Document:

EXHIBIT
10.4

 

REVOLVING CREDIT
AND TERM LOAN AGREEMENT

Dated as of
October 17, 2003

 

MedAmicus, Inc., a
Minnesota corporation (the “Borrower”), located at 15301 Highway 55 West,
Plymouth, MN 55447 and M&I Marshall & Ilsley Bank, a Wisconsin state
banking corporation (the “Bank”), located at 651 Nicollet Mall, Minneapolis,
Minnesota 55402-1611, agree as follows:

 

ARTICLE I.

 

DEFINITIONS

 

Section 1.1.                Definitions.  As used in this Agreement the following
terms shall have the following meanings (such meanings to be equally applicable
to singular and plural forms of the terms defined):

 

(a)                                  “Affiliate”
means any of the following Persons:

 

(i)                                     any
director, officer or employee of the Borrower;

 

(ii)                                  any
person who, individually or with his immediate family, beneficially owns or
holds 5% or more of voting equity interest in the Borrower; or

 

(iii)                               any
Subsidiary and any company in which any Person described above owns a 5% or
greater equity interest.

 

(b)                                 “BIOMEC
Purchase” means the purchase by Medacquisition, Inc. (“Medacquisition”), a
wholly-owned subsidiary of the Borrower, of certain assets of BIOMEC
Cardiovascular Inc. and BIOMEC, INC. pursuant to an Asset Purchase
Agreement dated as of July 21, 2003, as amended.

 

 

(c)                                  “Borrowing
Base” means an amount equal to the sum of the following:

 

(i)                                     80%
of the Value of Eligible Accounts Receivable; and

 

(ii)                                  50%
of the Value of Eligible Inventory.

 

(d)                                 “Borrowing
Base Certificate” means a certificate signed by the controller of the Borrower
that shows as of the date of determination the Value of Eligible Accounts
Receivable and the Value of Eligible Inventory and is delivered to the Bank
pursuant to Section 5.1(a).

 

(e)                                  “Business
Day” means any day other than a Saturday, Sunday or a public holiday or the
equivalent under the laws of the State of Minnesota or the United States of
America.

 

(f)                                    “Debt”
means (i) indebtedness for borrowed money or for the deferred purchase price of
property or services, (ii) obligations as lessee under leases that have been or
should be, in accordance with generally accepted accounting principles,
recorded as capital leases, (iii) obligations under direct or indirect
guaranties in respect of, and obligations (contingent or otherwise) to purchase
or otherwise acquire, or otherwise to assure a creditor against loss in respect
of, indebtedness or obligations of others of the kinds referred to in clause
(i) or (ii) above, and (iv) liabilities in respect of unfunded vested benefits
under plans covered by Title IV of ERISA.

 

(g)                                 “EBITDA”
means in any period the sum of the Borrower’s and Medacquisition’s consolidated
net income during that period plus interest, depreciation, amortization and
income tax expense during that period.

 

(h)                                 “Event
of Default” means one of the events specified in Section 6.1.

 

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(i)                                     “Excess
Cash Flow” means, for any quarter, EBITDA during that quarter less (i) the total
amount of principal and interest paid on Debt for borrowed money and
capitalized leases during that quarter, less (ii) $500,000, less (iii) capital
expenditures during that period to the extent such expenditures are not
financed with a purchase money loan or lease, less (iv) any contingent earn-out
payments made in 2004 or 2005 in connection with the BIOMEC Purchase; less (v) expenditures
for the acquisition or licensing of intellectual property to the extent such
expenditures are not financed with a purchase money loan, lease or license.

 

(j)                                     “Fixed
Charge Coverage Ratio” for any time period means a ratio the numerator of which
is (i) EBITDA, less
(ii) capital expenditures during that period to the extent such expenditures
are not financed with a purchase money loan or lease, less (iii) dividends
paid during that period, less
(iv) expenditures for the acquisition or licensing of intellectual property to
the extent such expenditures are not financed with a purchase money loan, lease
or license, and the denominator of which is the sum of interest expense during
that period plus that portion of the principal of the Borrower’s and
Medacquisition’s Debt for borrowed money and capitalized leases coming due
during that period.  (Contingent
earn-out payments made in 2004 or 2005 in connection with the BIOMEC Purchase
shall not be deducted from EBITDA in calculating the numerator of this ratio.)

 

(k)                                  “Inventory”
means the Borrower’s and Medacquisition’s raw materials, work in process and
finished goods held for sale in the ordinary course of business but not
including that portion of Medacquisition’s work in process attributable to
accrued labor.

 

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(l)                                     “LIBOR”
means the annual rate equal to the rate at which one-month U.S. dollar deposits
are offered on the first day of each calendar month on or about 9:00 a.m.,
Milwaukee, Wisconsin time (rounded upwards, if necessary, to the nearest 1/16
of 1%) as determined by the British Bankers Association (BBA LIBOR) and
reported by a major news service selected by the Bank (such as Reuters,
Bloomberg or Moneyline Telerate).  If BBA LIBOR for the one month period
is not provided or reported on the first day of a month because, for example,
it is a weekend or holiday or for another reason, the LIBOR shall be
established as of the preceding day on which a BBA LIBOR rate is provided for a
one month period and reported by the selected news service.

 

(m)                               “Loan
Documents” means this Agreement, the Notes, the Security Agreements, and all
other documents to be executed in connection with this Agreement.

 

(n)                                 “Loan
Party” means any Person obligated under any Loan Document.

 

(o)                                 “Notes”
means both the Revolving Note described in Section 2.2 and the Term Note
described in Section 2.3.

 

(p)                                 “Permitted
Liens” means liens described in Section 5.2(a).

 

(q)                                 “Person”
means an individual, corporation, partnership, joint venture, trust or
unincorporated organization or governmental agency or political subdivision
thereof.

 

(r)                                    “Senior
Funded Debt Ratio” means for any time period means a ratio the numerator of
which is the Borrower’s and Medacquisition’s Debt for borrowed money and
capitalized leases at the end of that period and the denominator of which is
EBITDA during that period.

 

(s)                                  “Subsidiary”
means any entity of which more than 50% of the outstanding equity interests
having ordinary voting power to elect a majority of the Board of

 

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Directors, Board of
Governors or comparable governing body of such entity (irrespective of whether
or not at the time equity interests of such entity shall or might have voting
power upon the occurrence of any contingency) is at the time directly or
indirectly owned by the Borrower, by the Borrower and one or more other
Subsidiaries, or by one or more other Subsidiaries.

 

(t)                                    “Tangible
Net Worth” means the aggregate of the consolidated capital stock, paid in
surplus and retained earnings of the Borrower and Medacquisition (excluding
stock of the Borrower held by the Borrower or Medacquisition), determined and
computed in accordance with generally accepted accounting principles
consistently applied from year to year, less the book value of all assets of
the Borrower and Medacquisition that would be treated as intangibles under
generally accepted accounting principles including without limitation, such
items as goodwill, trademarks, tradenames, service marks, copyrights, patents,
licenses, internet domain names, uniform resource locators, and website
contracts and registration rights and less the book value of all obligations
owed to the Borrower or Medacquisition by any of its Affiliates.

 

(u)                                 “Value
of Eligible Accounts Receivable” means the aggregate net unpaid amount then due
and owing under all domestic accounts receivable of the Borrower and
Medacquisition that: (i) arise from the sale of finished goods
constituting part of Inventory in the ordinary course of business of the
Borrower or Medacquisition; (ii) are equal to or less than 90 days old;
(iii) are not owed by an Affiliate of the Borrower or Medacquisition;
(iv) are subject to a perfected security interest in favor of only the
Bank as required by this Agreement; (v) are not subject to dispute by the
account debtor; (vi) are not owed by an account debtor as to which any
bankruptcy, receivership or

 

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similar insolvency proceeding
is pending; and (vii) are not owed by the United States government or an
agency of the United States government; provided, however, that
no obligations of any account debtor to the Borrower or Medacquisition shall be
included in this computation if more than 10% of such account debtor’s total
obligations to the Borrower and Medacquisition are more than 90 days old.  (Up to $500,000.00 of accounts receivable
owed by Medtronic, Inc. that are not more than 90 days old may be included in
the Value of Eligible Accounts Receivable notwithstanding the application of
the 10% cross-aging rule stated above. 
In the event that any other well-established and creditworthy customer
of the Borrower or MedAcquisition becomes subject to the 10% cross-aging rule
stated above, the Bank will negotiate in good faith for an adjustment to the
cross-aging rule comparable to the adjustment stated above for Medtronic, Inc.)

 

(v)                                 “Value
of Eligible Inventory” means an amount equal to the lesser of cost or fair
market value of the Borrower’s and Medacquisition’s Inventory that is subject
to a perfected security interest in favor of only the Bank as required by this
Agreement as determined and computed in accordance with generally accepted
accounting principles.

 

Section 1.2.                Accounting and
Other Terms.  All accounting terms
not specifically defined in this Agreement shall be construed in accordance
with generally accepted accounting principles consistently applied as such
principles may change from time to time. 
Other terms defined herein shall have the meanings ascribed to them
herein.

 

ARTICLE II.

 

THE LOANS

 

Section 2.1.                Commitment for
Revolving Loan.  The Bank agrees, in
accordance with the terms of this Agreement, to make advances (the “Advances”)
to the Borrower from time to

 

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time
from the date hereof to and including April 30, 2004 (the “Termination
Date”) or the earlier termination of the Commitment under the terms of this
Agreement, in an aggregate amount not to exceed $3,000,000.00 (the
“Commitment”); provided, however, that the aggregate amount of
Advances outstanding shall not at any time exceed the lesser of (i) the
Commitment or (ii) the Borrowing Base. 
Each Advance shall be in an amount of not less than $10,000.00.  Within the limits of the Commitment the
Borrower may borrow, prepay pursuant to Section 2.6 and reborrow under
this Section 2.1.

 

Section 2.2.                The Revolving
Note.  The Advances made by the Bank
shall be evidenced by a promissory note (the “Revolving Note”) that is in
substantially the form of Exhibit A attached hereto and is delivered to the
Bank pursuant to Article III.

 

Section 2.3.                Commitment For
Term Loan.  The Bank hereby agrees
to lend to the Borrower on or about the date hereof the amount of $5,000,000.00
(the “Term Loan”).  The Term Loan shall
be evidenced by a promissory note (the “Term Note”) that is in substantially
the form of Exhibit B attached hereto and is delivered to the Bank pursuant to
Article III.

 

Section 2.4.                Making of
Advances.  The Borrower may request
Advances under this Agreement by giving notice to the Bank, specifying the date
of the requested Advance and the amount thereof.  Any request for an Advance shall be deemed to be a representation
that the Borrower’s representations and warranties contained in
Section 4.1 are true and correct as of the date of the Advance as though
made on and as of such date and that no event has occurred and is continuing,
or will result from such Advance, that constitutes an Event of Default or would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both.  The Bank may
disburse each requested Advance and the Term Loan by crediting immediately

 

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available
funds in the amount of the Advance and the Term Loan to the Borrower’s demand
deposit account maintained with the Bank.

 

Section 2.5.                Interest and
Payments.  The Borrower shall repay,
and shall pay interest on, the aggregate unpaid principal amount of the Advances
and the Term Loan in accordance with the Notes, except that during the
continuance of an Event of Default the Borrower shall pay interest on each Note
at an annual rate equal to 2.0% in excess of the rate of interest otherwise
provided under that Note.  All payments
of principal, interest and fees under this Agreement shall be made when due to
the Bank in immediately available funds. 
All computations of interest shall be made by the Bank on the basis of
the actual number of days elapsed in a year of 360 days.  Whenever any such payment shall be due on a
non-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
interest.  The Bank is expressly
authorized to charge any principal, interest or fee payment, when due, to the
Borrower’s demand deposit account maintained at the Bank, or, if that account
shall not contain sufficient funds, to any other account maintained by the
Borrower at the Bank.

 

Section 2.6.                Voluntary
Prepayment.  The Borrower may prepay
the Notes in whole or in part without premium or penalty.

 

Section 2.7.                Mandatory
Prepayment – Revolving Note.  In the
event that the aggregate outstanding principal amount of the Revolving Note
shall exceed the Borrowing Base as shown on the Borrowing Base Certificate most
recently delivered to the Bank pursuant to Section 5.1(a), the Borrower
shall pay to the Bank the amount of such excess together with the amount of
accrued interest to the date of such prepayment on the amount prepaid.

 

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Section 2.8.                Mandatory
Prepayment – Term Note.  By
December 31, 2004, the Borrower shall make a principal payment on the Term
Note of not less than $150,000.00 in addition to the principal payments
otherwise required by that date under the Term Note.  Commencing on April 30, 2005 and on the 30th day
after the end of each fiscal quarter thereafter, the Borrower shall make a
principal payment on the Term Note equal to the lesser of (i) 40% of Excess
Cash Flow for the preceding quarter and (ii) the then remaining principal
balance of the Term Note.  Any mandatory
prepayment of the Term Note otherwise required under this Section shall be
reduced or eliminated to the extent that the Borrower would be required to fund
that prepayment with an Advance.

 

Section 2.9.                Use of Proceeds.  The proceeds of the Advances from the Bank
shall be used for working capital purposes. 
The proceeds of the Term Loan shall be used solely to fund a portion of
the cost of completing the BIOMEC Purchase.

 

Section 2.10.          Commitment Fee.  The Borrower agrees to pay to the Bank a
commitment fee (the “Commitment Fee”) of $10,000.00 on the date hereof and of
0.002 times the then outstanding principal balance of the Term Note on
October 31, 2004 and each October 31 thereafter while the Term Note
is outstanding.

 

Section 2.11.          Termination of
Agreement.  If the BIOMEC Purchase
has not been completed by November 30, 2003, this Agreement shall
terminate and the Bank shall have no obligation to fund any Advance or the Term
Loan.

 

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ARTICLE III.

 

CONDITIONS OF
LENDING

 

Section 3.1.                Conditions
Precedent to Initial Advance and Term Loan.  The Bank shall have no obligation to make the initial Advance or
the Term Loan hereunder unless the Bank shall have received on or before the
date of such Advance and Term Loan the following documents:

 

(a)                                  The
Notes, properly executed and delivered on behalf of the Borrower.

 

(b)                                 A
security agreement (the “Borrower Security Agreement”), in a form acceptable to
the Bank properly executed and delivered on behalf of the Borrower, granting to
the Bank a security interest in all of the Borrower’s inventory, accounts,
equipment, general intangibles and other property described therein as security
for the performance of the Borrower’s obligations under this Agreement and the
Notes, together with any UCC-1 Financing Statement or other document deemed
necessary or desirable by the Bank to perfect the security interest granted by
the Borrower Security Agreement.

 

(c)                                  A
security agreement (the “Medacquisition Security Agreement” and, together with
the Borrower Security Agreement, the “Security Agreements”), in a form
acceptable to the Bank properly executed and delivered on behalf of
Medacquisition, granting to the Bank a security interest in all of
Medacquisition ‘s inventory, accounts, equipment, general intangibles and other
property described therein as security for the performance of the Borrower’s
obligations under this Agreement and the Notes, together with any UCC-1
Financing Statement or other document deemed necessary or desirable by the Bank
to perfect the security interest granted by the Medacquisition Security
Agreement.

 

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(d)                                 A
certified copy of the resolutions of the Board of Directors of the Borrower and
Medacquisition, approving the execution and delivery of the Loan Documents to
which each is a party and approving all other matters contemplated by this
Agreement.

 

(e)                                  A
certificate by the Secretary or any Assistant Secretary of the Borrower and
Medacquisition certifying the names of the officer or officers of the Borrower
and Medacquisition authorized to sign the Loan Documents to which each is a party,
together with a sample of the true signature of such officer.

 

Section 3.2.                Conditions
Precedent to Each Advance and the Term Loan.  The obligation of the Bank to make each Advance (including the
initial Advance) and the Term Loan shall be subject to the further conditions
precedent, that on the date of such Advance and Term Loan:

 

(a)                                  The
representations and warranties contained in Section 4.1 of this Agreement
are correct on and as of the date of such Advance and Term Loan as though made
on such date; and

 

(b)                                 No
event has occurred and is continuing, or will result from such Advance or Term
Loan, that constitutes an Event of Default or would constitute an Event of
Default but for the requirement that notice be given or time elapse or both.

 

ARTICLE IV.

 

REPRESENTATIONS
AND WARRANTIES

 

Section 4.1.                Representations
and Warranties of the Borrower.  To
induce the Bank to make Advances and the Term Loan, the Borrower represents and
warrants as follows:

 

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(a)                                  Existence
of Borrower and Medacquisition. 
Each of the Borrower and Medacquisition is a corporation duly
incorporated, validly existing and in good standing under the laws of
Minnesota.  The Borrower has not, in the
past five years, operated under any name, including any trade name or assumed
name, other than the name indicated at the beginning of this Agreement.

 

(b)                                 Authority
to Execute.  The execution, delivery
and performance by the Borrower and Medacquisition of the Loan Documents to
which each is a party are within its corporate powers, have been duly
authorized by all necessary corporate action, do not and will not conflict with
any provision of law or of the charter or bylaws of the Borrower or
Medacquisition or of any agreement or contractual restriction binding upon or
affecting the Borrower or Medacquisition or any of its property, and need no
further shareholder or creditor consent.

 

(c)                                  Binding
Obligation.  This Agreement is, and
the other Loan Documents when delivered hereunder will be, legal, valid and
binding obligations of the Loan Parties enforceable against such Persons in
accordance with their respective terms.

 

(d)                                 Governmental
Approval.  No consent of, or filing
with, any governmental authority is required on the part of any Loan Party in
connection with the execution, delivery or performance of any Loan Documents.

 

(e)                                  Financial
Statements.  The audited financial
statements of the Borrower as of December 31, 2002 and the unaudited
financial statements as of June 30, 2003, copies of which have been
furnished to the Bank, have been prepared in conformity with generally accepted
accounting principles consistently applied and present fairly the financial
condition of the Borrower as of such dates, and the results of the operations
of

 

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the Borrower for the
financial periods then ended, and since such dates, there has been no
materially adverse change in such financial condition.

 

(f)                                    Litigation.  No litigation or governmental proceeding is
pending or threatened against the Borrower or Medacquisition that may have a
materially adverse effect on the financial condition or operations of the
Borrower or Medacquisition.

 

(g)                                 Title
to Assets.  Each of the Borrower and
Medacquisition has good and marketable title to all assets used in connection
with its trades or businesses, and none of such assets is subject to any
mortgage, pledge, lien, security interest or encumbrance of any kind, except
for current taxes not delinquent, and except as has been disclosed in writing
to the Bank contemporaneously with this Agreement.

 

(h)                                 Taxes.  Each of the Borrower and Medacquisition has
filed all federal and state income tax returns that are required to be filed,
and has paid all taxes shown on such returns to be due and all other tax
assessments received by it to the extent that such assessments have become due.

 

(i)                                     ERISA.  No plan (as that term is defined in the
Employee Retirement Income Security Act of 1974 (“ERISA”)) of the Borrower or
Medacquisition (a “Plan”) that is subject to Part 3 of Subtitle B of Title
1 of ERISA had an accumulated funding deficiency (as such term is defined in
ERISA) as of the last day of the most recent fiscal year of such Plan ended
prior to the date hereof, or would have had such an accumulated funding
deficiency on such date if such year were the first year of such Plan, and no
material liability to the Pension Benefit Guaranty Corporation has been, or is
expected by the Borrower or Medacquisition to be, incurred with respect to any
such Plan.  No

 

13

 

Reportable Event (as
defined in ERISA) has occurred and is continuing in respect to any such Plan.

 

(j)                                     Defaults.  Neither the Borrower nor Medacquisition is
in default in the payment of principal or interest on any indebtedness for
borrowed money and is not in default under any instrument or agreement under or
subject to which any indebtedness for borrowed money has been issued, and no
event has occurred and is continuing that, with or without the lapse of time or
the giving of notice, or both, constitutes or would constitute an event of
default under any such instrument or agreement or an Event of Default
hereunder.

 

(k)                                  Subsidiaries.  The Borrower has no Subsidiaries other than
Medacquisition.

 

(l)                                     Burdensome
Contracts.  Neither the Borrower nor
Medacquisition is subject to any contracts or agreements outside the ordinary
course of business the terms of which, if enforced, would materially adversely
affect the financial condition or operations of the Borrower or Medacquisition.

 

(m)                               Patents,
Trademarks, Etc.  Each of the
Borrower and Medacquisition has good and marketable title or valid licenses to
all patents, trademarks, processes and copyrights that are necessary for the
operation of the Borrower’s and Medacquisition’s businesses.

 

(n)                                 Use
of Proceeds For Securities Transactions. 
No proceeds of any Advance or the Term Loan will be used to acquire any
security in any transaction that is subject to Section 12 of the
Securities Exchange Act of 1934.

 

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(o)                                 Regulation
U.  Neither the Borrower not
Medacquisition is engaged in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of Regulation U
issued by the Board of Governors of the Federal Reserve System), and no
proceeds of any Advance or the Term Loan will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock.

 

(p)                                 BIOMEC
Purchase.  The BIOMEC Purchase has
been completed, or will be completed contemporaneously with the first funding
of an Advance or the Term Loan, substantially in accordance with terms of the
Asset Purchase Agreement dated as of July 21, 2003, a copy of which the
Borrower has provided to the Bank.  The
Borrower has provided a copy of each amendment to such Asset Purchase Agreement
to the Bank.

 

ARTICLE V.

 

COVENANTS OF THE
BORROWER

 

Section 5.1.                Affirmative
Covenants.  So long as any Note
shall remain unpaid or the Bank shall have a Commitment hereunder, the Borrower
will, unless the Bank shall give its prior written consent:

 

(a)                                  Financial
Reporting.  Furnish to the Bank: (i)
as soon as available and in any event within 30 days after the end of each
month of each fiscal year (45 days in the case of the last month of each fiscal
year) of the Borrower and Medacquisition, balance sheets of the Borrower and
Medacquisition as of the end of such month and statements of income and
retained earnings of the Borrower and Medacquisition for the period commencing
at the end of the previous fiscal year and ending with the end of such month,
certified by the controllers of the Borrower and Medacquisition; (ii) as soon
as available

 

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and in any event within
90 days after the end of each fiscal year of the Borrower and Medacquisition,
(A) a copy of the annual report for such year for the Borrower and
Medacquisition, containing financial statements for such year certified in a
manner acceptable to the Bank by McGladrey & Pullen, LLP or other
independent public accountants acceptable to the Bank and (B) a budget and
projections prepared by the Borrower and Medacquisition in a form acceptable to
the Bank for the fiscal year that has just begun; (iii) promptly upon the
sending or filing thereof copies of all public reports filed by the Borrower or
Medacquisition with the Securities and Exchange Commission or to any national
securities exchange; (iv) promptly upon the filing or receiving thereof, copies
of all reports that the Borrower or Medacquisition files under ERISA or that
the Borrower or Medacquisition receives from the Pension Benefit Guaranty
Corporation if such report shows any material violation or potential violation
by the Borrower of its obligations under ERISA; (v) such other information
concerning the conditions or operations, financial or otherwise, of the
Borrower and Medacquisition as the Bank from time to time may reasonably
request; (vi) within 30 days after the end of each month, a Borrowing Base
Certificate, together with an accounts receivable and accounts payable aging,
for the month most recently ended.

 

(b)                                 Visitation
Rights.  At any reasonable time and
from time to time, permit the Bank or any agents or representatives thereof, to
examine and make copies of and abstracts from the records and books of account
of, and visit the properties of, the Borrower and Medacquisition, and to
discuss the affairs, finances and accounts of the Borrower and Medacquisition
with any of its respective officers or directors.  The

 

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Borrower will reimburse
the Bank for its reasonable costs and expenses of conducting such periodic
examinations.

 

(c)                                  Notification
of Default, Etc.  Notify the Bank as
promptly as practicable (but in any event not later than 5 Business Days) after
the Borrower or Medacquisition obtains knowledge of: (i) the occurrence of any
event which constitutes an Event of Default or which would constitute an Event
of Default with the passage of time or the giving of notice or both; or (ii)
the commencement of any litigation or governmental proceedings of any type that
could materially adversely affect the financial condition or business operations
of the Borrower or Medacquisition.

 

(d)                                 Compliance
Certificate.  At the time any
financial statement is required to be provided to Bank under this Agreement,
the Borrower will provide to Bank a certificate of the controller of the
Borrower substantially in the form of Exhibit C attached hereto (appropriately
completed).  If that certificate shows
that an Event of Default or any event that would constitute an Event of Default
with the passage of time or the giving of notice or both, has occurred, the
certificate shall state in reasonable detail the circumstances surrounding such
event and action proposed by the Borrower to cure such event.

 

(e)                                  Keeping
of Financial Records and Books of Account. 
Maintain proper financial records in accordance with generally accepted
accounting principles consistently applied that fully and correctly reflect all
financial transactions and all assets and liabilities of the Borrower and
Medacquisition.

 

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(f)                                    Tangible
Net Worth.  Maintain Tangible Net
Worth of not less than $6,000,000.00 at December 31, 2003 and of not less
than $10,000,000.00 at December 31, 2004.

 

(g)                                 Senior
Funded Debt Ratio.  Maintain as of
the end of each fiscal quarter a Senior Funded Debt Ratio of not more than the
following:

 

	
  Time Period

  	
   

  	
  Maximum
  Ratio

  
	
  2004

  	
   

  	
  1.25 to 1

  
	
  2005

  	
   

  	
  1.15 to 1

  
	
  2003

  	
   

  	
  1.50 to 1

  
	
  2006 and thereafter

  	
   

  	
  1.0 to 1

  

 

(h)                                 Fixed
Charge Coverage Ratio.  Maintain as
of the end of each fiscal quarter a Fixed Charge Coverage Ratio of not less
than 1.20 to 1.

 

(i)                                     Maintenance
of Insurance.  Maintain such
insurance with reputable insurance carriers as is normally carried by companies
engaged in similar businesses and owning similar property, and name the Bank as
loss payee on all policies insuring personal property in which the Bank has a
security interest and provide the Bank with certificates of insurance
evidencing its status as a loss payee. 
The loss payee endorsement shall provide for payment to the Bank
notwithstanding any acts or omissions of the Borrower or Medacquisition and
shall require notice to the Bank 30 days prior to the expiration or
cancellation of the insurance.

 

(j)                                     Maintenance
of Properties, Etc.  Maintain and
preserve, and cause Medacquisition to maintain and preserve, all of its
properties that are necessary or useful in the proper conduct of its business,
in good working order and condition, ordinary wear and tear excepted.

 

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(k)                                  Payment
of Taxes.  Pay, and cause Medacquisition
to pay, all taxes, assessments and governmental charges of any kind payable by
it as such taxes, assessments and charges become due and before any penalty
shall be imposed, except as the Borrower or Medacquisition shall contest in
good faith and by appropriate proceedings providing such reserves as are
required by generally accepted accounting principles.

 

(l)                                     Compliance
with ERISA.  Cause each Plan to
comply and be administered in accordance with those provisions of ERISA that
are applicable to such Plan.

 

(m)                               Maintenance
of Accounts.  Maintain, and cause
Medacquisition to maintain, its corporate bank accounts at the Bank except for
such incidental accounts that reasonable business judgment requires to be
maintained elsewhere, and either (i) keep collected demand deposit
balances in such accounts in the amount necessary to compensate the Bank for
applicable activity charges in such accounts, as calculated by the Bank and
applied to such balances in a manner consistent with all similar accounts or
(ii) pay such activity charges on a monthly basis.

 

(n)                                 Preservation
of Corporate Existence, Etc. 
Preserve and maintain its corporate existence, rights, franchises and
privileges in the jurisdiction of its incorporation, and qualify and remain
qualified, as a foreign corporation in each jurisdiction in which such
qualification is necessary or desirable in view of its business and operations
or the ownership of its properties, and cause Medacquisition to do so.

 

Section 5.2.                Negative
Covenants.  So long as any Note
shall remain unpaid or the Bank shall have a Commitment hereunder, and unless
the Bank shall give its prior written consent, the Borrower will not, and will
not permit Medacquisition to:

 

19

 

(a)                                  Liens.
 Create or suffer to exist any mortgage,
pledge, lien, security interest or other encumbrance with respect to any assets
now owned or hereafter acquired by the Borrower or Medacquisition except those
encumbrances made in favor of the Bank and present and future purchase money
security interests on, or leases of, equipment (“Permitted Liens”).

 

(b)                                 Debt.  Create or suffer to exist any Debt except
the Debt under this Agreement or the Notes, Debt consisting of contingent
earn-out payments that may be due in 2004 or 2005 in connection with the BIOMEC
Purchase and Debt secured by Permitted Liens.

 

(c)                                  Guaranties,
Etc.  Assume, guarantee, endorse or
otherwise become liable upon the obligation of any Person except by endorsement
of negotiable instruments for collection in the ordinary course of business.

 

(d)                                 Merger,
Etc.  Merge or consolidate with any
other Person; sell, transfer, convey, lease or otherwise dispose of (whether in
one transaction or in a series of transactions) all or a substantial portion of
its assets (whether now owned or hereafter acquired) to any other Person,
except for the completion of the BIOMEC Purchase and a merger of Medacquisition
into the Borrower.

 

(e)                                  Transactions
with Affiliates.  Engage in any
transaction (including, without limitation, loans or financial accommodations
of any kind) with any Affiliate, other than the completion of the BIOMEC
Purchase, provided that such transactions are permitted if they are on terms no
less favorable to the Borrower or Medacquisition, as applicable, than would be
obtainable if no such relationship existed.

 

20

 

(f)                                    Investments
in Other Persons.  Make any loan or
advance to any Person; or purchase or otherwise acquire the capital stock,
assets, or obligations of, or any interest in, any other Person other than
readily marketable direct obligations of the United States of America, deposits
in commercial banks of recognized standing operating in the United States of
America and other investments not in excess of $250,000.00 in the aggregate
outstanding at any time.

 

(g)                                 Change
in Nature of Business.  Make any
material change in the line of business of the Borrower or Medacquisition,
taken as a whole, as carried on at the date hereof.

 

(h)                                 Fixed
Assets.  Expend for fixed assets an
amount aggregating more than $2,000,000.00 in any fiscal year for the Borrower
and Medacquisition combined.

 

ARTICLE VI.

 

DEFAULT

 

Section 6.1.                Events of
Default.  “Events of Default” in
this Agreement means any of the following events:

 

(a)                                  Failure
of the Borrower to pay the principal of any Note when due or, if payable on
demand, upon demand;

 

(b)                                 Failure
of the Borrower to pay any interest or fees required to be paid hereunder or
under any Note when due;

 

(c)                                  Any
representation or warranty made by, or on behalf of, any Loan Party in, or
pursuant to, any Loan Document shall prove to have been incorrect in any
material respect when made or the Borrower or Medacquisition shall dispose of
any collateral described in the Security Agreement in violation of the Security
Agreements;

 

21

 

(d)                                 Default
in performance of any other covenant or agreement of any Loan Party in, or
pursuant to, any Loan Document and continuance of such default or breach for a
period of 30 days after written notice thereof to such Person by the Bank;

 

(e)                                  Any
Loan Party shall generally not pay its debts as such debts become due, or shall
admit in writing its inability to pay its debts generally, or shall make a
general assignment for the benefit of creditors; or any proceeding shall be
instituted by or against any Loan Party seeking to adjudicate it a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization, arrangement,
adjustment, custodianship, protection, relief, or composition of it or its
debts under any law relating to bankruptcy, insolvency or reorganization or
relief of debtors, or seeking the entry of an order for relief, or the
appointment of a receiver, custodian, trustee, or other similar official for it
or for any substantial part of its property; or any Loan Party shall take any
corporate action to authorize any of the actions set forth above in this
subsection; and in the case of a proceeding of the type described in this
paragraph commenced against any Loan Party, that proceeding shall not be
dismissed within 60 days or that Loan Party shall consent to that proceeding;

 

(f)                                    The
Borrower or Medacquisition shall fail to pay any of its Debts that individually
or in the aggregate total more than $100,000.00 (but excluding Debt evidenced
by any Note) any interest or premium thereon, when due (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise) and such
failure shall continue after the applicable grace period, if any, specified in
the agreement or instrument relating to such Debt; or any other default under
any agreement or instrument relating to any such Debt, or any other event,
shall occur and shall continue

 

22

 

after the applicable
grace period, if any, specified in such agreement or instrument, if the effect
of such default or event is to accelerate, or to permit the acceleration of,
the maturity of such Debt; or any such Debt shall be declared to be due and payable,
or required to be prepaid (other than by a regularly scheduled required
prepayment), prior to the stated maturity thereof;

 

(g)                                 The
entry against any Loan Party of a final judgment, decree or order for the
payment of money in excess of $150,000.00 and the continuance of such judgment,
decree or order unsatisfied for a period of 30 days without a stay of
execution;

 

(h)                                 Any
Reportable Event (as defined in ERISA) shall have occurred and continue for 30
days; or any Plan shall have been terminated by the Borrower or Medacquisition
not in compliance with ERISA, or a trustee shall have been appointed by a court
to administer any Plan, or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan.

 

Section 6.2.                Rights and
Remedies.  If any Event of Default
shall occur and be continuing, the Bank may exercise any or all of the
following rights and remedies:

 

(a)                                  By
written notice to the Borrower, suspend or terminate the Commitment, whereupon
the same shall forthwith be suspended or terminated;

 

(b)                                 Declare
the Notes, all interest thereon, and all other obligations under, or pursuant
to, any Loan Document to be immediately due and payable, and upon such
declaration such Notes, interest and other obligations shall immediately be due
and payable, without presentment, demand, protest or any notice of any kind,
all of which are expressly waived;

 

23

 

(c)                                  Exercise
any right or remedy under the Security Agreements, or any other right or remedy
of a secured party under the Uniform Commercial Code as in effect in Minnesota;

 

(d)                                 Exercise
any other right or remedy available to the Bank at law or in equity.

 

ARTICLE VII.

 

MISCELLANEOUS

 

Section 7.1.                No Waiver;
Cumulative Remedies.  No failure or
delay on the part of the Bank in exercising any right or remedy under, or
pursuant to, any Loan Document shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right, remedy or power preclude other or
further exercise thereof, or the exercise of any other right, remedy or
power.  The remedies in the Loan
Documents are cumulative and are not exclusive of any remedies provided by law.

 

Section 7.2.                Amendments and
Waivers.  No amendment or waiver of
any provision of any Loan Document shall be effective unless such amendment or
waiver is in writing and is signed by the Bank, and such amendment or waiver
shall be effective only in the specific instance and for the specific purpose
for which it was given.

 

Section 7.3.                Notices, Etc.  All notices and other communications
provided for hereunder shall be in writing (including telecopier communication)
and mailed or telecopied or delivered, if to the Borrower, at its address stated
in the preamble hereof, Attention: 
Michael Erdmann; and if to the Bank, at its address stated in the
preamble hereof, Attention:  John R.
Dan; or, as to each party, at such other address as shall be designated by such
party in a written notice to the other party. 
All such notices and communications shall, when mailed or telecopied,

 

24

 

be
effective when deposited in the mails or transmitted by telecopier,
respectively, addressed as provided above, except that notices to the Bank
pursuant to the provisions of Article II shall not be effective until
received by the Bank.

 

Section 7.4.                Costs and
Expenses.  The Borrower agrees to
pay all costs and expenses of the Bank, including reasonable attorneys fees and
expenses, in connection with the administration and enforcement of the Loan
Documents (whether suit is commenced or not).

 

Section 7.5.                Right of
Set-off.  Upon the occurrence and
during the continuance of any Event of Default the Bank is hereby authorized at
any time and from time to time, to the fullest extent permitted by law, to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by the Bank to or for the credit or the account of the Borrower or
Medacquisition against any and all of the obligations of the Borrower now or
hereafter existing under any Loan Document, irrespective of whether or not the
Bank shall have made any demand under any Loan Document and although such
obligations may be unmatured.  The Bank
agrees promptly to notify the Borrower after any such set-off and application,
provided that the failure to give such notice shall not affect the validity of
such set-off and application.  The rights
of the Bank under this Section are in addition to other rights and
remedies (including, without limitation, other rights of set-off) that the Bank
may have.

 

Section 7.6.                Governing Law.  All Loan Documents shall be governed by the
laws of the State of Minnesota.  Any
term used in this Agreement and not otherwise defined shall have the definition
given that term in the Uniform Commercial Code as in effect in the State of
Minnesota from time to time, and such definition automatically shall change on
the effective date of any amendment to the Uniform Commercial Code that changes
such definition.  If any term in this

 

25

 

Agreement
shall be held to be illegal or unenforceable, the remaining portions of this
Agreement shall not be affected, and this Agreement shall be construed and
enforced as if this Agreement did not contain the term held to be illegal or
unenforceable.  The Borrower hereby
irrevocably submits to the jurisdiction of the Minnesota District Court, Fourth
District, and the Federal District Court, District of Minnesota, Fourth
Division, over any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of such action or proceeding
may be heard and determined in any such court.

 

Section 7.7.                Binding Effect;
Assignment.  All Loan Documents
shall be binding upon and inure to the benefit of the Loan Parties and the Bank
and their respective successors and assigns. 
No Loan Party shall have the right to assign its rights or interest
under any such agreement without the prior written consent of the Bank.

 

IN WITNESS WHEREOF, the
parties have caused this Agreement to be executed by their duly authorized
officers as of the date first above written.

 

	
   

  	
  MedAmicus, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  James D. Hartman

  
	
   

  	
   

  	
  Its President & CEO

  
	
   

  	
   

  
	
   

  	
  M&I Marshall & Ilsley Bank

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
      Its

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
      Its

  	
   

  	
   

  
						

 

26

 

EXHIBIT A

 

REVOLVING
PROMISSORY NOTE

 

	
  $3,000,000.00

  	
   

  	
  Dated: October 17,
  2003

  

 

 

For value received, on
April 30, 2004, MedAmicus, Inc., a Minnesota corporation (the “Borrower”)
promises to pay to the order of M&I Marshall & Ilsley Bank (the
“Bank”), at its offices in Minneapolis, Minnesota, in lawful money of the United
States of America, the principal amount of Three Million and no/100 Dollars
($3,000,000.00) or, if less, the aggregate unpaid principal amount of Advances
made by the Bank to the Borrower pursuant to the Loan Agreement (as defined
below); together with interest on any and all principal amounts remaining
unpaid hereon from the date of this Note until such principal amounts are fully
paid at a fluctuating annual rate equal to 2.25% above LIBOR (as defined in the
Loan Agreement).  Interest shall be due
and payable on the last day of each calendar month starting on
November 30, 2003.  Each change in
the fluctuating interest rate shall take effect simultaneously with the
corresponding change in LIBOR.

 

All Advances made by the
Bank to the Borrower pursuant to the Loan Agreement and all principal payments
made by the Borrower on this Note shall be recorded by the Bank.

 

This Note is the
Revolving Note referred to in, and is entitled to the benefits of, the
Revolving Credit and Term Loan Agreement dated as of the date hereof (the “Loan
Agreement”) between the Borrower and the Bank, which Loan Agreement, among
other things, contains provisions for the acceleration of the maturity of this
Note upon the happening of certain stated

 

A-1

 

events, for an increase
to the interest rate upon the happening of certain stated events, and for
prepayments of the principal amount due under this Note upon stated terms and
conditions.

 

 

	
   

  	
  MedAmicus, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  [DRAFT ONLY. DO NOT SIGN.]

  	
   

  
	
   

  	
   

  	
  James D. Hartman

  
	
   

  	
   

  	
  Its President & CEO

  

 

A-2

 

EXHIBIT B

 

TERM PROMISSORY
NOTE

 

	
  $5,000,000.00

  	
   

  	
  Dated:
  October 17, 2003

  

 

 

For value received,
MedAmicus, Inc., a Minnesota corporation (the “Borrower”) promises to pay to
the order of M&I Marshall & Ilsley Bank (the “Bank”), at its offices in
Minneapolis, Minnesota, in lawful money of the United States of America, the
principal amount of Five Million and no/100 Dollars ($5,000,000.00); together
with interest on any and all principal amounts remaining unpaid hereon from the
date of this Note until such principal amounts are fully paid at a fluctuating
annual rate equal to 2.50% above LIBOR (as defined in the Loan Agreement).  Each change in the fluctuating interest rate
shall take effect simultaneously with the corresponding change in LIBOR.

 

The Borrower shall pay
principal in 60 monthly installments of $83,334.00 each payable on the last day
of each month starting on November 30, 2003 and continuing on the last day
of each month thereafter until October 31, 2008 when all remaining
principal and accrued interest shall be due and payable in full.  The Borrower shall pay accrued interest on
this Note on the last day of each month starting on November 30, 2003 and
at maturity.

 

This Note is the Term
Note referred to in, and is entitled to the benefits of, the Revolving Credit
and Term Loan Agreement dated as of the date hereof (the “Loan Agreement”)
between the Borrower and the Bank, which Loan Agreement, among other things,
contains provisions for the acceleration of the maturity of this Note upon the
happening of certain stated events, for an

 

B-1

 

increase to the interest
rate upon the happening of certain stated events, and for prepayments of the
principal amount due under this Note upon stated terms and conditions.

 

 

	
   

  	
  MedAmicus, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  [DRAFT ONLY. DO NOT SIGN.]

  	
   

  
	
   

  	
   

  	
  James D. Hartman

  
	
   

  	
   

  	
  Its President & CEO

  

 

B-2

 

EXHIBIT C

 

FORM OF COMPLIANCE
CERTIFICATE

 

I, the
                                            
of MedAmicus, Inc. (the “Borrower”), hereby provide this Compliance Certificate
in accordance with Section 5.1(d) of the Revolving Credit and Term Loan
Agreement (the “Agreement”) dated as of October 17, 2003 between the
Borrower and M&I Marshall & Ilsley Bank.

 

I certify that as of the
date hereof:

 

(1)                                  The
representations and warranties of the Borrower contained in Article IV of
the Agreement are correct as though made on the date hereof.

 

(2)                                  No
event has occurred and is continuing that constitutes an Event of Default under
the Agreement or would constitute an Event of Default but for the requirement
that notice be given or time elapse or both.

 

(3)                                  The
Borrower’s and Medacquisition, Inc.’s State of formation is Minnesota.

 

I
further certify that as of
                                   ,
20    :

 

(1)                                  Tangible
Net Worth as defined in the Agreement was
$                      
compared to a minimum in the Agreement of
$                              .  [Year end report only]

 

(2)                                  Fixed
asset expenditures were
                        
compared to a maximum in the Agreement of $2,000,000.  [Year end report only]

 

(3)                                  The
Senior Funded Debt Ratio as defined in the Agreement was
            to 1
compared to a minimum in the Agreement of
            to 1.  [Quarter end report only]

 

(4)                                  The
Fixed Charge Coverage Ratio as defined in the Agreement was
          to 1 compared to a
minimum in the Agreement of 1.20 to 1. 
[Quarter end report only]

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

C-1

 

EXHIBIT D

 

BORROWING BASE
CERTIFICATE

 

	
  A.

  	
   

  	
  Gross Accounts
  Receivable

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B.

  	
   

  	
  Less Ineligibles:

  	
   

  	
   

  
	
   

  	
   

  	
  Over
  90 days from invoice date

  	
   

  	
   

  
	
   

  	
   

  	
  10%
  rule (subject to special $500,000 Medtronic threshold)

  	
   

  	
   

  
	
   

  	
   

  	
  Receivables
  from Affiliates

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C.

  	
   

  	
  Total Eligible
  Receivables (A-B)

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  D.

  	
   

  	
  Advance Rate –     %
  (Cx    %)

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  E.

  	
   

  	
  Net Book Value
  Inventory (Excluding Medacquisition’s raw materials and work in process)

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  F.

  	
   

  	
  Advance Rate –     %
  (Ex    %)

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  G.

  	
   

  	
  Total Borrowing Base (D+F)

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  H.

  	
   

  	
  Less Line of Credit Outstanding

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  I.

  	
   

  	
  Availability (the lesser of Amount
  of Commitment minus H or G minus H must be equal to or greater than $0
  at all times)

  	
   

  	
   

  

 

 

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

 

The collateral
eligibility and advance rates shall be reviewed by the Bank annually.

 

D-1EXHIBIT
10.5

 

TERM PROMISSORY
NOTE

 

	
  $5,000,000.00

  	
   

  	
  Dated: October 17, 2003

  

 

For value received, MedAmicus, Inc., a Minnesota
corporation (the “Borrower”) promises to pay to the order of M&I Marshall
& Ilsley Bank (the “Bank”), at its offices in Minneapolis, Minnesota, in
lawful money of the United States of America, the principal amount of Five
Million and no/100 Dollars ($5,000,000.00); together with interest on any and
all principal amounts remaining unpaid hereon from the date of this Note until
such principal amounts are fully paid at a fluctuating annual rate equal to
2.50% above LIBOR (as defined in the Loan Agreement).  Each change in the fluctuating interest rate shall take effect
simultaneously with the corresponding change in LIBOR.

 

The Borrower shall pay principal in 60 monthly
installments of $83,334.00 each payable on the last day of each month starting
on November 30, 2003 and continuing on the last day of each month
thereafter until October 31, 2008 when all remaining principal and accrued
interest shall be due and payable in full. 
The Borrower shall pay accrued interest on this Note on the last day of
each month starting on November 30, 2003 and at maturity.

 

This Note is the Term Note referred to in, and is
entitled to the benefits of, the Revolving Credit and Term Loan Agreement dated
as of the date hereof (the “Loan Agreement”) between the Borrower and the Bank,
which Loan Agreement, among other things, contains provisions for the
acceleration of the maturity of this Note upon the happening of certain stated
events, for an

 

 

increase to the interest
rate upon the happening of certain stated events, and for prepayments of the
principal amount due under this Note upon stated terms and conditions.

 

	
   

  	
  MedAmicus, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
     /s/  James D. Hartman

  	
   

  
	
   

  	
   

  	
  James D. Hartman

  
	
   

  	
   

  	
  Its President & CEO

  

 

2

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