Document:

Exhibit 10.3 to Electromed, Inc. Form S1

Exhibit 10.3

TERM NOTE A

	
  

 	
  

 
	
 $1,520,000

 	
 December 9, 2009

 Minneapolis, Minnesota

 

          FOR
VALUE RECEIVED, ELECTROMED, INC., a corporation organized under the laws of the
State of Minnesota hereby promises to pay to the order of U.S. BANK NATIONAL
ASSOCIATION (the “Bank”) at its main office in Minneapolis, Minnesota, in
lawful money of the United States of America in Immediately Available Funds (as
such term and each other capitalized term used herein are defined in the Credit
Agreement hereinafter referred to) the principal amount of ONE MILLION FIVE
HUNDRED TWENTY THOUSAND AND NO/100 DOLLARS ($1,520,000.00) and to pay interest
(computed on the basis of actual days elapsed and a year of 360 days) in like
funds on the unpaid principal amount hereof from time to time outstanding at
the rates and times set forth in the Credit Agreement.

          The
principal hereof is payable as provided in the Credit Agreement.

          This
note is the Term Note A referred to in the Credit Agreement dated as of
December 9, 2009 (as the same may hereafter be from time to time amended,
restated or otherwise modified, the “Credit Agreement”) between the undersigned
and the Bank. This note is secured and its maturity is subject to acceleration,
in each case upon the terms provided in said Credit Agreement.

          In
the event of default hereunder, the undersigned agrees to pay all costs and
expenses of collection, including reasonable attorneys' fees. The undersigned
waives demand, presentment, notice of nonpayment, protest, notice of protest
and notice of dishonor.

          THE
VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE CONFLICT
OF LAWS PRINCIPLES THEREOF,, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED
STATES APPLICABLE TO NATIONAL BANKS.

	
  

 	
  

 	
  

 
	
  

 	
 ELECTROMED, INC.

 
	
  

 	
  

 	
  

 
	
  

 	
 By:

 	
 

 
	
  

 	
 Name: Robert D. Hansen

 
	
  

 	
 Title: Chief Executive OfficerExhibit 10.4 to Electromed, Inc. Form S1

Exhibit 10.4

TERM NOTE B

	
  

 	
  

 
	
 $1,000,000

 	
 December 9, 2009

 Minneapolis, Minnesota

 

          FOR
VALUE RECEIVED, ELECTROMED, INC., a corporation organized under the laws of the
State of Minnesota hereby promises to pay to the order of U.S. BANK NATIONAL
ASSOCIATION (the “Bank”) at its main office in Minneapolis, Minnesota, in
lawful money of the United States of America in Immediately Available Funds (as
such term and each other capitalized term used herein are defined in the Credit
Agreement hereinafter referred to) the principal amount of ONE MILLION AND
NO/100 DOLLARS ($1,000,000.00) and to pay interest (computed on the basis of
actual days elapsed and a year of 360 days) in like funds on the unpaid
principal amount hereof from time to time outstanding at the rates and times
set forth in the Credit Agreement.

          The
principal hereof is payable as provided in the Credit Agreement.

          This
note is the Term Note B referred to in the Credit Agreement dated as of
December 9, 2009 (as the same may hereafter be from time to time amended,
restated or otherwise modified, the “Credit Agreement”) between the undersigned
and the Bank. This note is secured and its maturity is subject to acceleration,
in each case upon the terms provided in said Credit Agreement.

          In
the event of default hereunder, the undersigned agrees to pay all costs and
expenses of collection, including reasonable attorneys’ fees. The undersigned
waives demand, presentment, notice of nonpayment, protest, notice of protest
and notice of dishonor.

          THE
VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE GOVERNED BY
THE INTERNAL LAWS OF THE STATE OF MINNESOTA WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF,, BUT GIVING EFFECT TO FEDERAL LAWS OF THE
UNITED STATES APPLICABLE TO NATIONAL BANKS.

	
  

 	
  

 	
  

 
	
  

 	
 ELECTROMED, INC.

 
	
  

 	
  

 	
  

 
	
  

 	
 By:

 	
 

 
	
  

 	
 Name: Robert D. Hansen

 
	
  

 	
 Title: Chief Executive OfficerExhibit 10.5 to Electromed, Inc. Form S1

Exhibit 10.5

SECURITY
AGREEMENT

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

RECITALS

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

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

          C.      The
Grantor finds it advantageous, desirable and in its best interests to comply
with the requirement that it execute and deliver this Security Agreement to the
Secured Party.

          NOW,
THEREFORE, in consideration of the premises and in order to induce the Secured
Party to enter into the Credit Agreement and to extend credit accommodations to
the Grantor thereunder, the Grantor hereby agrees with the Secured Party for
the Secured Party’s benefit as follows:

	
  

 	
  

 	
  

 
	
  

 	
 Section 1.
         Defined Terms.

 
	
  

 	
  

 	
  

 
	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
  

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

 
	
  

 	
  

 	
  

 
	
  

 	
             1
 (b)     All other terms used in this Agreement which
 are not specifically defined herein shall have the meaning assigned to such
 terms in Article 9 of the Uniform Commercial Code as in effect in the State
 of Minnesota

 
	
  

 	
  

 	
  

 
	
  

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

 

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

 
	
  

 	
  

 	
  

 	
  

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

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(a)

 	
 All Accounts.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(b)

 	
 All Chattel Paper.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(c)

 	
 All Deposit Accounts

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(d)

 	
 All Documents.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(e)

 	
 All Equipment.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(f)

 	
 All Fixtures

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(g)

 	
 All General Intangibles.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(h)

 	
 All Instruments.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(i)

 	
 All Inventory.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(j)

 	
 All Investment Property

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(k)

 	
 All Letter of Credit Rights

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
  

 	
 2(1)    To the extent not
 otherwise included in the foregoing, all other rights to the payment of
 money, including rents and other sums payable to the Grantor under leases,
 rental agreements and other Chattel Paper; all books, correspondence, credit
 files, records, invoices, bills of lading, and other documents relating to
 any of the foregoing, including, without limitation, all tapes, cards, disks,
 computer software, computer runs, and other papers and documents in the
 possession or control of the Grantor or any computer bureau from time to time
 acting for the Grantor; all rights in, to and under all policies insuring the
 life of any officer, director, stockholder or employee of the Grantor, the
 proceeds of which are payable to the Grantor; all accessions and additions
 to, parts and appurtenances of, substitutions for and replacements of any of
 the foregoing; and all proceeds (including insurance proceeds) and products
 thereof.

 
	
  

 	
  

 	
  

 	
  

 
	
  

 	
 Section 3.      Grantor
 Remains Liable. Anything herein to the contrary notwithstanding, (a) the
 Grantor shall remain liable under the Accounts, Chattel Paper, General
 Intangibles and

 

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

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

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

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

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

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

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

	
  

 	
  

 
	
  

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

 
	
  

 	
  

 
	
  

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

 

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

 
	
  

 	
  

 
	
  

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

 

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

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

          Section
11.        Inspection,
Reports, Verifications. The Grantor will at all reasonable times permit the
Secured Party or its representatives to examine or inspect any Collateral, any
evidence of Collateral and the Grantor’s books and records concerning the
Collateral, wherever located. The Borrower shall pay for (a) one collateral
exam per calendar year and (b) any expenses incurred by the Bank pursuant to
its rights of examination and inspection under the preceding sentence at the
time an Event of Default has occurred and is continuing. The Grantor will from
time to time when requested by the Secured Party furnish to the Secured Party a
report on its Accounts, Chattel Paper, General Intangibles and Instruments,
naming the Account Debtors or other obligors thereon, the amount due and the
aging thereof. The Secured Party or its designee is authorized to contact
Account Debtors and other Persons obligated on any such Collateral from time to
time to verify the existence, amount and/or terms of such Collateral.

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

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          Section
13.     Insurance. The Grantor will keep the
Collateral insured as required in the Credit Agreement.

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

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

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

          Section
17.     The Secured Party’s Duties. The powers
conferred on the Secured Party hereunder are solely to protect its interest in
the Collateral and shall not impose any duty upon it to exercise any such
powers. The Secured Party shall be deemed to have exercised reasonable

8

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

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

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

	
  

 	
  

 
	
  

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

 
	
  

 	
  

 
	
  

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

 

9

	
  

 	
  

 
	
  

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

 
	
  

 	
  

 
	
  

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

 
	
  

 	
  

 
	
  

 	
           19(e)     If
 notice to the Grantor of any intended disposition of Collateral or any other
 intended action is required by law in a particular instance, such notice
 shall be deemed commercially reasonable if given in the manner specified for
 the giving of notice in Section 24 hereof at least ten calendar days prior to
 the date of intended disposition or other action, and the Secured Party may
 exercise or enforce any and all other rights or remedies available by law or
 agreement against the Collateral, against the Grantor, or against any other
 Person or property. The Secured Party (i) may dispose of the Collateral in
 its then present condition or following such preparation and processing as
 the Secured Party deems commercially reasonable, (ii) shall have no duty to
 prepare or process the Collateral prior to sale, (iii) may disclaim
 warranties of title, possession, quiet enjoyment and the like, and (iv) may
 comply with any applicable state or federal law requirements in connection
 with a disposition of the Collateral and none of the foregoing actions shall
 be deemed to adversely affect the commercial reasonableness of the
 disposition of the Collateral.

 
	
  

 	
  

 

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

10

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

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

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

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

11

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

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

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

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

          Section
29.     Consent
to Jurisdiction. AT THE OPTION OF THE SECURED PARTY, THIS AGREEMENT
MAY BE ENFORCED IN ANY FEDERAL COURT OR

12

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

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

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

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

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

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

13

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

	
  

 	
  

 	
  

 
	
  

 	
 ELECTROMED, INC.

 
	
  

 	
  

 
	
  

 	
 By: 

 	
   

 
	
  

 	
 Name: Robert D. Hansen 

 
	
  

 	
 Title: Chief Executive Officer

 
	
 Address:

 	
  

 
	
  

 	
  

 
	
 500 Sixth Avenue NW 

 New Prague, MN 56071 

 ATTN: Robert D. Hansen 

 Fax Number: 952-758-1941

 	
  

 
	
  

 	
  

 
	
 Address for the Lender:

 	
  

 
	
  

 	
  

 
	
 U.S. Bank National Association 

 BC-MN-H03W 

 800 Nicollet Mall 

 Minneapolis, MN 55402-4302 

 ATTN: Daniel J. Miller 

 Fax Number: 612-303-2252

 	
  

 

[Signature Page to
Security Agreement]

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