0000897101-01-500692.txt : 20011031 0000897101-01-500692.hdr.sgml : 20011031 ACCESSION NUMBER: 0000897101-01-500692 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDAMICUS INC CENTRAL INDEX KEY: 0000833140 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 411533300 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19467 FILM NUMBER: 1768628 BUSINESS ADDRESS: STREET 1: 15301 HGHWY 55 W CITY: PLYMOUTH STATE: MN ZIP: 55447 BUSINESS PHONE: 7635592613 10QSB 1 medamicus014313_10qsb.txt MEDAMICUS, INC. FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________ COMMISSION FILE NUMBER 0-19467 MEDAMICUS, INC. (Exact Name of Small Business Issuer as Specified in Its Charter) MINNESOTA 41-1533300 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 15301 HIGHWAY 55 WEST, PLYMOUTH, MN 55447 (Address of Principal Executive Offices) (763) 559-2613 (Registrant's Telephone Number, Including Area Code) N/A -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ The number of shares of Registrant's Common Stock outstanding on October 25, 2001 was 4,425,250 Transitional Small Business Disclosure Format. Yes _____ No __X__ 1 MEDAMICUS, INC. INDEX
--------------------------------------------------------------------------------------------------------- Page # --------------------------------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Balance Sheets as of September 30, 2001 and December 31, 2000 3 Statements of Operations for the three and nine months ended September 30, 2001 and 2000 4 Statement of Shareholders' Equity for the nine months ended September 30, 2001 5 Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 6 Condensed Notes to the Financial Statements 7-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 13 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 ITEM 5. OTHER INFORMATION 13 ITEM 6(a). EXHIBITS 13 ITEM 6(b). REPORTS ON FORM 8-K 13
2 BALANCE SHEETS
UNAUDITED AUDITED SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,592,431 $ 1,007,149 Accounts receivable, less allowance for doubtful accounts of $18,944 and $15,000, respectively 2,334,667 1,673,626 Inventories, less obsolescence reserve of $106,869 and $40,000, respectively 1,428,295 1,427,197 Prepaid expenses and other assets 58,819 49,423 Other receivable (Note 3) 288,869 0 Deferred income taxes 427,546 0 ------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 8,130,627 4,157,395 ------------------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Equipment 2,683,060 2,814,148 Office furniture, fixtures and computers 657,821 682,352 Leasehold improvements 910,650 692,260 ------------------------------------------------------------------------------------------------------------------------------- 4,251,531 4,188,760 Less accumulated depreciation and amortization (1,998,325) (2,854,166) ------------------------------------------------------------------------------------------------------------------------------- NET PROPERTY AND EQUIPMENT 2,253,206 1,334,594 ------------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES 250,000 0 OTHER ASSETS: License agreement at cost (Note 8) 2,014,000 0 Patent rights, net of accumulated amortization of $56,443 and $163,435, respectively 87,720 69,043 ------------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER ASSETS 2,101,720 69,043 ------------------------------------------------------------------------------------------------------------------------------- =============================================================================================================================== TOTAL ASSETS $ 12,735,553 $ 5,561,032 =============================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Note payable to bank $ -- $ 1,551,047 Accounts payable 854,060 436,650 License agreement payable (Note 8) 1,000,000 0 Accrued expenses 622,396 668,345 Current installments of capital lease obligations 72,636 57,938 ------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,549,092 2,713,980 ------------------------------------------------------------------------------------------------------------------------------- LONG-TERM LIABILITIES: Capital lease obligations, less current installments 246,106 214,849 ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,795,198 2,928,829 ------------------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock-undesignated, authorized 1,000,000 shares 0 0 Common stock-$.01 par value, authorized 9,000,000 shares; issued and outstanding 4,384,207 and 4,164,599 shares, respectively 43,842 41,646 Additional paid-in capital 10,155,146 8,649,043 Accumulated deficit (258,633) (6,058,486) ------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 9,940,355 2,632,203 =============================================================================================================================== TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,735,553 $ 5,561,032 ===============================================================================================================================
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS 3 STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEP 30, 2001 SEP 30, 2000 SEP 30, 2001 SEP 30, 2000 ----------------------------- ------------------------------ Sales $ 3,681,963 $ 1,845,499 $ 9,052,935 $ 5,428,159 Cost of sales 1,971,880 930,112 4,632,747 2,679,562 ---------------------------------------------------------------------------------------------------- ------------------------------ GROSS PROFIT 1,710,083 915,387 4,420,188 2,748,597 ---------------------------------------------------------------------------------------------------- ------------------------------ OPERATING EXPENSES: Research and development 269,853 123,071 829,603 376,274 Selling, general and administrative 443,062 335,830 1,357,435 1,096,016 ---------------------------------------------------------------------------------------------------- ------------------------------ TOTAL OPERATING EXPENSES 712,915 458,901 2,187,038 1,472,290 ---------------------------------------------------------------------------------------------------- ------------------------------ ---------------------------------------------------------------------------------------------------- ------------------------------ OPERATING INCOME 997,168 456,486 2,233,150 1,276,307 ---------------------------------------------------------------------------------------------------- ------------------------------ OTHER INCOME (EXPENSE): Interest expense (7,528) (34,002) (70,971) (105,496) Interest income 29,557 13,206 66,952 36,679 Other (1,226) (3,825) (6,654) (15,618) ---------------------------------------------------------------------------------------------------- ------------------------------ TOTAL OTHER INCOME (EXPENSE) 20,803 (24,621) (10,673) (84,435) ---------------------------------------------------------------------------------------------------- ------------------------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,017,971 431,865 2,222,477 1,191,872 Income tax (expense) benefit (Note 5) (386,829) 0 534,802 0 ---------------------------------------------------------------------------------------------------- ------------------------------ INCOME FROM CONTINUING OPERATIONS 631,142 431,865 2,757,279 1,191,872 ---------------------------------------------------------------------------------------------------- ------------------------------ DISCONTINUED OPERATIONS (NOTE 3) Income (loss) from operations of discontinued segment, net of tax 81,458 (321,651) 145,964 (995,417) Gain from disposal of discontinued segment 0 0 2,896,610 0 ---------------------------------------------------------------------------------------------------- ------------------------------ INCOME (LOSS) FROM DISCONTINUED OPERATIONS 81,458 (321,651) 3,042,574 (995,417) ---------------------------------------------------------------------------------------------------- ------------------------------ ---------------------------------------------------------------------------------------------------- ------------------------------ NET INCOME $ 712,600 $ 110,214 $ 5,799,853 $ 196,455 ---------------------------------------------------------------------------------------------------- ------------------------------ EARNINGS PER SHARE BASIC Income from continuing operations $ 0.15 $ 0.10 $ 0.65 $ 0.29 Income (loss) from discontinued operations 0.02 (0.07) 0.73 (0.24) ---------------------------------------------------------------------------------------------------- ------------------------------ NET INCOME $ 0.17 $ 0.03 $ 1.38 $ 0.05 ---------------------------------------------------------------------------------------------------- ------------------------------ DILUTED Income from continuing operations $ 0.13 $ 0.10 $ 0.61 $ 0.28 Income (loss) from discontinued operations 0.02 (0.07) 0.68 (0.23) ---------------------------------------------------------------------------------------------------- ------------------------------ NET INCOME $ 0.15 $ 0.03 $ 1.29 $ 0.05 ---------------------------------------------------------------------------------------------------- ------------------------------ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Basic 4,283,115 4,145,096 4,213,016 4,130,273 Diluted 4,765,987 4,402,895 4,509,630 4,302,596
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS 4 STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional --------------------------- Paid-In Accumulated NINE MONTHS ENDED SEPTEMBER 30, 2001 Shares Amount Capital Deficit Total ------------------------------------------------------------------------------------------------------------------------------ BALANCES AT DECEMBER 31, 2000 (AUDITED) 4,164,599 $ 41,646 $ 8,649,043 $ (6,058,486) $ 2,632,203 Options and warrants exercised 151,581 1,516 505,280 0 506,796 Warrants issued to consultant for services 0 0 1,503 0 1,503 Stock issued for license agreement (Note 8) 68,027 680 999,320 0 1,000,000 Net income for the nine-month period ended 9/30/01 0 0 0 5,799,853 5,799,853 ------------------------------------------------------------------------------------------------------------------------------ BALANCES AT SEPTEMBER 30, 2001 (UNAUDITED) 4,384,207 $ 43,842 $10,155,146 $ (258,633) $ 9,940,355 ------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS 5 STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED Sep 30, 2001 Sep 30, 2000 ------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,799,853 $ 196,455 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 249,436 228,014 Warrants issued for compensation 1,503 1,884 Gain on sale of Gynecology Division (2,896,610) 0 Deferred income taxes (677,546) 0 Changes in operating assets and liabilities, net of the effect of the sale of the Gynecology Division: Accounts receivable (1,069,263) (349,455) Inventories (501,581) (58,686) Prepaid expenses and other assets (19,251) (229,108) Accounts payable 417,410 17,645 Accrued expenses (83,249) 61,572 ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,220,702 (131,679) ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net of retirements (1,298,578) (195,821) Net cash received from sale of Gynecology Division 3,808,380 0 Additions to patent rights (29,128) (36,587) Acquisition of license agreement (14,000) 0 ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,466,674 (232,408) ------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations (57,843) (17,933) Borrowing (payments) on note payable to bank (1,551,047) 224,495 Proceeds from exercise of stock options and warrants 506,796 59,531 ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,102,094) 266,093 ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,585,282 (97,994) ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,007,149 1,006,695 ------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,592,431 $ 908,701 ------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 83,399 $ 103,040 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital leases incurred for use of equipment $ 103,798 $ -- Other receivable from sale of Gynecology Division $ 288,869 $ -- Stock issued for license agreement $ 1,000,000 $ -- License agreement payable $ 1,000,000 $ --
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS 6 CONDENSED NOTES TO FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION The financial statements included in this Form 10-QSB have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to such rules and regulations, although management believes the disclosures are adequate to make the information presented not misleading. These statements should be read in conjunction with the Company's annual report on Form 10-KSB for the year ended December 31, 2000, filed by the Company with the Securities and Exchange Commission. The financial statements presented herein as of September 30, 2001 and for the three and nine months ended September 30, 2001 and 2000 reflect, in the opinion of management, all material adjustments consisting only of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for these interim periods. 2. INVENTORIES Inventories are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market. Inventories consist of the following: SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------------------------------- Purchased parts and subassemblies $ 865,408 $ 981,463 Work in process 504,005 208,077 Finished goods 58,882 237,657 -------------------------------------------------------------------------------- TOTAL INVENTORIES $1,428,295 $1,427,197 ================================================================================ 3. SALE OF GYNECOLOGY DIVISION On April 25, 2001, the Company sold the assets of its Gynecology Division to CooperSurgical, Inc. ("Cooper") for $4,700,000. The agreement called for Cooper to pay the Company $3,995,000 on April 25, 2001, $235,000 on July 25, 2001 after verification of the value of the Gynecology Division assets and the remaining $470,000 on April 25, 2002 provided no material claims are identified. The agreement also called for a reduction in the purchase price for the amount by which the value of the actual assets transferred to Cooper was less than $1,400,000. The asset statement presented to Cooper on June 14, 2001 reflected an asset value of $34,424 less than $1,400,000. Finally, the agreement called for the Company to continue manufacturing monitors and catheters for Cooper until the end of 2001, at which time Cooper will assume responsibility for manufacturing. Because of this arrangement, a final settlement will be made at year-end based on the inventory value on April 25, 2001 compared to the value on December 31, 2001. The on-hand inventory value for the Gynecology Division on September 30, 2001 was $485,363 which represents a $181,131 shortfall from the April 25, 2001 balance. Therefore, the "Other Receivable" noted on the balance sheet is comprised of the following elements: Amount Due From Cooper $470,000 Difference in Inventory Value on September 30, 2001 (181,131) -------------------------------------------------------------------------------- OTHER RECEIVABLE $288,869 -------------------------------------------------------------------------------- The Company recognized a gain on the sale of approximately $2,897,000 and incurred approximately $375,000 in transactional costs associated with the sale. 4. NET INCOME (LOSS) PER SHARE Basic per-share amounts are computed, generally, by dividing net income or loss by the weighted-average number of common shares outstanding. Diluted per-share amounts assume the conversion, exercise, or issuance of all potential common stock instruments unless the effect is anti-dilutive, thereby reducing the loss or increasing the income per common share. 7 5. INCOME TAXES The Company had previously provided a valuation allowance to fully offset its net deferred income tax asset due to the uncertainty of future Company earnings. The deferred income tax asset at December 31, 2000 of approximately $2.7 million, before the valuation allowance, was comprised primarily of net operating loss (NOL) carry-forwards and tax credits totaling approximately $5.9 million. In connection with the sale of the Gynecology Division, the Company utilized approximately $3.0 million of the NOL carry-forwards. Immediately after the sale of the Gynecology Division, the Company determined that a high degree of certainty existed that its remaining future income tax benefits will be realized as a result of current and future income of its remaining business segment. Accordingly, the valuation allowance on the remaining deferred income tax asset was eliminated in the second quarter to reflect the anticipated net deferred tax asset utilization. As a result of eliminating the valuation allowance, the Company recorded an income tax benefit of $923,000 in the quarter ended June 30, 2001. At June 30, 2001, the Company recorded a total net deferred income tax asset of $1,025,000 which is comprised primarily of NOL carry-forwards and income tax credits, including approximately $100,000 of tax credits generated in the quarter ended June 30, 2001. During the quarter ended September 30, 2001, the company recorded total income tax expense of approximately $437,000, comprised of $387,000 on continuing operations and $50,000 on discontinued operations. As a result, approximately $437,000 of the net deferred tax asset was utilized during the quarter. In addition, approximately $89,000 of income tax credits were generated during the quarter thereby increasing the net deferred tax asset by a like amount. 6. SEGMENT AND RELATED INFORMATION The Company now operates in one reportable segment, the Percutaneous Delivery Solutions (PDS) Division, having recently sold the Gynecology Division on April 25, 2001. Sales for the Gynecology Division for the three month periods ended September 30, 2001 and 2000 were $554,846 and 732,941, respectively. Sales for the Gynecology Division for the nine-month periods ended September 30, 2001 and 2000 were $2,138,909 and 2,566,136, respectively. 7. SIGNIFICANT CUSTOMER For the nine months ended September 30, 2001, one customer accounted for 76% of the Company's sales. This customer also accounted for 74% of accounts receivable as of September 30, 2001. 8. EXPANDED LICENSING AGREEMENT On September 7, 2001, the Company finalized Addendum Number One to its Development and Licensing Agreement of August 2000 with Med-Design Corporation (the Addendum"). Under the terms of the Addendum, MedAmicus gained exclusive marketing rights to Med-Design's center-line retractable safety needle technology for the arterial access market in exchange for a payment of $2,000,000. Previously the Company had exclusive rights only to the venous access market. The $2,000,000 payment to Med-Design consists of $1,000,000 in cash payable on October 15, 2001 and $1,000,000 worth of MedAmicus stock, or 68,027 shares. Under the terms of the Addendum, the Company has agreed to file a registration statement with the Securities and Exchange Commission during October 2001 to register the 68,027 shares. As of September 30, 2001, the Company has recorded the full payment to Med-Design plus related transaction costs incurred to date as a License Agreement asset and will amortize the cost of the licensing rights over the estimated useful life of the exclusive rights acquired. 9. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001 FAS 141, Business Combinations, and FAS 142 Goodwill and Other Intangible Assets, were issued. These pronouncements provide that all business combinations initiated after June 30, 2001 be accounted for using the purchase method and that goodwill be reviewed for impairment rather than amortized, beginning on January 1, 2002. The Company does not believe that the adoption of these pronouncements will have a material effect on its financial statements. Any business combination transactions in the future would be accounted for under this new guidance. 8 In September 2001, the FASB issued Statement 143, Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligation associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Statement will be effective for the Company's fiscal year ending December 2003. The Company does not believe that the adoption of this pronouncement will have a material effect on its financial statements. In August 2001, the FASB issued Statement 144, Accounting for Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Statement will be effective for the Company's fiscal year ending December 2002. The Company does not believe that the adoption of this pronouncement will have a material effect on its financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that the Company's management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. This discussion should be read in conjunction with the accompanying financial statements and footnotes. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues were $9,052,935 for the nine months ended September 30, 2001 compared to $5,428,159 for the nine months ended September 30, 2000, representing a 66.8% increase. Sales of vessel introducers were $8,442,005 for the nine months ended September 30, 2001, compared to $4,742,459 for the nine months ended September 30, 2000, representing a 78.0% increase. This increase was due to several factors. First, sales of Left Ventricle Lead Delivery Systems to Medtronic, Inc. in support of Medtronic's clinical trials and sales release of Medtronic's InSync(R) device increased 293% compared to a year ago. The Food and Drug Administration (FDA) formally approved Medtronic's InSync cardiac resynchronization therapy for the treatment of congestive heart failure in August 2001. This approval and subsequent product launch should continue to have a positive impact on future sales. Second, sales of existing products to Medtronic as well as sales to new customers increased approximately $1,900,000 during the comparable periods. A year ago, we had three primary customers and today we are selling products to twelve primary customers. We expect introducer sales to remain strong for the remainder of 2001 as we continue to ship orders to our new customer base. We recently received clearance from the FDA to begin marketing our guidewire introducer safety needle, which included technology licensed from Med-Design Corporation. The first shipments of the safety needle were made in September 2001 and we expect to see sales of this product accelerate in the fourth quarter. Contract manufacturing sales were $526,323 for the nine months ended September 30, 2001, compared to $644,561 for the nine months ended September 30, 2000. We expect contract manufacturing sales to remain slow in the fourth quarter due to our largest customer decreasing its orders because of excess inventory on hand. Other sales, which include freight charges to customers and engineering services, totaled $84,607 for the nine months ended September 30, 2001, compared to $41,139 for the nine months ended September 30, 2000. Total gross profit increased from $2,748,597 for the nine months ended September 30, 2000, to $4,420,188 for the nine months ended September 30, 2001, representing a 60.8% increase. Total gross profit as a percent of sales dropped from 50.6% to 48.8% between comparable periods. We expect our gross profit percentage to decrease in the next several quarters as we begin to ramp up production of our safety needle product and strengthen our infrastructure. Total research and development expenditures were $829,603 or 9.2% of sales for the nine months ended September 30, 2001, compared to $376,274 or 6.9% of sales for the nine months ended September 30, 2000. This increase was primarily due to two factors. First, we increased our engineering staff in order to handle new projects for 9 Medtronic, as well as develop new introducer product concepts. Second, we have been paying a fee to Med-Design Corporation for the development of the safety needle and the next generation safety introducer. We expect research and development expenditures as a percentage of sales to remain consistent with those seen in the first nine months of 2001 as we continue to develop new products for our increasing customer base. Selling expenses increased from $153,648 for the nine months ended September 30, 2000 to $228,052 for the nine months ended September 30, 2001. Increased commission expense and additional spending on attending trade shows, printing brochures and booth graphics attributed to this increase. General and administrative expenses increased from $942,368 for the nine months ended September 30, 2000 to $1,129,383 for the nine months ended September 30, 2001. This increase was primarily due to increased spending on salaries, amortization of leasehold improvements, investor relations activities, legal costs associated with registering our stock option plans and increased rent costs associated with the additional space added to the facility in the third quarter of 2000. Interest income increased $30,273 and interest expense decreased $34,525 during the comparable periods. This was due to utilizing the cash from the Gynecology Division sale to pay off our line of credit and investing the excess cash to earn additional interest income. We expect interest expense to decrease and interest income to increase for the balance of 2001. On April 25, 2001, we completed the sale of our Gynecology business to CooperSurgical, Inc. recognizing a gain of approximately $2,897,000. As part of the agreement, MedAmicus will continue to manufacture catheters and monitors for CooperSurgical until the end of 2001, at which time the manufacturing responsibilities will be transferred to Cooper. Consequently, we will continue to report results from discontinued operations for the remainder of 2001. As of the start of the year 2001, we had approximately $5.9 million of net operating loss (NOL) carry-forwards and research and development tax credits. Because of the uncertainty of future profits, the benefit of these carry-forwards, as well as other deferred tax assets had not been previously recognized as an asset on our books. During the first half of 2001, our income from continuing and from discontinued operations utilized approximately $1.3 million of the carry-forward while the gain on the sale of the Gynecology Division absorbed another $3.0 million of the NOL carry-forward. Because of the high level of confidence that the remaining carry-forward and other deferred tax assets can be offset against future profits, the Company recorded a gain of $923,000 during the second quarter 2001, which is the tax benefit of the remaining unutilized NOL and tax credits available to the Company in the future. During the quarter ended September 30, 2001, the Company recorded total income tax expense of $437,000, comprised of $386,829 on continuing operations and $ 49,925 on discontinued operations. As a result, approximately $436,754 of the net deferred tax asset was utilized during the quarter. In addition, approximately $89,000 of income tax credits were generated during the quarter thereby increasing the net deferred tax asset by a like amount. As a result, we had net income of $5,799,853 or $1.29 per diluted share for the nine months ended September 30, 2001, compared to net income of $196,455 or $.05 per diluted share for the nine months ended September 30, 2000. Because we began recognizing income tax expense in the third quarter of 2001, a more meaningful comparison of our results going forward from continuing operations would ignore the effects of the recent changes in our business. Ignoring the effects of the income tax benefit, the income from discontinued operations and the gain from disposal of discontinued segment, the results would have been as follows, assuming a 38% tax rate: 10
PRO FORMA FOR THE QUARTER ENDED 03/31/00 06/30/00 09/30/00 YTD 2000 --------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 373,286 386,721 431,865 1,191,872 Income tax expense (38%) (141,849) (146,954) (164,109) (452,912) ------------------------------------------------------------------------------------------------- NET INCOME 231,437 239,767 267,756 738,960 ------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Basic $ 0.06 $ 0.06 $ 0.06 $ 0.18 Diluted $ 0.06 $ 0.06 $ 0.06 $ 0.18 WTD AVG SHARES OUTSTANDING Basic 4,116,288 4,122,781 4,145,096 4,130,273 Diluted 4,116,288 4,279,537 4,402,895 4,302,596 PRO FORMA FOR THE QUARTER ENDED 03/31/01 06/30/01 09/30/01 YTD 2001 --------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 479,443 725,063 1,017,971 2,222,477 Income tax expense (38%) (182,188) (275,524) (386,829) (844,541) ------------------------------------------------------------------------------------------------- NET INCOME 297,255 449,539 631,142 1,377,936 ------------------------------------------------------------------------------------------------- EARNINGS PER SHARE Basic $ 0.07 $ 0.11 $ 0.15 $ 0.33 Diluted $ 0.07 $ 0.10 $ 0.13 $ 0.30 WTD AVG SHARES OUTSTANDING Basic 4,166,206 4,188,442 4,283,115 4,213,016 Diluted 4,448,275 4,557,154 4,765,987 4,509,630
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 Total revenues were $3,681,963 for the three months ended September 30, 2001 compared to $1,845,499 for the three months ended September 30, 2000, representing a 99.5% increase. Sales of vessel introducers were $3,519,754 for the three months ended September 30, 2001, compared to $1,565,930 for the three months ended September 30, 2000, representing a 124.8% increase. In addition to introducer sales to new customers discussed above, the Company also realized a 600% increase in sales of Left Ventricle Lead Delivery Systems to Medtronic in support of its clinical trials and sales release of its InSync device when compared to the same period last year. Contract manufacturing sales were $106,802 for the three months ended September 30, 2001, compared to $237,360 for the three months ended September 30, 2000, representing a 55.0% decrease. This decrease was due to one of our existing customers reducing its orders for product during the period. As discussed above, we expect contract manufacturing sales to be down in the fourth quarter due to reduced orders from this customer. Other sales, which include freight charges to customers and engineering services, totaled $55,407 for the three months ended September 30, 2001, compared to $42,209 for the three months ended September 30, 2000. Total gross profit increased from $915,387 for the three months ended September 30, 2000, to $1,710,083 for the three months ended September 30, 2001, representing a 86.8% increase. Total gross profit as a percent of sales decreased from 49.6% to 46.4% during the comparable periods. We expect our gross profit percentage to remain below historical levels in the next several quarters as we begin to ramp up production of our safety needle product and make investments in our infrastructure to support future growth. Total research and development expenditures were $269,853 or 7.3% of sales for the three months ended September 30, 2001, compared to $123,071 or 6.7% of sales for the three months ended September 30, 2000. This increase was primarily due to the factors discussed above. Selling expenses increased from $37,197 for the three months ended September 30, 2000 to $76,315 for the three months ended September 30, 2001. This increase was primarily due to the factors discussed above. 11 General and administrative expenses increased from $298,633 for the three months ended September 30, 2000 to $366,747 for the three months ended September 30, 2001. This increase was primarily due to the factors discussed above. Interest income increased $16,351 and interest expense decreased $26,474 during the comparable periods This increase was also primarily due to the factors discussed above. As a result, we had net income of $712,600 or $.15 per diluted share for the three months ended September 30, 2001, compared to net income of $110,214 or $.03 per diluted share for the three months ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the nine months ended September 30, 2001 was $1,220,702, consisting of net income of $5,799,853, adjusted for non-cash items of depreciation and amortization of $249,436, plus warrants issued for compensation of $1,503, minus both the gain on the sale of the Gynecology Division of $2,896,610 and the net change in the a deferred tax asset of $677,546, less a net change in operating assets and liabilities of $1,255,934. Net cash provided by investing activities for the nine months ended September 30, 2001 was $2,466,674. Equipment was purchased totaling $1,298,578 and we had additions to patent rights totaling $29,128 during the period. We also incurred transaction costs related to acquiring license rights totaling $14,000. This was offset by net cash received from the sale of the Gynecology Division totaling $3,808,380. Net cash used in financing activities for the nine months ended September 30, 2001 was $1,102,094. We made principal debt payments of $57,843 and paid off our line of credit totaling $1,551,047. This was offset by proceeds from option and warrant exercises of $506,796. As a result, our cash and cash equivalents were $3,592,431 as of September 30, 2001 compared to $1,007,149 at December 31, 2000. Working capital increased from $1,443,415 as of December 31, 2000 to $5,581,535 as of September 30, 2001. We received a payment of $3,995,000 on April 25, 2001 from the sale of the Gynecology Division. We used $1,421,000 of these funds to pay off our line of credit with the bank and closed the line of credit. We had $3,592,431 in cash and cash equivalents as of September 30, 2001. On July 31, 2001, the Company secured a $2,000,000 line of credit with a financial institution. The agreement calls for interest at the financial institution's base rate with no minimum interest due. The availability under the line is subject to borrowing base requirements, and advances are at the discretion of the lender. The line is secured by substantially all of the Company's assets. While we believe that we have sufficient cash to fund our planned operations, there is no assurance that we will not need additional capital in the future. Sources of additional capital may include additional debt financing and/or the sale of debt or equity securities. Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Reform Litigation Act of 1995. Certain important factors could cause results to differ materially from those anticipated by some statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainties. A number of factors that could cause results to differ materially are those discussed in our Annual Report on Form 10-KSB, in our Registration Statement on Form S-3 filed with the Securities and Exchange Commission on October 16, 2001 and other recent filings with the Securities and Exchange Commission. Additional factors that could cause results to differ materially are: the Company's dependence upon a limited number of key customers for its revenue; the Company's dependence upon licensing agreements with third parties for the technology underlying some of its products, especially the safety needle; successful implementation of the Company's safety needle production ramp-up schedule; attracting and retaining key personnel; lack of market acceptance of the Company's products, especially the safety needle; introduction of competitive products; patent and government regulatory matters; economic conditions; and the ability to raise capital. All such forward-looking statements, whether written or oral, and whether made by or on behalf of the Company are expressly qualified by these cautionary statements. In addition, the Company disclaims any obligation to update forward-looking statements to reflect events or circumstances after the date hereof. 12 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Recent Sales of Unregistered Securities On September 28, 2001, the Company issued 68, 027 shares of common stock valued at $1.0 million to Med-Design Corporation pursuant to the terms of the Addendum dated September 7, 2001, to the Development and Licensing Agreement dated as of August 25, 2000 between the Company and Med-Design Corporation. During the period from June 13, 2001 through September 30, 2001, the Company issued a total of 61,706 shares of common stock to private investors upon the exercise of Warrants originally issued by the Company in January 1994. The Warrants were exercisable at a price of $5.61 and expire in January 2002. At September 30, 2001, there were an additional 314,689 shares issuable upon exercise of Warrants. The Company believes that the transactions listed above were exempt pursuant to Section 4(2) of the Securities Act of 1933. All the shares that were issued bear restrictive legends indicating that the shares could not be resold without registration under the Securities Act of 1933 or an opinion of counsel that such registration was not required. No commissions were paid in connection with the issuance of the common stock. On October 16, 2001, the Company filed a registration statement with the Securities and Exchange Commission concerning resale of the shares issued to Med-Design and issued or issuable under the Warrants. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 - OTHER INFORMATION None ITEM 6(a) - EXHIBITS 10.1 Credit Agreement between Wells Fargo Bank and Company dated July 31, 2001. 10.2 Revolving Note Agreement between Wells Fargo Bank and Company dated July 31, 2001. 10.3 Arbitration Agreement between Wells Fargo Bank and Company dated July 31, 2001. 10.4 Security Agreement between Wells Fargo Bank and Company dated July 31, 2001. ITEM 6(b) - REPORTS ON FORM 8-K None 13 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: MEDAMICUS, INC. By: /s/ James D. Hartman Date: October 26 2001 President, Chief Executive Officer and Chief Financial Officer 14 EXHIBIT INDEX ------------- ---------------------------------------------------------- ------- EXHIBIT # DESCRIPTION PAGE ------------- ---------------------------------------------------------- ------- 10.1 Credit Agreement, dated July 31, 2001, between the Company and Wells Fargo Bank Minnesota, N.A. ------------- ---------------------------------------------------------- ------- 10.2 Revolving Note Agreement, dated July 31, 2001, between the Company and Wells Fargo Bank Minnesota, N.A. ------------- ---------------------------------------------------------- ------- 10.3 Arbitration Agreement, dated July 31, 2001, between the Company and Wells Fargo Bank Minnesota, N.A. ------------- ---------------------------------------------------------- ------- 10.4 Security Agreement, dated July 31, 2001, between the Company and Wells Fargo Bank Minnesota, N.A. ------------- ---------------------------------------------------------- ------- 15 EX-10.1 3 medamicus014313_ex10-1.txt CREDIT AGREEMENT Exhibit 10.1 [LOGO] WELLS FARGO BANK MINNESOTA, WELLS NATIONAL ASSOCIATION CREDIT AGREEMENT FARGO ================================================================================ THIS CREDIT AGREEMENT (the "Agreement") dated as of July 31, 2001 (the "Effective Date") is between Wells Fargo Bank Minnesota, National Association, formerly known as Norwest Bank Minnesota, National Association (the "Bank") and MEDAMICUS, INC., a Minnesota corporation (the "Borrower"). BACKGROUND The Borrower has asked the Bank to provide it with a Two Million and 00/100 Dollars ($2,000,000.00) line of credit to be used for financing accounts receivable and inventory. The Bank is agreeable to meeting the Borrower's requests, provided that the Borrower agrees to the terms and conditions of this Agreement. The Note, this Agreement, and all "Security Documents" described in Exhibit B, and any modifications, amendments or replacements to such promissory notes or agreements shall be referred to collectively as the "Documents." In consideration of the above premises, the Bank and the Borrower agree as follows: 1. LINE OF CREDIT 1.1 LINE OF CREDIT AMOUNT. During the Line Availability Period defined below, the Bank agrees to provide a revolving line of credit (the "Line") to the Borrower. Outstanding amounts under the Line shall not, at any one time, exceed the lesser of the Borrowing Base or TWO MILLION and 00/100 Dollars ($2,000,000.00). The Borrowing Base is defined in Exhibit A-1 to this Agreement. 1.2 LINE AVAILABILITY PERIOD. The "Line Availability Period" shall mean the period of time from the Effective Date or the date on which all conditions precedent described in this Agreement have been met, whichever is later, to the Line Expiration Date of August 1, 2002. 1.3 THE REVOLVING NOTE. The Borrower's obligation to repay advances under the Line shall be evidenced by a promissory note (the "Revolving Note") dated as of the Effective Date, and in form and content acceptable to the Bank. Reference is made to the Revolving Note for interest rate and repayment terms. 1.4 MANDATORY PREPAYMENT. If at any time the principal outstanding under the Revolving Note exceeds the lesser of the Borrowing Base or $2,000,000.00, the Borrower must immediately prepay the Revolving Note in an amount sufficient to eliminate the excess. 2. FEES AND EXPENSES 2.1 DOCUMENTATION EXPENSE. The Borrower agrees to reimburse the Bank for its reasonable expenses relating to the preparation of the Documents, which reimbursement may include, but shall not be limited to, reimbursement of reasonable attorneys' fees, including the allocated costs of the Bank's in-house counsel, which shall not be in excess of $500.00. Despite such reimbursement the Borrower acknowledges that the Bank's counsel is engaged solely to represent the Bank and does not represent the Borrower. 2.2 COLLECTION EXPENSE. In the event the Borrower fails to comply with any covenant or condition of this Agreement or the Documents, or fails to pay the Bank any amounts due under this Agreement or under the Documents, the Borrower shall pay all costs of workout and collection, including reasonable attorneys' fees and legal expenses incurred by the Bank. 2.3 AUDIT EXPENSE. The Borrower agrees to reimburse the Bank for the cost of periodic audits of all collateral granted to the Bank by the Borrower, which may be conducted at such intervals as the Bank may reasonably require but limited to a maximum of one audit each calendar year and will be performed only if the average outstanding principal under the Line exceeds $250,000.00 in any calendar year. Reimbursement for by the Borrower will be limited to one audit each calendar year, with a maximum reimbursement of $1,500.00. 3. ADVANCES AND PAYMENTS 3.1 REQUESTS FOR ADVANCES. Any Line advance requested under the terms of this Agreement shall be requested by telephone or in a writing delivered to the Bank (or transmitted via facsimile) by any person reasonably believed by the Bank to be authorized by the Borrower to do so. The Bank will not consider any such request following an event which is, or with notice or the lapse of time would be, an event of default under this Agreement. Proceeds shall be deposited into the Borrower's account at the Bank or disbursed in such other manner as the parties may agree. 3.2 PAYMENTS. All principal, interest and fees due under the Documents shall be paid by the direct debit of available funds deposited in the Borrower's account with the Bank. The Bank shall debit the account on the dates the payments become due. If a due date does not fall on a day on which the Bank is open for substantially all of its business (a "Banking Day", except as otherwise provided), the Bank shall debit the account on the next Banking Day, and interest shall continue to accrue during the extended period. If there are insufficient funds in the account on the day the Bank enters any debit authorized by this Agreement, the debit will be reversed and the payment shall be due immediately without necessity of demand by direct remittance of immediately available funds. 4. SECURITY During the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full, unless the Bank shall otherwise agree in writing, all amounts due under this Agreement and the Documents shall be secured at all times as provided in Exhibit B. The Borrower also hereby grants the Bank a security interest (independent of the Bank's right of set-off) in its deposit accounts at the Bank and in any other debt obligations of the Bank to the Borrower. 5. CONDITIONS PRECEDENT The Borrower must deliver to the Bank the documents described in Exhibit B, properly executed and in form and content acceptable to the Bank, prior to the Bank's initial advance or disbursement under this Agreement. The Borrower must also deliver to the Bank, prior to the initial advance and any subsequent line advances under this Agreement, a Borrowing Base Certificate in the form of Exhibit A-2, at the intervals provided in Section 7. -2- 6. REPRESENTATIONS AND WARRANTIES To induce the Bank to enter into this Agreement, the Borrower, to the best of its knowledge and upon due inquiry, makes the representations and warranties contained in Exhibit C. Each request for an advance or a disbursement under this Agreement following the Effective Date constitutes a reaffirmation of these representations and warranties. 7. COVENANTS 7.1 FINANCIAL INFORMATION AND REPORTING Except as otherwise stated in this Agreement, all financial information provided to the Bank shall be compiled using generally accepted accounting principles consistently applied. During the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full, unless the Bank shall otherwise agree in writing, the Borrower agrees to: (a) Annual Financial Statements. Provide the Bank within 90 days of the Borrower's fiscal year end, the Borrower's annual financial statements. The statements must be audited by a certified public accountant acceptable to the Bank. (b) Annual Covenant Compliance Certificate. Provide the Bank within 90 days of the Borrower's fiscal year end, an Annual Covenant Compliance Certificate in the form of Exhibit D. (c) Interim Financial Statements. Provide the Bank within 45 days of each quarter end, the Borrower's consolidated interim financial statements for the interim period then ending. The statements must be current through the end of that period. (d) Quarterly Covenant Compliance Certificate. Provide the Bank within 45 days of each quarter end, the Borrower's Covenant Compliance Certificate in the form of Exhibit D for the interim period then ending. (e) Borrowing Base Certificate. Provide the Bank within 30 days of each month end, for each month in which the line usage exceeds $250,000.00, a Borrowing Base Certificate in the form of Exhibit A-2, current through the end of that period and certified as correct by an officer of the Borrower acceptable to the Bank. (f) Accounts Receivable Aging. Provide the Bank within 30 days of each calendar month end for each month in which the line usage exceeds $250,000.00, an accounts receivable aging report in form acceptable to the Bank, current through the end of that period. (g) Inventory List. Provide the Bank within 30 days of each calendar month end for each month in which the line usage exceeds $250,000.00, an inventory list in form acceptable to the Bank, current through the end of that period. (h) Notices. Provide the Bank prompt written notice of: (1) any event of default or any event which would, after the lapse of time or the giving of notice, or both, constitute an event of default under the Agreement or any of the Documents; or (2) any future event that would cause the representations and warranties contained in this Agreement to be untrue when applied to the Borrower's circumstances as of the date of such event. -3- (i) Additional Information. Provide the Bank with such other information as it may reasonably request, and permit the Bank to visit and inspect its properties and examine its books and records. 7.2 FINANCIAL COVENANTS During the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full, unless the Bank shall otherwise agree in writing, the Borrower agrees to comply with the financial covenants described below, which shall be calculated using generally accepted accounting principles consistently applied, except as they may be otherwise modified by the following capitalized definitions: "Retained Net Profit" means after-tax net profit less shareholder distributions. "Tangible Net Worth" means total assets less total liabilities and less the following types of assets: (1) leasehold improvements; (2) receivables and other investments in or amounts due from any shareholder, director, officer, employee or other person or entity related to or affiliated with the Borrower; and (3) goodwill, patents, copyrights, mailing lists, trade names, trademarks, servicing rights, organizational and franchise costs, bond underwriting costs and other like assets properly classified as intangible. (a) Retained Net Profit. Achieve a minimum Retained Net Profit of $175,000.00 as of each fiscal year end, beginning December 31, 2001. (b) Total Liabilities to Tangible Net Worth. Maintain a ratio of total liabilities to Tangible Net Worth of less than 1.5 to 1.0 as of the end of each quarter, beginning with the quarter ending June 30, 2001. 7.3 OTHER COVENANTS During the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full, unless the Bank shall otherwise agree in writing, the Borrower agrees to: (a) Additional Borrowings. Refrain from incurring any indebtedness except: (1) trade credit incurred in the ordinary course of business; (2) purchase money debt; (3) indebtedness expressly subordinated to the Bank in a writing acceptable to the Bank; and (4) indebtedness in existence on the date of this Agreement and disclosed in advance to the Bank in writing. (b) Other Liens, Assignments, and Subordinations. Refrain from allowing any security interest or lien on property it owns now or in the future, or assign any interest that it may have in any assets or subordinate any rights that it may have in any assets now or in the future, except: (1) liens, assignments, or subordinations in favor of the Bank; (2) liens, assignments, or subordinations outstanding on the date of this Agreement and disclosed in advance to the Bank in writing; (3) purchase money liens; (4) liens for taxes or assessments or other governmental charges not delinquent or which the Borrower is contesting in good faith; and (5) liens that are imposed by law for obligations for labor or materials not overdue for more than 120 days, such as mechanics', materialmen's, carriers', landlords', and warehousemen's liens, or liens, pledges, or deposits under workers' compensation, unemployment insurance, Social Security, or similar legislation. (c) Insurance. Cause its properties to be adequately insured by a reputable insurance company against loss or damage and to carry such other insurance (including business interruption, flood, or environmental risk insurance) as is required of or usually carried by -4- persons engaged in the same or similar business. Such insurance must, with respect to the Bank's collateral security, include a lender's loss payable endorsement in favor of the Bank in form acceptable to the Bank. (d) Change in Management. Refrain from permitting or suffering any material change in its management personnel or management structure. (e) Nature of Business. Refrain from engaging in any line of business materially different from that presently engaged in by the Borrower. (f) Guaranties. Refrain from assuming, guaranteeing, endorsing or otherwise becoming contingently liable for any obligations of any other person, except for those guaranties outstanding as of the Effective Date and disclosed to the Bank in writing. (g) Deposit Accounts. Maintain its principal deposit accounts with the Bank. (h) Form of Organization and Mergers. Refrain from changing its legal form of organization, or consolidating, merging, pooling, syndicating or otherwise combining with any other entity without disclosing such to the Bank and obtaining written consent from the Bank. (i) Maintenance of Properties. Make all repairs, renewals or replacements necessary to keep its plant, properties and equipment in good working condition. (j) Books and Records. Maintain adequate books and records, refrain from making any material changes in its accounting procedures for tax or other purposes, and permit the Bank to inspect same upon reasonable notice. (k) Collateral Audits. Permit the Bank to conduct audits of all collateral pledged to the Bank by the Borrower at such intervals as the Bank may reasonably require but not in excess of one time per calendar year. The audits may be performed by employees of the Bank or independent contractors retained by the Bank. (l) Compliance with Laws. Comply in all material respects with all laws applicable to its form of organization, business, and the ownership of its property. (m) Preservation of Rights. Maintain and preserve all permits, licenses, rights, privileges, charters and franchises that it now owns. These covenants were negotiated by the Bank and Borrower based on information provided to the Bank by the Borrower. A breach of a covenant is an indication that the risk of the transaction has increased. As consideration for any waiver or modification of these covenants, the Bank may require: additional collateral, guaranties or other credit support; higher fees or interest rates; and possible modifications to the Documents and the monitoring of the Agreement. The waiver or modification of any covenant that has been violated by the Borrower shall be made at the sole discretion of the Bank. These options do not limit the Bank's right to exercise its rights under Section 8 of this Agreement. 8. EVENTS OF DEFAULT AND REMEDIES 8.1 DEFAULT Upon the occurrence of any one or more of the following events of default, or at any time afterward unless the default has been cured, the Bank may declare the Line to be terminated and in its discretion accelerate and declare the unpaid principal, accrued interest and all other amounts payable under the Note and the Documents to be immediately due and payable. -5- (a) Failure by the Borrower to make any payment of principal or interest due under the Revolving Note which continues for fifteen (15) days after its due date. (b) Default by the Borrower in the observance or performance of any covenant or agreement contained in this Agreement, and continuance for more than fifteen (15) days. (c) Default by the Borrower in the observance or performance of any covenant or agreement contained in any of the Documents (excepting defaults under this Agreement, which are addressed in the preceding paragraph), after giving effect to applicable grace periods, if any. (d) Default by the Borrower with respect to any indebtedness or obligation owed to the Bank, which is unrelated to any loan or facility subject to the terms of this Agreement, or to any third party creditor which would allow the maturity of any such indebtedness or obligation to be accelerated. (e) Any representation or warranty made by the Borrower to the Bank in this Agreement, or any financial statement or report submitted to the Bank by or on behalf of the Borrower or any Guarantor before or after the Effective Date is untrue or misleading in any material respect. (f) Any litigation or governmental proceeding against the Borrower seeking an amount that would have a material adverse effect on the Borrower and its operations which is not insured or subject to indemnity by a solvent third party either (1) results in a judgment in an amount that would have a material adverse effect on the Borrower or (2) remains unresolved on the 270th day following the date of service on the Borrower. (g) A garnishment, levy or writ of attachment, or any local, state, or federal notice of tax lien or levy is made or issues against the Borrower, or any post judgment process or procedure is commenced or any supplementary remedy for the enforcement of a judgment is employed against the Borrower or the Borrower's property. (h) A material adverse change occurs in the Borrower's financial condition or ability to repay its obligations to the Bank. 8.2 IMMEDIATE DEFAULT If, with or without the Borrower's consent, a custodian, trustee or receiver is appointed for any of the Borrower's properties, or if a petition is filed by or against the Borrower under the United States Bankruptcy Code, or the Borrower is dissolved, liquidated, or winds up its business then the Line shall immediately terminate without notice, and the unpaid principal, accrued interest, and all other amounts payable under the Revolving Note and the Documents shall become immediately due and payable without notice or demand. 8.3 SUPPLEMENTARY CROSS DEFAULT OF OTHER PROMISSORY NOTES The Borrower agrees that each promissory note evidencing indebtedness of the Borrower to the Bank which is not otherwise documented in this Agreement, and regardless of whether delivered before or after the Effective Date, shall hereby be amended on a supplementary basis to provide that each such promissory note may be accelerated by the Bank in its discretion following the occurrence of any event of default described in Section 8.1 or shall be accelerated and become immediately due and payable without notice by the Bank following the occurrence of any event of default described in Section 8.2 which events of default and rights of acceleration are in addition to, and not exclusive of, any events of default and rights of acceleration agreed to in the promissory note itself. -6- 9. MISCELLANEOUS (a) No Waiver; Cumulative Remedies. No failure or delay by the Bank in exercising any rights under this Agreement shall be deemed a waiver of those rights. The remedies provided for in this Agreement and the Documents are cumulative and not exclusive of any remedies provided by law. (b) Amendments or Modifications. Any amendment or modification of this Agreement must be in writing and signed by the Bank and Borrower. Any waiver of any provision in this Agreement must be in writing and signed by the Bank. (c) Binding Effect: Assignment. This Agreement and the Documents are binding on the successors and assigns of the Borrower and Bank. The Borrower may not assign its rights under this Agreement and the Documents without the Bank's prior written consent. The Bank may sell participations in or assign this Agreement and the Documents and exchange financial information about the Borrower with actual or potential participants or assignees. (d) Minnesota Law. This Agreement and the Documents shall be governed by the substantive laws (other than conflict of laws) of the State of Minnesota, and the Bank and Borrower consent to the personal jurisdiction of the state and federal courts located in the State of Minnesota. (e) Severability of Provisions. If any part of this Agreement or the Documents are unenforceable, the rest of this Agreement or the Documents may still be enforced. (f) Integration. This Agreement and the Documents describe the entire understanding and agreement of the parties and supersede all prior agreements between the Bank and the Borrower relating to each credit facility subject to this Agreement, whether verbal or in writing, and may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. In the event of any inconsistency between the Agreement and the Documents, inconsistent terms shall, where possible, be construed as conferring cumulative rights and remedies upon the Bank, and, to the extent that such construction is not possible, the terms of this Agreement shall govern. Address for notices to Bank: Address for notices to Borrower: Wells Fargo Bank Minnesota, MedAmicus, Inc. National Association 15301 Highway 55 West 900 East Wayzata Blvd. Plymouth, Minnesota 55447 Wayzata, MN 55391 Attention: James Hartman Attention: Teresa Earl Vice President WELLS FARGO BANK MINNESOTA, MEDAMICUS, INC. NATIONAL ASSOCIATION BY: /s/ TERESA SHANNON EARL BY: /s/ JAMES D. HARTMAN -------------------------------- -------------------------------- ITS VICE PRESIDENT ITS CEO -7- EXHIBIT A-1 BORROWING BASE DEFINITION Borrowing Base means the sum 1. of 85% of Eligible Accounts Receivable (as defined below) 2. the lesser of (A) the sum of (1) 25% of the Eligible Inventory plus (2) 50% of Introducer Inventory (as defined below) or (B) $1,000,000.00. "Eligible Accounts Receivable" means all accounts receivable of the Borrower except those which are: 1) Greater than 120 days past the invoice date. 2) Due from an account debtor, 10% or more of whose accounts owed to the Borrower are more than 120 days past the invoice date. 3) Subject to offset or dispute. 4) Due from an account debtor who is subject to bankruptcy proceeding. 5) Due from a unit of government, whether foreign or domestic. 6) Due from an account debtor located outside the United States of America and not supported by a standby letter of credit acceptable to the Bank. 7) Owed by a shareholder, subsidiary, affiliate, officer or employee of the Borrower. 8) Not subject to a perfected first lien security interest in favor of the Bank. 9) Accounts deemed ineligible at the reasonable discretion of the Bank. "Eligible Inventory" means all inventory of the Borrower, at the lower of cost or market as determined by generally accepted accounting principles, except inventory which is: 1) In-transit; located at any warehouse, job site or other premises not approved by the Bank in writing; located outside of the states, or localities, as applicable, in which the Bank has filed financing statements to perfect a first priority security interest in the such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title, 2) On consignment to or from any other person or subject to any bailment unless such consignee or bailee has executed an agreement with the Bank. 3) Supplies, packaging, maintenance parts or sample Inventory. 4) Work-in-process Inventory, including subassemblies. 5) Damaged, obsolete, slow moving or not currently saleable in the normal course of the Borrower's operations. 6) Inventory that is perishable or live. 7) Not subject to a perfected first lien security interest in favor of the Bank. 8) In the process of being returned. 9) Introducer Inventory 10) Inventory deemed ineligible at the reasonable discretion of the bank. "Introducer Inventory" means raw materials used in the assembly of introducer kits, including but not limited to, plastic and metal trays, syringes and needles, work-in-process introducer kits consisting of assembled kits needing only sterilization and shrink-wrapping introducer kits, and shrink-wrapped, sterilized introducer kits, as defined on the Borrower's financial statements as Raw Material, Subassemblies, Work-in-process and Finished Goods.) EXHIBIT A-2 MEDAMICUS, INC. BORROWING BASE CERTIFICATE TO: Wells Fargo Bank Minnesota, N.A. 900 East Wayzata Blvd. Wayzata, MN 55391 (the "Bank") MedAmicus, Inc. (the "Borrower") certifies that the following computation of the Borrowing Base was performed as of the date set forth below in accordance with the Borrowing Base definitions set forth in Exhibit A-1 to the Credit Agreement entered into between the Bank and the Borrower dated July __, 2001. Total A/R $ ---------------- Less: 1) Greater than 120 days $ ---------------- 2) 10% Rule $ ---------------- 3) Other ineligibles $ ---------------- Eligible A/R $ ---------------- 85% of Eligible Accts. Receivable $ ================ Total Inventory $ ---------------- Less: Ineligible Inventory $ ---------------- 25% of Eligible Inventory. $ ---------------- Introducer Inventory $ -------------------- ---------------- 50% of Introducers Inventory $ ---------------- Lesser of: 25% of Eligible Inventory plus $ 50% of Introducer Inventory or $1,000,000.00 ================ Total Borrowing Base $ ================ Total Line Outstandings ($ ) =============== Excess (Deficit) $ ================ MEDAMICUS, INC. BY: DATE -------------------------------- ---------------------- ITS: -------------------------------- EXHIBIT B CONDITIONS PRECEDENT AND SECURITY PLEASE NOTE: This Exhibit describes the Note or Notes, and all Security Documents, Authorizations, Organizational Documents, and all other miscellaneous documents, reports, certificates and other information required as a condition to each advance or disbursement under the Agreement, whether or not they have previously been delivered to the Bank. PLEASE REFER TO THE CLOSING CHECKLIST FOR A COMPLETE DESCRIPTION OF WHICH OF THE FOLLOWING DOCUMENTS REMAIN TO BE DELIVERED TO THE BANK. Each Security Document described below must continue in full force and effect at all times in accordance with its terms during the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full. THE FAILURE OF ANY SECURITY DOCUMENT TO MEET THESE REQUIREMENTS MAY RESULT IN AN EVENT OF DEFAULT UNDER THE AGREEMENT AND THE ACCELERATION OF ALL OF THE BORROWER'S OBLIGATIONS TO THE BANK EVIDENCED BY THE DOCUMENTS. NOTES Revolving Note SECURITY DOCUMENTS Security Agreement of MedAmicus, Inc. . A Security Agreement signed by the Borrower, granting the Bank a first lien security interest in the Borrower's inventory, equipment, accounts and general intangibles, described in that Agreement. AUTHORIZATION Certificate of Authority of Borrower. A Certificate of Authority executed by such person or persons authorized by the Borrower's organizational documents and/or agreements to do so, certifying the incumbency and signatures of the officers or other persons authorized to execute the Documents, and authorizing the execution of the Documents and performance in accordance with their terms. ORGANIZATION Articles of Incorporation and By-Laws. A recently certified copy of the Borrower's Articles of Incorporation and By-laws, and any amendments, if applicable. Certificate of Good Standing. A recently certified copy of the Borrower's Certificate of Good Standing. OTHER Arbitration Agreement. The Bank's standard form of Arbitration Agreement signed by the Bank and Borrower, subjecting potential controversies between them to binding arbitration, including but not limited to those relating to the Documents and this Agreement. Evidence of Insurance. Evidence that the Borrower has obtained all insurance coverage required by this Agreement, and that the Bank has been named as the beneficiary of such policy or policies of insurance. EXHIBIT C REPRESENTATIONS AND WARRANTIES Organizational Status. The Borrower is a corporation duly formed and in good standing under the laws of the State of Minnesota. Authorization. The execution and delivery of the Documents is within the Borrower's powers, has been duly authorized by the Borrower and does not conflict with any of the Borrower's organizational documents or any other agreement by which the Borrower is bound, and has been signed by all persons authorized and required to do so under its organizational documents. Financial Reports. The Borrower has provided the Bank with the Borrower's audited financial statements dated December 31, 2000 and this statements fairly represent the financial condition of the Borrower as of their respective dates and were prepared in accordance with generally accepted accounting principles consistently applied. Litigation. There is no litigation or governmental proceeding pending or threatened against the Borrower which could have a material adverse effect on the Borrower's financial condition or business. Taxes. The Borrower has paid when due all federal, state and local taxes. No Default. There is no event which is, or with notice or the lapse of time would be, an event of default under this Agreement. ERISA. The Borrower is in compliance in all material respects with the Employee Retirement Income Security Act of 1974 and has received no notice to the contrary from the Pension Benefit Guaranty Corporation or any related governmental entity. EXHIBIT D MEDAMICUS, INC. CERTIFICATE OF COMPLIANCE In accordance with the Credit Agreement dated July____, 2001 (the "Agreement"), between Wells Fargo Bank Minnesota, National Association (the "Bank") and MedAmicus, Inc. (the "Borrower") attached are the financial statements of the Borrower for the period ending________________. I certify that the financial statements have been accurately prepared in accordance with generally accepted accounting principals applied on a basis consistent with those applied in the annual financial statement. I also certify that as of __________________, the Borrower is in compliance with the covenants stated in the Agreement and I have no knowledge of the occurrence of an Event of Default under the Agreement or of any event which with notice or lapse of time would constitute an Event of Default pursuant to the terms of the Agreement, except those specifically stated below. The calculations made to determine compliance were as follows: Total Liabilities to Tangible Net Worth $ less than 1.5:1.0 as ------------- of 6/30/01 and each each quarter end, thereafter. Retained Net Profit $ Greater than ------------- $175,000.00 at each fiscal year end. MEDAMICUS, INC. BY: --------------------------------- ITS: -------------------------------- EX-10.2 4 medamicus014313_ex10-2.txt REVOLVING NOTE Exhibit 10.2 [LOGO] WELLS FARGO BANK MINNESOTA, WELLS NATIONAL ASSOCIATION REVOLVING NOTE FARGO ================================================================================ $2,000,000.00 JULY ___, 2001 FOR VALUE RECEIVED, MedAmicus, Inc. (the "Borrower") promises to pay to the order of Wells Fargo Bank Minnesota, National Association (the "Bank"), at its principal office or such other address as the Bank or holder may designate from time to time, the principal sum of TWO MILLION and 00/100 Dollars ($2,00,000.00) or the amount shown on the Bank's records to be outstanding, plus interest (calculated on the basis of actual days elapsed in a 360-day year) accruing on the unpaid balance at the annual interest rate defined below. Absent manifest error, the Bank's records will be conclusive evidence of the principal and accrued interest owing hereunder. INTEREST RATE. The principal balance outstanding under this Revolving Note shall bear interest at an annual rate equal to the Base Rate plus 0.0%, floating. Base Rate means the rate of interest established by Wells Fargo Bank Minnesota, National Association from time to time as its "base" or "prime" rate of interest at its principal office in Minneapolis, Minnesota. DEFAULT RATE OF INTEREST. The interest rate otherwise in effect under this Revolving Note shall increase by 0.25% for the first 30 days following the Bank's determination that an event of default under Section 8.1 of the Agreement has occurred, and that any applicable grace period, if any, has elapsed. The interest rate shall be increased by an additional 0.25% for each 30 day period that occurs thereafter until either the indebtedness evidenced by this Revolving Note is paid in full, the default has been cured to the Bank's satisfaction, or this Revolving Note is accelerated and the interest after maturity rate described below becomes effective. The interest rate in effect prior to default will be reinstated by the Bank to be effective as of the date determined by the Bank to be the date that the default was cured. THE BANK'S ASSESSMENT OR ACCEPTANCE OF INTEREST PAID AT AN INCREASED RATE SHALL NOT CONSTITUTE A WAIVER OF ANY DEFAULT UNDER THE TERMS OF SECTION 8.1 OF THE AGREEMENT AND THIS REVOLVING NOTE, OR ANY WAIVER OF THE BANK'S RIGHT TO ACCELERATE OR DEMAND PAYMENT OF THIS REVOLVING NOTE. INTEREST AFTER MATURITY. The unpaid principal balance and interest due under this Revolving Note after maturity (whether this Revolving Note matures by demand, acceleration or lapse of time) shall bear interest until paid at the Base Rate plus 2.0%, floating. REPAYMENT TERMS INTEREST. Interest shall be payable on the first day of each month, beginning September 1, 2001. PRINCIPAL. Principal, and any unpaid interest, shall be due on August 1, 2002. ADDITIONAL TERMS AND CONDITIONS. This Revolving Note is issued pursuant to the Credit Agreement between the Bank and the Borrower dated July __, 2001 (the "Agreement"). The Agreement, and any amendments or substitutions, contains additional terms and conditions, including default and acceleration provisions, which are incorporated into this Revolving Note by reference. Capitalized terms not expressly defined herein shall have the meanings given them in the Agreement. The Borrower agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses incurred by the Bank if this Revolving Note is not paid as provided above. This Revolving Note shall be governed by the substantive laws of the State of Minnesota. WAIVER OF PRESENTMENT AND NOTICE OF DISHONOR. Borrower and any other person who signs, guarantees or endorses this Revolving Note, to the extent allowed by law, hereby waives presentment, demand for payment, notice of dishonor, protest, and any notice relating to the acceleration of the maturity of this Revolving Note. MEDAMICUS, INC. BY: /s/ JAMES D. HARTMAN ------------------------- ITS: CEO ------------------------- EX-10.3 5 medamicus014313_ex10-3.txt ARBITRATION AGREEMENT Exhibit 10.3 [LOGO] WELLS FARGO BANK MINNESOTA, WELLS NATIONAL ASSOCIATION ARBITRATION AGREEMENT FARGO ================================================================================ Wells Fargo Bank Minnesota, MedAmicus, Inc. National Association 15301 Highway 55 West 900 East Wayzata Boulevard Plymouth, Minnesota 55447 Wayzata, Minnesota 55391 (the "Customer") and (the "Borrower") (the "Bank") July __, 2001 1. AGREEMENT TO ARBITRATE. The Bank and Borrower agree to submit to binding arbitration by the American Arbitration Association (the "AAA") of all claims, disputes and controversies (whether in tort, contract, or otherwise, except "core proceedings" under the U.S. Bankruptcy Code) arising between themselves and their respective employees, officers, directors, attorneys and other agents, which relate in any way without limitation to existing and future loans and extensions of credit or requests for additional credit, including by way of example but not by way of limitation the negotiation, collateralization, administration, repayment, modification, default, termination and enforcement of such loans or extensions of credit. 2. RULES GOVERNING ARBITRATION. Arbitration under this Agreement will be governed by the Federal Arbitration Act and proceed in Wayzata, Minnesota in accordance with AAA Rules. 3. SELECTION OF ARBITRATOR. Arbitration will be conducted before a single neutral arbitrator selected in accordance with AAA Rules and who shall be an attorney who has practiced commercial law for at least ten years. 4. STATUTES OF LIMITATION AND PROCEDURAL ISSUES. The arbitrator will determine whether an issue is arbitratable and will give effect to applicable statutes of limitation. Judgment upon the arbitrator's award may be entered in any court having jurisdiction. The arbitrator has the discretion to decide, upon documents only or with a hearing, any motion to dismiss for failure to state a claim or any motion for summary judgment. The institution and maintenance of an action for judicial relief or for any provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. 5. DISCOVERY. Discovery will be governed by the Minnesota Rules of Civil Procedure. Discovery must be completed at least 20 days before the hearing date and within 180 days of the commencement of arbitration. Each request for an extension and all other discovery disputes will be determined by the arbitrator upon a showing that the request is essential for the party's presentation and that no alternative means for obtaining information are available during the initial discovery period. 6. EXCEPTIONS TO ARBITRATION. This Agreement does not limit the right of either party to a) foreclose against real or personal property collateral; b) exercise self-help remedies such as setoff or repossession; c) obtain provisional remedies such as replevin, injunctive relief, attachment or the appointment of a receiver during the pendency or before or after any arbitration proceeding; or d) obtain a cognovit judgment, if available. These exceptions do not constitute a waiver of the right or obligation of either party to submit any dispute to arbitration, including those arising from the exercise of these remedies. 7. ARBITRATION COSTS AND FEES. The arbitrator will award costs and expenses in accordance with the provisions of the documents evidencing each loan or extension of credit. WELLS FARGO BANK MINNESOTA, MEDAMICUS, INC. NATIONAL ASSOCIATION BY: /s/ TERESA SHANNON EARL BY: /s/ JAMES D. HARTMAN ------------------------------------ ------------------------------------ ITS VICE PRESIDENT ITS CEO ------------------------------------ ------------------------------------ EX-10.4 6 medamicus014313_ex10-4.txt SECURITY AGREEMENT Exhibit 10.4 ================================================================================ [LOGO] SECURITY AGREEMENT WELLS FARGO -------------------------------------------------------------------------------- ---------------------------------------- --------------------------------------- Date 7/31/01 ---------------------------------------- --------------------------------------- Debtor Secured Party MedAmicus, Inc. Wells Fargo Bank Minnesota, National Association ---------------------------------------- --------------------------------------- Street Address Street Address 15301 Highway 55 900 East Wayzata Blvd ---------------------------------------- --------------------------------------- City State Zip Code City State Zip Code Minneapolis, MN 55447 Wayzata, MN 55391 ---------------------------------------- --------------------------------------- 1. SECURITY INTEREST AND COLLATERAL. To secure the payment and performance of each and every debt, liability and obligation of every type and description which Debtor may now or at any time hereafter owe to Secured Party (whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it is currently contemplated by the Debtor and Secured Party, whether any documents evidencing it refer to this Security Agreement, whether it arises with or without any documents (e.g. obligations to Secured Party created by checking overdrafts), and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several; (all such debts, liabilities and obligations being herein collectively referred to as "Obligations"), Debtor hereby grants Secured Party a security interest (herein called the "Security Interest") in the following property (herein called the "Collateral") (check applicable boxes and complete information): (a) INVENTORY: X All inventory of Debtor, whether now owned or hereafter acquired and wherever located; (b) EQUIPMENT, FARM PRODUCTS AND CONSUMER GOODS: X All equipment of Debtor, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, appliances, fixtures, manufacturing and processing equipment, farm machinery and equipment, shop equipment, office and record-keeping equipment, computer hardware and software, parts and tools, goods, and types of goods of every kind and description. |_| The following equipment or types of equipment: ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- |_| All farm products of Debtor, whether now owned or hereafter acquired, including but not limited to (i) all poultry and livestock and their young, products thereof and produce thereof, all holding marks and brands and branding irons of Debtor that at any time cover any such livestock, and, if the livestock includes sheep, all wool pulled, clipped or shorn therefrom, (ii) all crops, whether annual or perennial, and the products thereof (THIS SECURITY AGREEMENT COVERS CROPS NOW GROWING. THIS SECURITY AGREEMENT ALSO COVERS FUTURE CROPS TO BE GROWN IN THE CURRENT YEAR OR ANY YEAR HEREAFTER), (iii) all feed, seed, fertilizer, medicines and other supplies used or produced by Debtor in farming operations, and (iv) all rights to crop insurance payments and storage payments and all rights to payments of any type under any government agricultural diversion, assistance , support or incentive program, Farm Services Agency program and any other government agricultural program. The real estate concerned with the above described crops growing or to be grown is: ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- and the name of the record owner is: ----------------------------------------------------- ----------------------------------------------------- |_| The following consumer goods or types of consumer goods: ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- (c) ACCOUNTS AND OTHER RIGHTS TO PAYMENT: X All accounts and each and every right of Debtor to the payment of money, whether such right to payment now exists or hereafter arises, whether such accounts or other rights to payment arise out of a sale, lease or other disposition of goods or other property by Debtor, out of a rendering of services by Debtor, out of a loan by Debtor, out of the overpayment of taxes or other liabilities of Debtor, or otherwise arises under any contract or agreement, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which Debtor may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any of the property of such account debtor or other obligor; all including but not limited to all present and future debt instruments, chattel papers, accounts, contract rights, loans and obligations receivable, tax refunds, unearned insurance premiums, rebates, and negotiable documents. (d) GENERAL INTANGIBLES: X All general intangibles of Debtor, whether now owned or hereafter acquired, including, but not limited to, certificates of deposit, applications for patents, patents, copyrights, trademarks, trade secrets, good will, tradenames, customer lists, permits and franchises, and the right to use Debtor's name, together with all other intangible property rights such as the right to redeem or accept payment under an annuity contract or a non-negotiable certificate of deposit issued by a bank. (e) OTHER: |_| ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- Regardless of which boxes are checked above, this Agreement also covers all substitutions and replacements for and products of any of the foregoing property not constituting consumer goods and proceeds of any and all of the foregoing property including, but not limited to, insurance proceeds and any rights of subrogation resulting from the damage or destruction thereof, and, in the case of all tangible Collateral, together with all accessions and, except in the case of consumer goods, together with (i) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any such goods, and (ii) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods. 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and agrees that: (a) Debtor is a corporation; (b) The Collateral will be used primarily for |_| personal, family or household purposes; |_| agricultural purposes; business purposes; (c) If any part or all of the tangible Collateral will become so related to particular real estate as to become a fixture, the real estate concerned is -------------------------------------------------------------- -------------------------------------------------------------- and the name of the record owner is: -------------------------------------------------------------- (d) Debtor's chief executive office is located at: -------------------------------------------------------------- or, if left blank, at the address of Debtor shown at the beginning of this Agreement. If Debtor is an individual, the Debtor's residence is at the address of Debtor shown at the beginning of this Agreement. -2- ================================================================================ ADDITIONAL PROVISIONS -------------------------------------------------------------------------------- 3. ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Debtor represents, warrants and agrees that: (a) Debtor has (or will have at the time Debtor acquires rights in Collateral hereafter arising) absolute title to each item of Collateral free and clear of all security interests, liens and encumbrances, except the Security Interest, and will defend the Collateral against all claims or demands of all persons other than Secured Party. Debtor will not sell or otherwise dispose of the Collateral or any interest therein without the prior written consent of Secured Party, except that, until the occurrence of an Event of Default and the revocation by Secured Party of Debtor's right to do so, Debtor may sell any inventory constituting Collateral to buyers in the ordinary course of business and use and consume any farm products constituting Collateral in Debtor's farming operation. If Debtor is not an individual, this Agreement has been duly and validly authorized by all necessary action of the Debtor's governing body. (b) Debtor will not permit any tangible Collateral to be located in any state (and, if county filing is required, in any county) in which a financing statement covering such Collateral is required to be, but has not in fact been, filed in order to perfect the Security Interest. (c) Each account and right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral is (or will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, set-off or counterclaim (other than those arising in the ordinary course of business) of the account debtor or other obligor named therein or in Debtor's records pertaining thereto as being obligated to pay such obligation. Debtor will neither agree to any material modification or amendment nor agree to any cancellation of any such obligation without Secured Party's prior written consent, and will not subordinate any such right to payment to claims of other creditors of such account debtor or other obligor. (d) Debtor will (i) keep all tangible Collateral in good repair, working order and condition, normal depreciation excepted, and will, from time to time, replace any worn, broken or defective parts thereof; (ii) promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interest; (iii) keep all Collateral free and clear of all security interests, liens and encumbrances except the Security Interest; (iv) at all reasonable times, permit Secured Party or its representatives to examine or inspect any Collateral, wherever located, and to examine, inspect and copy Debtor's books and records pertaining to the Collateral and its business and financial condition and to discuss with account debtors and other obligors requests for verifications of amounts owed to Debtor; (v) keep accurate and complete records pertaining to the Collateral and pertaining to Debtor's business and financial condition and submit to Secured Party such periodic reports concerning the Collateral and Debtor's business and financial condition as Secured Party may from time to time reasonably request; (vi) promptly notify Secured Party of any loss of or material damage to any Collateral or of any adverse change, known to Debtor, in the prospect of payment of any sums due on or under any instrument, chattel paper, or account constituting Collateral; (vii) if Secured Party at any time so requests (whether the request is made before or after the occurrence of an Event of Default), promptly deliver to Secured Party any instrument, document or chattel paper constituting Collateral, duly endorsed or assigned by Debtor; (viii) at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (in case of Collateral consisting of motor vehicles) and such other risks and in such amounts as Secured Party may reasonably request, with any loss payable to Secured Party to the extent of its interest and with the commitment of the issuer to notify Secured Party before cancellation (DEBTOR HAS THE OPTION OF FURNISHING THE REQUIRED INSURANCE EITHER THROUGH EXISTING POLICIES OF INSURANCE OWNED OR CONTROLLED BY DEBTOR OR OF PROCURING AND FURNISHING EQUIVALENT INSURANCE COVERAGES THROUGH ANY INSURANCE COMPANY AUTHORIZED TO TRANSACT BUSINESS IN THE STATE NAMED AS PART OF SECURED PARTY'S ADDRESS ABOVE. IF DEBTOR FAILS TO FURNISH THE REQUIRED INSURANCE OR MAINTAIN THE REQUIRED INSURANCE IN FORCE, SECURED PARTY MAY (BUT NEED NOT) PROCURE THE REQUIRED INSURANCE AT DEBTOR'S EXPENSE, AND THE COST OF THE REQUIRED AND THE COST OF THE REQUIRED INSURANCE WILL BE ADDED TO THE OBLIGATIONS. IF SECURED PARTY IS LOCATED IN TEXAS AND SHOULD PROCURE SUCH REQUIRED INSURANCE AT A PREMIUM OR RATE OF CHARGE NOT FIXED OR APPROVED BY THE STATE BOARD OF INSURANCE, SECURED PARTY SHALL NOTIFY THE DEBTOR AND THE DEBTOR SHALL HAVE THE OPTION FOR A PERIOD OF FIVE (5) DAYS FROM THE DATE OF THIS AGREEMENT OF FURNISHING THE REQUIRED INSURANCE COVERAGE THROUGH ANY INSURANCE COMPANY AUTHORIZED TO TRANSACT BUSINESS IN THE STATE OF TEXAS); (ix) from time to time execute such financing statements, and furnish lists of potential buyers of farm products as Secured Party may reasonably require in order to perfect the Security Interest and, if any Collateral consists of a motor vehicle, execute such documents as may be required to have the Security Interest properly noted on a certificate of title; (x) pay when due or reimburse Secured Party on demand for all costs of collection of any of the Obligations and all other out-of-pocket expenses (including in each case all reasonable attorney's fees) incurred by Secured Party -3- in connection with the creation, perfection, satisfaction, protection, defense or enforcement of the Security Interest or the creation, continuance, protection, defense or enforcement of this Agreement or any or all of the Obligations, including expenses incurred in any litigation or bankruptcy, receivership or insolvency proceedings; (xi) execute, deliver or endorse any and all instruments, documents, assignments, security agreements and other agreements and writings which Secured Party may at any time reasonably request in order to secure, protect, perfect or enforce the Security Interest and Secured Party's rights under this Agreement; (xii) not use the Collateral for hire, use or keep any Collateral, or permit it to be used or kept, for any unlawful purpose or in violation of any federal, state or local law, statute, ordinance, or insurance policy; (xiii) permit Secured Party at any time and from time to time to send requests (both before and after the occurrence of an Event of Default) to account debtors or other obligors for verification of amounts owed to Debtor; (xiv) not permit any tangible Collateral to become part of or to be affixed to any real property without first assuring to the reasonable satisfaction of Secured Party that the Security Interest will be prior and senior to any interest or lien then held or thereafter acquired by any mortgagee of such real property or the owner or purchaser of any interest therein; (xv) upon Secured Party's request, obtain a waiver or consent from the owner and any mortgagee of any real property where the Collateral may be located that provides that the Security Interest will at all times be senior to any such interest or lien; and (xvi) if any Collateral consists of farm products, if applicable, sell, cosign or transfer the Collateral only to those persons whose names and addresses have been furnished to Secured Party as potential buyers of farm products. If Debtor at any time fails to perform or observe any agreement contained in this Section, and if such failure shall continue for a period of ten calendar days after Secured Party gives Debtor written notice thereof (or, in the case of the agreements contained in clauses (viii) and (ix) of this Section, immediately upon the occurrence of such failure, without notice or lapse of time), Secured Party may (but need not) perform or observe such agreement on behalf and in the name, place and stead of Debtor (or, at Secured Party's option, in Secured Party's own name) and may (but need not) take any and all other actions which Secured Party may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens, or encumbrances, the performance of obligations under contracts or agreements with account debtors or other obligors, the procurement and maintenance of insurance, the execution of financing statements, the endorsement of instruments, and the procurement of repairs, transportation or insurance); and, except to the extent that the effect of such payment would be to render any loan or forbearance of money usurious or otherwise illegal under any applicable law. Debtor shall thereupon pay Secured Party on demand the amount of all moneys expended and all costs and expenses (including reasonable attorneys' fees) incurred by Secured Party in connection with or as a result of Secured Party's performing or observing such agreements or taking such actions, together with interest thereon from the date expended or incurred by Secured Party at the highest rate then applicable to any of the Obligations. To facilitate the performance or observance by Secured Party of such agreements of Debtor, Debtor hereby irrevocably appoints (which appointment is coupled with an interest) Secured Party, or its delegate, as the attorney-in-fact of Debtor with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file, in the name and on behalf of Debtor, any and all instruments, documents, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by Debtor under this Section and the Section entitled "Lock Box, Collateral Account." Unless not permitted by applicable law, Debtor hereby irrevocably authorizes Secured Party to create, prepare, complete, execute and file, in the name and on behalf of Debtor, such financing statements as may be required to perfect the Security Interest. 4. LOCK BOX, COLLATERAL ACCOUNT. If Secured Party so requests at any time (whether before or after the occurrence of an Event of Default), Debtor will direct each of its account debtors to make payments due under the relevant account or chattel paper directly to a special lock box to be under the control of Secured Party. Debtor hereby authorizes and directs Secured Party to deposit into a special collateral account to be established and maintained with Secured Party all checks, drafts and cash payments, received in said lock box. All deposits in said collateral account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations. At its option, Secured Party may, at any time, apply finally collected funds on deposit in said collateral account to the payment of the Obligations in such order of application as Secured Party may determine, or permit Debtor to withdraw all or any part of the balance on deposit in said collateral account. If a collateral account is so established, Debtor agrees that Debtor will promptly deliver to Secured Party, for deposit into said collateral account, all payments on accounts and chattel paper received by Debtor. All such payments shall be delivered to Secured Party in the form received except for Debtor's endorsement where necessary. Until so deposited, all payments on accounts and chattel paper received by Debtor shall be held in trust by Debtor for and as the property of Secured Party and shall not be commingled with any funds or property of Debtor. 5. COLLECTION RIGHTS OF SECURED PARTY. Notwithstanding Secured Party's rights under the Section entitled "Lock Box, Collateral Account" with respect to any and all debt instruments, chattel papers, accounts, and other rights to payment constituting Collateral (including proceeds), Secured Party may, at any time (both before and after the occurrence of an Event of Default) notify any account debtor, or any other person obligated to pay any amount due, that such chattel paper, account, or other right to payment has been assigned or transferred to Secured Party for security and shall be paid directly to Secured Party. If Secured Party so requests at any time, Debtor will so notify such account debtors and other obligors in writing and will indicate on all invoices to such account debtors or other obligors that the amount due is payable directly to Secured Party. -4- At any time after Secured Party or Debtor gives such notice to an account debtor or other obligor, Secured Party may (but need not), in its own name or in Debtor's name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such chattel paper, account, or other right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor. 6. ASSIGNMENT OF INSURANCE. Debtor hereby assigns to Secured Party, as additional security for the payment of the Obligations, any and all moneys (including but not limited to proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of Debtor under or with respect to, any and all policies of insurance covering the Collateral, and Debtor hereby directs the issuer of any such policy to pay any such moneys directly to Secured Party. Both before and after the occurrence of an Event of Default, Secured Party may (but need not), in its own name or in Debtor's name, execute and deliver proofs of claim, receive all such moneys, endorse checks and other instruments representing payment of such moneys, and adjust, litigate, compromise or release any claim against the issuer of any such policy. 7. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"): (i) any amount payable under the Obligations is not paid when due, whether through lapse of time or acceleration, after giving effect to any applicable grace period therein; (ii) Debtor is otherwise in default under the terms of the Obligations; (iii) Grantor fails to observe or perform any of the covenants, agreements or conditions contained in this Agreement; or (iv) Any representation or warranty in this Agreement is false or materially misleading. 8. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default under the Section entitled "Events of Default" and at any time thereafter, Secured Party may exercise any one or more of the following rights and remedies: (i) declare all unmatured Obligations to be immediately due and payable, and the same shall thereupon be immediately due and payable, without presentment or other notice or demand; (ii) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including but not limited to the right to take possession of any Collateral, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which Debtor hereby expressly waives), and the right to sell, lease or otherwise dispose of any or all of the Collateral, and in connection therewith, Secured Party may require Debtor to make the Collateral available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties, and if notice to Debtor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in the Section entitled "Miscellaneous") at least 10 calendar days prior to the date of intended disposition or other action; (iii) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Debtor or against any other person or property. Secured Party is hereby granted a nonexclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, trade secrets, franchises, copyrights and patents of Debtor that Secured Party deems necessary or appropriate to the disposition of any Collateral. 9. OTHER PERSONAL PROPERTY. Unless at the time Secured Party takes possession of any tangible Collateral, or within 7 days thereafter, Debtor gives written notice to Secured Party of the existence of any goods, papers or other property of Debtor, not affixed to or constituting a part of such Collateral, but which are located or found upon or within such Collateral, describing such property, Secured Party shall not be responsible or liable to Debtor for any action taken or omitted by or on behalf of Secured Party with respect to such property without actual knowledge of the existence of any such property or without actual knowledge that it was located or to be found upon or within such Collateral. 10. MISCELLANEOUS. This Agreement does not contemplate a sale of accounts, or chattel paper. Debtor agrees that each provision whose box is checked is part of this Agreement. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor shall be deemed sufficiently given if delivered or mailed by registered or certified mail, postage prepaid, to Debtor at Debtor's address set forth above or at the most recent address shown on Secured Party's records. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercises reasonable care in physically safekeeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Debtor may have against prior parties, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective heirs, representatives, successors and assigns and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance hereof. Secured Party may execute this Agreement if appropriate for the purpose of filing, but the failure of Secured Party to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. A photographic or other reproduction of this Agreement or of any financing statement signed by the Debtor shall have the same force and effects as the original for all purposes of a financing statement. Except to the extent otherwise required by law, this Agreement shall be governed by the internal laws of the state named as part of Secured Party's address above. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. If this Agreement is signed by more than one person as Debtor, the term "Debtor" shall refer to each of them separately and to both or all of them jointly; all such persons shall be bound both severally and jointly with the other(s); and the Obligations shall include all debts, liabilities and obligations owed to Secured Party by any Debtor solely or by both or several or all Debtors jointly or jointly and severally, and all property described in the Section entitled "Security Interest and Collateral" shall be included as part of the Collateral, whether it is owned jointly or by both or all Debtors or is owned in whole or in part by one (or more) of them. -5- THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE COLLATERAL AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES WITH RESPECT TO THE COLLATERAL. -------------------------------------------------------------------------------- Signatures -------------------------------------------------------------------------------- Debtor's Name MedAmicus, Inc. ------------------------------------------- ------------------------------------ Signature Signature /s/ James D. Hartman x ------------------------------------------- ------------------------------------ Name and Title (if applicable) Name and Title (if applicable) James D. Hartman, Pres & CEO ------------------------------------------- ------------------------------------ Signature Signature X x ------------------------------------------- ------------------------------------ Name and Title (if applicable) Name and Title (if applicable) ------------------------------------------- ------------------------------------ Bank's Name Wells Fargo Bank Minnesota, National Association ------------------------------------------- ------------------------------------ Signature /s/ Teresa Shannon Earl ------------------------------------------- ------------------------------------ Title Teresa Earl, Vice President ------------------------------------------- ------------------------------------ LND 12585 (3-00-24272-J) -6-