Document:

Exhibit 10.3

 

[Approved by HR
Committee—11/17/04]

FINANCIAL SECURITY ASSURANCE
HOLDINGS LTD.

AGREEMENT EVIDENCING AN AWARD OF
PERFORMANCE SHARES

 

	
   

  	
  January [     ], 2005

  

 

To:  [                   ]
“Employee”

 

We are pleased to notify you that by the determination
of the Human Resources Committee (the “Committee”) of the Board of
Directors of Financial Security Assurance Holdings Ltd. (together with any
successor thereto, the “Company”) an award of (Number of Shares) (               )
Performance Shares has been granted to you under the Financial Security
Assurance Holdings Ltd. 2004 Equity Participation Plan (as amended from time to
time, the “Plan”).  Unless
otherwise defined herein, all capitalized terms contained herein shall have the
definitions that are ascribed to them in the Plan.

 

As described herein, the Performance Shares will be
valued based upon the Company’s return on equity during two performance cycles,
each having a term of three years.  The
Performance Shares will be allocated (i) 33-1/3% to the three-year performance
cycle beginning January 1, 2005 and ending December 31, 2007 (the “2005/2006/2007
Cycle”) and (ii) 66-2/3% to the three-year performance cycle beginning
January 1, 2006 and ending December 31, 2008 (the “2006/2007/2008 Cycle”).
 Subject to Section 7 of this Agreement,
payouts for Performance Shares allocated to each Performance Cycle will be made
in cash and/or shares of common stock, $.01 par value per share (the “FSA
Stock”) of the Company following the end of such Performance Cycle, or
deferred as provided in this Agreement.  Until such time as FSA Stock becomes publicly traded, the Company does
not expect to allow payouts with respect to Performance Shares in FSA Stock.

 

1.             Purpose
of Award.

 

The purpose of the Plan pursuant to which this award
of Performance Shares has been granted is to enable the Company to retain and
attract executives and employees who will contribute to the Company’s success
by their ability, ingenuity and industry, and to enable such executives and
employees to participate in the long-term growth of the Company and Dexia S. A.
by obtaining a proprietary interest in the Company or Dexia S. A. and/or the
cash equivalent thereof.

 

2.             Acceptance
of the Performance Shares Award Agreement.

 

Your execution of this Performance Shares award
agreement (this “Agreement”) will indicate your acceptance of, and your
agreement to be bound by, the terms set forth in this Agreement and in the
Plan.

 

3.             Performance
Cycles.

 

The Performance Shares subject to this Performance
Shares award shall be allocated to the following two Performance Cycles:

 

	
  Performance Cycle

  	
   

  	
  % of Performance Shares Allocated

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  The 2005/2006/2007
  Cycle

  (January 1, 2005 through December 31, 2007)

  	
   

  	
  33-1/3%

  	
   

  
	
  The 2006/2007/2008
  Cycle

  (January 1, 2006 through December 31, 2008)

  	
   

  	
  66-2/3%

  	
   

  

 

 

4.             Performance
Objectives.

 

Subject to the terms of this Agreement, you shall be
entitled to receive FSA Stock and/or cash as provided in Section 6 of this
Agreement following the end of a Performance Cycle based upon the
Company’s Return on Equity or ROE (as defined below) during such Performance
Cycle, which is the Performance Objective designated by the Committee with
respect to your Performance Shares.

 

For purpose of the foregoing:

 

“ROE” means, in respect of any Performance
Cycle, the average of:

 

(i)            the discount rate (expressed as an
annual percentage rate) such that (a) the Adjusted Book Value per share of FSA
Stock on the last day of the Performance Cycle, adjusted to exclude the
after-tax change in accumulated other comprehensive income (unrealized gains
and losses in the Company’s investment portfolio and any other component of
other comprehensive income) during such Performance Cycle, and the dividends
paid per share during such Performance Cycle, each discounted at such discount
rate to the first day of such Performance Cycle, equals (b) the Adjusted Book
Value per share of FSA Stock on the first day of such Performance Cycle; and

 

(ii)           the discount rate (expressed as an
annual percentage rate) such that (a) the Book Value per share of FSA Stock on
the last day of the Performance Cycle, adjusted to exclude the after-tax change
in accumulated other comprehensive income (unrealized gains and losses in the
Company’s investment portfolio and any other component of other comprehensive
income) during such Performance Cycle, and the dividends paid per share during
such Performance Cycle, each discounted at such discount rate to the first day
of such Performance Cycle, equals (b) the Book Value per share of FSA Stock on
the first day of such Performance Cycle.

 

“Adjusted Book Value”
means, as of a particular date, the Book Value on such date, subject to the
following adjustments, each of which shall have been derived from the Company’s
U. S. GAAP financial statements for the period ended on such date (or, if not
derivable from such financial statements, shall be determined in good faith by
the Company), but reduced by the amount of the federal income tax applicable
thereto:

 

(i)            add to the Book Value the sum of (A)
the unearned premiums net of prepaid reinsurance premiums at such date, (B) the
estimated present value of future installment premiums, net of reinsurance, at
such date, (C) the estimated present value of ceding commissions to be received
related to reinsured future installment premiums at such date and (D) the
estimated present value of future net interest margin at such date, and

 

(ii)           subtract from such total the sum of
(A) the deferred acquisition costs at such date and (B) the estimated present
value of premium taxes to be paid related to future installment premiums.

 

2

 

For
purposes hereof, Adjusted Book Value shall be determined excluding the
after-tax effect of gains or losses attributable to mark-to-market of
Investment Grade credit derivatives.

 

“Adjusted Book Value
per share” means, as of a particular date, Adjusted Book Value on such date
divided by the number of shares of FSA Stock outstanding (excluding treasury
shares other than those owned to hedge obligations under the Company’s Deferred
Compensation Plan(s) or Supplemental Executive Retirement Plan(s)) on such
date.

 

“Book Value” means, as of a particular date, the Company’s
total shareholders’ equity on such date, as derived from the Company’s U. S.
GAAP financial statements for the period ended on such date.  For purposes hereof, Book Value shall be
determined excluding the after-tax effect of gains or losses attributable to
mark-to-market of Investment Grade credit derivatives.

 

“Book Value per share”
means, as of a particular date, Book Value on such date divided by the number
of shares of FSA Stock outstanding (excluding treasury shares other than those
owned to hedge obligations under the Company’s Deferred Compensation Plan(s) or
Supplemental Executive Retirement Plan(s)) on such date.

 

The effect that the ROE for a particular Performance
Cycle shall have on the value of the Performance Shares allocated to such
Performance Cycle is set forth in Section 6 below.  The Committee shall determine the extent to
which the Performance Objective defined herein has been achieved by the Company
in the applicable Performance Cycle. 
Such determination by the Committee shall, in the absence of bad faith
or manifest error, be final and binding on you.

 

If, any time after the date of the award made
hereunder, any change shall occur in or affect the FSA Stock or Performance
Shares on account of any increase or decrease in the number of outstanding
shares of FSA Stock resulting from payment of a stock dividend on FSA Stock, a
subdivision or combination of shares of FSA Stock, a reclassification of FSA
Stock, a recapitalization involving the Company or in the event of a merger or
consolidation in which the Company shall be the surviving corporation, then the
Committee shall make such adjustments, if any, that it deems necessary in the
number of shares of FSA Stock allocated to awards of Performance Shares then
outstanding to reflect such change.  In
the event of an Internal Reorganization, as defined below, (providing for a new
holding company for the FSA group of companies), (i) the Committee shall make
such adjustments to then outstanding Performance Shares (including Performance
Shares underlying outstanding Performance Share Units) as it shall deem appropriate
to reflect such Internal Reorganization so that, with respect to your
outstanding Performance Shares, you are compensated based upon the overall
performance of the reconstituted FSA group of companies, including, without
limitation, adjusting the number of shares of FSA Stock allocated to such
Performance Shares and adjusting the Performance Objectives or manner of
calculating the Performance Objectives in respect of such Performance Shares;
and (ii) the term “Company” shall be deemed to refer to such new holding
company and the term “FSA Stock” shall be deemed to refer to the securities of
such new holding company for all purposes of the Plan.  For purposes hereof, “Internal
Reorganization” means the direct or indirect acquisition of all or
substantially all of the outstanding FSA Stock by a newly organized holding
company established to own the Company and other companies engaged or to be
engaged in the financial guaranty insurance business, immediately following
which Dexia continues to own, directly or indirectly, shares of capital stock
of the Company entitling Dexia to, directly or indirectly, cast more than 90%
of the votes for the election of directors of the Company.

 

To reflect a change in tax laws or regulations or
accounting principles, the Performance Objectives relating to Performance
Cycles not then completed under this award shall be adjusted by the Committee
so as to reflect such change to preserve the value of the Performance Shares
consistent with the intent and the purpose of the Plan,

 

3

 

provided the Company’s independent auditors shall have determined that
such adjustments shall not result in the Company’s loss of deductibility under
Section 162(m) with respect to your compensation if it is, in the reasonable
belief of the Committee, subject thereto. 
Further, if the Company’s deductibility with respect to your award of
Performance Shares will not, in the reasonable belief of the Committee, be
subject to Section 162(m) of the Code, the Committee may, in its discretion and
independent of any determination made by the Company’s independent auditors,
make adjustments to the Performance Objective hereunder in respect of
Performance Cycles not then completed so as to reflect a change in tax laws or
regulations or accounting principles to preserve the value of the Performance
Shares consistent with the intent and the purpose of the Plan.

 

5.             Vesting.

 

On the date hereof, you are vested in none of the
Performance Shares subject to this award. 
You will become vested in your Performance Shares immediately upon
completion of the Performance Cycle to which those Performance Shares attach,
subject to earlier vesting or forfeiture as provided in this Agreement or the
Plan.

 

If your employment with the Company should terminate
prior to completion of a Performance Cycle for Cause or other than by reason of
death, Disability or Retirement or termination by the Company without Cause,
you will forfeit, and will not be entitled to any distribution or payment under
Section 6 of this Agreement with respect to, Performance Shares which have not
vested on or prior to such termination of employment.

 

The Plan provides for vesting of all your Performance
Shares upon termination of employment upon your death or Disability.  The Plan provides for partial vesting of your
Performance Shares upon termination of your employment by the Company without
Cause or Retirement prior to the completion of the related Performance Cycle,
with the percentage, if any, of your Performance Shares vesting being equal to
the percentage of the term of the Performance Cycle during which you were
employed by the Company (or such greater percentage as the Committee, in its
sole discretion, shall approve), and with the unvested balance of your Performance
Shares being forfeited.

 

Upon a Change in Control of the Company, the Plan
allows the Board of Directors of the Company to elect to continue the
Plan.  If the Board does not elect to
continue the Plan upon a Change in Control, then the Plan provides for
accelerated vesting and payout of outstanding Performance Shares, subject to
the satisfaction of certain conditions related to your continued employment for
a One-Year Period after such Change in Control. 
If the Board elects to continue the Plan upon a Change in Control, then
the Plan will continue as if no Change in Control had occurred, provided that
if your employment is terminated without Cause or you voluntarily terminate
your employment for Good Reason prior to completion of any Performance Cycle
for Performance Shares outstanding at the time of the Change in Control, then
the Plan provides for accelerated vesting and payout of such Performance Shares
as described in Section 9 of this Agreement.

 

6.             Distributions
and Payments on Completion of Performance Cycle.

 

In furtherance of an election made under Section 7 of
this Agreement, and subject to the Company’s rights thereunder, distributions
of shares of FSA Stock and/or payments of cash with respect to Performance
Shares allocated to a particular Performance Cycle covered by this award shall
be made to you within one hundred twenty (120) days after the completion of
such Performance Cycle in accordance with the Committee’s determination of the
achievement of the applicable Performance Objective, unless you shall have made
a deferral pursuant to Section 8 of this Agreement.  Provided you shall have been employed by the
Company through the date on which a particular Performance Cycle shall have
been completed, or your employment with the Company shall have been terminated
prior thereto by reason of death or Disability, you shall be entitled to
receive with respect to this Agreement:

 

4

 

(1)           a
number of shares of FSA Stock to be determined in accordance with the following
formula:

 

a x b = c; or

 

(2)           a
cash payment in an amount to be determined in accordance with the following
formula:

 

a x b x d = e; or

 

(3)           a
combination of FSA Stock and cash in the amounts determined in accordance with
the formulae set forth in clauses (1) and (2) above, provided, however, that,
in such event, in each such formula a shall be
multiplied by the percentage that represents the portion of the Performance
Shares allocated to such Performance Cycle to be paid in FSA Stock or cash, as
the case may be;

 

	
  where:

  	
  a =

  	
  the number of Performance Shares allocated to the
  applicable Performance Cycle under this Agreement;

  
	
   

  	
   

  	
   

  
	
   

  	
  b =

  	
  the percentage (which may be more than 100%), which
  represents the extent to which the Performance Objective defined herein has
  been achieved by the Company in the applicable Performance Cycle.
  Specifically, subject to Section 4 of this Agreement, the ROE calculated for
  each Performance Cycle will determine such percentage according to the
  following table:

  

 

	
  Performance 

  Cycle ROE

  	
   

  	
  Percentage of Performance 

  Objective Achieved

  	
   

  
	
  19% or higher

  	
   

  	
  200%

  	
   

  	
   

  
	
  16%

  	
   

  	
   

  	
  150%

  	
   

  	
   

  
	
  13%

  	
   

  	
   

  	
  100%

  	
   

  	
   

  
	
  10%

  	
   

  	
   

  	
  50%

  	
   

  	
   

  
	
  7%

  	
   

  	
   

  	
  0%

  	
   

  	
   

  

 

	
   

  	
   

  	
  All points in between will be interpolated using the
  straight line method.

  
	
   

  	
   

  	
   

  
	
   

  	
  c =

  	
  the number of shares of FSA Stock to be distributed
  to you at the end of the applicable Performance Cycle under this Agreement;

  
	
   

  	
   

  	
   

  
	
   

  	
  d =

  	
  the Fair Market Value of a share of FSA Stock as of
  the day the Committee determines the extent to which the Performance
  Objective has been achieved by the Company in the applicable Performance
  Cycle; and

  
	
   

  	
   

  	
   

  
	
   

  	
  e =

  	
  the amount of the cash to be paid to you at the end
  of the applicable Performance Cycle under this Agreement.

  

 

For purposes
hereof, so long as the FSA Stock is not listed on a national securities
exchange, “Fair Market Value” of a share of FSA Stock shall equal the
greater of (i) the product of 0.85 and the Adjusted Book Value per share of FSA
Stock as of the last day of the calendar quarter ending prior to the date of
determination of Fair Market Value and (ii) the average of (a) the product of
1.15 and the Adjusted Book Value per share of FSA Stock as of the last day of
the calendar quarter ending prior to the date of determination of Fair Market
Value and (b) the product of 14 and Operating Earnings per share of FSA Stock
as of the last day of the calendar quarter ending prior

 

5

 

to the date of determination of Fair Market Value.  For purposes of the foregoing, “Operating
Earnings” shall mean, as
of a particular date, net income of the Company for the first four
completed calendar quarters ended on or prior to such date less the after-tax effect of gains or losses
attributable to mark-to-market of Investment Grade credit derivatives, as
determined by the Company, consistent, as applicable, with its determination of
net income reported from time to time in the Company’s quarterly reports on
Form 10-Q.

 

In the event you shall not have been employed by the
Company through the date on which a particular Performance Cycle covered by
this award has been completed, you shall be entitled to receive the foregoing
distribution and/or payment with respect to the number of Performance Shares,
if any, which have vested (by reason of Termination without Cause or Retirement
during such Performance Cycle or otherwise) but with respect to which a
distribution or payment had not previously been made with respect thereto.

 

7.             Election
to Receive FSA Stock or Cash.

 

Subject to the provisions of this Section 7, payouts
for Performance Shares allocated to each Performance Cycle will be made in cash
and/or shares of common stock, $.01 par value per share (the “FSA Stock”)
of the Company following the end of such Performance Cycle, or deferred as
provided in this Agreement.  Until such time as FSA Stock becomes publicly traded, the Company does
not expect to allow payouts with respect to Performance Shares in FSA Stock.  In the event that the Company does allow
payouts with respect to Performance Shares in FSA Stock then, subject to
Section 9 hereof, prior to the date on which a Performance Cycle shall be
completed with respect to this award of Performance Shares, you will have an
opportunity to make an election to receive your distribution, if any, following
completion of such Performance Cycle, in shares of FSA Stock and/or cash.  Such election shall be made in writing and
shall be delivered to the Company’s Chief Financial Officer or General Counsel,
or such other officer as the Committee shall from time to time designate.  Notwithstanding any such election made by
you, the Committee may, in its sole and absolute discretion, satisfy the
Company’s obligations to you either by delivery of FSA Stock, subject to the
availability of such FSA Stock under the Plan, or by paying cash.  If you fail to make a timely election, the
Committee shall have the sole discretion to deliver shares of FSA Stock and/or
pay cash to satisfy any such obligation.

 

In the event you elect to receive shares of FSA Stock
in satisfaction of all or part of the Company’s obligations under Section 6 of
this Agreement with respect to the completion of a particular Performance
Cycle, and the aggregate number of shares of FSA Stock subject to elections
made by all Participants exceeds the maximum number of shares of FSA Stock
reserved and available for distribution under the Plan (the “Reserved Stock”),
the Committee shall have the absolute and sole discretion to satisfy such
obligations by reducing the number of shares of FSA Stock delivered pursuant to
such elections to the number of shares of FSA Stock then equal to the Reserved
Stock.  In such event, the Committee
shall reduce the aggregate number of shares of FSA Stock deliverable to you
pursuant to your election pro rata among all Participants making similar
elections, based upon the number of shares of FSA Stock otherwise deliverable
pursuant to such elections.  The Company
shall satisfy the obligations to you, which remain unsatisfied following a
distribution made pursuant to the foregoing reduction, by paying cash in
accordance with Section 6 of this Agreement.

 

8.             Election to Defer.

 

The Committee has established procedures for deferral
of award payments under the Plan and under the Company’s Deferred Compensation
Plan(s) for eligible employees.  You may
elect, if so eligible, to defer receipt of any FSA Stock and/or cash to which
you may be entitled pursuant to this Agreement, provided such election to defer
shall have been made in writing to the Committee in accordance with procedures
established by the Company.  The effect
of a timely election to defer under this Section 8 will be that the Committee
shall direct that the deferred amount be an obligation of the Company to you
under the Plan or the Company’s Deferred

 

6

 

Compensation Plan(s), as the case may be, and your rights with respect
thereto will thereafter be governed by the Plan or the Deferred Compensation
Plan(s), as the case may be.

 

9.             Change
in Control.

 

If the Board of Directors does not elect to continue
the Plan in connection with any Change in Control and you are then employed by
the Company, you shall immediately become fully vested with respect to all
Performance Shares subject to this award. 
In such event, you shall be entitled to a cash payment or payments
pursuant to Section 6 of this Agreement with respect to all Performance Cycles
completed on or prior to the date of the Change in Control, as provided in said
paragraph; in addition, the Committee shall value all Performance Shares in
respect of Performance Cycles which shall not have been completed on or before
the Operative Date (as defined below) based upon the formulae set forth in
Section 6 except that b shall be
equal to a percentage (the “Minimum Percentage”) equal to (i) for all
Performance Cycles that do not include at least one completed year at the
Operative Date, 100%, and (ii) for all Performance Cycles that include at least
one completed year at the Operative Date, a percentage (which may be more than
100%), which represents the extent to which the Performance Objectives set
forth in such award have been achieved by the Company in the applicable
Performance Cycle assuming that the Company achieved 100% of its Performance
Objectives for each year not completed at the Operative Date.  For purposes of the foregoing, “Operative
Date” shall mean the date of the Change in Control.

 

On the date one year after the Change in Control (the “One-Year
Period”), the Company shall pay to you the cash to which you are entitled
with respect to the Performance Shares whose vesting has been accelerated based
upon the Change in Control unless, prior thereto, your employment shall have
been terminated by the Company for Cause or you shall have voluntarily
terminated your employment without Good Reason, in either of which events you
shall forfeit all rights to the Performance Shares whose vesting had been
accelerated based upon the Change in Control which would not have otherwise
vested and all rights of payment attributable to application of the Minimum
Percentage, and any distributions of FSA Stock and/or in cash with respect
thereto.  In the case of any Performance
Cycle completed during the One-Year Period, payment of any amounts due shall be
made in accordance with Section 6 hereof, provided that any incremental payment
due pursuant to the foregoing provisions of this Section 9 by reason of
application of the Minimum Percentage shall be payable at the end of the
One-Year Period unless forfeited as provided above.

 

In the event of a Change in Control, the Board of
Directors may elect by resolution prior to the Change in Control to continue
the Plan (a “Plan Continuation”), in which event all Performance Shares
subject to this award shall vest and be payable as if no Change in Control had
occurred except as otherwise provided in the next two succeeding
sentences.  Following a Plan
Continuation, if your employment shall be terminated by the Company without
Cause or you shall voluntarily terminate your employment for Good Reason (as
defined in the Plan) in either case prior to the completion of any Performance
Cycle in respect of the Performance Shares subject to this award, then (i) all
Performance Shares subject to this award outstanding at the time of the Change
in Control and having Performance Cycles which shall not have been completed
prior to the date of termination of employment shall be deemed to be payable as
if no Plan Continuation had occurred (except that “Operative Date” shall
mean the date of termination of employment) and shall be paid immediately if
the One-Year Period shall have elapsed. 
In the event of a Plan Continuation, the Committee shall make such
adjustments, if any, to the Performance Objectives and/or the method of
calculating the Performance Objectives as it shall deem necessary or
appropriate to preserve the value of the Performance Shares consistent with the
intent and the purpose of the Plan.

 

7

 

10.           No
Rights as a Stockholder.

 

Neither you, nor any person entitled to exercise your
rights hereunder in the event of death, shall have any rights of a stockholder
with respect to any shares of FSA Stock subject to your award of Performance
Shares, except to the extent that a certificate for such shares shall have been
issued as provided for herein.

 

11.           Non-Transferability
of Performance Shares.

 

This award of Performance Shares shall not be
transferable except by will or the laws of descent and distribution.

 

12.           Subject
to Terms of the Plan.

 

This Agreement shall be subject in all respects to the
terms and conditions of the Plan and in the event of any question or
controversy relating to the terms of the Plan, or any ambiguity in interpreting
the provisions thereof, the decision of the Committee shall be conclusive.

 

13.           Miscellaneous.

 

(a)           All
decisions made by the Committee pursuant to the provisions of this Agreement
and the Plan (including without limitation any interpretation of this Agreement
and the Plan) shall be final and binding, in the absence of bad faith or
manifest error, on all persons and otherwise entitled to the maximum deference
permitted by law, including the Company and you.  Any dispute, controversy or claim between the
parties hereto arising out of or relating to this Agreement shall be settled by
arbitration conducted in the City of New York, in accordance with the
Commercial Rules of the American Arbitration Association then in force and New
York law.  In any dispute or controversy
or claim challenging any determination by the Committee, the arbitrator(s)
shall uphold such determination in the absence of the arbitrator’s finding of
the presence of bad faith or manifest error of the Committee.  The arbitration decision or award shall be
final and binding upon the parties.  The
arbitration shall be in writing and shall set forth the basis therefor.  The parties hereto shall abide by all awards
rendered in such arbitration proceedings, and all such awards may be enforced
and executed upon in any court having jurisdiction over the party against whom
enforcement of such award is sought. 
Each party shall bear its own costs with respect to such arbitration,
including reasonable attorneys’ fees; provided, however, that: (i) the fees of
the American Arbitration Association shall be borne equally by the parties; and
(ii) if the arbitration is resolved in your favor, your costs of arbitration
(including such fees) shall be paid by the Company.

 

(b)           All
certificates for shares of FSA Stock delivered pursuant to this Agreement shall
be subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the FSA Stock is then listed, and any applicable Federal or state securities
law, and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.  The foregoing provisions of this section
shall not be effective if and to the extent that the shares of FSA Stock
delivered under the Plan and hereunder are covered by an effective registration
statement under the Securities Act of 1933, as amended, such that application
of such provisions is no longer required, or if and so long as the Committee
otherwise determines that such application is no longer required.

 

(c)           This
Agreement shall not confer upon you any right to continued employment with the
Company, nor shall it interfere in any way with the right of the Company to
terminate your employment at any time. 
Notwithstanding any other provisions of this Agreement or the Plan, if
the Committee determines that any

 

8

 

individual entitled to take action or receive payments hereunder is an
infant or incompetent by reason of physical or mental disability, it may permit
such action to be made by or cause such payments to be made to a different
individual, without any further responsibility with respect thereto under this
Agreement or the Plan.

 

(d)           The
Company shall be entitled to withhold from any distribution of FSA Stock or
cash made under this Agreement the amount of taxes the Company deems necessary
to satisfy any applicable federal, state and local income and employment tax
withholding obligations arising from the payment of the award or to make other
appropriate arrangements with you to satisfy such obligations.  The Committee, in its discretion (and giving
consideration to, without limitation, Section 16 of the Securities Act of 1933,
as amended), may permit you to satisfy the obligation, in whole or in part, by
irrevocably electing to have the Company withhold FSA Stock that you already
own, having a value equal to the amount required to be withheld.  The value of shares to be withheld, or
delivered to the Company, shall be based on the Fair Market Value of the
shares, as determined in accordance with procedures to be established by the
Committee, on the date the amount of tax to be withheld is to be determined.

 

(e)           All
notices hereunder shall be in writing and, if to the Company, shall be
delivered or mailed to its principal office, addressed to the attention of the
General Counsel; and if to you, shall be delivered personally or mailed to you
at the address appearing in the records of the Company.  Such addresses may be changed at any time by
written notice to the other party given in accordance with this Section 13.

 

(f)            The
failure of you or the Company to insist upon strict compliance with any
provision of this Agreement or the Plan, or to assert any right you or the
Company may have under this Agreement or the Plan, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement or the Plan.

 

(g)           This
Agreement contains the entire agreement between the parties with respect to the
subject hereof and supersedes all prior agreements, written or oral, with
respect thereto.

 

(h)           THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW
YORK, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS.

 

	
   

  	
  Sincerely yours,

  
	
   

  	
   

  
	
   

  	
  FINANCIAL SECURITY ASSURANCE HOLDINGS LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Sean W. McCarthy, President

  	
   

  
	
  Agreed to and accepted as of the

  	
   

  
	
  date first set forth above (Please sign on the line

  	
   

  
	
  below and print name in the space provided):

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  (signature)

  	
   

  
	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  (print name)

  	
   

  
					

 

9EXHIBIT 10.1

 

OCTOBER 2004 CREDIT
AGREEMENT

 

THIS CREDIT AGREEMENT, dated as of October
29, 2004, is by and between MEDICALCV, INC., a Minnesota corporation (the “Borrower”),
and PKM PROPERTIES, LLC, a Minnesota limited liability company (the “Lender”).

 

RECITALS:

 

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

 

2.             The
Lender has previously made available to the Borrower a $943,666 discretionary
credit facility under a Discretionary Credit Agreement dated January 17, 2003
as it may have been or may be amended, modified, supplemented, restated or
replaced from time to time (the “January Discretionary Credit Agreement”),
a $1,000,000 discretionary credit facility under a May Discretionary Credit
Agreement dated July 1, 2003 as it may have been or may be amended, modified,
supplemented, restated or replaced from time to time (the “May Discretionary
Credit Agreement”), a $500,000 discretionary credit facility under a
November 11, 2003 Discretionary Credit Agreement (the “November 2003 Credit
Agreement”), and a $250,000 discretionary credit facility under an April 16,
2004 April 2004 Discretionary Credit Agreement.

 

3.             The
Borrower has requested that the Lender make available to the Borrower an
additional $500,000 credit facility under this Agreement.

 

4.             The
Borrower will use the proceeds of advances, if any, under the Facility (defined
below) as working capital to continue operating as a going concern.

 

AGREEMENTS:

 

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

 

ARTICLE 1 
DEFINITIONS AND ACCOUNTING TERMS

 

Section 1.1            Defined
Terms.  Except as otherwise
defined herein, capitalized terms shall have the meanings set forth in the
November Credit Agreement.  The following
terms shall have the meanings set out respectively after each (and such
meanings shall be equally applicable to both the singular and plural form of
the terms defined, as the context may require):

 

Agreement:  This October 2004 Credit Agreement, as it may
be amended, modified, supplemented, restated or replaced from time to time.

 

Credit Expiration Date:  The date that first occurs: (i) February 28,
2005, or (ii) the date on which the Facility is terminated pursuant to Section
9.2.

 

Event of Default:  Any event described in Section 9.1.

 

1

 

Facility:  This facility under which the Lender will
make loans to the Borrower in accordance with Article 2 and the Note up
to an aggregate principal amount at any one time outstanding not to exceed
$500,000.

 

Intellectual Property Agreement:  That certain Intellectual Property Security
Agreement of even date granting Lender a security interest in the collateral
described therein.

 

Loan Documents:  This Agreement, the October 2004 Note, the
Intellectual Property Security Agreement, the Financing Statements, the
Warrants, and each other instrument, document, guaranty, security agreement, or
other agreement executed and delivered by the Borrower or any guarantor or
party granting security interests in connection with this Agreement, or any
collateral for the Loans.

 

Loans:  Any loans made by the Lender to the Borrower
under the Facility.

 

Note:  That certain October 2004 Credit Note dated
the date hereof executed by the Borrower and made payable to the order of the
Lender in the original principal amount of $500,000, as it may be amended,
modified, supplemented, restated or replaced from time to time.

 

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

 

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

 

Section 1.2            Accounting
Terms and Calculations.  Except
as may be expressly provided to the contrary herein, all accounting terms used
herein shall be interpreted and all accounting determinations hereunder shall
be made in accordance with GAAP consistently applied.

 

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

 

ARTICLE 2 
TERMS OF LENDING

 

Section 2.1            Facility.  Subject to and upon the terms and conditions
hereof and in reliance upon the representations and warranties of the Borrower
herein, the Lender agrees to make loans to the 

 

2

 

Borrower under this Section
2.1 from time to time from the date hereof until the Credit Expiration
Date, provided, that the aggregate unpaid principal amount of all outstanding
loans under this Section 2.1 shall not exceed the amount of the Facility
at any time.  If, at any time, or for any
reason, the amount outstanding under the Loans exceeds the Facility, the Borrower
shall immediately pay to the Lender, in cash, the amount of such excess.  This is not a revolving facility, and the
Borrower may not repay and reborrow.

 

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

 

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

 

ARTICLE 3 
INTEREST AND COSTS

 

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

 

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

 

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

 

Section 3.4            Warrant.  As further consideration for the financing
provided by Lender hereunder, the Borrower will issue warrants in form and
substance satisfactory to the Lender to purchase for the Strike Price (defined
below) per share the number of shares of common stock of the Borrower equal to
the principal amount of such Note multiplied by ten percent (10%), divided by
the Strike Price.  For purposes of this
Section, “Strike Price” means lower of: 
(a) $1.47 or (b) the price at which Borrower first sells its
common stock or units (each consisting of a share of common stock and a stock
purchase warrant), minus the value of the warrant component thereof, determined
at the date of sale thereof using the Black Scholes formula but in no event
less than $1.00.

 

3

 

ARTICLE 4 
PAYMENTS AND PREPAYMENTS

 

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

 

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

 

Section 4.3            Accelerated
Payments.  Upon the occurrence of
an Event of Default and the acceleration of the Note, pursuant to and as
permitted by Section 9.2, the Note and all other Obligations, shall be
immediately due and payable as provided in Section 9.2 and in the Note.

 

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

 

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

 

ARTICLE 5 
COLLATERAL SECURITY

 

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

 

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

 

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

 

4

 

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

 

ARTICLE 6 
CONDITIONS PRECEDENT

 

Section 6.1            Conditions
of Initial Loan.  The obligation
of the Lender to make an initial Loan hereunder shall be subject to the
satisfaction of the conditions precedent, in addition to the applicable
conditions precedent set forth in Section 6.2 below, that the Lender
shall have received all of the following, in form and substance satisfactory to
the Lender, each duly executed and certified or dated the date hereof or such
other date as is satisfactory to the Lender:

 

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

 

(b)           The Warrants.

 

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

 

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

 

(e)           Amendment No. 3 to
First Amended and Restated Subordination and Intercreditor Agreement duly
executed by Borrower, Lender and Hauser.

 

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

 

Section 6.2            Conditions
Precedent to all Loans.  The
obligation of the Lender to make any Loan shall be subject to the satisfaction
of the following conditions precedent (and any request for a Loan shall be
deemed a written certification that such conditions precedent have been
satisfied):

 

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

 

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

 

(c)           At the time of
requesting such Loan, the Borrower does not possess any proceeds received on or
after the date of this Agreement from the issuance and/or sale of securities or
the sale of assets (other than the sale of its inventory in the ordinary course
of business).

 

5

 

ARTICLE 7 
REPRESENTATIONS AND WARRANTIES

 

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

 

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

 

Section 7.2            Authorization
and Validity.  The execution,
delivery and performance by the Borrower of the Loan Documents have been duly
authorized by all necessary corporate action by the Borrower, and the Loan
Documents constitute the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms,
subject to limitations as to enforceability which might result from bankruptcy,
insolvency, moratorium and other similar laws affecting creditors’ rights
generally and subject to limitations on the availability of equitable remedies.

 

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

 

Section 7.4            November Credit Agreement.  The
representations and warranties contained in the November Credit Agreement and
the other Loan Documents (as defined therein) are true and correct as of the
date hereof as though made on the date hereof except to the extent that such
representations and warranties relate solely to an earlier date.

 

Section 7.5            No Event of Default.  There
does not exist any Event of Default (as defined in this Agreement) or any event
which with the giving of notice or the passage of time could result in an Event
of Default.

 

Section 7.6            Survival
of Representations.  All of the
representations and warranties set forth in the immediately preceding
subsections shall survive until all the Obligations shall have been satisfied
in full, and the Facility has been terminated.

 

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

 

6

 

ARTICLE 8   COVENANTS

 

Section 8.1            Survival
of covenants under November Discretionary Credit Agreement.   Until all of its Obligations shall have been
indefeasibly satisfied in full, the Borrower shall continue to comply with all
its affirmative and negative covenants under the November Discretionary Credit
Agreement, regardless of whether it repays all of the Indebtedness owing under
the November Discretionary Credit Agreement.

 

ARTICLE 9   EVENTS OF DEFAULT AND REMEDIES

 

Section 9.1            Events
of Default.  The occurrence of
any one or more of the following events shall constitute an Event of Default:

 

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

 

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

 

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

 

(d)           The Borrower shall fail
to comply with any agreement, covenant, condition, provision or term contained
in the Loan Documents or any other document, instrument or agreement between
Borrower and either Lender or Miller; or

 

(e)           An Event of Default or
the like shall occur under any Loan Document.

 

Section 9.2            Remedies.  If (a) any Event of Default described in Section
9.1(b) shall occur, the Facility (including, without limitation, any
obligation of the Lender to make any Loan under Section 2.1) shall
automatically terminate and the outstanding unpaid principal balance of the
Note, the accrued interest thereon and all other Obligations shall
automatically become immediately due and payable; or (b) any other Event of
Default shall occur and be continuing, then the Lender may take any or all of
the following actions: (i) declare the Facility (including, without limitation,
any obligation of the Lender to make any Loan under Section 2.1) to be
terminated, whereupon the Facility (including, without limitation, any
obligation of the Lender to make any Loan under Section 2.1) shall terminate,
and (ii) declare the outstanding unpaid principal balance of the Note, the
accrued and unpaid interest thereon and all other Obligations to be forthwith
due and payable, whereupon the Note, all accrued and unpaid interest thereon
and all such other Obligations shall immediately become due and payable, in
each case without further demand or notice of any kind, all of which are hereby
expressly waived, anything in this Agreement or in the Note to the contrary
notwithstanding.  In addition, upon any
Event of Default, the Lender may exercise all rights and remedies under any
other instrument, document or agreement between the Borrower and the Lender,
and enforce all rights and remedies under any applicable law, including without
limitation the rights and remedies available upon default to a secured party
under the Uniform Commercial Code as adopted in the State of Minnesota,
including, without limitation, the right to take possession of the Collateral,
or any evidence thereof, proceeding without judicial process or by judicial process
(without a prior hearing or notice thereof, which the Borrower hereby expressly
waives) and the right to sell, lease or otherwise dispose of any or all of the
Collateral, and, in connection therewith, the 

 

7

 

Borrower will on demand
assemble the Collateral and make it available to the Lender at a place to be
designated by the Lender which is reasonably convenient to both parties.

 

Section 9.3            Offset.  In addition to the remedies set forth in Section
9.2, the Lender or any other holder of the Note may offset any and all
obligations of the Lender or such other holder of the Note, against the
Indebtedness then owed by the Borrower to the Lender.  Nothing in this Agreement shall be deemed a
waiver or prohibition of the Lender’s rights offset or counterclaim, which
right the Borrower hereby grants to the Lender.

 

ARTICLE 10 
MISCELLANEOUS

 

Section 10.1         Waiver
and Amendment.  No failure on the
part of the Lender or the holder of the Note to exercise and no delay in
exercising any power or right hereunder or under any other Loan Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
power or right preclude any other or further exercise thereof or the exercise
of any other power or right.  The
remedies herein and in any other instrument, document or agreement delivered or
to be delivered to the Lender hereunder or in connection herewith are
cumulative and not exclusive of any remedies provided by law.  No notice to or demand on the Borrower not
required hereunder or under the Note shall in any event entitle the Borrower to
any other or further notice or demand in similar or other circumstances or
constitute a waiver of the right of the Lender or the holder of the Note to any
other or further action in any circumstances without notice or demand.  No amendment, modification or waiver of any
provision of this Agreement or consent to any departure by the Borrower
therefrom shall be effective unless the same shall be in writing and signed by
the Lender, and then such amendment, modifications, waiver or consent shall be
effective only in the specific instances and for the specific purpose for which
given.  Miller’s approval of any Borrower
corporate action, in his capacity as a director of Borrower, whether by written
action or otherwise, is not a sufficient waiver or consent to satisfy any
waiver or consent requirement with respect to any Obligations.

 

Section 10.2         Expenses
and Indemnities.  Whether or not
any the Loan is made hereunder, the Borrower agrees to reimburse the Lender
upon demand for all reasonable expenses paid or incurred by either the Lender
or Miller (including filing and recording costs and fees and expenses of legal
counsel of each of Lender and Miller) in connection with the preparation,
review, execution, delivery, amendment, modification, interpretation,
collection and enforcement of the Loan Documents.  The Borrower agrees to pay, and save the
Lender harmless from all liability for, any stamp or other taxes which may be
payable with respect to the execution or delivery of the Loan Documents.  The Borrower agrees to indemnify and hold the
Lender harmless from any loss or expense which may arise or be created by the
acceptance of instructions for making Loans or disbursing the proceeds
thereof.  The Borrower agrees to
indemnify and hold the Lender and Miller harmless from any obligation to pay
any fees or commissions to any broker or finder in connection with the
transactions contemplated in the Loan Documents, including, without limitation,
to NDX Trading, Inc.  The Borrower shall
indemnify and hold harmless the Lender and its respective Affiliates, and each
such Person’s respective officers, directors, employees, attorneys, agents and
representatives (each, an “Indemnified Person”), from and against any
and all suits, actions, proceedings, claims, damages, losses, liabilities and
expenses (including reasonable attorneys’ fees and disbursements and other
costs of investigation or defense, including those incurred upon any appeal)
that may be instituted or asserted against or incurred by any such Indemnified
Person as the result of any representation or warranty made by the Borrower in
the Loan Documents or in any certificate, statement, report or other writing
furnished by the Borrower to the Lender or Miller pursuant to the Loan
Documents or any other instrument, document or agreement shall prove to have
been false or misleading. The obligations of the Borrower under this Section
10.2 shall survive any termination or expiration of the Facility and
payment in full of the Obligations.

 

8

 

Section 10.3         Notices.  Except when telephonic notice is expressly
authorized by this Agreement, any notice or other communication to any party in
connection with this Agreement shall be in writing and shall be sent by manual
delivery, telegram, telex, facsimile transmission, overnight courier or United
States mail (postage prepaid) addressed to such party at the address specified
on the signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. 
All periods of notice shall be measured from the date of delivery
thereof if manually delivered, from the date of sending thereof if sent by telegram,
telex or facsimile transmission, from a first Business Day after the date of
sending if sent by overnight courier, or from four days after the date of
mailing if mailed; provided, however, that any notice to the
Lender under Article 2 hereof shall be deemed to have been given only
when received by the Lender.  If notice
to the Borrower of any intended disposition of the Collateral or any other
intended action is required by law in a particular instance, such notice shall
be deemed commercially reasonable if given at least ten calendar days prior to
the date of intended disposition or other action.

 

Section 10.4         Successors.  This Agreement shall be binding on the
Borrower and the Lender and their respective successors and assigns, and shall
inure to the benefit of the Borrower and the Lender, and the successors and
assigns of the Lender.  The Borrower
shall not assign its rights or duties hereunder without the written consent of
the Lender.

 

Section 10.5         Participations
and Information.  The Lender may
sell participation interests in any or all of the Loans and in all or any
portion of the Facility to any Person. 
The Lender may furnish any information concerning the Borrower in the
possession the Lender from time to time to participants and prospective participants
and may furnish information in response to credit inquiries.

 

Section 10.6         Severability.  Any provision of the Agreement which is
prohibited or unenforceable in any jurisdiction shall, in such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction.

 

Section 10.7         Captions.  The captions or headings herein are for
convenience only and in no way define, limit or describe the scope or intent of
any provision of this Agreement.

 

Section 10.8         Entire
Agreement.  This Agreement and
the Note, and the other Loan Documents, embody the entire agreement and
understanding between the Borrower and the Lender with respect to the subject
matter hereof and thereof.  This
Agreement supersedes all prior agreements and understandings relating to the
subject matter hereof.

 

Section 10.9         Counterparts.  This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.

 

Section 10.10       Governing
Law.  The validity, construction
and enforceability of this Agreement and the Note shall be governed by the
internal laws of the State of Minnesota, without giving effect to conflict of
laws principles thereof.

 

Section 10.11       Financing
With More Preferable Terms.  To
the extent any financing obtained by Borrower has more favorable terms than
terms provided to Lender with respect to any Obligations, all as reasonably
determined by Lender, then in the Lender’s discretion, such terms shall
automatically be adopted into agreements evidencing the Obligations.  Borrower will provide written notice to the
Lender of any financing obtained by Borrower, describing the nature thereof and
what terms may be more preferable than those existing with respect to the
Obligations.  Contemporaneously with such
financing,

 

9

 

Borrower will provide copies of
all documents evidencing such financing to Lender.  Borrower will execute, deliver or endorse any
and all instruments, documents, assignments, security agreements, warrants,
notes and other agreements and writings which Lender may at any time reasonably
request in order to secure, protect, perfect or enforce the rights under this
Section.  Nothing in this Section shall
be deemed to waive the provisions of this Agreement or any other agreement
requiring the Lender’s prior written consent to obtaining any such financing.

 

(The signature page follows.)

 

10

 

THE PARTIES HERETO have caused this October
2004 Credit Agreement to be executed as of the date first above written.

 

	
   

  	
  MEDICALCV, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  John H. Jungbauer

  	
   

  
	
   

  	
  Name: John H. Jungbauer

  
	
   

  	
   

  
	
   

  	
  Title: Chief Financial Officer

  
	
   

  	
  9725 South Robert Trail

  
	
   

  	
  Inver Grove Heights, MN 55077

  
	
   

  	
  Attention: Chief Executive Officer

  
	
   

  	
  Telephone: (651) 452-3000

  
	
   

  	
  Fax: (651) 234-6699

  
	
   

  	
   

  
	
  with a copy to:

  	
  Avron L.
  Gordon, Esq.

  
	
   

  	
  Briggs and Morgan, P.A.

  
	
   

  	
  2400 IDS Center

  
	
   

  	
  80 South Eighth Street

  
	
   

  	
  Minneapolis, MN 55402

  
	
   

  	
  Fax (612) 334-8650

  
	
   

  	
   

  
	
   

  	
  PKM PROPERTIES, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Paul K. Miller

  	
   

  
	
   

  	
  Name: Paul K. Miller

  
	
   

  	
   

  
	
   

  	
  Title: Chief Executive Officer

  
	
   

  	
  c/o Gracon
  Contracting, Inc.

  
	
   

  	
  606 24th Avenue South, Suite B12

  
	
   

  	
  Minneapolis, MN 55454

  
	
   

  	
  Attention: Paul K. Miller

  
	
   

  	
  Fax: (612) 305-4813

  
	
   

  	
   

  
	
  with a copy to:

  	
  Charles F.
  Diessner Esq.

  
	
   

  	
  Fredrikson & Byron, P.A.

  
	
   

  	
  4000 Pillsbury Center

  
	
   

  	
  200 South Sixth Street

  
	
   

  	
  Minneapolis, MN 55402-1425

  
	
   

  	
  Fax (612) 492-7077

  
						

 

11

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