Document:

EXHIBIT 10.5

 

WARRANT

 

To Purchase 380,357 Shares
of

Common Stock

of

MEDICALCV, INC.

 

This Warrant and the securities
issuable upon exercise of this Warrant have not been registered under the
Securities Act of 1933 (the “Securities Act”) or under any state securities or
“Blue Sky” laws (“Blue Sky Laws”).  No
transfer, sale, assignment, pledge, hypothecation or other disposition of this
Warrant or the securities issuable upon exercise of this Warrant or any
interest therein may be made except (a) pursuant to an effective registration
statement under the Securities Act and any applicable Blue Sky Laws or (b) if
the Company has been furnished with an opinion of counsel for the holder, which
opinion and counsel shall be reasonably satisfactory to the Company, to the
effect that no registration is required because of the availability of an
exemption from registration under the Securities Act and applicable Blue Sky
Laws.

 

THIS CERTIFIES THAT, for
good and valuable consideration, PETER LUDWIG HAUSER or his registered assigns,
is entitled to subscribe for and purchase from MedicalCV, Inc., a Minnesota
corporation (the “Company”), at any time to and including the date that
is ten (10) years after the date hereof, Three Hundred Eighty Thousand Three
Hundred Fifty-Seven (380,357) fully paid and nonassessable shares of the Common
Stock of the Company at the price of Seventy Cents ($0.70) per share (the “Warrant
Exercise Price”), subject to the antidilution provisions of this
Warrant.  The shares which may be
acquired upon exercise of this Warrant are referred to herein as the “Warrant
Shares.”  As used herein, the term
“Holder” means Hauser, any party who acquires all or a part of this Warrant as
a registered transferee of Hauser, or any record holder or holders of the Warrant
Shares issued upon exercise, whether in whole or in part, of the Warrant; the
term “Common Stock” means the Company’s Common Stock, $.01 par value.

 

This Warrant is subject to
the following provisions, terms and conditions:

 

1.             Exercise; Conversion Right; Transferability.

 

(a)           The rights represented by this Warrant may be exercised by
the Holder hereof at any time, for a period of ten (10) years commencing on the
date hereof, in whole or in part (but not as to a fractional share of Common
Stock), by written notice of exercise (in the form attached hereto) delivered
to the Company at the principal office of the Company prior to the expiration
of this Warrant and accompanied or preceded by the surrender of this Warrant
along with a check in payment of the Warrant Exercise Price for such shares.

 

(b)           Subject to the restrictions on transfer of this Warrant or
the Warrant Shares set forth herein, the Holder of this Warrant shall have the
right to require the Company to convert this Warrant (the “Conversion Right”)
at any time after the date hereof and prior to its expiration into shares of
Common Stock as provided for in Sections 1(b) through 1(d) hereof.  Upon

 

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exercise of the Conversion Right, the Company
shall deliver to the Holder (without payment by the Holder of any Warrant
Exercise Price) that number of shares of Company Common Stock equal to the
quotient obtained by dividing (i) the value of the Warrant at the time the
Conversion Right is exercised (determined by subtracting the aggregate Warrant
Exercise Price for the Warrant Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value (as
defined in Section 10 hereof) for the Warrant Shares immediately prior to the
exercise of the Conversion Right) by (ii) the Fair Market Value of one share of
Common Stock immediately prior to the exercise of the Conversion Right.

 

(c)           The Conversion Right may be exercised by the Holder, at
any time or from time to time, after the date hereof and prior to its
expiration, on any business day by delivering a written notice in the form
attached hereto (the “Conversion Notice”) to the Company at the offices
of the Company exercising the Conversion Right and specifying (i) the total
number of shares of Common Stock the Holder will purchase pursuant to such
conversion and (ii) a place and date not less than one or more than 20 business
days from the date of the Conversion Notice for the closing of such purchase.

 

(d)           At any closing under Section 1(c) hereof, (i) the Holder
will surrender the Warrant, (ii) the Company will deliver to the Holder a
certificate or certificates for the number of shares of Common Stock issuable
upon such conversion, together with cash, in lieu of any fraction of a share,
and (iii) the Company will deliver to the Holder a new warrant representing the
number of shares, if any, with respect to which the Warrant shall not have been
exercised.

 

(e)           Subject to the provisions of Section 7 hereof, this
Warrant shall be fully transferable, in whole or in part; provided that this
Warrant shall be transferable only on the books of the Company by the Holder in
person, or by duly authorized attorney, on surrender of the Warrant, properly
assigned.

 

2.             Exchange and Replacement.  Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.  Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction, or mutilation of
this Warrant, and, in case of loss, theft or destruction, of indemnity
reasonably satisfactory to it, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will make and deliver a new Warrant of like
tenor, in lieu of this Warrant.  This
Warrant shall be promptly canceled by the Company upon the surrender hereof in
connection with any exchange or replacement. 
The Company shall pay all expenses, taxes (other than stock transfer
taxes), and other charges incurred by it in connection with the preparation,
execution, and delivery of Warrants pursuant to this Section 2.

 

3.             Issuance of the Warrant Shares.

 

(a)           The Company agrees that the shares of Common Stock
purchased upon exercise of this Warrant shall be and are deemed to be issued to
the Holder as of the close of business on

 

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the date on which this Warrant shall have
been surrendered and the payment made for such Warrant Shares as
aforesaid.  Subject to the provisions of
paragraph (b) of this Section 3, certificates for the Warrant Shares so
purchased shall be delivered to the Holder within a reasonable time, not
exceeding fifteen (15) days after the rights represented by this Warrant shall
have been so exercised, and, unless this Warrant has expired, a new Warrant
representing the right to purchase the number of Warrant Shares, if any, with
respect to which this Warrant shall not then have been exercised shall also be
delivered to the Holder within such time.

 

(b)           Notwithstanding the foregoing, the Company shall not be
required to deliver any certificate for Warrant Shares upon exercise of this
Warrant except in accordance with exemptions from the applicable securities
registration requirements or registrations under applicable securities
laws.  Nothing herein, however, shall
obligate the Company to effect registrations under federal or state securities
laws, except as provided in Section 9. 
If registrations are not in effect and if exemptions are not available
when the Holder seeks to exercise the Warrant, the Warrant exercise period will
be extended, if need be, to prevent the Warrant from expiring, until such time
as either registrations become effective or exemptions are available, and the
Warrant shall then remain exercisable for a period of at least 30 calendar days
from the date the Company delivers to the Holder written notice of the
availability of such registrations or exemptions.  The Holder agrees to execute such documents and make such
representations, warranties, and agreements as may be required solely to comply
with the exemptions relied upon by the Company, or the registrations made, for
the issuance of the Warrant Shares.

 

4.             Covenants of the Company.  The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
nonassessable, and free from all taxes, liens, and charges with respect to the
issuance thereof.  The Company further
covenants and agrees that during the period within which the rights represented
by this Warrant may be exercised, the Company will at all times have authorized
and reserved for the purpose of issue or transfer upon exercise of the
subscription rights evidenced by this Warrant a sufficient number of shares of
Common Stock to provide for the exercise of the rights represented by this
Warrant.

 

5.             Antidilution Adjustments.  The provisions of this Warrant are subject to
adjustment as provided in this Section 5; provided that no adjustment shall be
made pursuant to this Section 5 which has the effect of duplicating any
adjustment made pursuant to the Articles of Incorporation of the Company or any
certificate of designation thereto, if any.

 

(a)           The Warrant Exercise Price shall be subject to adjustment
from time to time as hereinafter provided. 
Upon each adjustment of the Warrant Exercise Price the holder of this
Warrant shall thereafter be entitled to purchase the number of shares of Common
Stock of the Company obtained by multiplying the Warrant Exercise Price in
effect immediately prior to such adjustment by the number of shares issuable
pursuant to exercise immediately prior to such adjustment and dividing the
product thereof by the Warrant Exercise Price resulting from such adjustment.

 

(b)           Except for (i) options, warrants or other rights to
purchase securities outstanding on the date of the issuance of this Warrant
(provided there is no adjustment to the terms of such

 

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options, warrants or other securities on or
after the date of issuance of this Warrant); (ii) options to purchase shares of
Common Stock and the issuance of awards of Common Stock pursuant to stock option
or employee stock purchase plans adopted by the Company and shares of Common
Stock issued upon the exercise of such options granted pursuant to such plans
(provided there is no adjustment to the terms of such options, awards or other
securities on or after the date of issuance of this Warrant) (appropriately
adjusted to reflect stock splits, combinations, stock dividends,
reorganizations, consolidations and similar changes); (iii) up to four separate
issues or sales by the Company during any twelve month period, none of which
shall exceed 25,000 shares of Common Stock or securities convertible into or
exercisable for the purchase of Common Stock; (iv) Common Stock or securities
convertible into or exercisable for the purchase of Common Stock issued in connection
with any merger or acquisition of any business or tangible or intangible assets
which is approved by the Company’s Board of Directors; and (v) warrants to
purchase shares of Common Stock and shares of Common Stock issued upon exercise
of such warrants granted to Tower Finance, Ltd. (“Tower”) pursuant
to that certain consulting agreement by and between the Company and
Tower; if and whenever the Company shall issue or sell any additional
securities, warrants or rights or any security convertible or exchangeable into
equity, securities, warrants or rights (collectively, “Convertible Securities”)
for a consideration per share less than the Warrant Exercise Price in effect
immediately prior to the time of such issue or sale, then, forthwith upon such
issue or sale, the Warrant Exercise Price shall be adjusted to a price
determined by multiplying such Warrant Exercise Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock
that the aggregate consideration received by the Company for such issuance
would purchase at such Warrant Exercise Price; and the denominator of which
shall be the number of shares of such additional Common Stock and the number of
shares of Common Stock outstanding prior to such issuance.  For the purpose of the above calculation,
the number of shares of Common Stock immediately prior to such issuance shall
be calculated on a fully-diluted basis, as if this Warrant and any other
outstanding warrants, options or other rights for the purchase of shares of
stock or Convertible Securities had been fully exercised as of such date.  Except as provided in Section 5(e)
below, no further adjustments of the Warrant Exercise Price shall be made upon
the actual issuance of Common Stock or of any Convertible Securities upon the
exercise of such rights or options or upon the actual issue of such Common
Stock upon conversion or exchange of such Convertible Securities.

 

(c)           For purposes of this Section 5, in case any shares of
Common Stock or Convertible Securities or any rights or options to purchase any
such Common Stock or Convertible Securities shall be issued or sold for cash,
the consideration received therefor shall be deemed to be the amount received
by the Company therefor, without deducting therefrom any expenses incurred or
any underwriting commissions, discounts or concessions paid or allowed by the
Company in connection therewith.  In case
any shares of Common Stock or Convertible Securities or any rights or options
to purchase any such Common Stock or Convertible Securities shall be issued or
sold for a consideration other than cash, the amount of the consideration other
than cash received by the Company shall be deemed to be the fair value of such
consideration as determined by the Board of Directors of the Company, without
deducting therefrom any expenses incurred or any underwriting commissions,
discounts or concessions paid or allowed by the Company in connection therewith.  In case any shares of Common Stock or
Convertible Securities or any rights or options to purchase such Common Stock
or Convertible Securities

 

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shall be issued in connection with any merger
or consolidation in which the Company is the surviving corporation, the amount
of consideration therefor shall be deemed to be the fair value as determined by
the Board of Directors of the Company of such portion of the assets and
business of the non-surviving corporation or corporations as such Board shall
determine to be attributable to such Common Stock, Convertible Securities,
rights or options, as the case may be. 
In the event of any consolidation or merger of the Company in which the
Company is not the surviving corporation or in the event of any sale of all or
substantially all of the assets of the Company for stock or other securities of
any other corporation, the Company shall be deemed to have issued a number of
shares of its Common Stock for stock or securities of the other corporation
computed on the basis of the actual exchange ratio on which the transaction was
predicated and for a consideration equal to the fair market value on the date
of such transaction of such stock or securities of the other corporation, and
if any such calculation results in adjustment of the Warrant Exercise Price,
the determination of the number of shares of Common Stock issuable upon
exercise immediately prior to such merger, conversion or sale, for purposes of
Section 5(f) below, shall be made after giving effect to such adjustment
of the Warrant Exercise Price.

 

(d)           In case the Company shall at any time subdivide its
outstanding shares of Common Stock into a greater number of shares, the Warrant
Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of
Common Stock of the Company shall be combined into a smaller number of shares,
the Warrant Exercise Price in effect immediately prior to such combination
shall be proportionately increased.

 

(e)           If (i) the purchase price provided for in any right or
option referred to in Section 5(b), or (ii) the additional consideration,
if any, payable upon the conversion or exchange of Convertible Securities, or
(iii) the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock, shall change at any time (other than under or by
reason of provisions designed to protect against dilution), or any Convertible
Securities shall terminate, expire or cease to be outstanding without exercise
thereof, the Warrant Exercise Price then in effect hereunder shall forthwith be
increased or decreased to such Warrant Exercise Price as would have applied had
the adjustments made upon the issuance of such rights, options or Convertible
Securities been made upon the basis of (a) the issuance of the number of
shares of Common Stock theretofore actually delivered upon the exercise of such
options or rights or upon the conversion or exchange of such Convertible
Securities, and the total consideration received therefor, and (b) the
issuance at the time of such change of any such options, rights, or Convertible
Securities then still outstanding for the consideration, if any, received by
the Company therefor and to be received on the basis of such changed price; and
on the expiration of any such option or right or the termination of any such
right to convert or exchange such Convertible Securities, the Warrant Exercise
Price then in effect hereunder shall forthwith be increased to such Warrant
Exercise Price as would have been obtained had the adjustments made upon the
issuance of such rights or options or Convertible Securities been made upon the
basis of the issuance of the shares of Common Stock theretofore actually
delivered (and the total consideration received therefor) upon the exercise of
such rights or options or upon the conversion or exchange of such Convertible
Securities.  If the purchase price
provided for in any right or option referred to in Section 5(b), or the
rate at which any Convertible Securities referred to in Section 5(b) are
convertible into or exchangeable for Common Stock, shall decrease at any

 

5

 

time under or by reason of provisions with
respect thereto designed to protect against dilution, then in case of the
delivery of Common Stock upon the exercise of any such right or option or upon
conversion or exchange of any such Convertible Security, the Warrant Exercise
Price then in effect hereunder shall forthwith be decreased to such Warrant
Exercise Price as would have applied had the adjustments made upon the issuance
of such right, option or Convertible Security been made upon the basis of the
issuance of (and the total consideration received for) the shares of Common
Stock delivered as aforesaid.

 

(f)            If any capital reorganization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, and except as otherwise
provided herein, lawful and adequate provision shall be made whereby the holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of the
Common Stock of the Company immediately theretofore receivable upon the
exercise of this Warrant, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such stock
immediately theretofore receivable upon the exercise of this Warrant had such
reorganization, reclassification, consolidation, merger or sale not taken place,
and in any such case appropriate provision shall be made with respect to the
rights and interests of the holder of this Warrant to the end that the
provisions hereof (including without limitation provisions for adjustments of
the Warrant Exercise Price and of the number of shares receivable upon the
exercise hereof) shall thereafter be applicable, as nearly as may be in
relation to any shares of stock, securities or assets thereafter receivable
upon the exercise of this Warrant.  The
Company shall not effect any such consolidation, merger or sale, unless prior
to the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument executed and mailed
to the registered holder of this Warrant, at the last address of such holder
appearing on the books of the Company, the obligation to deliver to such holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to receive.

 

(g)           Upon any adjustment of the Warrant Exercise Price, the
Company shall give written notice thereof, by first-class mail, postage
prepaid, addressed to the registered holder of this Warrant, as shown on the
books of the Company, which notice shall state the Warrant Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.  No
adjustment to the Warrant Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($0.05); provided, however, that any adjustments which by reason of this
Section 5(g) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment; and, provided further, that
adjustment shall be required and made in accordance with the provisions of this
Section 5 (other than this Section 5(g)) not later than such time as
may be required in order to preserve the tax-free nature of a distribution to
the holders of shares of Common Stock. 
All calculations under this Section 5

 

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shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be.  Anything in this Section 5 to the contrary notwithstanding, the
Company shall be entitled to make such increases in the conversion rate in
addition to those required by this Section 5 as it in its discretion shall
determine to be advisable in order that any stock dividends, subdivisions of
shares, distribution of rights to purchase stock or securities, or distribution
of securities convertible into or exchangeable for stock hereafter made by the
Company to its stockholders shall not be taxable.

 

(h)           In case at any time: (i) there shall be any capital
reorganization, or reclassification of the capital stock of the Company, or
consolidation or merger of the Company with, or sale of all or substantially
all of its assets to, another corporation; or (ii) there shall be a voluntary
or involuntary dissolution, liquidation or winding up of the Company; then, in any
one or more of said cases, the Company shall give written notice, by
first-class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, of
the date on which (a) the books of the Company shall close or a record
shall be taken for such dividend, distribution or subscription rights, or (b)
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place, as the case may
be.  Such notice shall also specify the
date as of which the holders of Common Stock of record shall participate in
such dividend, distribution or subscription rights, or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, or winding up, as the case may be.  Such written notice shall be given at least
twenty (20) days prior to the action in question and not less than twenty (20)
days prior to the record date or the date on which the Company’s transfer books
are closed in respect thereto.

 

(i)            If any event occurs as to which in the opinion of the
Board of Directors of the Company the other provisions of this Section 5 are
not strictly applicable or if strictly applicable would not fairly protect the
rights of the holder of this Warrant in accordance with the essential intent
and principles of such provisions, then the Board of Directors shall make an
adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights as aforesaid.

 

(j)            As used in this Section 5 the term “Common Stock” shall
mean and include the Company’s presently authorized Common Stock and any
additional Common Stock that may be authorized by due action of the Company’s
Board of Directors and shareholders entitled to vote thereon.

 

6.             No Voting Rights.  This Warrant shall not entitle the Holder to any voting rights or
other rights as a shareholder of the Company.

 

7.             Notice of Transfer of Warrant or Resale of the
Warrant Shares.

 

(a)           The Holder, by acceptance hereof, agrees to give written
notice to the Company before transferring this Warrant or transferring any
Warrant Shares of such Holder’s intention to do so, describing briefly the
manner of any proposed transfer. 
Promptly upon receiving such written notice, the Company shall present
copies thereof to the Company’s counsel and to counsel to the original
purchaser of this Warrant.  If in the

 

7

 

opinion of each such counsel
the proposed transfer may be effected without registration or qualification
(under any federal or state securities laws), the Company, as promptly as
practicable, shall notify the Holder of such opinion, whereupon the Holder
shall be entitled to transfer this Warrant or to dispose of Warrant Shares
received upon the previous exercise of this Warrant, all in accordance with the
terms of the notice delivered by the Holder to the Company; provided that an
appropriate legend may be endorsed on this Warrant or the certificates for such
Warrant Shares respecting restrictions upon transfer thereof necessary or
advisable in the opinion of counsel and satisfactory to the Company to prevent
further transfers which would be in violation of Section 5 of the Securities
Act of 1933, as amended (the “Securities Act”) and applicable state securities
laws; and provided further that the prospective transferee or purchaser shall
execute such documents and make such representations, warranties, and
agreements as may be required solely to comply with the exemptions relied upon
by the Company for the transfer or disposition of the Warrant or Warrant
Shares.

 

(b)           If in the opinion of either of the counsel referred to in
this Section 7, the proposed transfer or disposition of this Warrant or such
Warrant Shares described in the written notice given pursuant to this Section 7
may not be effected without registration or qualification of this Warrant or
such Warrant Shares the Company shall promptly give written notice thereof to
the Holder, and the Holder will limit its activities in respect to such
transfer or disposition as, in the opinion of both such counsel, are permitted
by law.

 

8.             Fractional Shares.  Fractional shares shall not be issued upon the exercise of this
Warrant, but in any case where the Holder would, except for the provisions of
this Section 8, be entitled under the terms hereof to receive a fractional
share, the Company shall, upon the exercise of this Warrant for the largest
number of whole shares then called for, pay a sum in cash equal to the sum of
(a) the excess, if any, of the Fair Market Value of such fractional share over
the proportional part of the Warrant Exercise Price represented by such
fractional share, plus (b) the proportional part of the Warrant Exercise Price,
if paid by the Holder, represented by such fractional share.

 

9.             Registration Rights.

 

(a)           If the Company at any time until two (2) years after
complete exercise or expiration of this Warrant proposes to register under the
Securities Act (except by a Form S-4 or Form S-8 Registration Statement or any
successor forms thereto) any of its equity securities, it will give written
notice to all Holders of this Warrant, any Warrants issued pursuant to Section
2 and/or Section 3(a) hereof, and any Warrant Shares of its intention to do so
and, on the written request of any such Holder given within twenty (20) days
after receipt of any such notice (which request shall specify the Warrant
Shares intended to be sold or disposed of by such Holder and describe the
nature of any proposed sale or other disposition thereof), the Company will use
its best efforts to cause all such Warrant Shares, the Holders of which shall have
requested the registration or qualification thereof, to be included in such
registration statement proposed to be filed by the Company; provided that:

 

(i)            if a greater number of Warrant
Shares is offered for participation in the proposed offering than in the
reasonable opinion of the managing underwriter of the

 

8

 

proposed offering can be
accommodated without adversely affecting the proposed offering, then the amount
of Warrant Shares proposed to be offered by such Holders for registration, as
well as the number of securities of any other selling shareholders
participating in the registration, shall be proportionately reduced to a number
deemed satisfactory by the managing underwriter

 

(ii)           the Company may, at its sole
discretion and without the consent of any holder of the Warrant Shares,
withdraw such registration statement and abandon the proposed offering in which
any such holder had requested to participate;

 

(iii)          if the offering to which the registration
statement relates is to be distributed by or through an underwriter, each
holder of the Warrant Shares shall agree, as a condition to the inclusion of
such holder’s securities in such registration, to sell securities held by such
holder through such underwriter on the same terms and conditions as the
underwriter agrees to sell securities on behalf of the Company and not to sell,
transfer, pledge, assign or otherwise dispose of the Warrant Shares of the
Company not sold by such holder in such offering for such period (up to 180
days after the effective date of the registration statement) as may be required
by the underwriter;

 

(iv)          the Company shall not be obligated to
include any Warrant Shares in any such registration for any Holder who is able
to sell all of the Warrant Shares in a single transaction pursuant to Rule 144
under the Securities Act (or any other similar rule or regulation) during the
three-month period beginning on the date such notice is received by such
holder, calculated as of the date of such receipt.

 

(b)           Further, on a one-time basis only, at any time until two
(2) years after complete exercise or expiration of this Warrant, upon request
by the Holder or Holders of a majority in interest of this Warrant, of any
Warrants issued pursuant to Section 2 and/or Section 3(a) hereof, and of any
Warrant Shares, the Company will promptly take all necessary steps to register
or qualify, under the Securities Act and the securities laws of such states as
the Holders may reasonably request, such number of Warrant Shares issued and to
be issued upon conversion of the Warrants requested by such Holders in their
request to the Company; provided that the Company shall not be obligated to
include any Warrant Shares in any such registration for any Holder who is able
to sell all of the Warrant Shares in a single transaction pursuant to Rule 144
under the Securities Act (or any other similar rule or regulation) during the
three-month period beginning on the date such notice is received by such
holder, calculated as of the date of such receipt.  The Company shall keep effective and maintain any registration,
qualification, notification, or approval specified in this Paragraph (b) for
such period as may be reasonably necessary for such Holder or Holders of such
Warrant Shares to dispose thereof and from time to time shall amend or
supplement the prospectus used in connection therewith to the extent necessary
in order to comply with applicable law.

 

(c)           Upon the exercise of registration rights pursuant to this
Section 9, Holder agrees to supply the Company with such information as may be
required by the Company to register or qualify the shares to be registered.

 

9

 

(d)           With respect to each inclusion of securities in a
registration statement pursuant to this Section 9, the Company shall bear the
following fees, costs, and expenses: all registration, filing and NASD fees,
printing expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or underwriters
of such securities (if the Company is required to bear such fees and
disbursements), all internal expenses, and legal fees and disbursements and
other expenses of complying with state securities laws of any jurisdictions in
which the securities to be offered are to be registered or qualified.  Fees and disbursements of special counsel
and accountants for the selling Holders, underwriting discounts and commissions,
and transfer taxes for selling Holders and any other expenses relating to the
sale of securities by the selling Holders not expressly included above shall be
borne by the selling Holders.

 

(e)           The Company hereby indemnifies each of the Holders of this
Warrant and of any Warrant Shares, and the officers and directors, if any, who
control such Holders, within the meaning of Section 15 of the Securities Act,
against all losses, claims, damages, and liabilities caused by (i) any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or Prospectus (and as amended or supplemented if the
Company shall have furnished any amendments thereof or supplements thereto),
any Preliminary Prospectus or any state securities law filings; (ii) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading
except insofar as such losses, claims, damages, or liabilities are caused by
any untrue statement or omission contained in information furnished in writing
to the Company by such Holder expressly for use therein; and each such Holder
by its acceptance hereof severally agrees that it will indemnify and hold
harmless the Company, each of its officers who signs such Registration
Statement, each underwriter of the Common Stock so registered, and each person,
if any, who controls the Company or such underwriter, within the meaning of
Section 15 of the Securities Act, with respect to losses, claims, damages, or
liabilities which are caused by any untrue statement or omission contained in
information furnished in writing to the Company by such Holder expressly for
use therein.

 

10.           Fair Market Value. 
Fair Market Value of a share of Common Stock as of a particular date
(the “Determination Date”) shall mean:

 

(a)           If the Company’s Common Stock is traded on an exchange or
is listed on the Nasdaq National Market or the Nasdaq SmallCap Market, then the
average closing or last sale prices, respectively, reported for the ten (10)
business days immediately preceding the Determination Date; or

 

(b)           If the Company’s Common Stock is not traded on an exchange
or listed on the Nasdaq National Market or the Nasdaq SmallCap Market but is
listed on the OTC Bulletin Board, the National Quotation Bureau, or any
comparable reporting service, then the average of the closing bid and ask
prices reported for the ten (10) business days immediately preceding the
Determination Date; or

 

(c)           If the Company’s Common Stock is not listed on an
exchange, on the Nasdaq National Market, the Nasdaq SmallCap Market, the OTC
Bulletin Board, the National Quotation

 

10

 

Bureau, or any comparable reporting service,
then the fair market value as determined in good faith by the Board of
Directors of the Company.

 

[signature
page follows]

 

11

 

IN WITNESS WHEREOF,
MedicalCV, Inc. has caused this Warrant to be signed by its duly authorized
officer and this Warrant to be dated July 1, 2003.

 

 

	
   

  	
  MEDICALCV,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/
  Jules L. Fisher

  
	
   

  	
   

  	
  Jules
  L. Fisher

  
	
   

  	
   

  	
  Chief
  Financial Officer

  

 

12

 

NOTICE OF EXERCISE OF WARRANT

 

(To be signed upon the exercise of the Warrant)

 

The undersigned hereby
irrevocably elects to exercise the attached Warrant to purchase, for cash,
                
of the shares of Common Stock issuable upon the exercise of such Warrant, and
requests that certificates for the shares of Common Stock (together with a new
Warrant to purchase the number of shares, if any, with respect to which this
Warrant is not exercised) be issued in the name and address set forth below.

 

 

	
  Dated: 

  	
   

  	
   

  	
   

  
	
   

  
	
   

  	
   

  
	
   

  	
  (Signature)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Name)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Address)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Social
  Security or Tax Ident. No.)

  
					

 

*                                         The signature on the Notice of Exercise of
Warrant must correspond to the name as written upon the face of the Warrant in
every particular without alteration or enlargement or any change
whatsoever.  When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.

 

13

 

CONVERSION NOTICE

 

(To be signed upon exercise of Warrant pursuant to Sections 1(b)
through 1(d))

 

The undersigned hereby
irrevocably elects to exercise the Conversion Right provided in Sections 1(b)
through 1(d) of the within Warrant for, and to acquire thereunder,
         shares of Common Stock.  If said number of shares shall not be all
the shares purchasable under the within Warrant, a new Warrant is to be issued
in the name of said undersigned for the balance remaining of the shares
purchasable thereunder rounded up to the next higher number of shares.

 

Please issue a certificate
or certificates for the shares of Common Stock in the name set forth below.

 

 

	
  Dated: 

  	
   

  	
   

  	
   

  
	
   

  
	
   

  	
   

  
	
   

  	
  (Signature)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Name)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Address)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Social
  Security or Tax Ident. No.)

  
					

 

*                                         The signature on the Conversion Notice must
correspond to the name as written upon the face of the Warrant in every
particular without alteration or enlargement or any change whatsoever.  When signing on behalf of a corporation,
partnership, trust or other entity, PLEASE indicate your position(s) and title(s)
with such entity.

 

14

 

ASSIGNMENT OF WARRANT

 

(To be signed only upon authorized transfer of the Warrant)

 

FOR VALUE RECEIVED, the
undersigned hereby sells, assigns, and transfers unto
                  
the right to purchase          shares
of Common Stock of MedicalCV, Inc., to which the within Warrant relates and
appoints
                ,
as attorney-in-fact, to transfer said right on the books of MedicalCV, Inc.
with full power of substitution in the premises.  By accepting such transfer, the transferee has agreed to be bound
in all respects by the terms and conditions of the within Warrant.

 

 

	
  Dated: 

  	
   

  	
   

  	
   

  
	
   

  
	
   

  	
   

  
	
   

  	
  (Signature)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Name)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Address)

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  (Social
  Security or Tax Ident. No.)

  
					

 

*                                         The signature on the Assignment of Warrant
must correspond to the name as written upon the face of the Warrant in every
particular without alteration or enlargement or any change whatsoever.  When signing on behalf of a corporation,
partnership, trust or other entity, PLEASE indicate your positions) and
title(s) with such entity

 

15EXHIBIT
10.6

 

MAY DISCRETIONARY

CREDIT AGREEMENT

 

THIS DISCRETIONARY CREDIT AGREEMENT, dated as of July 1, 2003, is
by and between MEDICALCV, INC., a Minnesota corporation (the “Borrower”),
and PKM PROPERTIES, LLC, a Minnesota limited liability company (the “Lender”).

 

RECITALS:

 

1.             Paul K. Miller (“Miller”)
is a director and shareholder of the Borrower and is a member and manager of,
and has a material financial interest in, the Lender.

 

2.             The Lender has
previously made available to the Borrower a $943,666 discretionary credit
facility under a Discretionary Credit Agreement dated January 17, 2003 as
it may have been or may be amended, modified, supplemented, restated or
replaced from time to time (the “January Discretionary Credit Agreement”).

 

3.             The Borrower and
the Lender are parties to that certain Building Lease dated April 4, 2003
between Lender as landlord and Borrower as tenant as it may be amended,
modified, supplemented, restated or replaced from time to time (the “Lease”).

 

4.             The Borrower has requested
that the Lender make available to the Borrower an additional $1,000,000
discretionary credit facility under this Agreement.

 

5.             The Borrower will
use the proceeds of advances, if any, under the Discretionary Facility (defined
below) to satisfy all currently due and payable obligations to the Lender under
the January Discretionary Credit Agreement and the Lease and as working
capital to continue operating as a going concern.

 

AGREEMENTS:

 

IN CONSIDERATION of the foregoing premises, and the mutual covenants
set forth herein, the parties agree as follows:

 

ARTICLE
1           DEFINITIONS
AND ACCOUNTING TERMS

 

Section
1.1            Defined Terms.  In addition to the terms defined elsewhere
in this Agreement, the following terms shall have the meanings set out
respectively after each (and such meanings shall be equally applicable to both
the singular and plural form of the terms defined, as the context may require):

 

Act of Bankruptcy:  With respect to any Person, if (i) the
Person shall (1) be or become insolvent, or (2) apply for or consent to the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
liquidator or the like of the Person or of all or a substantial part of

 

1

 

the Person’s property, or (3) commence a voluntary case under any
bankruptcy, insolvency, reorganization, arrangement, readjustment of debt,
dissolution, liquidation or similar proceeding under the laws of any
jurisdiction, or (4) file a petition seeking to take advantage of any other law
relating to bankruptcy, insolvency, reorganization, winding up or composition
or adjustment of debts, or (5) admit in writing its inability to pay its debts
as they mature, or (6) make an assignment for the benefit of its creditors; or
(ii) a proceeding or case shall be commenced, without the application or
consent of the Person, in any court of competent jurisdiction, seeking (1) the
liquidation, reorganization, dissolution, winding up or the composition or
adjustment of debts of the Person, (2) the appointment of a trustee, receiver,
custodian or liquidator or the like of the Person or of all or any substantial
part of the Person’s property, or (3) similar relief in respect of the Person
under any law relating to bankruptcy, insolvency, reorganization, winding up or
composition or adjustment of debts.

 

Adverse Event:  The occurrence of any event that could have
a material adverse effect on the business, operations, property, assets or
condition (financial or otherwise) of the Borrower or on the ability of the
Borrower or any other party obligated thereunder to perform its obligations
under the Loan Documents.

 

Affiliate:  Any Person (i) which directly or indirectly
through one or more intermediaries controls, or is controlled by, or is under
common control with, the Borrower or any of its Subsidiaries, or (ii) five
percent (5%) or more of the equity interest of which is held beneficially or of
record by the Borrower or any of its Subsidiaries.  Control for purposes of this definition means the possession,
directly or indirectly, of the power to cause the direction of management and
policies of a Person, whether through the ownership of voting securities or
otherwise.

 

Agreement:  This May Discretionary Credit
Agreement, as it may be amended, modified, supplemented, restated or replaced
from time to time.

 

Business Day:  Any day (other than a Saturday, Sunday or
legal holiday in the State of Minnesota) on which state banks are permitted to
be open in Minneapolis, Minnesota.

 

Capitalized Lease:  Any lease which is or should be capitalized
on the books of the lessee in accordance with GAAP.

 

Code:  The Internal Revenue Code of 1986, as
amended, or any successor statute, together with regulations thereunder.

 

Collateral:  The collateral as defined in Section 5.1.

 

Default:  Any event which, with the giving of notice
to the Borrower or lapse of time, or both, would constitute an Event of
Default.

 

Discretionary Credit Expiration Date:   The date that first occurs: (i)
May 27, 2004, or (ii) the date on which the Discretionary Facility is
terminated pursuant to Section 10.2.

 

2

 

Discretionary Facility:  The discretionary credit facility under
which the Lender may make loans, in the Lender’s sole and absolute discretion,
to the Borrower in accordance with Article 2 and the Discretionary Note
up to an aggregate principal amount at any one time outstanding not to exceed
$1,000,000.

 

Discretionary Loans:  Any loans made by the Lender to the
Borrower, in the Lender’s sole and absolute discretion, under the Discretionary
Facility, including, without limitation, the Initial Advances.

 

Discretionary Note:  That certain May Discretionary Credit
Note dated the date hereof executed by the Borrower and made payable to the order
of the Lender in the original principal amount of $1,000,000, as it may be
amended, modified, supplemented, restated or replaced from time to time.

 

Event of Default:  Any event described in Section 10.1.

 

Federal Reserve Board:  The Board of Governors of the Federal
Reserve System or any successor thereto.

 

Financing Statements:  UCC Financing Statements naming the Borrower
as debtor and the Lender as secured party and describing the Collateral as the
property covered thereby.

 

GAAP:  Generally accepted accounting principles,
consistently applied.

 

Hauser:  Peter L. Hauser, his successors heirs and
assigns.

 

Hauser Note:  That certain Subordinated Promissory Note
given by the Borrower in favor of Hauser in the original principal amount of
$1,000,000 as it exists on the date hereof.

 

Indebtedness:  Without duplication, all obligations,
contingent or otherwise, which in accordance with GAAP should be classified
upon the obligor’s balance sheet as liabilities, but in any event including the
following (whether or not they should be classified as liabilities upon such
balance sheet): (a) obligations secured by any mortgage, pledge, security
interest, lien, charge or other encumbrance existing on property owned or
acquired subject thereto, whether or not the obligation secured thereby shall
have been assumed and whether or not the obligation secured is the obligation
of the owner or another party; (b) any obligation on account of deposits or
advances; (c) any obligation for the deferred purchase price of any property or
services; (d) any obligation as lessee under any Capitalized Lease; (e) all
guaranties, endorsements and other contingent obligations respecting
Indebtedness of others; and (f) undertakings or agreements to reimburse or
indemnify issuers of letters of credit. 
For all purposes of this Agreement (i) the Indebtedness of any Person
shall include the Indebtedness of any partnership in which such Person is a
general partner, and (ii) the Indebtedness of any Person shall include the
Indebtedness of any joint venture in which such Person is a joint
venturer.  The term “Indebtedness” shall
in no event include Trade Accounts Payable.

 

Interest Rate:  The rate of interest equal to 10.0%; provided,
however, that from and after the occurrence of any Default and continuing
thereafter until such Default shall be remedied to

 

3

 

the written satisfaction of the Lender, the Interest Rate shall, at the
election of the Lender, be that rate of interest equal to Interest Rate
otherwise applicable plus 2.0%.

 

Investment:  The acquisition, purchase, making or holding
of any stock or other security, any loan, advance, contribution to capital,
extension of credit (except for trade and customer accounts receivable for
inventory sold or services rendered in the ordinary course of business and
payable in accordance with customary trade terms), any acquisitions of real or
personal property (other than real and personal property acquired in the
ordinary course of business) and any purchase or commitment to purchase stock
or other debt or equity securities of or any interest in another Person or any
integral part of any business or the assets comprising such business or part
thereof.

 

Lien:  Any security interest, mortgage, pledge,
lien, hypothecation, judgment lien or similar legal process, charge,
encumbrance, title retention agreement or analogous instrument or device
(including, without limitation, the interest of the lessors under Capitalized
Leases and the interest of a vendor under any conditional sale or other title
retention agreement).

 

Loan Documents:  This Agreement, the Discretionary Note, the
May Security Agreement, the Financing Statements, the Warrants, and each
other instrument, document, guaranty, security agreement, or other agreement
executed and delivered by the Borrower or any guarantor or party granting
security interests in connection with this Agreement, or any collateral for the
Discretionary Loans.

 

May Security Agreement:  That certain May Security Agreement dated
the date hereof executed by the Borrower and delivered to the Lender and
Hauser, as it may be amended, modified, supplemented, restated or replaced from
time to time.

 

Obligations:  The obligation of the Borrower: (a) to pay
the principal of and interest on the Discretionary Note in accordance with the
terms hereof and thereof, and to satisfy all of the Borrower’s other
obligations to the Lender, whether hereunder, under any Loan Document, or
otherwise, whether now existing or hereafter incurred, matured or unmatured
including without limitation the obligations pursuant to the
January Discretionary Credit Agreement, the Lease, letters of credit,
direct or contingent, joint or several, and including without limitation
obligations to or credit from others in which the Lender has a direct or
indirect interest (including without limitation participations), including any
extensions, modifications, renewals thereof and substitutions therefor; (b) to
repay to the Lender all amounts advanced by the Lender hereunder or otherwise
on behalf of the Borrower, including, but without limitation, advances for
principal or interest payments to prior secured parties, mortgagees or lienors,
or for taxes, levies, insurance, rent, repairs to or maintenance or storage of
any of the Collateral; and (c) to pay all of the Lender’s expenses and costs,
together with the reasonable fees and expenses of its counsel in connection
with the preparation and negotiation of this Agreement and other Loan
Documents, and any amendments thereto and the documents required hereunder or
thereunder, or any proceedings brought or threatened to enforce payment of any
of the Obligations described in clauses (a) or (b) above.

 

Permitted Lien:  Any Lien of a kind specified in paragraphs
(a)-(e) of Section 9.7.

 

4

 

Person:  Any natural person, corporation,
partnership, 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.

 

Subordinated Debt:  Any Indebtedness of the Borrower, now
existing or hereafter created, incurred or arising, which is subordinated in
right of payment to the payment of the Obligations in a manner and to an extent
that the Lender has approved in writing prior to the date hereof or prior to
the creation of such Indebtedness.

 

Subordination and Intercreditor Agreement:  That certain Subordination and Intercreditor
Agreement between Lender and Hauser dated the date hereof as it may be amended,
modified, supplemented, restated or replaced from time to time.

 

Subsidiary:  Any Person of which or in which the Borrower
and its other Subsidiaries own directly or indirectly 50% or more of:  (a) the combined voting power of all classes
of stock having general voting power under ordinary circumstances to elect a
majority of the board of directors of such Person, if it is a corporation, (b)
the capital interest or profit interest of such Person, if it is a partnership,
joint venture or similar entity, or (c) the beneficial interest of such Person,
if it is a trust, association or other unincorporated organization.

 

Trade Accounts Payable:  The trade accounts payable of any Person
with a maturity of not greater than 90 days incurred in the ordinary course of
such Person’s business.

 

Warrants:  Warrants to purchase shares of the common
stock of the Borrower in form and substance acceptable to Lender to be issued
by the Borrower to the Lender as required under Section 3.4.

 

Section
1.2            Accounting Terms and
Calculations. 
Except as may be expressly provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder (including, without limitation, determination of
compliance with financial ratios and restrictions in Articles 8 and 9
hereof) shall be made in accordance with GAAP consistently applied.

 

Section
1.3            Other Definitional Terms.  The words “hereof,” “herein” and “hereunder”
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this
Agreement.  References to Sections,
Exhibits, Schedules and like references are to this Agreement unless otherwise
expressly provided.

 

ARTICLE
2           TERMS
OF LENDING

 

Section
2.1            Discretionary Facility.  The Borrower has requested that the Lender
make loans to the Borrower from time to time under the Discretionary
Facility.  THE LENDER HAS NOT COMMITTED TO PROVIDE
ANY SUCH LOANS AND MAY, IN ITS SOLE AND ABSOLUTE DISCRETION, DECIDE NOT TO MAKE
ANY SUCH LOANS.  If the
Lender, in its discretion, agrees to make any such loans, such loans shall
(a) not exceed an

 

5

 

aggregate principal amount of the Discretionary Facility, (b) be
made in accordance with the terms of this Agreement, and (c) be made on or
before the Discretionary Credit Expiration Date.  THE BORROWER ACKNOWLEDGES AND AGREES THAT THE LENDER IS NOT OBLIGATED TO
MAKE ANY ADVANCES HEREUNDER, WHETHER OR NOT A DEFAULT OR AN EVENT OF DEFAULT
HAS OCCURRED.

 

Section
2.2            Borrowing Procedures.  Each time the Borrower desires to obtain a
loan under the Discretionary Facility pursuant to Section 2.1, such
request shall be in writing (which may be by telecopy) or by telephone, and
must be given so as to be received by the Lender not later than 11:00 a.m.,
Minneapolis time, on the date of the requested advance.  Each request for a Discretionary Loan shall
specify (i) the borrowing date (which shall be a Business Day), and (ii) the
amount of such Loan.  Any request for a
Discretionary Loan shall be deemed to be a representation that no event has
occurred and is continuing, or will result from such Discretionary Loan, which
constitutes a Default or an Event of Default, and that the Borrower’s
representations and warranties contained in Article 7 are true and
correct as of the date of the Discretionary Loan as though made on and as of
such date.  If the Lender approves a
requested Discretionary Loan in its sole discretion, the Lender shall make the
amount of the requested advance available to the Borrower at the Lender’s
principal office in Edina, Minnesota, in immediately available funds not later
than 5:00 p.m., Minneapolis time, within 3 Business Days of the date
requested.  The Borrower shall be
obligated to repay all advances the Lender reasonably determines were requested
on behalf of the Borrower notwithstanding the fact that the person requesting
the same was not in fact authorized to do so.

 

Section
2.3            The Discretionary Note.  The obligation of the Borrower to repay any
and all loans made under Section 2.1 shall be evidenced by the
Discretionary Note of the Borrower, in form and substance acceptable to the
Lender.  The Lender shall enter in its records
the amount of each advance under, and the payments made on, the Discretionary
Facility, and such records shall be deemed conclusive evidence of the subject
matter thereof, absent manifest error.

 

ARTICLE
3           INTEREST
AND COSTS

 

Section
3.1            Interest on
Discretionary Loan.  The unpaid principal amount of the Discretionary Facility shall
bear interest at the Interest Rate.

 

Section
3.2            Computation.  Interest on the Discretionary Note shall be
computed on the basis of actual days elapsed and a year of 360 days.

 

Section
3.3            Payment Dates.  Interest accruing on the Discretionary Note
shall be due and payable as specified in such Discretionary Note.

 

Section 3.4            Warrant.  As further consideration for the financing
provided by Lender hereunder, upon the Lender making Discretionary Loans in the
amounts set forth below, the Borrower will issue warrants in form and substance
satisfactory to the Lender to purchase the number of shares of common stock of
the Borrower for $0.70 per share set forth opposite the advance amounts below:

 

6

 

 

	
  Advance Amounts under the

  Discretionary Facility

  	
   

  	
  Shares

  	
   

  
	
  $260,000
  (advanced May, 28, 2003)

  	
   

  	
  200,000

  	
   

  
	
  $225,000
  (advanced June 11, 2003)

  	
   

  	
  60,000

  	
   

  
	
  $225,000

  	
   

  	
  60,178

  	
   

  
	
  $225,000

  	
   

  	
  60,179

  	
   

  

 

 

The Borrower acknowledges that the Lender advanced $260,000 to the
Borrower on May 28, 2003 and an additional $225,000 on June 11, 2003,
in each case under this Agreement upon the mutual agreement that this Agreement
and the related Loan Documents would be drafted, executed and delivered as soon
as practicable.  Accordingly, on the
date hereof, the Borrower will issue to the Lender a warrant to purchase
260,000 shares of the common stock of the Borrower for $0.70 per share.

 

Section 3.5            Loan
Fee.  As further
consideration for the financing provided by Lender hereunder, upon the Lender
making Discretionary Loans in the amounts set forth below, the Borrower will
pay to the Lender a fee in the amount set forth opposite the advance amounts
below:

 

	
  Advance Amounts under the

  Discretionary Facility

  	
   

  	
  Fee

  	
   

  
	
  $260,000
  (advanced May, 28, 2003)

  	
   

  	
  $

  	
  34,210.53

  	
   

  
	
  $225,000
  (advanced June 11, 2003)

  	
   

  	
  $

  	
  10,263.16

  	
   

  
	
  $225,000

  	
   

  	
  $

  	
  10,263.16

  	
   

  
	
  $225,000

  	
   

  	
  $

  	
  10,263.16

  	
   

  

 

The Borrower acknowledges that the Lender advanced $260,000 to the
Borrower on May 28, 2003 and an additional $225,000 on June 11, 2003,
in each case under this Agreement upon the mutual agreement that this Agreement
and the related Loan Documents would be drafted, executed and delivered as soon
as practicable.  Accordingly, on the
date of each such advance, the Lender is deemed to have made an additional
Discretionary Loan in the amounts of $34,210.53 and $10,263.16 respectively,
and the Borrower is deemed to have immediately paid such amounts to Lender as
payment of the required fee.  If and
when additional Discretionary Loans are made under this Agreement, loan
proceeds will be advanced by the Lender to the Borrower net of the fee required
under this Section, and that such fee will be deemed to be a Discretionary
Loan.

 

ARTICLE
4           PAYMENTS
AND PREPAYMENTS

 

Section
4.1            Repayment.  Principal of the Discretionary Facility
shall be due and payable as specified in the Discretionary Note.

 

7

 

Section
4.2            Conditional Optional
Prepayments. 
The Borrower may prepay the Discretionary Loan, in whole or in part, at
any time without premium or penalty; provided, however, that the
Borrower may not prepay all or any part of the Discretionary Loan until the
Borrower first indefeasibly satisfies in full (a) all of the Borrower’s
Obligations due and payable at such time under the Lease, and (b) all of the
Borrower’s other Obligations to the Lender (excluding the Borrower’s
Obligations under the Lease) regardless of whether such other Obligations are
then due and payable, including, without limitation all of the Borrower’s
obligations under the January Discretionary Credit Agreement.  Any such prepayment must be accompanied by
accrued and unpaid interest on the amount prepaid.

 

Section
4.3            Accelerated Payments.  Upon the occurrence of an Event of Default
and the acceleration of the Discretionary Note, pursuant to and as permitted by
Section 10.2, the Discretionary Note and all other Obligations, shall be
immediately due and payable as provided in Section 10.2 and in the
Discretionary Note.

 

Section
4.4            Payments.  Payments and prepayments of principal of,
and interest on, the Discretionary Note and all fees, expenses and other
obligations under the Loan Documents shall be made without set-off or
counterclaim in immediately available funds not later than 2:00 p.m.,
Minneapolis time, on the dates due at the main office of the Lender in
Minneapolis, Minnesota.  Funds received
on any day after such time shall be deemed to have been received on the next
Business Day.  Whenever any payment to
be made hereunder or on the Discretionary Note shall be stated to be due on a
day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall be included in the
computation of any interest or fees.

 

Section 4.5            Mandatory
Prepayments. 
The Borrower shall prepay the Obligations as provided in the
Subordination and Intercreditor Agreement.

 

ARTICLE
5           COLLATERAL
SECURITY

 

Section
5.1            Composition of the
Collateral. 
The property in which a security interest is, or is intended to be,
granted pursuant to this Agreement, the May Security Agreement, or any
other Loan Document and the provisions of Section 5.2 is herein
collectively called the “Collateral.” 
The Collateral, together with all the Borrower’s other property of any
kind held by the Lender, shall stand as one general, continuing collateral
security for all of the Obligations, and may be retained by the Lender until
all Obligations have been satisfied in full, and the Discretionary Facility has
terminated.

 

Section
5.2            Rights in Property Held
by the Lender. 
As security for the prompt satisfaction of all Obligations, the Borrower
hereby assigns, transfers and sets over to the Lender all of its right, title
and interest in and to, and grants to the Lender a lien on and a security
interest in, any amounts which may be owing from time to time by the Lender to
the Borrower in any capacity, including, but without limitation, any balance or
share belonging to the Borrower of any deposit or other account with the
Lender, which lien and security interest shall be independent of any right of
setoff which the Lender may have.

 

8

 

Section
5.3            Priority of Liens. The liens as provided for under this
Agreement, the May Security Agreement and the other Loan Documents shall
be first and prior liens subject only to Permitted Liens.

 

Section
5.4            Financing Statements.  The Borrower will authorize, execute and
deliver such security agreements, assignments, and UCC financing statements
(including amendments thereto and continuation statements thereof) in form
satisfactory to the Lender as the Lender may specify and will pay or reimburse
the Lender for all costs of filing or recording the same in such public offices
as the Lender may designate, and take such other steps as the Lender shall
direct, including the noting of the Lender’s lien on the chattel paper or any
vehicle certificates of title, in order to perfect the Lender’s interest in the
Collateral.

 

ARTICLE
6           CONDITIONS
PRECEDENT

 

Section
6.1            Conditions of Initial
Loan.  If
the Lender decides to make any additional Loans under the Discretionary
Facility in the Lender’s discretion, the Borrower shall deliver to the Lender
(prior to the Lender making any other Discretionary Loan) all of the following,
in form and substance satisfactory to the Lender, each duly executed and
certified or dated the date hereof or such other date as is satisfactory to the
Lender.

 

(a)            The
Discretionary Note, duly executed by the Borrower.

 

(b)            The
May Security Agreement, duly executed by the Borrower.

 

(c)            The
Warrants.

 

(d)            The
Financing Statements, duly authorized by the Borrower.

 

(e)            A
Secretary’s Certificate certifying: (1) a copy of the Articles of Incorporation
of the Borrower with all amendments thereto, (2) a copy of the Bylaws of the
Borrower with all amendments thereto, (3) a copy of the corporate resolutions
of the Borrower authorizing the execution, delivery and performance of the Loan
Documents, and (4) the names, titles, and signatures of the officers of the
Borrower authorized to execute the Loan Documents and to request advances
hereunder.

 

(f)             Copies
of the policies of insurance or other evidence acceptable to the Lender in its
absolute discretion showing that the insurance required by the
May Security Agreement and the other Loan Documents is in full force and
effect.

 

(g)            Such
collateral audits, equipment appraisals and lien searches as the Lender may
request, each in form and substance, and conducted by
auditors/appraisers/search services acceptable to the Lender in its sole
discretion.

 

(h)            Satisfaction
in full of all Obligations or other obligations due and payable from Borrower
to Lender or Miller as of the date of such additional loan, including,

 

9

 

without limitation, all amounts due and payable with respect to the
Lease and the January Discretionary Credit Agreement.

 

(i)            The
Subordination and Intercreditor Agreement duly executed by Hauser.

 

(j)            That
certain Representation Acknowledgement duly executed by Hauser.

 

(k)           That
certain Amendment to Warrants duly executed by the Borrower.

 

(l)            True,
correct, fully-executed and complete copies of the Hauser Note and all documents
related thereto.

 

(m)          Such
other documents or instruments as the Lender may request to consummate the
transaction contemplated hereby.

 

Section
6.2            Conditions Precedent to
all Loans. 
The obligation of the Lender to make the Discretionary Loan described in
Section 2.1(b) hereunder, and if the Lender decides to make any other loan
under the Discretionary Facility in the Lender’s discretion, each such loan
shall be subject to the satisfaction of the following conditions precedent (and
any request for a Discretionary Loan shall be deemed a written certification
that such conditions precedent have been satisfied):

 

(a)            Before
and after giving effect to such Discretionary Loan, the representations and
warranties contained in Article 7 shall be true and correct, as though
made on the date of such Discretionary Loan; and

 

(b)            Before
and after giving effect to such Discretionary Loan, no Default or Event of
Default shall have occurred and be continuing.

 

ARTICLE
7           REPRESENTATIONS
AND WARRANTIES

 

To induce the Lender to enter into this Agreement, and to consider
making Discretionary Loans hereunder, the Borrower represents and warrants to
the Lender:

 

Section
7.1            Organization, Standing,
Etc.  The
Borrower is a corporation duly incorporated and validly existing and in good
standing under the laws of the State of Minnesota, and has all requisite
corporate power and authority to carry on its businesses as now conducted, to
enter into the Loan Documents and to perform its obligations under the Loan
Documents.  The Borrower is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character of the properties owned, leased or operated by it or the
business conducted by it makes such qualification necessary, and where the
failure to so qualify could result in an Adverse Event.

 

Section
7.2            Authorization and
Validity. 
The execution, delivery and performance by the Borrower of the Loan
Documents have been duly authorized by all necessary corporate action by the
Borrower, and the Loan Documents constitute the legal, valid and binding

 

10

 

obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms, subject to limitations as to
enforceability which might result from bankruptcy, insolvency, moratorium and
other similar laws affecting creditors’ rights generally and subject to
limitations on the availability of equitable remedies.

 

Section
7.3            No Conflict; No Default.  The execution, delivery and performance by
the Borrower of the Loan Documents will not (a) violate any provision of any
law, statute, rule or regulation (including, without limitation, Minnesota
Statute Section 302A.673) or any order, writ, judgment, injunction, decree,
determination or award of any court, governmental agency or arbitrator
presently in effect having applicability to the Borrower, (b) violate or
contravene any provisions of the Articles of Incorporation or Bylaws of the
Borrower, or (c) 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 Borrower is a party or by which it or any of its properties may be
bound or result in the creation of any Lien on any asset of the Borrower, other
than Liens in favor of the Lender and Permitted Liens. The Borrower 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
constitute an Adverse Event.  The
Borrower is not in default under the Lease or any Loan Document (as such term
is defined in the January Discretionary Credit Agreement).

 

Section
7.4            Government Consent.  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 Borrower to authorize, or is required in connection with the
execution, delivery and performance of, or the legality, validity, binding
effect or enforceability of, the Loan Documents.

 

Section
7.5            Financial Statements and
Condition. 
The Borrower’s financial statements, as heretofore furnished to the
Lender, have been prepared in accordance with GAAP on a consistent basis and
fairly present the financial condition of the Borrower as at such dates
specified therein and the results of its operations and changes in financial
position for the respective periods then ended.  As of the dates of such financial statements, the Borrower has
not had any material obligation, contingent liability, liability for taxes or
long-term lease obligation which is not reflected in such financial statements
or in the notes thereto.

 

Section
7.6            Litigation.  There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against or affecting
the Borrower 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 Borrower, could constitute an Adverse Event.

 

Section
7.7            Contingent Payments or
Liabilities. 
Except as disclosed in the financial statements described in Section
7.5, the Borrower does not have any contingent payments or liabilities
which are material to the Borrower.

 

11

 

Section
7.8            Compliance.  The Borrower is in material compliance with
all statutes and governmental rules and regulations applicable to it.

 

Section
7.9            Environmental, Health
and Safety Laws. 
There does not exist any violation by the Borrower of any applicable
federal, state or local law, rule or regulation or order of any government,
governmental department, board, agency or other instrumentality relating to
environmental, pollution, health or safety matters which will or threatens to
impose a material liability on the Borrower or which would require a material
expenditure by the Borrower to cure. 
The Borrower has not received any notice to the effect that any part of
its operations or properties is not in material compliance with any such law,
rule, regulation or order or notice that it or its property is the subject of
any governmental investigation evaluating whether any remedial action is needed
to respond to any release of any toxic or hazardous waste or substance into the
environment, the consequences of which non-compliance or remedial action could
constitute an Adverse Event.

 

Section
7.10         Ownership of Property:
Liens.  The
Borrower has good and marketable title to its real properties and good and
sufficient title to its other properties, including all properties and assets
referred to as owned by the Borrower in the financial statements of the
Borrower referred to in Section 7.5 (other than property disposed of
since the date of such financial statement in the ordinary course of
business).  None of the properties,
revenues or assets of the Borrower is subject to a Lien, except for Permitted
Liens.

 

Section
7.11         Taxes.  The Borrower has filed all federal, state
and local tax returns required to be filed and has paid or made provision for
the payment of all taxes due and payable pursuant to such returns and pursuant
to any assessments made against it or any of its property and all other taxes,
fees and other charges imposed on it or any of its property by any governmental
authority (other than taxes, fees or charges the amount or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in accordance with GAAP have been provided on the
books of the Borrower).  No tax Liens
have been filed and no material claims are being asserted with respect to any
such taxes, fees or charges.  The
charges, accruals and reserves on the books of the Borrower in respect of taxes
and other governmental charges are adequate.

 

Section
7.12         Licenses and Infringement.  The Borrower possesses adequate licenses,
permits, franchises, patents, copyrights, trademarks and trade names, or rights
thereto, to conduct its business substantially as now conducted and as
presently proposed to be conducted. 
There does not exist and there is no reason to anticipate that there may
exist, any liability to the Borrower with respect to any claim of infringement
regarding any franchise, patent, copyright, trademark or trade name possessed
or used by the Borrower.

 

Section
7.13         Subsidiaries.  The Borrower does not have any Subsidiaries.

 

Section
7.14         Partnerships and Joint
Ventures. 
The Borrower is not a partner (limited or general) in any partnerships
and the Borrower is not a joint venturer in any joint ventures.

 

12

 

Section 7.15         Minnesota
Business Corporation Act.  If and to the extent that Minnesota Statute
§ 302A.673 (the “Minnesota Business Combination Act”) applies to the
execution, delivery and performance by the Borrower of the Loan Documents, such
execution, delivery and performance by the Borrower of the Loan Documents would
be permitted under the Minnesota Business Combination Act because the date of
the execution of this Agreement is subsequent to the expiration of the period
of four years following Miller’s “share acquisition date” (as that term is
defined in the Minnesota Business Corporation Act under Minnesota Statute
§302A.011, Subd. 51.).

 

Section 7.16         TCF
Line of Credit.  The
Borrower was in negotiations with TCF for financing.  Neither Miller nor Lender has any obligation to provide any
guaranty or other credit enhancement or has any other obligation with respect
to any such financing.  Borrower will
indemnify and hold Miller and Lender harmless from any claims, fees, costs or
expenses related to such financing.

 

Section
7.17         Completeness of
Disclosures. 
No representation or warranty by the Borrower contained herein or in any
other Loan Document, or in any certificate or other document furnished
heretofore or concurrently with the signing of this Agreement or any other Loan
Document by the Borrower to the Lender in connection with the transactions
contemplated hereunder or under any other Loan Document, contains any untrue
statement of a material fact or omits to state a material fact which would
prevent or materially inhibit the Borrower from performing this Agreement or
any other Loan Document according to its terms.

 

Section
7.18         Survival of
Representations. 
All of the representations and warranties set forth in the immediately
preceding subsections shall survive until all the Obligations shall have been
satisfied in full, and the Discretionary Facility has been terminated.

 

Each of the foregoing warranties and representations shall be deemed to
be repeated and reaffirmed on and as of the date any Discretionary Loan is made
hereunder by the Lender to the Borrower pursuant to Article 2.

 

ARTICLE
8           AFFIRMATIVE
COVENANTS

 

From the date of this Agreement and thereafter until the Discretionary
Facility is terminated or expires and the Obligations have been paid in full,
unless the Lender shall otherwise expressly consent in writing, the Borrower
will do all of the following:

 

Section
8.1            Financial Statements and
Reports. 
Furnish to the Lender:

 

(a)            As
soon as available and in any event within 120 days after the end of each fiscal
year of the Borrower, the audited financial statements of the Borrower prepared
in conformity with GAAP, consisting of at least statements of income, cash flow
and stockholders’ equity for such year, and a balance sheet as at the end of
such year, all in reasonable detail and certified without qualification by
independent certified public accountants of recognized standing selected by the
Borrower and acceptable to the Lender.

 

13

 

(b)            As
soon as available and in any event within 30 days after the end of each month,
a copy of the company-prepared financial statements of the Borrower prepared in
the same manner as the financial statements referred to in Section 8.1(a),
signed by the Chief Financial Officer of the Borrower, consisting of at least a
statement of income for such month, and a balance sheet of the Borrower as at
the end of such month.

 

(c)            promptly
after the sending or filing thereof, copies of all regular and periodic
financial reports which the Borrower shall file with the Securities and
Exchange Commission or any national securities exchange.

 

(d)            From
time to time, such other information regarding the business, operation and
financial condition of the Borrower as the Lender may reasonably request.

 

Section
8.2            Corporate Existence.  Maintain its corporate existence in good
standing under the laws of its jurisdiction of incorporation and its
qualification to transact business in each jurisdiction in which the character
of the properties owned, leased or operated by it or the business conducted by
it makes such qualification necessary.

 

Section
8.3            Insurance.  Maintain with financially sound and
reputable insurance companies such insurance in such amounts and against such
risks as is reasonably requested by the Lender or as may be required by law or
as may be customary in the case of reputable corporations engaged in the same
or similar business and similarly situated, including, without limitation,
property, hazard, fire, wind, hail, theft, collapse, comprehensive general
public liability, and business interruption insurance, and worker’s
compensation or similar insurance.  The
Borrower shall furnish to the Lender full information and written evidence as
to the insurance maintained by the Borrower. 
All policies shall contain the insurer’s promise not to cancel the
policy without 30 days prior written notice to the Lender at its address set
forth below.  All policies shall name
the Lender as an additional insured or loss payee, as appropriate, as its
interests may appear.

 

Section
8.4            Payment of Taxes and
Claims. 
File all tax returns and reports which are required by law to be filed
by it and pay before they become delinquent all taxes, assessments and
governmental charges and levies imposed upon it or its property and all claims
or demands of any kind (including, without limitation, those of suppliers,
mechanics, carriers, warehouses, landlords and other like Persons) which, if
unpaid, might result in the creation of a Lien upon its property; provided
that the foregoing items need not be paid if they are being contested in good
faith by appropriate proceedings, and as long as the Borrower’s title to its
property is not materially adversely affected, its use of such property in the
ordinary course of its business is not materially interfered with and adequate
reserves with respect thereto have been set aside on the Borrower’s books in
accordance with GAAP.

 

Section
8.5            Inspection; Collateral
Audits. 
Permit any Person designated by the Lender to visit and inspect any of
its properties, corporate books and financial records, to examine and to make
copies of its books of accounts and other financial records, to discuss the
affairs, finances and accounts of the Borrower with, and to be advised as to
the same by, its

 

14

 

officers, and to conduct such collateral audits and appraisals, at such
times and intervals as the Lender may designate.  The expenses of the Lender for such visits, inspections,
examinations and audits shall be at the expense of the Borrower.

 

Section
8.6            Books and Records.  Keep adequate and proper records and books
of account in which full and correct entries will be made of its dealings,
business and affairs.

 

Section
8.7            Compliance.  Comply with the requirements of all
applicable state and federal laws, and of all rules, regulations, orders,
writs, judgments, injunctions, decrees or awards to which it may be subject.

 

Section
8.8            Environmental Matters.  Observe and comply with all laws, rules,
regulations and orders of any government or government agency relating to
health, safety, pollution, hazardous materials or other environmental matters
to the extent non-compliance could result in a material liability or otherwise
constitute an Adverse Event.

 

Section
8.9            Notice of Litigation.  Promptly provide written notice to the
Lender of all litigation, arbitration or mediation proceedings, and of all
proceedings by or before any court or governmental or regulatory agency
affecting the Borrower, describing the nature thereof and the steps being taken
with respect to such proceeding.

 

Section
8.10         Notice of Default.  Promptly provide written notice to the
Lender of any Default or Event of Default, describing the nature thereof and
what action the Borrower proposes to take with respect thereto.

 

ARTICLE
9           NEGATIVE
COVENANTS

 

From the date of this Agreement and thereafter until the Discretionary
Facility is terminated or expires and the Obligations have been paid in full,
unless the Lender shall otherwise expressly consent in writing, the Borrower
will not do any of the following:

 

Section
9.1            Merger.  Merge or consolidate or enter into any
analogous reorganization or transaction with any Person.

 

Section
9.2            Sale of Assets.  Sell, transfer, assign, lease or otherwise
convey all or any substantial part of its assets (whether in one transaction or
in a series of transactions) to any Person other than in the ordinary course of
business.

 

Section
9.3            Subsidiaries,
Partnerships, Joint Ventures.  Do any of the following: (a) form or acquire
any corporation or limited liability company which would thereby become a
Subsidiary; or (b) form or enter into any partnership as a limited or general
partner or into any joint venture.

 

Section
9.4            Restricted Payments.  Either: (a) purchase or redeem or otherwise
acquire for value any shares of the Borrower’s stock, declare or pay any
dividends or distributions thereon, make any distribution on, or payment on
account of the purchase,

 

15

 

redemption, defeasance or other acquisition or retirement for value of,
any shares of the Borrower’s stock or set aside any funds for any such purpose;
or (b) directly or indirectly make any payment on, or redeem, repurchase, defease,
or make any sinking fund payment on account of, or any other provision for, or
otherwise pay, acquire or retire for value, any Indebtedness of the Borrower
that is subordinated in right of payment to any of the Obligations (whether
pursuant to its terms or by operation of law) except for payments expressly
permitted by a written subordination agreement to which Lender is a party.

 

Section
9.5            Investments.  Acquire for value, make, have or hold any
Investments, except:

 

(a)            Investments
outstanding on the date hereof and listed on Schedule 9.5;

 

(b)            direct
obligations of the United States of America;

 

(c)            extensions
of credit in the nature of accounts receivable or notes receivable arising from
the sale of goods and services in the ordinary course of business; and

 

(d)            commercial
paper issued by U.S. corporations rated “A-1” by Standard & Poor
Corporation or “P-1” by Moody’s Investors Service or certificates of deposit or
bankers’ acceptances having a maturity of one year or less issued by members of
the Federal Reserve System having deposits in excess of $100,000,000 (which
certificates of deposit or bankers’ acceptances are fully insured by the
Federal Deposit Insurance Corporation).

 

Section
9.6            Indebtedness.  Create, incur, issue, assume or suffer to
exist any Indebtedness, except:

 

(a)            the
Obligations;

 

(b)            Indebtedness
outstanding on the date hereof secured by Permitted Liens, together with any
extension, renewal or replacement thereof (so long as such Indebtedness is not
increased above the amount outstanding immediately prior to giving effect to
any such extension, renewal or replacement);

 

(c)            the
Hauser Note; and

 

(d)            any
Subordinated Debt.

 

Section
9.7            Liens.  Create, incur, assume or suffer to exist any
Lien with respect to any property, revenues or assets now owned or hereafter
arising or acquired, except:

 

(a)            Liens
existing on the date of this Agreement and disclosed on Schedule 9.7;

 

16

 

(b)            Deposits
or pledges to secure payment of workers’ compensation, unemployment insurance,
old age pensions or other social security obligations, in the ordinary course
of the Borrower’s business;

 

(c)            Liens
for taxes, fees, assessments and governmental charges not delinquent or to the
extent that payments therefor shall not at the time be required to be made in
accordance with the provisions of Section 8.4;

 

(d)            Liens
of carriers, warehousemen, mechanics and materialmen, and other like Liens
arising in the ordinary course of business, for sums not due or to the extent
that payment therefor shall not at the time be required to be made in
accordance with the provisions of Section 8.4; and

 

(e)            Purchase
money liens or security interests or Capitalized Leases upon or in property
acquired after the date hereof by Borrower, provided  that: (i) no
such lien or security interest extends or shall extend to or cover any property
of Borrower other than the property then being acquired; and (ii) the aggregate
principal amount of the Indebtedness secured by any such lien or security
interest shall not exceed the cost of such property so acquired in connection
therewith.

 

Section
9.8            Transactions with
Affiliates. 
Enter into or be a party to any transaction or arrangement, including,
without limitation, the purchase, sale, lease or exchange of property or the
rendering of any service, with any Affiliate, except in the ordinary course of
and pursuant to the reasonable requirements of the Borrower’s business and upon
fair and reasonable terms no less favorable to the Borrower than would be
obtained in a comparable arm’s-length transaction with a Person not an
Affiliate.

 

ARTICLE
10        EVENTS
OF DEFAULT AND REMEDIES

 

Section
10.1         Events of Default.  The occurrence of any one or more of the
following events shall constitute an Event of Default:

 

(a)            The
Borrower shall fail to make when due, whether by acceleration or otherwise, any
payment of the Obligations; or

 

(b)            Any
representation or warranty made by the Borrower in the Loan Documents or in any
certificate, statement, report or other writing furnished by the Borrower to
the Lender pursuant to the Loan Documents or any other instrument, document or
agreement shall prove to have been false or misleading in any material respect
on the date as of which the facts set forth are stated or certified or deemed
to have been stated or certified; or

 

(c)            The
Borrower shall fail to comply with any other agreement, covenant, condition,
provision or term contained in the Loan Documents or any other document,
instrument or agreement between Borrower and either Lender or Miller,
including, without limitation, the Lease and the January Discretionary
Credit Agreement; or

 

17

 

(d)            An
Act of Bankruptcy shall occur with respect to the Borrower; or

 

(e)            The
maturity of any Indebtedness (other than Indebtedness under this Agreement and
whether owed to the Lender or to others) shall be accelerated, or the Borrower
shall fail to pay any such Indebtedness when due or, in the case of such
Indebtedness payable on demand, when demanded, or any event shall occur or
condition shall exist and shall continue for more than the period of grace, if
any, applicable thereto and shall have the effect of causing or permitting (any
required notice having been given and grace period having expired) the holder
of any such Indebtedness or any trustee or other Person acting on behalf of
such holder to cause, such Indebtedness to become due prior to its stated
maturity or to realize upon any collateral given as security therefor.

 

Section
10.2         Remedies.  If (a) any Event of Default described in Section
10.1(d) shall occur, the Discretionary Facility (including, without
limitation, any obligation of the Lender to make any Discretionary Loan under
Section 2.1(b)) shall automatically terminate and the outstanding unpaid
principal balance of the Discretionary Note, the accrued interest thereon and
all other Obligations shall automatically become immediately due and payable;
or (b) any other Event of Default shall occur and be continuing, then the
Lender may take any or all of the following actions: (i) declare the
Discretionary Facility (including, without limitation, any obligation of the
Lender to make any Discretionary Loan under Section 2.1(b)) to be terminated,
whereupon the Discretionary Facility (including, without limitation, any
obligation of the Lender to make any Discretionary Loan under Section 2.1(b))
shall terminate, and (ii) declare the outstanding unpaid principal balance of
the Discretionary Note, the accrued and unpaid interest thereon and all other
Obligations to be forthwith due and payable, whereupon the Discretionary Note,
all accrued and unpaid interest thereon and all such other Obligations shall
immediately become due and payable, in each case without further demand or notice
of any kind, all of which are hereby expressly waived, anything in this
Agreement or in the Discretionary Note to the contrary notwithstanding.  In addition, upon any Event of Default, the
Lender may exercise all rights and remedies under any other instrument,
document or agreement between the Borrower and the Lender, and enforce all
rights and remedies under any applicable law, including without limitation the
rights and remedies available upon default to a secured party under the Uniform
Commercial Code as adopted in the State of Minnesota, including, without
limitation, the right to take possession of the Collateral, or any evidence
thereof, proceeding without judicial process or by judicial process (without a
prior hearing or notice thereof, which the Borrower hereby expressly waives)
and the right to sell, lease or otherwise dispose of any or all of the
Collateral, and, in connection therewith, the Borrower will on demand assemble
the Collateral and make it available to the Lender at a place to be designated
by the Lender which is reasonably convenient to both parties.

 

Section
10.3         Offset.  In addition to the remedies set forth in Section
10.2, the Lender or any other holder of the Discretionary Note may offset
any and all obligations of the Lender or such other holder of the Discretionary
Note, against the Indebtedness then owed by the Borrower to the Lender.  Nothing in this Agreement shall be deemed a
waiver or prohibition of the Lender’s rights offset or counterclaim, which
right the Borrower hereby grants to the Lender.

 

18

 

ARTICLE
11        MISCELLANEOUS

 

Section
11.1         Waiver and Amendment.  No failure on the part of the Lender or the
holder of the Discretionary Note to exercise and no delay in exercising any
power or right hereunder or under any other Loan Document shall operate as a
waiver thereof; nor shall any single or partial exercise of any power or right
preclude any other or further exercise thereof or the exercise of any other
power or right.  The remedies herein and
in any other instrument, document or agreement delivered or to be delivered to
the Lender hereunder or in connection herewith are cumulative and not exclusive
of any remedies provided by law.  No
notice to or demand on the Borrower not required hereunder or under the
Discretionary Note shall in any event entitle the Borrower to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the right of the Lender or the holder of the Discretionary Note to
any other or further action in any circumstances without notice or demand.  No amendment, modification or waiver of any
provision of this Agreement or consent to any departure by the Borrower
therefrom shall be effective unless the same shall be in writing and signed by
the Lender, and then such amendment, modifications, waiver or consent shall be
effective only in the specific instances and for the specific purpose for which
given.  Miller’s approval of any Borrower
corporate action, in his capacity as a director of Borrower, whether by written
action or otherwise, is not a sufficient waiver or consent to satisfy any
waiver or consent requirement with respect to any Obligations.

 

Section
11.2         Expenses and Indemnities.  Whether or not any Discretionary Loan is
made hereunder, the Borrower agrees to reimburse the Lender upon demand for all
reasonable expenses paid or incurred by either the Lender or Miller (including
filing and recording costs and fees and expenses of legal counsel of each of
Lender and Miller) in connection with the preparation, review, execution,
delivery, amendment, modification, interpretation, collection and enforcement
of the Loan Documents.  The Borrower
agrees to pay, and save the Lender harmless from all liability for, any stamp
or other taxes which may be payable with respect to the execution or delivery
of the Loan Documents.  The Borrower
agrees to indemnify and hold the Lender harmless from any loss or expense which
may arise or be created by the acceptance of instructions for making Loans or
disbursing the proceeds thereof. The Borrower agrees to indemnify and hold the
Lender and Miller harmless from any obligation to pay any fees or commissions
to any broker or finder in connection with the transactions contemplated in the
Loan Documents, including, without limitation, to NDX Trading, Inc.  The Borrower shall indemnify and hold
harmless the Lender and its respective Affiliates, and each such Person’s
respective officers, directors, employees, attorneys, agents and representatives
(each, an “Indemnified Person”), from and against any and all suits,
actions, proceedings, claims, damages, losses, liabilities and expenses
(including reasonable attorneys’ fees and disbursements and other costs of
investigation or defense, including those incurred upon any appeal) that may be
instituted or asserted against or incurred by any such Indemnified Person as
the result of any representation or warranty made by the Borrower in the Loan
Documents or in any certificate, statement, report or other writing furnished
by the Borrower to the Lender or Miller pursuant to the Loan Documents or any
other instrument, document or agreement shall prove to have been false or
misleading. The obligations of the Borrower under this Section 11.2
shall survive any termination or expiration of the Discretionary Facility and
payment in full of the Obligations.

 

19

 

Section
11.3         Notices.  Except when telephonic notice is expressly
authorized by this Agreement, any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, telegram, telex, 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
telegram, telex or facsimile transmission, from a first Business Day after the
date of sending if sent by overnight courier, or from four days after the date
of mailing if mailed; provided, however, that any notice to the
Lender under Article 2 hereof shall be deemed to have been given only
when received by the Lender.  If notice
to the Borrower of any intended disposition of the Collateral or any other
intended action is required by law in a particular instance, such notice shall
be deemed commercially reasonable if given at least ten calendar days prior to
the date of intended disposition or other action.

 

Section
11.4         Successors.  This Agreement shall be binding on the
Borrower and the Lender and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Lender, and the successors and
assigns of the Lender.  The Borrower
shall not assign its rights or duties hereunder without the written consent of
the Lender.

 

Section
11.5         Participations and
Information. 
The Lender may sell participation interests in any or all of the
Discretionary Loans and in all or any portion of the Discretionary Facility to
any Person.  The Lender may furnish any
information concerning the Borrower in the possession the Lender from time to
time to participants and prospective participants and may furnish information
in response to credit inquiries.

 

Section
11.6         Severability.  Any provision of the Agreement which is
prohibited or unenforceable in any jurisdiction shall, in such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.

 

Section
11.7         Captions.  The captions or headings herein are for
convenience only and in no way define, limit or describe the scope or intent of
any provision of this Agreement.

 

Section
11.8         Entire Agreement.  This Agreement and the Discretionary Note,
and the other Loan Documents, embody the entire agreement and understanding
between the Borrower and the Lender with respect to the subject matter hereof
and thereof.  This Agreement supersedes
all prior agreements and understandings relating to the subject matter hereof.

 

Section
11.9         Counterparts.  This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.

 

Section
11.10       Governing Law.  The validity, construction and
enforceability of this Agreement and the Discretionary Note shall be governed
by the internal laws of the State of Minnesota, without giving effect to
conflict of laws principles thereof.

 

20

 

Section 11.11       Financing
With More Preferable Terms. 
To the extent any financing obtained by Borrower has more favorable
terms than terms provided to Lender with respect to any Obligations, all as
reasonably determined by Lender, then in the Lender’s discretion, such terms
shall automatically be adopted into agreements evidencing the Obligations.  Borrower will provide written notice to the
Lender of any financing obtained by Borrower, describing the nature thereof and
what terms may be more preferable than those existing with respect to the
Obligations.  Contemporaneously with
such financing, Borrower will provide copies of all documents evidencing such
financing to Lender.  Borrower will
execute, deliver or endorse any and all instruments, documents, assignments,
security agreements, warrants, notes and other agreements and writings which
Lender may at any time reasonably request in order to secure, protect, perfect
or enforce the rights under this Section. 
Nothing in this Section shall be deemed to waive the provisions of this
Agreement or any other agreement requiring the Lender’s prior written consent
to obtaining any such financing.

 

(The signature page follows.)

 

21

 

THE PARTIES HERETO have caused this Discretionary Credit Agreement to
be executed as of the date first above written.

 

	
   

  	
   

  	
  MEDICALCV, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Jules L. Fisher

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Jules L. Fisher

  
	
   

  	
   

  	
  Title:

  	
  Chief Financial Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  9725 South Robert Trail

  
	
   

  	
   

  	
  Inver Grove Heights, MN  55077

  
	
   

  	
   

  	
  Attention:  Chief Executive
  Officer

  
	
   

  	
   

  	
  Telephone:  (651) 452-3000

  
	
   

  	
   

  	
  Fax:  (651) 234-6669

  
	
   

  	
   

  	
   

  
	
  with a copy to:

  	
   

  	
  Avron L. Gordon, Esq.

  
	
   

  	
   

  	
  Briggs and Morgan, P.A.

  
	
   

  	
   

  	
  2400 IDS Center

  
	
   

  	
   

  	
  80 South Eighth Street

  
	
   

  	
   

  	
  Minneapolis, MN 55402

  
	
   

  	
   

  	
  Fax (612) 334-8650

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  PKM PROPERTIES, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Paul K. Miller

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Paul K. Miller

  
	
   

  	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  c/o Gracon Contracting, Inc.

  
	
   

  	
   

  	
  606 24th Avenue South, Suite B12

  
	
   

  	
   

  	
  Minneapolis, MN 55454

  
	
   

  	
   

  	
  Attention:  Paul K. Miller

  
	
   

  	
   

  	
  Fax:  (612) 305-4813

  
	
   

  	
   

  	
   

  
	
  with a copy to:

  	
   

  	
  Charles F. Diessner Esq.

  
	
   

  	
   

  	
  Fredrikson & Byron, P.A.

  
	
   

  	
   

  	
  4000 Pillsbury Center

  
	
   

  	
   

  	
  200 South Sixth Street

  
	
   

  	
   

  	
  Minneapolis, MN 55402-1425

  
	
   

  	
   

  	
  Fax (612) 492-7077

  

 

22

 

Schedules

 

9.5           Existing Investments

 

None.

 

9.7           Existing Liens

 

Minnesota Secretary
of State

 

	
  File No.

  	
   

  	
  Debtor

  	
   

  	
  Date

  	
   

  	
  Creditor

  	
   

  	
  Collateral

  	
   

  
	
  2015773

  	
   

  	
  CV Dynamics, Inc.

  	
   

  	
  2/27/98

  	
   

  	
  LCA A Division Of Associates

  	
   

  	
  Specific Leased Equipment

  	
   

  
	
  2128365

  	
   

  	
  C V Dynamics, Inc.

  	
   

  	
  5/4/99

  	
   

  	
  Dexxon Capital Corporation

  	
   

  	
  Specific Equipment

  	
   

  
	
  2197986

  	
   

  	
  CV Dynamics, Inc. d/b/a Medical Incorporated

  	
   

  	
  2/1/00

  	
   

  	
  Dakota Electric Association

  	
   

  	
  Specific Equipment

  	
   

  
	
  20024930253

  	
   

  	
  MedicalCV

  	
   

  	
  8/19/02

  	
   

  	
  Segmed, Inc.

  	
   

  	
  Security Interest in Specific Intellectual Property

  	
   

  
	
  20036276297

  	
   

  	
  MedicalCV

  	
   

  	
  1/17/03

  	
   

  	
  PKM Properties, LLC

  	
   

  	
  Blanket Lien

  	
   

  

 

The security interest created in favor of Hauser under the
May Security Agreement to secure the Hauser Note.

 

23

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