SECURITY AGREEMENT

 

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                                                                    EXHIBIT 10.3

 

 

                               SECURITY AGREEMENT

 

      This Security Agreement (this "Agreement"), dated as of December 6th, 2005

is made by and among Diametrics Medical, Inc. ("Debtor") and those entities

listed on the Schedule of Secured Parties attached hereto as Schedule 1

(individually, a "Secured Party" and collectively, the "Secured Parties"), each

a holder of a Convertible Secured Promissory Note in the principal amount

indicated across from each Secured Party's name on the Schedule of Secured

Parties (individually, a "Note" and collectively, the "Notes").

 

                                    RECITALS

 

      A. Debtor has executed and delivered the Notes payable to the order of the

Secured Parties as of the date hereof.

 

      B. In connection with the Notes, Debtor desires to grant a security

interest in certain collateral to the Secured Parties as set forth herein.

 

 

                                    AGREEMENT

 

      NOW, THEREFORE, in consideration of the above recitals and the mutual

covenants hereinafter set forth, the parties hereby agree as follows:

 

      SECTION 1 Definitions; Interpretation.

 

            (a) All capitalized terms used in this Agreement and not otherwise

defined herein shall have the meanings assigned to them in the Notes.

 

            (b) As used in this Agreement, the following terms shall have the

following meanings:

 

                  "Collateral" has the meaning set forth in Section 2.

 

                  "Documents" means this Agreement, the Notes and all other

certificates, documents, agreements and instruments delivered to Secured Parties

under the Notes or in connection with the Obligations.

 

                  "Event of Default" has the meaning set forth in Section 8.

 

                  "Lien" means any mortgage, deed of trust, pledge, security

interest, assignment, deposit arrangement, charge or encumbrance, lien, or other

type of preferential arrangement.

 

                  "Notes" has the meaning set forth in the preamble above, as

they may be amended, modified, renewed, extended or replaced from time to time.

 

                  "Obligations" means the indebtedness, liabilities and other

obligations of Debtor to the Secured Parties under or in connection with the

Notes or any of the other Documents, including, without limitation, all unpaid

principal of the Notes, all interest accrued

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thereon, all fees and all other amounts payable by Debtor to the Secured Parties

thereunder or in connection therewith, whether now existing or hereafter

arising, and whether due or to become due, absolute or contingent, liquidated or

unliquidated, determined or undetermined.

 

                  "Person" means an individual, corporation, partnership, joint

venture, trust, unincorporated organization, governmental agency or authority,

or any other entity of whatever nature.

 

                  "UCC" means the Uniform Commercial Code as the same may, from

time to time, be in effect in the State of Minnesota.

 

            (c) Where applicable and except as otherwise defined herein, terms

used in this Agreement shall have the meanings assigned to them in the UCC.

 

            (d) In this Agreement, (i) the meaning of defined terms shall be

equally applicable to both the singular and plural forms of the terms defined;

and (ii) the captions and headings are for convenience of reference only and

shall not affect the construction of this Agreement.

 

      SECTION 2 Security Interest.

 

            (a) As security for the payment and performance of the Obligations,

Debtor hereby grants to each Secured Party a security interest in all of

Debtor's right, title and interest in, to and under all of its personal

property, wherever located and whether now existing or owned or hereafter

acquired or arising, including all accounts, chattel paper, commercial tort

claims, deposit accounts, documents, equipment (including all fixtures),

instruments, inventory, investment property, letter-of-credit rights, money,

general intangibles including, without limitation, all intellectual property and

all rights therein of any type or description, including, without limitation,

all inventions and discoveries, patents and patent applications, trademarks,

service marks and trade names, and applications for registration of such

trademarks, service marks and trade names, trade secrets, trade dress, trade

styles, logos, other source of business identifiers, mask-works, mask-work

registrations, mask-work applications, software, confidential and proprietary

information, and all licenses relating to any of the foregoing, all reissuance,

continuations and continuations-in-part of the foregoing, all other rights

derived from or associated with the foregoing, including the right to sue and

recover for past infringement, and all income and royalties with respect

thereto, and all products, proceeds and supporting obligations of any and all of

the foregoing (collectively, the "Collateral").

 

            (b) This Agreement shall create a continuing security interest in

the Collateral which shall remain in effect until terminated in accordance with

Section 20 hereof.

 

            (c) Secured Parties acknowledge that a principal amount of $15,917

of the Senior Secured Fixed Rate Note of the Company issued August 4, 1998 may

be considered outstanding and prior in right to the security interest granted

hereunder.

 

      SECTION 3 Financing Statements, Etc. Debtor shall execute and deliver to

each Secured Party concurrently with the execution of this Agreement, and Debtor

hereby authorizes each Secured Party to file (with or without Debtor's

signature), at any time and from time to time

 

 

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thereafter, all financing statements, assignments, amendments, continuation

financing statements, termination statements, account control agreements, and

other documents and instruments, in form reasonably satisfactory to such Secured

Party, and take all other action, as a Secured Party may reasonably request, to

perfect and continue perfected, maintain the priority of or provide notice of

the security interest of each Secured Party in the Collateral. Debtor will

cooperate with each Secured Party in obtaining control (as defined in the UCC)

of Collateral consisting of deposit accounts, investment property, letter of

credit rights and electronic chattel paper. Debtor will join with the Secured

Parties in notifying any third party who has possession of any Collateral of the

Secured Parties' security interest therein and obtaining an acknowledgment from

the third party that it is holding the Collateral for the benefit of the Secured

Parties. Debtor will not create any chattel paper without placing a legend on

the chattel paper acceptable to each Secured Party indicating that the Secured

Parties have a security interest in the chattel paper.

 

      SECTION 4 Representations and Warranties. Debtor represents and warrants

to the Secured Parties that:

 

            (a) Debtor is duly organized, validly existing and in good standing

under the law of the jurisdiction of its organization and has all requisite

power and authority to execute, deliver and perform its obligations under this

Agreement.

 

            (b) The execution, delivery and performance by Debtor of this

Agreement have been duly authorized by all necessary action of Debtor, and this

Agreement constitutes the legal, valid and binding obligation of Debtor,

enforceable against Debtor in accordance with its terms, except as enforcement

may be limited by equitable principles or by bankruptcy, insolvency,

reorganization, moratorium, or similar laws relating to or limiting creditors'

rights generally.

 

            (c) No authorization, consent, approval, license, exemption of, or

filing or registration with, any governmental authority or agency, or approval

or consent of any other Person is required for the due execution, delivery or

performance by Debtor of this Agreement, except for any filings necessary to

perfect any Liens on any Collateral.

 

            (d) Debtor's chief executive office and principal place of business

(as of the date of this Agreement) is located at the address set forth in

Schedule 2; Debtor's jurisdiction of organization is set forth in Schedule 2;

Debtor's exact legal name is as set forth in the first paragraph of this

Agreement; and all other locations where Debtor conducts business or Collateral

is kept (as of the date of this Agreement) are set forth in Schedule 2.

 

            (e) Debtor has rights in or the power to transfer the Collateral,

and Debtor is the sole and complete owner of the Collateral, free from any Lien,

except as set forth in Schedule 2.

 

            (f) All of Debtor's material U.S. and foreign patents and patent

applications, copyrights (whether or not registered), applications for

copyright, trademarks, service marks and trade names (whether registered or

unregistered), and applications for registration of such trademarks, service

marks and trade names, are set forth in Schedule 2.

 

 

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             (g) No control agreements exist with respect to any Collateral other

than control agreements in favor of the Secured Parties.

 

            (h) As of the date hereof, Debtor does not have or hold any chattel

paper, letter-of-credit rights or commercial tort claims except as disclosed to

the Secured Parties; provided, however, that a failure to disclose such a claim

will not be construed to be a waiver of such claim.

 

            (i) The names and addresses of all financial institutions and other

Persons at which Debtor maintains its deposit and securities accounts, and the

account numbers and account names of such accounts, are set forth in Schedule 2.

 

      SECTION 5 Covenants. So long as any of the Obligations remain unsatisfied,

Debtor agrees that:

 

            (a) Debtor shall appear in and defend any action, suit or proceeding

which may affect to a material extent its title to, or right or interest in, or

a Secured Party's right or interest in, the Collateral, and shall do and perform

all reasonable acts that may be necessary and appropriate to maintain, preserve

and protect the Collateral.

 

            (b) Debtor shall comply in all material respects with all laws,

regulations and ordinances, and all policies of insurance, relating in a

material way to the possession, operation, maintenance and control of the

Collateral.

 

            (c) Debtor shall give prompt written notice to each Secured Party

(and in any event not later than 10 days following any change described below in

this subsection) of: (i) any change in the location of Debtor's chief executive

office or principal place of business; (ii) any change in the locations set

forth in Schedule 2; (iii) any change in its name; (iv) any changes in its

identity or structure in any manner which might make any financing statement

filed hereunder incorrect or misleading; (v) any change in its registration as

an organization (or any new such registration); or (vi) any change in its

jurisdiction of organization; provided that Debtor shall not locate any

Collateral outside of the United States nor shall Debtor change its jurisdiction

of organization to a jurisdiction outside of the United States.

 

            (d) Debtor shall not surrender or lose possession of, sell, lease,

rent, or otherwise dispose of or transfer any of the Collateral or any right or

interest therein, except in the ordinary course of business or unless such

Collateral is replaced by comparable Collateral of similar value; provided that

no such disposition or transfer of Collateral consisting of investment property

or instruments shall be permitted while any Event of Default exists.

 

            (e) Debtor shall keep the Collateral free of all Liens.

 

            (f) Debtor shall pay and discharge all taxes, fees, assessments and

governmental charges or levies imposed upon it with respect to the Collateral

prior to the date on which penalties attach thereto, except to the extent such

taxes, fees, assessments or governmental charges or levies are being contested

in good faith by appropriate proceedings.

 

 

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            (g) Debtor shall maintain and preserve its legal existence, its

rights to transact business and all other material rights, franchises and

privileges necessary or desirable in the normal course of its business and

operations and the ownership of the Collateral, except in connection with any

transactions expressly permitted by the Notes or any other Document.

 

            (h) Upon the request of a Secured Party, Debtor shall (i)

immediately deliver to such Secured Party, or an agent designated by it,

appropriately endorsed or accompanied by appropriate instruments of transfer or

assignment, all documents and instruments, all certificated securities with

respect to any investment property, all letters of credit and all accounts and

other rights to payment at any time evidenced by promissory notes, trade

acceptances or other instruments, (ii) cause any securities intermediaries to

show on their books that the Secured Parties are the entitlement holders with

respect to any investment property, and/or obtain account control agreements in

favor of the Secured Parties from such securities intermediaries, in form and

substance satisfactory to each Secured Party, with respect to any investment

property, as requested by a Secured Party, and (iii) provide such notice, obtain

such acknowledgments and take all such other action, with respect to any chattel

paper, documents and letter-of credit rights, as a Secured Party shall

reasonably specify.

 

      SECTION 6 Collection of Accounts. Until the Secured Parties exercise their

rights hereunder to collect the accounts and other rights to payment, Debtor

shall endeavor in the first instance diligently to collect all amounts due or to

become due on or with respect to the accounts and other rights to payment. At

the request of a Secured Party, upon the occurrence and during the continuance

of any Event of Default, all remittances received by Debtor shall be held in

trust for the Secured Parties and, in accordance with such Secured Party's

instructions, remitted to the Secured Parties or deposited into account(s) of

the Secured Parties in the form receiv