default, in
addition to the aforementioned remedies, the Lender may declare any and all
secured Obligations to be immediately due and payable, and the same shall
thereupon become immediately due and payable without further notice, demand,
presentment, or protest, all of which are expressly waived by the Debtor. 


          17. Governing
Law. This Agreement will be construed and enforced in accordance with the
substantive laws of the State of Minnesota without giving effect to the
conflicts of laws principles of any jurisdiction. 


          18. Entire
Agreement. This Agreement contains the entire understanding of the parties
hereto with respect to the subject matter contained herein. There are no
restrictions, promises, warranties, covenants, or undertakings, other than
those expressly provided for herein. This Agreement supersedes all prior
agreements and undertakings between the parties with respect to such subject
matter. 


          19. Amendments;
Consents; Waivers. The Lender may by written agreement with the Debtor
amend this Agreement. No waiver of any term or condition of this Agreement, in
any one or more instances, will constitute a waiver of the same term or
condition of this Agreement on any future occasion. 


          20. Severability
of Invalid Provision. If any one or more covenant or agreement provided in
this Agreement is contrary to law, then such covenant or agreement will be null
and 


12





void and will in no way affect the validity of the other provisions of
this Agreement, which will otherwise be fully effective and enforceable. 


          21. Successors
and Assigns. This Agreement will be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns, including
one or more future holders of the Note; provided, however, that
neither party shall assign any of its obligations or rights hereunder without
the prior written consent of the other party. Notwithstanding the foregoing,
Lender may assign or transfer this Agreement to an affiliate of Lender, provided
that such affiliate is not a competitor of Debtor and Medtronic, Inc. remains
such affiliate’s agent with respect to the obligations under this Agreement. 


          22. Counterparts.
This Agreement may be executed in one or more counterparts, and will become
effective when one or more counterparts have been signed by each of the
parties. 


          23. Cumulative
Remedies. The rights, remedies, powers, and privileges provided in this
Agreement are cumulative and not exclusive and will be in addition to any and
all other rights, remedies, powers, and privileges granted by law, rule,
regulation, or instrument. 


          24. Subordination.
The Lender acknowledges and agrees that the Lender’s rights in and to the
Collateral hereunder are subordinate to the rights of the Senior Lender as set
forth in that certain Subordination Agreement dated as of the date hereof by
and among the Lender and the Senior Lender (the “Subordination Agreement”),
which has been approved by the Debtor. In the event of an assignment by Senior
Lender to a successor or assignee or Debtor enters into a refinancing with a
New Lender, Lender agrees to enter into a new subordination agreement with such
lender; provided that the terms and conditions are substantially the same in
all material respects, up to the Capped Amount, as entered into as of the date
hereof with Senior Lender. 


          25. Termination.
This Agreement shall terminate automatically upon payment in full of the
Obligations. 


          26. Notices.
All notices, requests, demands, and other communications under this Agreement
shall be in writing and shall be deemed to have been duly given (a) on the date
of service if served personally on the party to whom notice is to be given, (b)
on the next business day after delivery to Federal Express or similar overnight
courier for next day delivery, or (c) on the third (3rd) day after mailing, if
mailed to the party to whom notice is to be given, by first class mail,
registered or certified, postage prepaid, and properly addressed to the party
as follows: 


          If to the
Lender:


	
  

 	
  

 
	
  

 	
 Medtronic,
 Inc.

 
	
  

 	
 710
 Medtronic Parkway NE

 
	
  

 	
 Minneapolis,
 MN 55432-5604

 
	
  

 	
  

 
	
  

 	
  

 


13









	
  

 	
  

 
	
  

 	
 With
 separate copies thereof addressed to:

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
 Attn:
 General Counsel

 
	
  

 	
  

 	
 Mail Stop
 LC400

 
	
  

 	
 and

 	
  

 
	
  

 	
  

 	
 Attn: Vice
 President of Corporate Development

 
	
  

 	
  

 	
 Mail Stop
 LC270

 
	
  

 	
  

 	
  

 
	
  

 	
 And with
 copy to:

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
 Stoel Rives
 LLP

 
	
  

 	
  

 	
 33 South
 Sixth Street, Suite 4200

 
	
  

 	
  

 	
 Minneapolis,
 MN 55402

 
	
  

 	
  

 	
 Attn: Robert
 A. Kukuljan

 
	
  

 	
  

 	
  

 
	
  

 	
 If to the
 Debtor:

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
 Urologix,
 Inc.

 
	
  

 	
  

 	
 14405 21st
 Avenue North

 
	
  

 	
  

 	
 Minneapolis,
 MN 55447

 
	
  

 	
  

 	
 Attn: Greg
 Fluet, CEO

 
	
  

 	
  

 	
  

 
	
  

 	
 With copy
 to:

 
	
  

 	
  

 	
  

 
	
  

 	
  

 	
 Lindquist
 & Vennum LLP

 
	
  

 	
  

 	
 4200 IDS
 Center

 
	
  

 	
  

 	
 80 South
 Eighth Street

 
	
  

 	
  

 	
 Minneapolis,
 MN 55402

 
	
  

 	
  

 	
 Attn: Charles P. Moorse

 



          27. Jurisdiction.
Each party hereto irrevocably submits to the exclusive jurisdiction of the
state or federal courts located in Hennepin County, Minnesota, and hereby
irrevocably waives, and agrees not to assert in any suit, action, or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that the venue thereof may not be appropriate, that such suit,
action, or proceeding is improper, or that this Agreement or any of the
documents referred to in this Agreement may not be enforced in or by such
courts, and each party hereto irrevocably agrees that all claims with respect
to such suit, action, or proceeding shall be heard and determined in such
Delaware state or federal court. Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action, or proceeding by mailing a copy thereof to such party in the manner
provided in Section 26 and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. 


          28. Waiver
of Jury Trial. To the fullest extent permitted by applicable law, the
Lender hereby knowingly, voluntarily, and intentionally waives its right to a
jury trial of any claim or cause of action based upon or arising out of this
Agreement or in any of the agreements 


14





mentioned herein or in any dealings between them relating to the
subject matter of this Agreement. Each party hereto acknowledges that it has
been induced to enter into this Agreement by, among other things, the mutual
waivers and certifications herein. 


 [Signature page follows.]


15






EXHIBIT 10.3 


          IN
WITNESS WHEREOF, this Security Agreement has been duly executed by the parties
hereto on the day and year first above written.


	
  

 	
  

 	
  

 
	
 THE LENDER:

 	
  

 	
 THE DEBTOR:

 






	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 
	
 MEDTRONIC,
 INC.

 	
  

 	
 UROLOGIX,
 INC.

 
	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 	
  

 
	
 By: 

 	
   /s/ Thomas
 M. Tefft

 	
  

 	
 By: 

 	
   /s/ Greg
 Fluet

 
	
 Name:

 	
 Thomas M.
 Tefft

 	
  

 	
 Name: 

 	
 Greg Fluet

 
	
 Title:

 	
 Senior Vice
 President & President,

 	
  

 	
 Title: 

 	
 Chief
 Executive Officer

 
	
  

 	
  

 	
 Neuromodulation

 	
  

 	
  

 	
  

 	
  

 


 [Signature page to Security Agreement.]