-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OZhTuleilZVixYYEHNtjblSioI9LZkKKp5QGbmccIaDcEFLQ0xjxToynS+4SWY/O 5+yvfV3Kl43IEPuRZxayDg== 0000897101-02-000756.txt : 20021105 0000897101-02-000756.hdr.sgml : 20021105 20021105144451 ACCESSION NUMBER: 0000897101-02-000756 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021105 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: 02809687 BUSINESS ADDRESS: STREET 1: 15301 HGHWY 55 W CITY: PLYMOUTH STATE: MN ZIP: 55447 BUSINESS PHONE: 7635592613 10QSB 1 medamicus025304_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, 2002 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 in its charter) MINNESOTA 41-1533300 (State of Incorporation) (IRS Employer Identification No.) 15301 HIGHWAY 55 WEST, PLYMOUTH, MN 55447 (Address of principal executive office, including zip code) (763) 559-2613 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, 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 31, 2002 was 4,726,093 Transitional Small Business Disclosure Format. Yes _____ No __X__ 1 INDEX - --------------------------------------------------------------------- ---------- PART I. FINANCIAL INFORMATION PAGE # - --------------------------------------------------------------------- ---------- Item 1. Financial Statements 3-8 - --------------------------------------------------------------------- ---------- Item 2. Management's Discussion and Analysis or Plan of Operation 8-12 - --------------------------------------------------------------------- ---------- Item 3. Controls and Procedures 13 - --------------------------------------------------------------------- ---------- - --------------------------------------------------------------------- ---------- 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. Exhibits and Reports on Form 8-K 13 - --------------------------------------------------------------------- ---------- - --------------------------------------------------------------------- ---------- SIGNATURES 14 - --------------------------------------------------------------------- ---------- - --------------------------------------------------------------------- ---------- CERTIFICATIONS 15 - -------------------------------------------------------------------- ---------- 2 ITEM 1. FINANCIAL STATEMENTS BALANCE SHEETS
UNAUDITED AUDITED SEPTEMBER 30, 2002 DECEMBER 31, 2001 - ----------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,934,267 $ 5,350,477 Accounts receivable, less allowance for doubtful accounts of $57,000 and $22,000, respectively 2,266,976 1,882,750 Inventories, less obsolescence reserve of $64,000 and $91,000, respectively (Note 2) 1,928,182 1,965,241 Prepaid expenses and other assets 201,563 41,906 Deferred income taxes 100,000 175,000 - ----------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 10,430,988 9,415,374 - ----------------------------------------------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT: Equipment 4,966,514 2,937,334 Office furniture, fixtures and computers 874,889 674,854 Leasehold improvements 897,708 924,243 - ----------------------------------------------------------------------------------------------------------------------- 6,739,111 4,536,431 Less accumulated depreciation and amortization (2,023,574) (2,126,558) - ----------------------------------------------------------------------------------------------------------------------- NET PROPERTY AND EQUIPMENT 4,715,537 2,409,873 - ----------------------------------------------------------------------------------------------------------------------- OTHER ASSETS: License agreement at cost, net of accumulated amortization of $229,752 and $41,668, respectively 1,818,142 2,005,810 Patent rights, net of accumulated amortization of $76,643 and $59,982, respectively 148,740 94,750 - ----------------------------------------------------------------------------------------------------------------------- TOTAL OTHER ASSETS 1,966,882 2,100,560 - ----------------------------------------------------------------------------------------------------------------------- ======================================================================================================================= TOTAL ASSETS $ 17,113,407 $ 13,925,807 ======================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 592,470 $ 820,682 Accrued expenses 717,794 791,091 Income taxes payable 1,070,041 80,155 Current maturities of capital lease obligations 59,490 78,478 - ----------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,439,795 1,770,406 - ----------------------------------------------------------------------------------------------------------------------- LONG-TERM LIABILITIES: Capital lease obligations, less current maturities 172,283 219,290 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,612,078 1,989,696 - ----------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 6) 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 4,726,093 and 4,601,567 shares, respectively 47,261 46,016 Additional paid-in capital 11,907,046 11,328,818 Retained earnings 2,547,022 561,277 - ----------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 14,501,329 11,936,111 - ----------------------------------------------------------------------------------------------------------------------- ======================================================================================================================= TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 17,113,407 $ 13,925,807 =======================================================================================================================
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS 3 STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED 09/30/02 09/30/01 09/30/02 09/30/01 ------------------------------ ------------------------------ Sales $ 4,541,518 $ 3,681,963 $ 13,222,243 $ 9,052,935 Cost of sales 2,387,792 1,971,880 7,081,543 4,632,747 - --------------------------------------------------------------------------------------------- ------------------------------ GROSS PROFIT 2,153,726 1,710,083 6,140,700 4,420,188 - --------------------------------------------------------------------------------------------- ------------------------------ OPERATING EXPENSES: Research and development 383,312 269,853 1,237,824 829,603 Selling, general and administrative 555,142 443,062 1,736,350 1,357,435 - --------------------------------------------------------------------------------------------- ------------------------------ TOTAL OPERATING EXPENSES 938,454 712,915 2,974,174 2,187,038 - --------------------------------------------------------------------------------------------- ------------------------------ - --------------------------------------------------------------------------------------------- ------------------------------ OPERATING INCOME 1,215,272 997,168 3,166,526 2,233,150 - --------------------------------------------------------------------------------------------- ------------------------------ OTHER INCOME (EXPENSE): Interest expense (5,455) (7,528) (17,940) (70,971) Interest income 19,300 29,557 58,753 66,952 Other (1,328) (1,226) (3,296) (6,654) - --------------------------------------------------------------------------------------------- ------------------------------ TOTAL OTHER INCOME (EXPENSE) 12,517 20,803 37,517 (10,673) - --------------------------------------------------------------------------------------------- ------------------------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT 1,227,789 1,017,971 3,204,043 2,222,477 Income tax benefit (expense) (Note 4) (466,560) (386,829) (1,218,298) 534,802 - --------------------------------------------------------------------------------------------- ------------------------------ INCOME FROM CONTINUING OPERATIONS 761,229 631,142 1,985,745 2,757,279 - --------------------------------------------------------------------------------------------- ------------------------------ DISCONTINUED OPERATIONS (NOTE 5) Income from operations of discontinued segment 0 81,458 0 145,964 Gain from disposal of discontinued segment 0 0 0 2,896,610 - --------------------------------------------------------------------------------------------- ------------------------------ INCOME FROM DISCONTINUED OPERATIONS 0 81,458 0 3,042,574 - --------------------------------------------------------------------------------------------- ------------------------------ - --------------------------------------------------------------------------------------------- ------------------------------ NET INCOME $ 761,229 $ 712,600 $ 1,985,745 $ 5,799,853 - --------------------------------------------------------------------------------------------- ------------------------------ EARNINGS PER SHARE (NOTE 3) BASIC Income from continuing operations $ 0.16 $ 0.15 $ 0.42 $ 0.65 Income from discontinued operations 0.00 0.02 0.00 0.73 - --------------------------------------------------------------------------------------------- ------------------------------ NET INCOME $ 0.16 $ 0.17 $ 0.42 $ 1.38 - --------------------------------------------------------------------------------------------- ------------------------------ DILUTED Income from continuing operations $ 0.15 $ 0.13 $ 0.40 $ 0.61 Income from discontinued operations 0.00 0.02 0.00 0.68 - --------------------------------------------------------------------------------------------- ------------------------------ NET INCOME $ 0.15 $ 0.15 $ 0.40 $ 1.29 - --------------------------------------------------------------------------------------------- ------------------------------ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Basic 4,719,343 4,283,115 4,706,691 4,213,016 Diluted 4,947,539 4,765,987 4,973,385 4,509,630
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS 4 STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional -------------------------- Paid-In Retained NINE MONTHS ENDED SEPTEMBER 30, 2002 Shares Amount Capital Earnings Total - ------------------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 2001 (AUDITED) 4,601,567 $ 46,016 $11,328,818 $ 561,277 $11,936,111 Options exercised 36,100 361 81,903 0 82,264 Warrants exercised 88,426 884 495,186 0 496,070 Warrants issued to consultant for services 0 0 1,139 0 1,139 Net income for the nine month period ended 09/30/02 0 0 0 1,985,745 1,985,745 - ------------------------------------------------------------------------------------------------------------------------------- BALANCES AT SEPTEMBER 30, 2002 (UNAUDITED) 4,726,093 $ 47,261 $11,907,046 $ 2,547,022 $14,501,329 - -------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING CONDENSED NOTES TO FINANCIAL STATEMENTS 5 STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED 09/30/02 09/30/01 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,985,745 $ 5,799,853 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 650,488 249,436 Warrants issued for compensation 1,139 1,503 Gain on sale of Gynecology Division 0 (2,896,610) Deferred income taxes 75,000 (677,546) Loss on disposal of equipment 385 Changes in operating assets and liabilities, net of the effect of the sale of the Gynecology Division: Accounts receivable (384,226) (1,069,263) Inventories 37,059 (501,581) Prepaid expenses and other assets (159,657) (19,251) Accounts payable (228,212) 417,410 Accrued expenses (73,297) (83,249) Income taxes payable 989,886 0 - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,894,310 1,220,702 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net of retirements (2,751,792) (1,298,578) Net cash received from sale of Gynecology Division 0 3,808,380 Additions to patent rights (70,651) (29,128) Acquisition of license agreement (416) (14,000) - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,822,859) 2,466,674 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease obligations (65,995) (57,843) Payments on note payable to bank 0 (1,551,047) Proceeds from exercise of stock options and warrants 578,334 506,796 - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 512,339 (1,102,094) - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 583,790 2,585,282 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,350,477 1,007,149 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,934,267 $ 3,592,431 - ----------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 5,455 $ 83,399 Cash paid during the period for income taxes $ 153,412 $ -- 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 THREE MONTHS ENDED SEPTEMBER 30, 2002 (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 accounting principles generally accepted in the United States have been condensed or omitted, pursuant to such rules and regulations. These statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001, filed by the Company with the Securities and Exchange Commission. The financial statements presented herein as of September 30, 2002 and for the three and nine months ended September 30, 2002 and 2001 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, 2002 DECEMBER 31, 2001 ------------------ ----------------- Purchased parts and subassemblies $ 1,346,251 $ 1,245,457 Work in process 492,637 561,011 Finished goods 89,294 158,773 - -------------------------------------------------------------------------------- TOTAL INVENTORY $ 1,928,182 $ 1,965,241 ================================================================================ 3. NET INCOME PER SHARE Basic per-share amounts are computed, generally, by dividing net income 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. 4. INCOME TAXES Income tax expense for the three and nine-month periods ended September 30, 2002 was computed using an estimated combined federal and state tax rate of 38%. Prior to the end of the second quarter of 2001, the Company had maintained a valuation allowance to fully offset its net deferred income tax asset due to the uncertainty of future Company earnings. In connection with the sale of the Gynecology Division during the second quarter of 2001, the Company utilized approximately $3 million of its 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 would be realized as a result of both current and future income of its remaining business segment. Accordingly, the valuation allowance on the remaining deferred income tax asset was eliminated 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. 5. DISCONTINUED OPERATIONS On April 25, 2001, the Company sold the assets of its Gynecology Division to CooperSurgical, Inc. ("Cooper") for approximately $4,700,000, recognizing a gain on the sale of $2,896,610. Under the terms of the agreement, the Company continued to manufacture products for Cooper until December 2001 at which time all of the manufacturing equipment was transferred to Cooper. As a result, we have reported the results of the Gynecology Division as discontinued operations for 2001. 7 6. COMMITMENT During the quarter ended March 31, 2002, the Company entered into an agreement to purchase automated manufacturing equipment for its safety needle products. The total cost of $1.5 million is billed to the Company as its construction progresses. As of September 30, 2002, the Company had paid approximately $1,400,000 under the agreement, leaving a remaining commitment of approximately $100,000. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 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 FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001 At the beginning of 2001, we were conducting business in two distinct operating segments: The PDS Division and the Gynecology Division. On April 25, 2001, we sold the Gynecology Division to CooperSurgical, Inc. for approximately $4,700,000. As a result, we have reported the results of the Gynecology Division as discontinued operations for 2001. Total revenues from continuing operations were $4,541,518 for the three months ended September 30, 2002, compared to $3,681,963 for the three months ended September 30, 2001, and $13,222,243 for the nine months ended September 30, 2002, compared to $9,052,935 for the nine months ended September 30, 2001, representing a 23.3% and 46.1% increase respectively. Sales of our core introducer products were $3,299,293 for the three months ended September 30, 2002, compared to $2,168,216 for the three months ended September 30, 2001, and $8,328,822 for the nine months ended September 30, 2002, compared to $5,967,991 for the nine months ended September 30, 2001, representing a 52.2% and 39.6% increase, respectively. The increases for both the three and nine month periods of 2002 were primarily due to increased sales to Bard Access Systems under a new supply agreement that was beginning to ramp up one year ago, as well as increased sales to a number of other new customers that were added during late 2001. We also benefited from a one-time shipment of specialty introducers to Medtronic in the third quarter of 2002. We expect sales of our core introducer products to remain strong for the remainder of 2002 as we continue to ship orders to our new customer base. Sales of our advanced delivery products were $933,255 for the three months ended September 30, 2002, compared to $1,351,538 for the three months ended September 30, 2001, and $3,987,088 for the nine months ended September 30, 2002, compared to $2,474,014 for the nine months ended September 30, 2001. These sales were primarily comprised of Left Ventricle Lead Delivery System procedural kits and related products sold to Medtronic in support of its launch of the InSyncTM pacing device to treat congestive heart failure. As previously announced, Medtronic began to transition packaging of the next generation of these procedural kits to its own facility in the second quarter of 2002. We are continuing to provide Medtronic several components and demonstration product for the next generation procedural kits and are also continuing to package the current generation procedural kits during the phase-out period. We will be participating in this market in the quarters ahead, but at decreased levels from those seen in 2001 and the first half of 2002. In the fourth quarter of 2001, we began marketing our Guidewire Introducer Safety Needle that incorporates technology licensed from Med-Design Corporation. We shipped a total of $14,094 and $82,063 worth of safety needles, respectively, in the three and nine-month periods ended September 30, 2002, primarily to companies for market assessment purposes. On June 27, 2002, we announced our first safety needle supply agreement with Bard Endoscopic Technologies and on October 15, 2002 we announced a new supply agreement with Medtronic, Inc. The Medtronic agreement sets forth the terms under which Medtronic will begin including our safety needle as part of Medtronic introducer kits later this year. Additionally, six other companies are, or have advised us that they will be, conducting market studies using the safety needle. We expect sales of this product to accelerate in early 2003 as we continue to formalize distribution relationships and our automated assembly system comes on line. 8 Contract manufacturing sales were $260,993 for the three months ended September 30, 2002, compared to $106,802 for the three months ended September 30, 2001, and $689,864 for the nine months ended September 30, 2002, compared to $526,323 for the nine months ended September 30, 2001. The increase for both the three and nine month periods of 2002 were due to one customer ordering more products in 2002 than during the comparable periods. Contract manufacturing sales represent sales of products to companies that have brought us a finished product design and asked us to manufacture it for them. We expect contract manufacturing sales to be lower in the fourth quarter of 2002 compared to sales in the third quarter of 2002. Other sales, which include freight charges to customers and engineering services, totaled $33,883 and $134,406 for the three and nine-month periods ended September 30, 2002, compared to $55,407 and $84,607 for the three and nine-month periods ended September 30, 2001. The three-month decrease and the nine month increase were primarily due to fluctuations in engineering services billings. Gross profit totaled $2,153,726 for the three months ended September 30, 2002, compared to $1,710,083 for the three months ended September 30, 2001, and $6,140,700 for the nine months ended September 30, 2002, compared to $4,420,188 for the nine months ended September 30, 2001, representing a 25.9% and 38.9% increase, respectively. Gross profit as a percent of sales increased from 46.4% to 47.4% for the comparable three month period and decreased from 48.8% to 46.4% for the comparable nine month period. We expect our gross profit percentage to remain lower over the next several quarters for several reasons. First, we made significant improvements to our infrastructure over the last year to accommodate the anticipated growth of our business. These improvements included expansion of our clean room, the purchase of additional manufacturing equipment, the hiring of additional management personnel and the purchase of a new integrated software system. These infrastructure improvements have added additional overhead costs which are not currently being fully absorbed. Second, we made an investment of $2,047,894 to gain exclusive rights to the arterial safety needle market with Med-Design Corporation which is being amortized over 96 months. We also have purchased automated safety needle assembly equipment with a total estimated cost of $1,600,000 which is expected to come on line in the fourth quarter which will increase our depreciation costs. As we continue to ramp up production of our safety needle and new introducer products over the next year, we should see our gross margins improve as we absorb a greater portion of our infrastructure costs and safety needle investments. Research and development expenses were $383,312 or 8.4% of sales for the three months ended September 30, 2002, compared to $269,853 or 7.3% of sales for the three months ended September 30, 2001, and $1,237,824 or 9.4% of sales for the nine months ended September 30, 2002, compared to $829,603 or 9.2% of sales for the nine months ended September 30, 2001. These increases were primarily due to increasing our engineering staff and continuing expenditures on a variety of new product development activities. We expect research and development expenditures to remain in the 9-10% of sales range for the remainder of 2002 while we complete certain validation activities on new products and continue working on new product concepts. Selling expenses were $115,159 or 2.5% of sales for the three months ended September 30, 2002, compared to $76,315 or 2.1% of sales for the three months ended September 30, 2001, and $406,779 or 3.1% of sales for the nine months ended September 30, 2002, compared to $228,052 or 2.5% of sales for the nine months ended September 30, 2001. These increases were primarily due to increased spending on salaries, commissions, trade shows and new marketing materials. We hired a new Director of Sales and Marketing at the end of January 2002 to help drive the sales and marketing efforts for the safety needle product. We also hired a product marketing manager and a sales administrator during the third quarter of 2002 to assist with ramping up our safety needle sales, as well as other new product sales. We expect selling expenses to be higher in the fourth quarter of 2002 than they were in the third quarter of 2002 due to the additional hires and increased expenses associated with marketing activities. General and administrative expenses were $439,983 or 9.7% of sales for the three months ended September 30, 2002, compared to $366,747 or 10.0% of sales for the three months ended September 30, 2001, and $1,329,571 or 10.1% of sales for the nine months ended September 30, 2002, compared to $1,129,383 or 12.5% of sales for the nine months ended September 30, 2001. The increases in dollars were primarily due to increased spending on accounting fees (primarily tax return preparation), legal fees (contract work), investor relations, depreciation, consulting services and insurance. 9 Interest income decreased $10,257 and $8,199 and interest expense decreased $2,073 and $53,031 during the three and nine-month periods, respectively. Interest income decreased primarily due to lower interest rates while interest expense decreased for the nine-month period because we utilized the cash from the sale of the Gynecology Division to fully pay-down our line of credit. As a result, we had net income after taxes of $761,229 or $.15 per diluted share for the three months ended September 30, 2002, compared to net income after taxes of $712,600 for the three months ended September 30, 2001. The net income for the three months ended September 30, 2001 included after tax income of $81,458 from discontinued operations. Net income after taxes for the nine months ended September 30, 2002 was $1,985,745 or $.40 per diluted share, compared to net income for the nine months ended September 30, 2001 of $5,799,853 or $1.29 per diluted share. The net income for the nine months ended September 30, 2001 included the gain on the sale of the Gynecology Division of $2,896,610, recognition of an income tax benefit of $923,000 on remaining net operating tax loss carryforwards, and after tax income from operations of discontinued segment of $145,964. Because we began recognizing income tax expense in the third quarter of 2001, but did not record income tax expense in prior quarters due to the offsetting losses in the Gynecology Division, a more meaningful comparison of our results from continuing operations would be to apply to previous quarters an income tax expense consistent with the 38% rate used in the second half of 2001 and the first nine months of 2002. Ignoring the effects of the income tax benefit, the income from discontinued operations and the gain from disposal of discontinued segment, the results on a quarterly pro forma basis would have been as follows, assuming a 38% tax rate: PRO FORMA SUMMARIZED STATEMENT OF OPERATIONS INFORMATION REFLECTING INCOME FROM CONTINUING OPERATIONS AFTER TAX UTILIZING A 38% TAX RATE
- ------------------------------------------------------------------------------------------------------------------ 2001 - ------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED ----------------------------------------------------------- 03/31/01 06/30/01 09/30/01 12/31/01 TOTALS ---------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS $ 478,074 $ 725,063 $ 1,017,971 $ 1,264,293 $ 3,485,401 Income tax expense (38%) (181,668) (275,524) (386,829) (480,431) (1,324,452) - ------------------------------------------------------------------------------------------------------------------ PRO FORMA NET INCOME $ 296,406 $ 449,539 $ 631,142 $ 783,862 $ 2,160,949 - ------------------------------------------------------------------------------------------------------------------ PRO FORMA EPS-DILUTED (1) $ 0.07 $ 0.10 $ 0.13 $ 0.16 $ 0.47 Wtd Avg Shares Outstanding-Diluted 4,448,275 4,557,154 4,765,987 4,860,406 4,625,647
(1) Quarterly EPS numbers do not add up to EPS for the year due to differences in weighted average shares outstanding. The actual results for the first three quarters of 2002 are shown below to give a clear comparison of results between periods.
- ----------------------------------------------------------------------------------------------------------------- ACTUAL RESULTS FOR 2002 - ----------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED ------------------------------------------------------------ 03/31/02 06/30/02 09/30/02 12/31/02 TOTALS ---------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS $ 963,754 $ 1,012,500 $ 1,227,789 $ -- $ 3,204,043 Income tax expense (38%) (366,988) (384,750) (466,560) (1,218,298) - ----------------------------------------------------------------------------------------------------------------- NET INCOME $ 596,766 $ 627,750 $ 761,229 $ -- $ 1,985,745 - ----------------------------------------------------------------------------------------------------------------- EPS-DILUTED $ 0.12 $ 0.13 $ 0.15 $ 0.40 Wtd Avg Shares Outstanding-Diluted 4,992,954 4,970,966 4,947,539 4,973,385
LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the nine months ended September 30, 2002 was $2,894,310, consisting of net income of $1,985,745, adjusted for non-cash items of depreciation and amortization of $650,488, warrants issued for compensation of $1,139 and loss on disposal of equipment of $385, plus a net change in the deferred tax asset of $75,000, plus a net change in operating assets and liabilities of $181,553. Accounts receivable increased $384,226 primarily due to the timing of invoicing and collections. Our days outstanding for receivables has remained constant in the 41-44 day range during the first nine months of 2002 compared to a 44-47 day range during the first nine months of 2001. Inventories decreased $37,059 during the comparable periods. 10 Net cash used in investing activities for the nine months ended September 30, 2002 was $2,822,859. Equipment was purchased totaling $2,751,792, primarily related to the automated safety needle manufacturing equipment and our new Enterprise Resource Planning ("ERP") software system that is used to process all of our business transactions. We also had additions to patent rights totaling $70,651 and additions to license agreement rights totaling $416 during the period. Net cash provided by financing activities for the nine months ended September 30, 2002 was $512,339. We made capital lease payments of $65,995 and received cash upon the exercise of options and warrants of $578,334. As a result, our cash and cash equivalents were $5,934,267 as of September 30, 2002 compared to $5,350,477 at December 31, 2001. Working capital increased from $7,644,968 as of December 31, 2001 to $7,991,193 as of September 30, 2002. Approximately 69% of our outstanding accounts receivable balance as of September 30, 2002 and 66% of our 2002 sales were related to Medtronic. We have not experienced problems with timely payments from Medtronic and do not anticipate problems in the future. As of September 30, 2002, we had $1,070,041 in accrued income taxes. Due to the safe harbor tax rules, we are allowed to defer payment of the major portion of our income tax liability until we file our 2002 tax return next year. Therefore, the bulk of this amount, as well as any additional accruals in the fourth quarter will be due in full in March 2003, along with a portion of our 2003 estimated income taxes. On August 28, 2002 we renewed our line of credit with a financial institution and increased the availability on the line to $3,000,000. The agreement calls for interest at the financial institution's base rate with no minimum interest due and expires on August 1, 2003. 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 our assets. The agreement also contains certain financial covenants, including minimum profitability and a maximum liabilities to net worth ratio. We had no outstanding borrowings under the new agreement at September 30, 2002. A summary of our contractual cash obligations at September 30, 2002 is as follows:
---------------------------------------------------------------------------------- PAYMENTS DUE BY PERIOD - ----------------------------------- ---------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS TOTAL REMAINDER OF 2003 2004 2005 2006 2002 - ----------------------------------- ------------ ------------- ------------- ------------- ------------- ------------- Long-term debt, including interest $274,000 $21,000 $87,000 $87,000 $72,000 $7,000 - ----------------------------------- ------------ ------------- ------------- ------------- ------------- ------------- Operating leases 495,000 45,000 176,000 173,000 101,000 0 - ----------------------------------- ------------ ------------- ------------- ------------- ------------- ------------- Purchase agreement for manufacturing equipment 100,000 100,000 0 0 0 0 - ----------------------------------- ------------ ------------- ------------- ------------- ------------- ------------- TOTAL CONTRACTUAL CASH OBLIGATIONS $869,000 $166,000 $263,000 $260,000 $173,000 $7,000 - ----------------------------------- ------------ ------------- ------------- ------------- ------------- -------------
We also have a commercial commitment as described below:
- ------------------------------- ---------------------------- ---------------------------- ---------------------------- OTHER COMMERCIAL TOTAL AMOUNT COMMITMENT COMMITTED OUTSTANDING AT 09/30/02 DATE OF EXPIRATION - ------------------------------- ---------------------------- ---------------------------- ---------------------------- Line of credit $3,000,000 $0 August 1, 2003 - ------------------------------- ---------------------------- ---------------------------- ----------------------------
We believe that our cash balance, availability under our line of credit, if needed, and anticipated cash flows from operations will be adequate to fund our cash requirements for the foreseeable future. We regularly grant incentive stock options to our employees pursuant to the shareholder-approved 1999 Incentive Stock Option Plan. During the nine month period ended September 30, 2002, we granted options to purchase a total of 103,300 shares of our common stock. Of this total, James Hartman (President & CEO) and Mark Kraus 11 (Executive VP and COO) each received grants of 15,000 options on February 11, 2002 at a price of $14.79/share, which was the market price of the stock on that date. As a Company, we currently do not treat employee stock option grants as an expense on our statement of operations, but rather report the impact of these grants on our earnings through a footnote disclosure in our annual report. Had we reflected the granting of employee stock options as a current expense, it would have reduced our earnings per share for the year ended December 31, 2001 by $.02 on a diluted basis. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are summarized in the footnotes to our financial statements, including those in our Annual Report on Form 10-KSB for the year ended December 31, 2001. Some of the most critical policies are also discussed below. As a matter of policy, we review our major assets for impairment. Our major operating assets are accounts receivable, inventory, license agreement and property and equipment. We have not experienced significant bad debt expense and our reserve for doubtful accounts of $57,000 should be adequate for any exposure to loss in our accounts receivable as of September 30, 2002. We have also established reserves for slow moving and obsolete inventories and believe the current reserve of $64,000 is adequate. We depreciate our property and equipment and license agreement over their estimated useful lives and we have not identified any items that are impaired. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued Statement 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENTS OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. The Company does not believe that the adoption of this pronouncement will have a material effect on its financial statements. In June 2002, the FASB issued Statement 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This Statement requires the recognition of a liability for a cost associated with and exit or disposal activity when the liability is incurred versus the date the Company commits to an exit plan. In addition, this Statement states the liability should be initially measured at fair value. The Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of this pronouncement will have a material effect on its financial statements. RISK FACTORS Statements included in this Quarterly Report on Form 10-QSB, in future filings by us with the Securities and Exchange Commission, in our press releases, and oral statements made with the approval of an authorized executive officer that are not historical, or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform 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 for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 28, 2002, and other recent filings with the Securities and Exchange Commission. Factors that could cause results to differ materially include: our dependence upon a limited number of key customers for our revenue, including the fact that 76% of sales from continuing operations in 2001 and 66% of sales for the first nine months of 2002 were to Medtronic; our ability to develop or acquire new products to increase revenues; our dependence upon licensing agreements with third parties for the technology underlying some of our products, especially the safety needle; our ability to negotiate and enter into safety needle supply agreements with major medical device companies and the ability of us and these customers to achieve market acceptance of the safety needle; successful implementation of our safety needle production ramp-up schedule; our ability to attract and retain key personnel; introduction of competitive products; patent and government regulatory matters; economic conditions; and our ability to raise capital in the future. All forward-looking statements made by us, whether written or oral, and whether made by or on behalf of us are expressly qualified by these cautionary statements. In addition, we disclaim any obligation to update forward-looking statements to reflect events or circumstances after the date hereof. 12 ITEM 3 CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief Executive Officer and Chief Financial Officer, James D. Hartman, has reviewed the Company's disclosure controls and procedures within 90 days prior to the filing of this report. Based upon this review, this officer believes that the Company's disclosure controls and procedures are effective in ensuring that material information related to the Company is made known to him by others within the Company. (b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls during the quarter covered by this report or from the end of the reporting period to the date of this Form 10-QSB. PART II - OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS None 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 EXHIBITS AND REPORTS ON FORM 8-K (a) THE FOLLOWING EXHIBITS ARE INCLUDED HEREIN: 10.1 First Amendment to Credit Agreement between Wells Fargo Bank and Company dated August 28, 2002. 10.2 Revolving Note Agreement between Wells Fargo Bank and Company dated August 28, 2002. 10.3 Supply Agreement between Medtronic, Inc. and Company dated October 11, 2002. ** 99.1 Certification pursuant to 18 U.S.C. ss.1350 ** Certain portions of this Exhibit have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for Confidential Treatment under Rule 24b-2. Deleted portions of the exhibit are represented by brackets with asterisks. (b) REPORTS ON FORM 8-K On August 12, 2002, the Company filed a Current Report on Form 8-K to furnish under Item 9 of the Form 8-K a certification required by Section 906 of the Sarbanes-Oxley Act of 2002. 13 SIGNATURES 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. Date: October 31, 2002 By: /s/ James D. Hartman President, Chief Executive Officer and Chief Financial Officer 14 CERTIFICATIONS I, James D. Hartman, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Medamicus, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date October 31, 2002 /s/ James D. Hartman ---------------- ---------------------------------------- President, Chief Executive Officer and Chief Financial Officer 15 EX-10.1 3 medamicus025304_ex10-1.txt FIRST AMENDMENT TO CREDIT AGREEMENT [LOGO] WELLS FARGO BANK MINNESOTA, EXHIBIT 10.1 WELLS NATIONAL ASSOCIATION FIRST AMENDMENT FARGO ================================================================================ THIS FIRST AMENDMENT (the "First Amendment") dated to be effective as of August 28, 2002 is between Wells Fargo Bank Minnesota, National Association (the "Bank") and Medamicus, Inc., a Minnesota corporation (the "Borrower"). BACKGROUND The Bank and the Borrower entered into a Credit Agreement dated July 31, 2001 (the "Agreement"), pursuant to which the Bank extended to the Borrower a Two Million and 00/100 Dollars ($2,000,000.00) line of credit (the "Line"). Borrowings under the Line are evidenced by a $2,000,000.00 Revolving Note dated July 31, 2001 (the "July 2001 Revolving Note"). The Borrower has requested that the Bank increase the Line by One Million and 00/100 Dollars ($1,000,000.00) to Three Million and 00/100 Dollars ($3,000,000.00) and extend the Line Availability Period to August 1, 2003. The Bank is agreeable to meeting the Borrower's request, provided that the Borrower agrees to the terms and the conditions of this First Amendment. Capitalized terms not otherwise defined in this First Amendment shall have the meaning given them in the Agreement. In consideration of the above premises, the Bank and the Borrower agree that the Agreement is hereby amended as of the date of this First Amendment as follows: 1. Sections 1.1, 1.2, 1.3, and 1.4 of the Agreement are hereby deleted in their entirety and restated as follows: 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 THREE MILLION AND 00/100 DOLLARS ($3,000,000.00). 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, 2003. 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. THE REVOLVING NOTE SHALL REPLACE, BUT NOT BE DEEMED TO SATISFY THE AUGUST 2000 REVOLVING NOTE AND CORRESPONDING AMENDMENTS. 1.4 Mandatory Prepayment. IF AT ANY TIME THE PRINCIPAL OUTSTANDING UNDER THE REVOLVING NOTE EXCEEDS THE LESSER OF THE BORROWING BASE OR $3,000,000.00, THE BORROWER MUST IMMEDIATELY PREPAY THE REVOLVING NOTE IN AN AMOUNT SUFFICIENT TO ELIMINATE THE EXCESS. 2. Section 7.1 (a) and (b) of the Agreement is hereby deleted in its entirety and restated as follows: 1 (a) ANNUAL FINANCIAL STATEMENTS. PROVIDE THE BANK WITHIN 120 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 120 days of the Borrower's fiscal year end, an Annual Covenant Compliance Certificate in the form of Exhibit D. 3. Section 7.2 (b) of the Agreement is hereby deleted in its entirety and restated as follows: (b) Total Liabilities to Tangible Net Worth. Maintain a ratio of total liabilities to Tangible Net Worth of less than 1.0 to 1.0 as of the end of each quarter, beginning with the quarter ending September 30, 2002. 4. To reflect these changes to the Line, the Borrower will replace the existing promissory note by executing and delivering to the Bank a new promissory note in form and content acceptable to the Bank (the "Revolving Note"), which shall be dated as of the date of this First Amendment and which shall replace, but not be deemed to satisfy, the August 2001 Revolving Note. The Revolving Note shall evidence the unpaid amount due to the Bank as was due to the Bank under the August 2001 Revolving Note as of the date of this First Amendment. Each reference in the Agreement to the Revolving Note shall be deemed to refer to the Revolving Note dated as of the date of this First Amendment. 5. The Borrower hereby represents and warrants to the Bank as follows: A. The Agreement as amended by this First Amendment remains in full force and effect. B. The Borrower has no knowledge of any default under the terms of the Agreement or any note evidencing any of the obligations of the Borrower that are documented in the Agreement, or of any event that with notice or the lapse of time or both would constitute a default under the Agreement or any such notes. C. The execution, delivery and performance of this First Amendment and all related documentation described in this First Amendment are within its corporate powers, have been duly authorized and are not in contravention of law or the terms of the Borrower's articles of incorporation or by-laws, or of any undertaking to which the Borrower is a party or by which it is bound. D. The resolutions set forth in the Corporate Certificate of Authority dated November 15, 2001 and delivered by the Borrower to the Bank have not been amended or rescinded, and remain in full force and effect. 6. Except as modified by this First Amendment, the Agreement remains unchanged and in full force and effect. IN WITNESS WHEREOF, the Bank and Borrower have executed this First Amendment to be effective as of the above date. WELLS FARGO BANK MINNESOTA, MEDAMICUS, INC. NATIONAL ASSOCIATION BY: /s/ TERESA EARL BY: /s/ JAMES D. HARTMAN --------------------------------- --------------------- ITS: VICE-PRESIDENT ITS: PRESIDENT & CEO -------------------------------- ---------------- 2 EX-10.2 4 medamicus025304_ex10-2.txt REVOLVING NOTE AGREEMENT [LOGO] WELLS FARGO BANK MINNESOTA, EXHIBIT 10.2 WELLS NATIONAL ASSOCIATION REVOLVING NOTE FARGO ================================================================================ $3,000,000.00 AUGUST 28, 2002 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 THREE MILLION AND 00/100 DOLLARS ($3,00,000.00) 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, 2002. PRINCIPAL. Principal, and any unpaid interest, shall be due on August 1, 2003. ADDITIONAL TERMS AND CONDITIONS. This Revolving Note is issued pursuant to the First Amendment of even date amending the Credit Agreement between the Bank and the Borrower dated July 31, 2001 (the "Agreement") and shall replace but not be deemed to satisfy the July 2001 Revolving Note as defined in 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. 1 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: PRESIDENT & CEO --------------- 2 EX-10.3 5 medamicus025304_ex10-3.txt SUPPLY AGREEMENT Exhibit 10.3 CERTAIN INFORMATION HAS BEEN DELETED FROM THIS EXHIBIT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24B-2. SUPPLY AGREEMENT THIS SUPPLY AGREEMENT (the "Agreement") is made and entered into effective as of October 11, 2002 (the "Effective Date"), between MEDAMICUS, INC., a Minnesota corporation, with a place of business at 15301 Highway 55 West, Minneapolis, Minnesota 55447 ("MedAmicus"), and MEDTRONIC, INC., THROUGH ITS CARDIAC RHYTHM MANAGEMENT DIVISION, a Minnesota corporation, with a place of business at 710 Medtronic Parkway, Minneapolis, Minnesota 55432 ("Medtronic"). RECITALS: 1. Medtronic is a manufacturer of medical devices. 2. MedAmicus is a manufacturer of percutaneous lead introducer kits and other products for use with medical devices. 3. MedAmicus desires to sell percutaneous lead introducers and other products to Medtronic and Medtronic wishes to purchase these products from MedAmicus all on terms set forth below. AGREEMENTS: NOW THEREFORE, in consideration of the representations, warranties, covenants and agreements contained herein and for other good and valuable mutual consideration, the receipt and adequacy of which is hereby acknowledged, the parties mutually agree as follows: ARTICLE 1 DEFINITIONS 1.1 Specific Definitions. As used in this Agreement, the following terms shall have the meanings set forth or as referenced below: "Affiliate" of a specified person means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. "Control" shall mean the ownership of more than 50% of the shares of stock entitled to vote for the election of directors in the case of a corporation, and more than 50% of the voting power in the case of a business entity other than a corporation. "Failure of Supply" means (i) MedAmicus' failure, for any reason other than Force Majeure, to provide Product under the terms of this Agreement (failure to provide product, for purposes of this paragraph, means that MedAmicus fails to provide full quantity of product scheduled on a Medtronic purchase order within ten (10) days of the scheduled delivery date three (3) or more times within any 6-month period), (ii) MedAmicus' failure due to Force Majeure to deliver any Product ordered in accordance with the provisions of this Agreement by the date scheduled for delivery thereof, including but not limited to a failure to deliver Product which conforms to the Specifications therefor, which failure is not cured within three (3) months after MedAmicus is notified of such failure, (iii) MedAmicus is prevented from delivering Product as a result of bankruptcy, business failure, or similar event, or (iv) if MedAmicus materially breaches this Agreement and does not cure such breach within thirty (30) days after notice by Medtronic. "Field of Use" means [ * * * ]. "Force Majeure" means any event or condition, not existing as of the date of this Agreement, not reasonably foreseeable as of such date and not reasonably within the control of either party, which prevents in whole or in material part the performance by one of the parties of its obligations hereunder, such as an act of government, war or related actions, civil insurrection, riot, sabotage, strike, epidemic, fire, flood, windstorm, and similar event. "Intellectual Property" means U.S. and foreign patents and patent applications, know-how, manufacturing processes, trade secrets, inventions, discoveries and technical information including but not limited to information embodied in drawings, designs, copyrights, copyright applications, trademarks and trademark applications, material specifications, processing instructions, formulas, equipment specifications, product specifications, confidential data, computer software, electronic files, research notebooks, invention disclosures, research and development reports and the like related thereto and all amendments, modifications, and improvements to any of the foregoing. "Introducer(s)" means introducer sheaths designed to gain venous access for passing diagnostic and therapeutic devices in the body, not to exceed 9-1/2 inches in length. "Introducer Kit(s)" means the Medtronic SoloTrak Introducer Kit and the Medtronic PLI Introducer Kit. "Licensed Intellectual Property" means, with respect to a Failure of Supply of Product, all Intellectual Property owned or otherwise licensable by MedAmicus to enable Medtronic to make, have made, and use and sell Product. "MedAmicus" means MedAmicus, Inc. and its Affiliates. "MedAmicus Slitter(s)" means any slitter sold to Medtronic under this Agreement, whether as a component in a Product, or as a separate Product, as set forth on Exhibit A, and as may be set forth in a written amendment signed by both parties. "MedAmicus VIP+" means the MedAmicus VIP+ Introducer as set forth on Exhibit A, and as may be set forth in a written amendment signed by both parties. "Medtronic" means Medtronic, Inc. and its Affiliates. "Medtronic Model 6216" means the therapy delivery system in the current configuration as manufactured by MedAmicus for Medtronic, and as set forth on Exhibit A, and as may be set forth in a written amendment signed by both parties. "Medtronic Model 6218" means the therapy delivery system in the current configuration as manufactured by MedAmicus for Medtronic, and as set forth on Exhibit A, and as may be set forth in a written amendment signed by both parties. "Medtronic Model 10600" means the therapy delivery system in the current configuration as manufactured by MedAmicus for Medtronic, and as set forth on Exhibit A, and as may be set forth in a written amendment signed by both parties. "Medtronic PLI Introducer Kit(s)" means that peelable, non-slittable introducer kit manufactured by MedAmicus for Medtronic, with or without a Safety Needle, as set forth on Exhibit A, and as may be set forth in a written amendment signed by both parties. 2 "Medtronic SoloTrak Introducer Kit(s)" means that slittable introducer kit manufactured by MedAmicus for Medtronic, with or without a Safety Needle, as set forth on Exhibit A and as may be set forth in a written amendment signed by both parties. "[ * * * ]Technology" means [ * * * ] Patent No. [ * * * ]. "Product(s)" means the Therapy Delivery Systems, the Introducer Kits, the Safety Needles, the MedAmicus Slitters and the MedAmicus VIP+ sold by MedAmicus to Medtronic under this Agreement. "Safety Needles" means the MedAmicus Axia RSN(TM) Safety Needles set forth on Exhibit A. "[ * * * ] Technology" means all Intellectual Property heretofore and hereafter owned by MedAmicus or acquired by or licensed to MedAmicus relating to the design, manufacture, use or sale of the [ * * * ], including without limitation, U.S. Patent Numbers [ * * * ] and subsequently filed patent applications relating to the [ * * * ]. "Specifications" means Medtronic's specifications for manufacturing, packaging and quality assurance for the Products as set forth on Exhibit A, with such changes thereto as the parties may mutually agree through a written amendment signed by both parties. "Therapy Delivery Systems" means the Medtronic Model 6216, Medtronic Model 6218 and Medtronic Model 10600 Therapy Delivery Systems as set forth on Exhibit A, and as may be set forth in a written amendment signed by both parties. ARTICLE 2 SUPPLY OF PRODUCT 2.1 Therapy Delivery Systems. (a) Medtronic Model 6216 and Medtronic Model 6218. Medtronic will purchase exclusively from MedAmicus all of Medtronic's requirements for Medtronic Model 6216 and Medtronic Model 6218 at the prices set forth on Exhibit B. Notwithstanding the foregoing, Medtronic reserves the right, at any time concurrent with purchasing the Medtronic Model 6216 and Medtronic Model 6218 from MedAmicus, to manufacture the Medtronic Model 6216 and Medtronic Model 6218 at its own facility should Medtronic determine, in its sole discretion, that market demands necessitate additional manufacture of the Medtronic Model 6216 and Medtronic Model 6218 by Medtronic. (b) Medtronic Model 10600. Medtronic will purchase exclusively from MedAmicus all of Medtronic's requirements for Medtronic Model 10600 at the prices set forth on Exhibit B, until January 1, 2003. Thereafter, Medtronic may, at its sole option, continue for the time period it so determines, to purchase its requirements of Medtronic Model 10600 exclusively from MedAmicus at the prices set forth in Exhibit B; or purchase or obtain its requirements of Medtronic Model 10600 from a party other than MedAmicus. Notwithstanding the foregoing, Medtronic reserves the right, at any time concurrent with purchasing the Medtronic Model 10600 from MedAmicus, to manufacture the Medtronic Model 10600 at its own facility should Medtronic determine, in its sole discretion, that market demands necessitate additional manufacture of the Medtronic Model 10600 by Medtronic. 2.2 Introducer Kits and MedAmicus VIP+. (a) PLI Introducer Kits, SoloTrak Introducer Kits and MedAmicus VIP+. Medtronic agrees to purchase exclusively from MedAmicus all of Medtronic's requirements for PLI Introducer Kits, SoloTrak Introducer Kits and MedAmicus VIP+ at the prices set forth on Exhibit B. (b) Safety Needle Conversion. Provided Medtronic is satisfied, in its sole discretion, with the quality and level of customer and market acceptance of the Safety Needles, Medtronic will begin purchasing all Medtronic PLI Introducer Kits and Medtronic Solo-Trak Introducer Kits for all US distribution (estimated to be 60 percent of current volume) with MedAmicus 3 Safety Needles after December 1, 2002, and will market the Safety Needle as part of the PLI Introducer Kits and Solo-Trak Introducer Kits. However, this obligation shall exist only if Introducer Kits containing Safety Needles sell in the market at levels equal to or greater than current sales of the Introducer Kits without the Safety Needles. If Medtronic believes, at any time, that sales are unacceptable, MedAmicus shall resume supply of Introducer Kits without the Safety Needles. MedAmicus will sell the Safety Needles or Introducer Kits with Safety Needles to Medtronic at the price set forth in Exhibit B. Medtronic regulatory and marketing personnel will cooperate with MedAmicus to facilitate this transition, and MedAmicus will supply marketing and regulatory material to support the product launch. MedAmicus, at its own expense, will supply Medtronic with sterile pouched non-engineered sharps protected needles for use by salespeople, if necessary, in facilitating the transition. MedAmicus has assured Medtronic that moving to Kits with safety needles will not result in an obsolescence issue for Medtronic, and Medtronic has relied on that assurance in agreeing to this position. 2.3 Additional Introducers and Alternative Technology. MedAmicus is aware that Medtronic is interested in identifying new and different technology to facilitate the implant process. Medtronic may identify new technology in several categories: [ * * * ]. If Medtronic desires to pursue a [ * * * ], Medtronic shall not enter into a supply agreement for the purchase of such [ * * * ] without first notifying MedAmicus of such [ * * * ] and allowing MedAmicus six (6) months from the date set forth in such notification to produce an identical product. Medtronic may pursue [ * * * ] and [ * * * ] without restriction. 2.4 MedAmicus Slitters. In addition to providing Medtronic with MedAmicus Slitters as components of the Medtronic Introducer Kits and Therapy Delivery Systems, MedAmicus shall sell to Medtronic MedAmicus Slitters at the price set forth on Exhibit B, at the quantities requested by Medtronic through a purchase order. Nothing herein shall prohibit Medtronic from purchasing or obtaining slitters from a party other than MedAmicus at any time. In the event Medtronic intends to completely stop buying MedAmicus Slitters, it shall provide MedAmicus with one hundred eighty (180) days written notice of such event. This notice provision shall not impose obligations for forecasting or committing to purchase orders other than those set forth in Article 3. ARTICLE 3 GENERAL SUPPLY TERMS 3.1 No Minimum. There are no minimum purchase obligations of Medtronic for any of the Products purchased hereunder. 3.2 Manufacture and Sale of Products. MedAmicus agrees to sell the Products to Medtronic under the terms of this Agreement. MedAmicus will manufacture the Products in accordance with the Specifications referenced on Exhibit A, or as amended hereunder. 3.3 Change Notification. If MedAmicus finds it necessary or desirable to make any changes to the process or materials used to produce the Products, MedAmicus shall give Medtronic written notice and not implement any change to primary tooling without Medtronic's consent, which shall not be unreasonably withheld. Medtronic will respond to any Change Notification request within one (1) business day; in the event that Medtronic's response includes a request for more time to consider the change, MedAmicus shall not unreasonably withhold consent to such a request. Examples of changes to be reported include but are not limited to: (a) New (different type) of raw material used in produce the Product (b) New process or new technology used to produce the Products. (c) New, repaired or modified primary tooling used to produce the Product. 4 (d) Any change deviating from the requirements listed on the engineering specification or drawing. (e) New sources for the materials and/or components used to manufacture the Product. (f) New or changed manufacturing facility. (g) Changes to design documentation following initial production release. (h) Changes to inspection processes. (i) Changes that modify process flow/sequence of events. Similarly, if Medtronic finds it necessary or desirable to change any such Specifications, it will so notify MedAmicus. MedAmicus will use its best efforts to make any such changes relating to a regulatory or safety issue, and will use all reasonable efforts to effect any other requested changes, in either case at such an adjusted purchase price as Medtronic and MedAmicus may agree to in writing pursuant to good faith negotiations. If such change would materially affect the price or delivery date, the parties shall mutually agree on equitable adjustments thereto. 3.4 Packaging and Labeling. All Products will be packaged and labeled in accordance with any applicable Specifications. 3.5 Raw Materials. Unless otherwise specified by Medtronic upon request for price quote for any Product to be fabricated and/or assembled pursuant to the terms of this Agreement, all raw material to be used in the fabrication and/or assembly by MedAmicus of any Product for Medtronic shall be purchased by MedAmicus. MedAmicus shall purchase sufficient quantities if available such that MedAmicus shall at all time have adequate raw material on hand to comply with Medtronic's forty-five (45) day requirements. 3.6 Tooling. Currently, all tooling used to produce the Products, with the exception of some of the tooling used to produce the Therapy Delivery Systems, is owned by MedAmicus. If Medtronic supplies unique tooling in the future, the following will apply: Any such tooling supplied or purchased by Medtronic to or from MedAmicus shall be and remain the property of Medtronic. MedAmicus shall store and maintain such tooling in good working condition, shall insure it at full replacement value under an all-risk policy of property insurance endorsed to name Medtronic as an additional insured with respect to such tooling, and shall not relocate said tooling without the express written permission of Medtronic. All direct charges for maintenance, repair or replacement after expiration of useful life of any Medtronic tooling by MedAmicus or any third party, other than that which may be caused by misuse of any tooling by MedAmicus will be the sole financial responsibility of Medtronic. MedAmicus shall use such tooling only in the manufacture of Medtronic Products and shall return said tooling without cost other than freight and packaging charges to Medtronic at any time upon the written request of Medtronic. 3.7 Price and Payment. (a) Price. The parties agree that the selling price for the Products set forth herein shall apply to all purchase orders issued by Medtronic in accordance with this Agreement after the Effective Date and before the expiration or termination of this Agreement, provided however that all such guaranteed pricing shall be subject to annual review in December of each year and possible changes or immediate charge per occurrence only for the following additional direct costs incurred by MedAmicus: (i) All costs quoted by MedAmicus to be incurred due to the modification, revision, or redesign of any of the initial Product Specifications provided by Medtronic. 5 (ii) Any direct labor cost increase or decrease to MedAmicus with respect to the fabrication and/or assembly of any Medtronic Product only, which change shall be limited to one (1) consecutive twelve (12) month period not to exceed the cost of living index increase in the U.S. Consumer Price Index for all Urban Consumers for the relevant time. (iii) If applicable, any increase or decrease in the cost to MedAmicus of any material, goods, or services which Medtronic directs MedAmicus to purchase from any independent third party vendor. Third party supplier must provide adequate justification for price increases. If adequate justification is not provided, Medtronic and MedAmicus agree to work jointly to contain pricing with third party supplier. Medtronic will pay MedAmicus for each shipment of Products within 30 days of MedAmicus' invoice. (b) Most-Favored Pricing. If MedAmicus offers a product comparable in quality and design to any Product covered by this Agreement to any third party at pricing or terms more favorable (based on comparable quantities) than this Agreement, MedAmicus will promptly notify Medtronic and extend the more favorable pricing or terms to Medtronic. (c) Price Reductions. On an ongoing basis, MedAmicus will use reasonable commercial efforts to reduce the cost of Products and will in good faith negotiate price reductions to equitably share the resulting cost savings with Medtronic. (d) Invoicing and Payment. Invoices for Product shall be addressed to Medtronic's Accounts Payable Department. Such invoices shall bear the purchase order number and details of the goods delivered. Any items such as value added tax payable shall be separately itemized at the applicable rate. 3.8 Shipment. Unless otherwise agreed in writing by MedAmicus, the Products will be shipped FOB MedAmicus' loading dock at Minneapolis, Minnesota, or FOB the loading dock of the party providing final shrink wrapping of the Products, if applicable. 3.9 Purchase Orders and Forecasts. Medtronic agrees to provide MedAmicus a non-binding twelve (12) month rolling forecast, or Procurement Requirement Plan, of Medtronic's reasonably expected monthly order volume for each of the Products, with the exception of the MedAmicus VIP+, for the forthcoming year. Medtronic agrees to update the forecast monthly. All purchases of the Products will be initiated pursuant to Medtronic purchase orders, which are subject to acceptance by MedAmicus. Products will be ordered via standard Medtronic purchase orders, which may be submitted via mail, fax or, if mutually agreed by the parties, electronic data interchange (EDI). MedAmicus will promptly acknowledge receipt of orders. Orders will be deemed accepted upon receipt, unless MedAmicus provides notice of rejection within five (5) business days. In order of priority, the terms of any order will be defined by the terms of (a) this Agreement and (b) the typed portions of Medtronic's purchase order, (c) the typed portions of MedAmicus' acceptance, (d) the printed terms of Medtronic's order, and (e) the printed terms of MedAmicus' acknowledgement. Medtronic will place orders at least forty-five (45) days prior to the scheduled delivery date. Medtronic may reschedule delivery dates within a purchase order if mutually agreed upon by MedAmicus. Medtronic shall have the right upon reasonable notice to MedAmicus to increase by purchase order its requirements for Product in whatever quantity is reasonably necessary to meet both Medtronic's current and future requirements, provided however that any increase or decrease in excess of fifty percent (50%) of any Product ordered by Medtronic over that purchase in the preceding six months shall require a minimum sixty (60) day notice. 3.10 Delivery. Delivery of Product shall be effected by MedAmicus within agreed upon Product lead times. MedAmicus shall notify Medtronic of any obstacles to meeting these lead times and any changes to lead times shall be mutually agreed upon by both parties. The period specified above in this 6 Article, and any other agreed delivery period, is a firm commitment by MedAmicus and time of delivery shall be of the essence for all purchase orders placed under this Agreement. (a) Early Delivery. Medtronic shall not be obliged to accept any deliveries tendered before the agreed date and may return the Product to MedAmicus at MedAmicus' sole risk and expense if delivered more than five days early. Alternatively Medtronic may elect to retain such Products and keep them in trust for and at the risk of MedAmicus and pay the price thereof in accordance with this Agreement upon receipt of any invoice effective at the agreed date of delivery. (b) Notice of Delay in Delivery. MedAmicus shall promptly notify the appropriate Medtronic buyer, by fax, phone, or e-mail of any prospective delay in delivery and MedAmicus shall obtain Medtronic's prior approval before shipment. If the delivery of the Products is delayed through no fault of Medtronic, Medtronic may, at its option, require MedAmicus to deliver the Products by means of premium transport identified by Medtronic with shipping costs to be borne by MedAmicus. (c) Drop shipping. MedAmicus agrees to drop ship Products to third party fabricators identified by Medtronic. MedAmicus will invoice the cost of Products to such third party fabricators as are mutually agreed upon by Medtronic and MedAmicus. In case of default in payment by such a third party fabricator, Medtronic will be responsible for payment for Products unless loss or damage of Products is a direct result of improper packaging by MedAmicus. (d) Allocation. Upon receipt of a purchase order from Medtronic, MedAmicus' obligation shall be to exercise its best efforts to comply with all requested receipt dates. Should MedAmicus be unable to meet its delivery obligation for Products, such as amounts or delivery date, in addition to any other rights hereunder, Medtronic shall be a preferred customer for delivery of what Product is available and in no case shall receive less than a pro rata share based on volume purchased over the preceding calendar year. If MedAmicus cannot supply the full amount of the order within the time requested, Medtronic may cancel any or all of such order. If MedAmicus delivers Products more than three (3) days late to requested date, MedAmicus' delivery rating will be negatively affected. 3.11 Compliance with Laws and Regulations. (a) MedAmicus represents and warrants to Medtronic that all Product will comply with present and future applicable statutes, laws, ordinances and regulations of national, federal, state and local governments now or hereafter in effect materially relating to its manufacture of the Products. Without limitation, MedAmicus represents and warrants to Medtronic that the Products delivered to Medtronic under this Agreement will have been manufactured in accordance with U.S. Food and Drug Administration ("FDA") Good Manufacturing Practices and MedAmicus' ISO-9001 certifications, and all applicable ISO standards and certified processes, and that no Products delivered by MedAmicus to Medtronic will be adulterated or misbranded at the time of delivery within the meaning of the U.S. Food, Drug and Cosmetic Act and regulations thereunder. Additionally, MedAmicus represents and warrants that Products delivered to Medtronic hereunder will be manufactured in accordance with all other quality standards and assurance plans referenced in the Specifications. Subject to the non-disclosure requirements of Section 12.1, MedAmicus will provide reasonable access for Medtronic's regulatory personnel from time to time to the facilities and records of MedAmicus for the purpose of confirming MedAmicus' compliance with any applicable FDA Good Manufacturing Practices and all other applicable requirements noted in this section. (b) Medtronic is responsible for compliance with present and future applicable statutes, laws, ordinances and regulations of national, federal, state and local governments now or hereafter in effect, including without limitation, applicable import and export laws, materially relating to its purchase, distribution or commercial sale of the Products. MedAmicus will provide to Medtronic the right to reference appropriate sections of MedAmicus' FDA submissions for the Slitter Technology, or other MedAmicus Technology, as are relevant to Medtronic's regulatory approval efforts for the Product 7 3.12 Non-Conforming Product. (a) Medtronic will have the right to reject any Product which does not meet the applicable Specifications, until the later of twelve (12) months from shipment or the "use before" date marked on the packaging. (b) In the event that any Product does not meet applicable Specifications and Medtronic has notified MedAmicus, MedAmicus will replace such Product free of charge and MedAmicus shall cover expenses (including freight and customs clearance, if any) incurred by Medtronic in connection with (1) shipment of replacement Product to the same location and (2) shipment of the non-conforming Product back to MedAmicus (if so requested by MedAmicus). In the event of a rejection of defective Product, MedAmicus will ship replacement Product within thirty (30) days of its receipt of a proper rejection notice from Medtronic. 3.13 Approvals. (a) For all Medtronic labeled Product hereunder, Medtronic will be responsible for obtaining any regulatory and agency approvals. MedAmicus will provide reasonably necessary assistance to Medtronic in obtaining those approvals. (b) For all MedAmicus labeled Product hereunder, MedAmicus will be responsible for obtaining any regulatory and agency approvals. Medtronic will provide reasonably necessary assistance to MedAmicus in obtaining those approvals. In addition, regarding MedAmicus labeled Product: (i) MedAmicus warrants that Product has been cleared by the U.S. Food and Drug Administration for commercial sale in the United States and that the Product has received the requisite CE mark for sales outside the United States. FDA approval and the CE mark are material terms of this Agreement. MedAmicus shall notify Medtronic immediately of any recall of the Product or if the approved status of the Product is called into question for any reason. (ii) MedAmicus shall retain responsibility for complaint handling, and agrees to maintain complaint records consistent with the MDR requirements established by the FDA. Medtronic agrees to forward any complaints it receives regarding the Product from any Medtronic customer to MedAmicus promptly. MedAmicus shall notify Medtronic of any complaints it receives regarding the Product from any of its customers within one (1) working day. (iii) In the event of a product problem, MedAmicus agrees to manage the response process and to work in good faith with Medtronic's regulatory organization to determine FDA strategy. MedAmicus recognizes the importance to Medtronic of its strong relationship with customers, and MedAmicus therefore agrees to allow Medtronic to participate in notifying Medtronic customers of a Product problem, if Medtronic wishes. (iv) If MedAmicus makes any change in regulatory status in any country in which Product is sold, MedAmicus will notify Medtronic. (v) All relevant quality related documents shall be kept on file by MedAmicus for a minimum of five (5) years, and shall be presented to Medtronic on request. Records shall be stored in a manner designed to protect against loss, damage, deterioration and misuse. (c) For all Product sold to Medtronic hereunder, in the event of an FDA audit, or an audit by any other relevant regulatory body, MedAmicus shall notify Medtronic immediately of any written findings from the FDA or any other notified body. 3.14 Subcontracting. MedAmicus may not subcontract any of its obligations under this Agreement without the prior consent of Medtronic, which will not be unreasonably withheld. 8 3.15 Warranty. MedAmicus warrants that the Products sold under this Agreement will conform with the Specifications and will be free from defects in material and workmanship at the time of shipment. MedAmicus will repair or replace non-conforming goods, or refund the purchase price, if the Product is returned to MedAmicus prior to the "use before" date stamped on the Product if the product is found by MedAmicus to not conform with the specifications. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR PARTICULAR USE. 3.16 Limitations. Under no circumstances will either party be liable for any indirect, consequential, collateral, special or incidental damages (including, without limitation, loss of profits), with respect to any product or service provided hereunder, whether such claim is based on contract, negligence, strict tort, warranty or any other basis. 3.17 Last Time Buy. If MedAmicus elects to exit the business of making any Product, MedAmicus shall give Medtronic notice two (2) years before such exit and give Medtronic the opportunity for a last time buy. ARTICLE 4 FAILURE OF SUPPLY AND FORCE MAJEURE 4.1 Notice of Force Majeure. Subject to Section 4.3 below, upon giving notice to the other party, a party affected by an event of Force Majeure shall be released without any liability on its part from the performance of its obligations under this Agreement, except for the obligation to pay any amounts due and owing hereunder, but only to the extent and only for the period that its performance of such obligations is prevented by the event of Force Majeure. 4.2 Suspension of Performance. Subject to Section 4.3 below, during the period that the performance by one of the parties of its obligations under this Agreement has been suspended by reason of an event of Force Majeure, the other party may likewise suspend the performance of all or a part of its obligations hereunder (except for the obligation to pay any amounts due and owing hereunder) to the extent that such suspension is commercially reasonable. 4.3 Exercise of License Upon Failure of Supply. Upon a Failure of Supply, Medtronic shall have the right to exercise its license rights granted pursuant to Section 4.4 below to manufacture and sell such Product (but not any other Product) itself or have such Product manufactured by others. Such right will terminate at such time as MedAmicus demonstrates an ability to commence manufacturing and shipping on a timely basis. 4.4 License Grant. MedAmicus hereby grants Medtronic a non-exclusive, perpetual, worldwide, paid-up license to the Licensed Intellectual Property, including, but not limited to, the [ * * * ] to make, have made, use, distribute, sell, offer for sale, have sold, import and otherwise commercialize and exploit the Product; provided that Medtronic may not exercise such license unless and until the occurrence of a Failure of Supply and only for the duration of the Failure to Supply. Medtronic may not sublicense the rights granted in this paragraph, except to the extent required for Medtronic to have the Product manufactured for sale by Medtronic or its affiliates and only for the duration of the Failure to Supply. 4.5 Technology Support. In support of the license granted pursuant to Section 4.4 above, MedAmicus shall provide technical support and training and otherwise assist Medtronic in establishing its own manufacturing operations for the production of each Product. MedAmicus will also provide Medtronic with a full and enabling technology transfer (including any tooling, mask works, foundry access, or other critical items necessary for production) relative to Product. Technology Support provided by MedAmicus during the period of Failure to Supply will be promptly returned to MedAmicus at such time as MedAmicus demonstrates an ability to commence manufacturing and shipping on a timely basis. 9 4.6 Maintain Licenses in Force. MedAmicus shall comply with all of the provisions of, and shall maintain in full force and effect, all license agreements with third parties pursuant to which MedAmicus is licensee of Intellectual Property included in the Licensed Intellectual Property. MedAmicus shall promptly notify Medtronic if any such third party licensor alleges any breach by MedAmicus of any such license agreement. Medtronic shall be entitled, but not obligated, to cure any alleged breach by MedAmicus of such license agreement and set-off the cost of such cure against amounts otherwise owed to MedAmicus hereunder. ARTICLE 5 REPRESENTATIONS AND WARRANTIES 5.1 Representations of MedAmicus. MedAmicus represents, warrants and covenants to Medtronic that: (a) MedAmicus is a corporation duly organized, validly existing, and in good standing under the laws of the State of Minnesota and has full corporate power to conduct the operations in which it is presently engaged and to enter into and perform its obligations under this Agreement. (b) MedAmicus has taken all necessary corporate action under the laws of the State of Minnesota and its charter, bylaws or other governing instruments to authorize the execution and consummation of this Agreement. This Agreement constitutes the valid and legally binding agreement of MedAmicus, enforceable against MedAmicus in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (c) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated herein, will violate any provision of the charter, bylaws or other governing instruments of MedAmicus or any law, rule, regulation, writ, judgment, injunction, decree, determination, award or other order of any court or governmental agency or instrumentality, domestic or foreign, or conflict with or result in any breach of any of the terms of or constitute a default under or result in termination of or the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature pursuant to the terms of any contract or agreement to which MedAmicus is a party or by which MedAmicus or any of its assets is bound. (d) All Intellectual Property used by MedAmicus in, or licensed to Medtronic pursuant to Section 4.4 for, the manufacture of Product under this Agreement, other than Intellectual Property provided to MedAmicus by Medtronic expressly for use in the manufacture of Product, will not and does not infringe any Intellectual Property rights of any third party. (e) There are no actions, suits, claims, disputes or proceedings or governmental investigations pending or threatened against MedAmicus or any of its Affiliates with respect to the Intellectual Property used by MedAmicus in, or licensed to Medtronic pursuant to Section 4.4 for, the manufacture of Product under this Agreement, or any Licensed Intellectual Property or the use thereof by MedAmicus, either at law or in equity, before any court or administrative agency or before any governmental department, commission, board, bureau, agency or instrumentality, or before any arbitration board or panel. Neither MedAmicus nor any of its officers, directors, employees or consultants has failed to comply with any law, rule, regulation, writ, judgment, injunction, decree, determination, award or other order of any court or other-governmental agency or instrumentality, domestic or foreign, which failure in any case would in any material respect impair any rights of Medtronic under this Agreement. 5.2 Representations of Medtronic. Medtronic represents, warrants and covenants to MedAmicus that: (a) Medtronic, Inc. is a corporation duly organized, validly existing, and in good standing under the laws of the State of Minnesota and has full corporate power to conduct the business in which it is presently engaged and to enter into and perform its obligations under this Agreement. 10 (b) Medtronic has taken all necessary corporate action under the laws of the state of its incorporation and its articles of incorporation and bylaws to authorize the execution and consummation of this Agreement. This Agreement constitutes the valid and legally binding agreement of Medtronic, enforceable against Medtronic in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (c) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated herein will violate any provision of the articles and bylaws of Medtronic or any law, rule, regulation, writ, judgment, injunction, decree, determination, award or other order of any court or governmental agency or instrumentality, domestic or foreign, or conflict with or result in any breach of any of the terms of or constitute a default under or result in termination of or the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature pursuant to the terms of any contract or agreement to which Medtronic is a party or by which Medtronic or any of its assets is bound. ARTICLE 6 EXPECTATIONS AND QUARTERLY REVIEW 6.1 Reviews. Medtronic may provide regular performance feedback to MedAmicus and conduct a quarterly review of this Agreement. Upon such review Medtronic and MedAmicus shall review quality, delivery, lead time, incremental sales opportunities, an action plan for customer diversification, cost improvements, the performance of both parties to the conditions of the Agreement, and the future business direction of the parties. The parties anticipate the review will be used jointly to address any problems, to initiate corrective actions plans (where necessary), and to agree upon any necessary adjustments for the following quarter. Failure to hold a Quarterly review will not relieve MedAmicus from its obligations under this Agreement. 6.2 Continuous Improvement. Medtronic and MedAmicus may meet at the beginning of each year to develop a Continuous Improvement plan for the year. Medtronic and MedAmicus may meet quarterly to review performance to the plan in the following areas: (a) Quality. Medtronic and MedAmicus shall work together to achieve 100% quality performance on all Products. MedAmicus shall maintain an average lot acceptance rate of no lower than 97% on any Product. If MedAmicus' lot acceptance rating falls below 97% and is not corrected within 90 days, Medtronic may terminate this Agreement, in whole or in part. MedAmicus shall have a closed-loop corrective action system in place. (b) Total Cost. MedAmicus shall continually work together with Medtronic to identify and eliminate costs in the fabrication, assembly or packaging of any currently manufactured Product or subsequently quoted product. MedAmicus shall furnish Medtronic with an analysis of potential cost savings on an annual basis beginning one year from the date of this agreements execution. Potential cost savings which could reasonably be anticipated by process changes in the following areas: 1) Tooling 2) Raw Materials 3) Method of Production 4) Testing and Inspection 5) Packaging and special handling 6) Assembly and shipping 7) Third Party suppliers 8) Product design and specifications 9) Quantity of components/Products. 11 6.3 Responsiveness. MedAmicus shall provide an initial response to any Medtronic request related to the appropriate Medtronic employee within one working day. MedAmicus shall respond to Medtronic Requests for Quote within one week. ARTICLE 7 INTELLECTUAL PROPERTY 7.1 Medtronic Intellectual Property. (a) Medtronic Property. Except as contemplated by Section 7.1(b) below, all tooling, patterns, dies, gauges, jobs, fixtures, and all specifications, drawings, samples, designs, software, firmware, programs, formulae, and other items, information and Intellectual Property, including, without limitation, improvements to any Product furnished by Medtronic to MedAmicus in connection with this Agreement shall only be used in the performance of work for Medtronic; and shall remain the property of Medtronic; and together with all copies thereof shall be disposed of or returned in good repair, normal wear and tear excepted, by MedAmicus to Medtronic at Medtronic's direction and expense upon Medtronic's request. MedAmicus assumes risk of loss and damage to said items while in its possession or under its control. MedAmicus shall notify Medtronic promptly whenever any items of Medtronic's tangible property are in need of repair or replacement. Medtronic's property shall be marked or otherwise adequately identified by MedAmicus as property of Medtronic for use only under this Agreement and shall be safely stored. MedAmicus waives any right it may have in law or equity to withhold Medtronic's property. (b) License Grant. Medtronic hereby grants MedAmicus a nonexclusive, worldwide fully paid license of the [ * * * ] Technology to use, manufacture or sell [ * * * ] outside the Field of Use for the term of this Agreement and any extensions of this Agreement pursuant to Section 9.1 below (the "[ * * * ] License"). MedAmicus may not sublicense MedAmicus' rights under the [ * * * ] License. In consideration for the [ * * * ] License, MedAmicus agrees to [ * * * ] the [ * * * ] price from [ * * * ] to [ * * * ] per [ * * * ] as set forth on Exhibit B. In the event that this Agreement terminates, the Parties agree to use the process set forth in Exhibit C to determine MedAmicus rights and obligations going forward. (c) No Other License. Other than as expressly set forth in this Article 8.1(b), no license to any Medtronic Intellectual Property is granted herein, and any other Medtronic Intellectual Property disclosed by Medtronic to MedAmicus hereunder shall be used solely for the purpose of producing Product for Medtronic hereunder. 7.2 MedAmicus Intellectual Property. No license to any MedAmicus Intellectual Property is granted herein, except as set forth in Article 4, or elsewhere in this Agreement. ARTICLE 8 INDEMNIFICATION 8.1 Indemnification by MedAmicus. MedAmicus shall indemnify, defend and hold harmless Medtronic and each of its subsidiaries, officers, directors, shareholders, employees, agents and affiliates (collectively, all such indemnified persons are referred to in this Section as "Medtronic") against and in respect of any and all claims, demands, losses, obligations, liabilities, damages, deficiencies, actions, settlements, judgments, costs and expenses which Medtronic may incur as a result of any injury, death, property damage, or other loss or damage (including reasonable costs and legal fees incident thereto) (collectively "Medtronic Damage"), but only to the proportional extent the Medtronic Damage arises out of (i) the breach by MedAmicus of any if its representations, warranties, covenants or agreements contained in this Agreement, or (ii) any act or omission of MedAmicus, or its agents or employees resulting in personal injury, except to the extent of injury or damage due to Medtronic's negligence or fault. 12 8.2 Indemnification by Medtronic. Medtronic shall indemnify, defend and hold harmless MedAmicus and each of its subsidiaries, officers, directors, shareholders, employees, agents and affiliates (collectively, all such indemnified persons are referred to in this Section as "MedAmicus") against and in respect of any and all claims, demands, losses, obligations, liabilities, damages, deficiencies, actions, settlements, judgments, costs and expenses which MedAmicus may incur as a result of any injury, death, property damage, or other loss or damage (including reasonable costs and legal fees incident thereto) (collectively "MedAmicus Damage") but only to the proportional extent the MedAmicus Damage arises out of (i) the breach by Medtronic of any of its representations, warranties, covenants or agreements contained in this Agreement, or (ii) any act or omission of Medtronic, or its agents or employees resulting in personal injury, except to the extent of injury or damage due to MedAmicus' negligence or fault. 8.3 Third Party Claims. If a claim by a third party is made against any indemnified party, and if the indemnified party intends to seek indemnity with respect thereto under this Article 8, such indemnified party shall promptly notify the indemnifying party of such claim; provided, however, that failure to give timely notice shall not affect the rights of the indemnified party so long as the failure to give timely notice does not materially adversely affect the indemnifying party's ability to defend such claim against a third party. The indemnifying party shall be entitled to settle or assume the defense of such claim in accordance with this Article 8, including the employment of counsel reasonably satisfactory to the indemnified party. Regardless of which party is controlling the settlement or defense of any claim, (a) both the indemnified party and indemnifying party shall act in good faith, (b) the indemnifying party shall not thereby permit to exist any lien, encumbrance or other adverse charge upon any asset of any indemnified party or of its subsidiaries, (c) the indemnifying party shall permit the indemnified party to participate in such settlement or defense through counsel chosen by the indemnified party with all fees, costs and expenses of such counsel borne by the indemnifying party, (d) no entry of judgment or settlement of a claim may be agreed to without the written consent of the indemnified party, and (e) the indemnifying party shall promptly reimburse the indemnified party for the full amount of such claim and the related expenses as incurred by the indemnified party pursuant to Article 8. ARTICLE 9 TERM AND TERMINATION 9.1 Term. The term of this Agreement shall commence on the Effective Date and, unless terminated earlier in accordance with this Agreement, shall continue in full force and effect until October 11, 2007. The Agreement may be extended upon the mutual written agreement of the parties. 9.2 Termination. Notwithstanding the provisions of Section 9.1 above, this Agreement may be terminated in accordance with the following provisions: (a) By written notice from MedAmicus to Medtronic in the event of (i) a breach of any material term of this Agreement by Medtronic that is not cured within sixty (60) calendar days after receipt by Medtronic of written notice from MedAmicus specifying the nature of and basis for the asserted breach; provided, that if such breach cannot reasonably be cured within sixty (60) days, such breach shall be deemed cured if Medtronic commences to cure such breach within such 60-day period and diligently thereafter prosecutes such cure, or (ii) the commencement by or against Medtronic of any bankruptcy, insolvency or reorganization proceeding which has not been dismissed within sixty (60) days after commencement; or (b) By written notice from Medtronic to MedAmicus in the event of (i) a breach of any material term of this Agreement by MedAmicus that is not cured within sixty (60) calendar days after receipt by MedAmicus of written notice from Medtronic specifying the nature of and basis for the asserted breach; provided, that if such breach cannot reasonably be cured within sixty (60) days, such breach shall be deemed cured if MedAmicus commences to cure such breach within such 60-day period and diligently thereafter prosecutes such cure, or (ii) the commencement by or against MedAmicus of any bankruptcy, insolvency or reorganization proceeding which has not been dismissed within sixty (60) days after commencement. 13 9.3 Rights and Obligations on Termination. In the event of termination of this Agreement for any reason, the parties shall have the following rights and obligations (in addition to such rights, obligations and remedies they may have at law and in equity with respect to any breach of this Agreement): (a) Termination shall not release either party from the obligation to make payment of all amounts due and payable prior to such termination. (b) Upon termination of this Agreement, each party will within thirty (30) days return to the other all tangible Confidential Information (as defined in Section 10.1) of the other party (except one copy which may be retained by legal counsel solely for evidentiary purposes in the event of a dispute). ARTICLE 10 MISCELLANEOUS 10.1 Non-Disclosure. Each party agrees not to disclose or use (except as permitted or required for performance by the party receiving such Confidential Information of its rights or duties hereunder) any Confidential Information of the other party obtained during the term of this Agreement until the expiration of five (5) years after the termination or expiration of this Agreement. Each party further agrees to take appropriate measures to prevent any such prohibited disclosure by its present and future Affiliates, employees, officers, agents, or consultants during the term of this Agreement and for a period of five (5) years thereafter. For purposes of this Agreement, "Confidential Information" means information not generally known or recognized as standard practice, and proprietary to one of the parties and includes, without limitation, trade secrets and inventions, information pertaining to research, development, testing studies, test procedures and results, techniques, designs, dimensions, configurations, tolerances, specifications, material chemistry and compounding, information relating to engineering, manufacturing, manufacturing methods, processes, descriptions of raw materials, acquisitions of supplies, purchasing, marketing, selling, servicing, customer lists, business methods and strategies, accounting and licensing, non-public financial information, and other know-how, trade secrets, and unpublished information disclosed (whether before or during the term of this Agreement) by one of the parties (the "disclosing party") to the other party (the "receiving party") or generated under this Agreement, excluding information which: (a) was already in the possession of receiving party prior to its receipt from the disclosing party (provided that the receiving party is able to provide the disclosing party with reasonable documentary proof thereof); (b) is or becomes part of the public domain by reason of acts not attributable to the receiving party: (c) is or becomes available to receiving party from a source other than the disclosing party which source, to the best of receiving party's knowledge, has rightfully obtained such information and has no obligation of non-disclosure or confidentiality to the disclosure party with respect thereto; (d) is made available by the disclosing party to a third party unaffiliated with the disclosing party on an unrestricted basis; (e) has been independently developed by the receiving party without breach of this Agreement or use of any Confidential Information of the other party; or (f) has been or must be publicly disclosed by reason of legal, accounting or regulatory requirements beyond the reasonable control, and despite the reasonable efforts, of the receiving party. 14 All Confidential Information disclosed by one party to the other under this Agreement shall be in writing and bear a legend "Proprietary," "Confidential" or words of similar import or, if disclosed in any manner other than writing, shall be preceded by an oral statement indicating that the information is proprietary or confidential, and shall be followed by transmittal of a reasonably detailed written summary of the information provided to the receiving party with identification as Confidential Information designated as above within thirty (30) days. 10.2 Public Announcements. MedAmicus is a public reporting company under the Securities Exchange Act of 1934. MedAmicus agrees that, at least 48 hours prior to the issuance of a press release or public announcement relating to this Agreement, MedAmicus will provide Medtronic a draft of the announcement and the opportunity to comment prior to its scheduled release. Medtronic acknowledges that MedAmicus may be required to file this Agreement with the SEC and consents to such filing, so long as MedAmicus uses reasonable efforts to obtain confidential treatment of appropriate provisions. 10.3 Relationship. The relationship of Medtronic and MedAmicus pursuant to this Agreement will be that of independent contractors. Neither party has, and will not, represent that it has any power, right or authority to bind or to incur any charges or expenses on behalf of the other party or in the other party's name without the written consent of the other party. 10.4 Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and the successors or assigns of the parties hereto; provided, that (i) the rights and obligations of MedAmicus herein may not be assigned except to any person who succeeds to substantially all of MedAmicus' business, and (ii) the rights and obligations of Medtronic herein may not be assigned except to any person who succeeds to all or a substantial portion of Medtronic's business to which this Agreement relates. Any attempted assignment of this Agreement in violation of this Section 10.4 shall be null and void. 10.5 Entire Agreement. This Agreement and the agreements contemplated herein constitutes the entire agreement of the parties with respect to the subject matter of such agreement and supersedes all previous proposals or agreements, oral or written, including without limitation, the SoloTrak Supply Agreement dated May 3, 1991 between Medtronic and MedAmicus, including the addendums dated November 18, 1992, April 9, 1993, August 1, 1995 and September 11, 1996, and all negotiations, conversations or discussions heretofore had between the parties related to the subject matter of this agreement. 10.6 Governing Law. This Agreement shall be governed by, and interpreted and construed in accordance with, the laws of the State of Minnesota, without giving effect to principles of conflicts of laws. 10.7 Survival. All of the representations, warranties, and indemnifications made in this Agreement, and all terms and provisions hereof intended to be observed and performed by the parties after the termination hereof (to the extent specified herein), shall survive such termination and continue thereafter in full force and effect, subject to applicable statutes of limitations. 10.8 Amendment, Waiver, Discharge, etc. This Agreement may not be amended, released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the parties to this Agreement by their duly authorized representatives. The failure of either party to enforce at any time any of the provisions of this Agreement shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of either party after any such failure to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach. 10.9 Execution in Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become a binding agreement when one or more counterparts have been signed by each party and delivered to the other party. 15 10.10 Titles and Headings; Construction. The titles and headings to Sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted. 10.11 Benefit. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties to this Agreement or their respective successors or permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 10.12 Notices. All notices or other communications to a party required or permitted hereunder shall be in writing and shall be delivered personally or by telecopy (receipt confirmed) to such party (or, in the case of an entity, to an executive officer of such party) or shall be given by certified mail, postage prepaid with return receipt requested, addressed as follows: if to Medtronic to: Medtronic, Inc. Cardiac Rhythm Management Central 7000 Central Avenue N.E. Minneapolis, Minnesota 55432-3576 Attention: Loretta Mallak FAX: 763-514-3362 and to: Medtronic, Inc. CRM Legal Dept. 7000 Central Avenue N.E. Minneapolis, Minnesota 55432 if to MedAmicus to: MedAmicus Incorporated 15301 Highway 55 West Minneapolis, Minnesota 55447 Attention: Mark Kraus FAX: 763-559-0148 with a copy to: Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South Eighth Street Minneapolis, Minnesota 55402 Attention: Barbara Lano Rummel MedAmicus or Medtronic may change their respective above-specified recipient and/or mailing address by notice to the other party given in the manner herein prescribed. All notices shall be deemed given on the day when actually delivered as provided above (if delivered personally or by telecopy) or on the day shown on the return receipt (if delivered by mail). 10.13 Severability. If any provision of this Agreement is held invalid by a court of competent jurisdiction, such provision shall be enforced to the maximum extent permissible and the remaining provisions shall nonetheless be enforceable according to their terms. 16 10.14 Execution of Further Documents. Each party agrees to execute and deliver without further consideration any further applications, licenses, assignments or other documents, and to perform such other lawful acts as the other party may reasonably request to fully secure and/or evidence the rights or interests herein. 10.15 Dispute Resolution. The Parties agree that any and all disputes, claims or controversies arising out of or relating to this agreement shall be submitted to final and binding arbitration before the Center for Public Resources. The parties covenant that they shall participate in the arbitration in good faith, and that they shall share equally in its costs. The provisions of this Paragraph may be enforced by any Court of competent jurisdiction, and the party seeking enforcement shall be entitled to an award of all costs, fees and expenses, including attorneys fees, to be paid by the party against whom enforcement is ordered. The venue of arbitration shall be in Minneapolis, Minnesota. The arbitrator shall apply the substantive law of Minnesota law, other than its arbitration law. The arbitrator will apply federal arbitration law. IN WITNESS WHEREOF, each of the parties has caused this Supply Agreement to be executed in the manner appropriate to each. MEDAMICUS INCORPORATED MEDTRONIC, INC. By: /s/ James D. Hartman By /s/ Dale A. Wahlstrom ---------------------------------- ------------------------------------- Print Name James D. Hartman Print Name Dale A. Wahlstrom --------------------------- ----------------------------- Title President and Chief Executive Title Vice President/ General Manager -------------------------------- ---------------------------------- Officer Cardiac Rhythm Management Division - ------------------------------------- --------------------------------------- Date October 11, 2002 Date October 11, 2002 --------------------------------- ---------------------------------- Exhibits: A Specifications B Prices C Process for Determining Royalty Payments Upon Termination of Agreement 17 EXHIBIT A SPECIFICATIONS Lead Delivery Systems: Medtronic Model 6216 Medtronic Model 6218 Medtronic Model 10600 Introducer Kits: Medtronic Solo Track Kit Medtronic Solo Track Kit with Safety Needle Medtronic PLI Kit Medtronic PLI Kit with Safety Needle MedAmicus Premium Kit Safety Needle: MedAmicus Safety Needle MedAmicus Slitter: MedAmicus Slitter MedAmicus VIP+ 18 EXHIBIT B PRICES Slitter [ * * * ] 5-pack Introducer [ * * * ] by [ * * * ] May 2002 Single Introducer Kit [ * * * ] by [ * * * ] May 2002 Premium Kit [ * * * ] Medtronic Model 6216 production [ * * * ] Medtronic Model 6218 production [ * * * ] Medtronic Model 6216 Kit [ * * * ] Medtronic Model 6218 Kit [ * * * ] Medtronic Model 10600 [ * * * ] Safety Needles Introducer single [ * * * ] Introducer 5-pack [ * * * ] MedAmicus VIP+ [ * * * ] 19 EXHIBIT C PROCESS FOR DETERMINING ROYALTY PAYMENTS UPON TERMINATION OF AGREEMENT Medtronic recognizes MedAmicus' need to ensure that the license remains in place even in the event that this Agreement expires or is terminated. MedAmicus recognizes Medtronic's need for a royalty payment if the Parties are no longer in a Supplier/Purchaser relationship. Therefore, the Parties agree to the following process to be used in the event that this Agreement expires or is terminated: (1) Representatives of the parties will exchange royalty proposals within 30 days of this Agreement's termination or expiration. (2) Within 30 days following the expiration of that 30-day period, representatives of Medtronic and MedAmicus will meet to discuss such royalty proposals. (3) If those representatives cannot agree upon royalty during their initial meeting, the general manager of Medtronic's CRM Therapy Delivery Business or an equivalent Medtronic executive and a representative of Medtronic's Corporate Development Group shall meet with the CEO of MedAmicus and another MedAmicus representative of the CEO's choice to negotiate a royalty. (4) If these senior management representatives cannot reach an agreement, Medtronic will have the option to submit the matter to binding arbitration. In the event that the matter goes to arbitration, Medtronic's Vice President of Legal-CRM will work with MedAmicus' counsel to agree on an arbitrator; if they cannot agree, they will each pick an arbitrator, who will work together to pick a third arbitrator who will handle the negotiation. (5) Throughout the above process, the parties will use their best efforts to reach terms. (6) MedAmicus' license will continue during the negotiation process set forth above, but royalty payments at whatever rate is determined by negotiation or arbitration shall be due on sales during the negotiation period. 20 EX-99.1 6 medamicus025304_ex99-1.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION The undersigned certify pursuant to 18 U.S.C. ss.1350, that: (1) The accompanying Quarterly Report on Form 10-QSB for the period ended September 30, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date October 31, 2002 /s/ James D. Hartman ---------------- -------------------------------------------- President, Chief Executive Officer and Chief Financial Officer 1 -----END PRIVACY-ENHANCED MESSAGE-----