Exhibit 10.1
 
ESSENTIAL THERAPEUTICS, INC.
1365 Main Street
Waltham, MA 02451
 
September 25, 2002
 
Fleet National Bank
100 Federal Street
Boston, MA 02110
 
Gentlemen:
 
This letter agreement will set forth certain understandings between Essential
Therapeutics, Inc., a Delaware corporation (the “Borrower”) and Fleet National
Bank (the “Bank”) with respect to Term Loans (hereinafter defined) to be made by
the Bank to the Borrower. In consideration of the mutual promises contained
herein and in the other documents referred to below, and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank agree as follows:
 
I. AMOUNTS AND TERMS
 
1.1. References to Documents. Reference is made to (i) that certain $2,000,000
face principal amount promissory note of even date herewith (the “Term Note”)
made by the Borrower and payable to the order of the Bank; and (ii) that certain
Account Pledge Agreement of even date herewith (the “Pledge”) from the Borrower
to the Bank.
 
1.2. Term Loans; Term Note. Subject to the terms and conditions hereinafter set
forth, the Bank will make one or more loans (the “Term Loans”) to the Borrower,
as the Borrower may request, on any Business Day prior to the first to occur of
(i) the close of business on December 31, 2002 or (ii) the earlier termination
of the within-described term loan facility pursuant to §5.2 or §6.5. A Term Loan
shall be made, not more than once per calendar quarter (except that more than
one Term Loan may be made in any calendar quarter provided that each additional
Term Loan in any one calendar quarter is in an amount of at least $250,000), in
order to finance the costs of Qualifying Equipment acquired by the Borrower
within the 90 days preceding the request for such Term Loan and/or the costs of
Qualifying Leasehold Improvements installed or constructed within the 90 days
preceding the request for such Term Loan, each such Term Loan to be in such
amount as may be requested by the Borrower; provided that (i) no Term Loan will
be made after December 31, 2002; (ii) the aggregate original principal amounts
of all Term Loans will not exceed $2,000,000; (iii) the aggregate original
principal amounts of all Term Loans made in respect of Qualifying Leasehold
Improvements will not exceed the lesser of (x) $1,400,000 or (y) 70% of the
total amount of the Term Loans advanced (and, at the earlier of January 1, 2003
or that date when the facility for Term Loans has been drawn in full, the
Borrower will make such prepayment, if any, of the Term Loans relating to
Qualifying Leasehold Improvements as may be needed so that the foregoing 70%
limit will not

--------------------------------------------------------------------------------

be exceeded); and (iv) no Term Loan relating to Qualifying Equipment will be in
an amount more than 100% of the invoiced actual costs of the tangible property
constituting the items of Qualifying Equipment with respect to which such Term
Loan is made (excluding taxes, shipping, software, installation charges,
training fees and other “soft costs”) and no Term Loan relating to Qualifying
Leasehold Improvements will be in an amount more than 100% of the invoiced
actual costs (including installation costs) of the relevant Qualifying Leasehold
Improvements (excluding taxes and shipping). Prior to the making of each Term
Loan, and as a precondition thereto, the Borrower will provide the Bank with:
(i) invoices supporting the costs of the relevant Qualifying Equipment and/or
Qualifying Leasehold Improvements, as the case may be; (ii) such evidence as the
Bank may reasonably require showing that all Qualifying Equipment has been
delivered to and installed at the Borrower’s premises in Waltham, MA, has become
fully operational, has been paid for by the Borrower and is owned by the
Borrower free of all liens and interests of any other Person; (iii) such
evidence as the Bank may reasonably require showing that the Qualifying
Leasehold Improvements have been installed at the Borrower’s premises at 78
Fourth Avenue, Waltham, MA, have been paid for by the Borrower and are owned by
the Borrower free of all liens and interests of any other Person, it being
acknowledged that such Qualifying Leasehold Improvements are to be affixed to
the Borrower’s premises and may become so built into such premises that they
become part of the realty, with the result that the owner of such premises would
have rights thereto upon the termination of the Borrower’s lease; and (iv)
sufficient Collateral, pledged pursuant to the Pledge, so that the Aggregate
Collateral Value (as defined in the Pledge) of such Collateral will not be less
than the aggregate outstanding principal amount of the Term Loans (after giving
effect to the Term Loan then proposed to be made).
 
The Term Loans will be evidenced by the Term Note. The Borrower hereby
irrevocably authorizes the Bank to make or cause to be made, on a schedule
attached to the Term Note or on the books of the Bank, at or following the time
of making each Term Loan and of receiving any payment of principal, an
appropriate notation reflecting such transaction and the then aggregate unpaid
principal balance of the Term Loans. The amount so noted shall constitute
presumptive evidence as to the amount owed by the Borrower with respect to
principal of the Term Loans. Failure of the Bank to make any such notation shall
not, however, affect any obligation of the Borrower or any right of the Bank
hereunder or under the Term Note.
 
1.3. Principal Repayment of Term Loans. The Borrower will repay principal of the
Term Loans in 16 equal consecutive quarterly installments, commencing on March
31, 2003 and continuing on the last Business Day of each calendar quarter
thereafter. Each such quarterly installment of principal of the Term Loans shall
be in an amount equal to 1/16th of the aggregate principal amount of the Term
Loans outstanding at the close of business on December 31, 2002. In any event,
the then outstanding principal balance of all Term Loans and all interest then
accrued but unpaid thereon shall be due and payable in full on December 31,
2006. At any time after January 1, 2003, the Bank may prepare a replacement Term
Note giving effect to the amortization schedule described above and setting out
the principal amount to be paid on each quarterly payment date. The Borrower
agrees that it will execute and deliver such replacement Term Note to the Bank,
whereupon it will become the “Term Note” for the purposes of this letter
agreement. The Borrower may prepay, at any time or from time to time, without
premium or

-2-

--------------------------------------------------------------------------------

penalty, the whole or any portion of the Term Loans to the extent that same are
Floating Rate Loans; provided that each such principal prepayment shall be
accompanied by payment of all interest under the Term Note accrued on the amount
so prepaid but unpaid to the date of payment. The Borrower may prepay the whole
or any portion of any LIBOR Loan; provided that (i) the Borrower gives the Bank
not less than three (3) Business Days’ prior written notice of its intent so to
prepay, (ii) the Borrower pays all interest on each LIBOR Loan (or portion
thereof) so prepaid accrued to the date of such prepayment, (iii) any voluntary
prepayment with respect to a LIBOR Loan must be in a principal amount of
$100,000 or an integral multiple of $100,000 and, after giving effect to such
voluntary prepayment, the remaining outstanding balance of such LIBOR Loan shall
be not less than $200,000 and (iv) if the Borrower for any reason makes any
prepayment of a LIBOR Loan prior to the last day of the Interest Period
applicable thereto, the Borrower shall forthwith pay all amounts owing to the
Bank pursuant to the provisions of §1.7 with respect to such LIBOR Loan. Any
partial prepayment of principal of the Term Loans will be applied to
installments of principal of the Term Loans thereafter coming due in inverse
order of normal maturity. Amounts repaid or prepaid with respect to the Term
Loans are not available for reborrowing.
 
1.4. Interest Rate. Except as otherwise provided below in this §1.4, interest on
the Term Loans will be payable at a fluctuating rate per annum (the “Floating
Rate”) which shall at all times be equal to the Prime Rate as in effect from
time to time (but in no event in excess of the maximum rate permitted by then
applicable law), with a change in such rate of interest to become effective on
each day when a change in the Prime Rate becomes effective, each such change to
become effective without notice or demand of any kind. Subject to the conditions
set forth herein, the Borrower may elect that all or any portion of any Term
Loan to be made under §1.2 will be made as a LIBOR Loan, that all or any portion
of any Floating Rate Loan will be converted to a LIBOR Loan and/or that any
LIBOR Loan will be continued at the expiration of the Interest Period applicable
thereto as a new LIBOR Loan. Such election shall be made by the Borrower giving
to the Bank a written or telephonic notice received by the Bank within the time
period and containing the information described in the next following sentence
(a “LIBOR Loan Notice”). The LIBOR Loan Notice must be received by the Bank no
later than 10:00 a.m. (Boston time) on that day which is two Business Days prior
to the date of the proposed borrowing, conversion or continuation, as the case
may be, and must specify the amount of the LIBOR Loan requested (which shall be
$200,000 or an integral multiple of $100,000 in excess of $200,000), must
identify the particular Term Loan or Term Loans so to be made, converted or
continued, as the case may be, and must specify the proposed commencement date
of the relevant Interest Period and the duration (one month, two months or three
months, as the Borrower shall select) of the relevant Interest Period.
Notwithstanding anything provided elsewhere in this letter agreement, the
Borrower may not elect to have any installment of a Term Loan included in a
LIBOR Loan if the Interest Period applicable thereto would continue after the
due date of such installment. Any LIBOR Loan Notice shall, upon receipt by the
Bank, become irrevocable and binding on the Borrower, and the Borrower shall,
upon demand and receipt of a Bank Certificate with respect thereto, forthwith
indemnify the Bank against any loss or expense incurred by the Bank as a result
of any failure by the Borrower to borrow any requested LIBOR Loan, including,
without limitation, any loss or expense incurred by reason of the liquidation or
redeployment of deposits or other funds acquired by the Bank to fund or maintain
such LIBOR Loan. At the

-3-

--------------------------------------------------------------------------------

expiration of each Interest Period applicable to a LIBOR Loan, the principal
amount of such LIBOR Loan may be continued as a new LIBOR Loan to the extent and
on the terms and conditions contained in this letter agreement by delivery to
the Bank of a new LIBOR Loan Notice conforming to the requirements set forth
above in this §1.4 (and any LIBOR Loan not repaid and not so continued as a new
LIBOR Loan will be deemed to have been converted into a Floating Rate Loan).
Notwithstanding any other provision of this letter agreement, the Bank need not
make or continue any LIBOR Loan or allow any conversion of a Floating Rate Loan
to a LIBOR Loan at any time when there exists any Default or Event of Default.
 
The Borrower may request and the Bank may issue caps, collars, swaps and other
rate protection products, using the Bank’s then customary documentation for such
transactions. Such caps, collars, swaps and other rate protection products will
be issued for such fees and upon such other terms and conditions as may be
agreed upon by the Bank and the Borrower at the time of issuance thereof.
 
Any request for a LIBOR Loan and any election to convert all or any portion of
the Term Loans to a LIBOR Loan may be made on behalf of the Borrower only by a
duly authorized officer; provided, however, that the Bank may conclusively rely
upon any written or facsimile communication received from any individual whom
the Bank believes in good faith to be such a duly authorized officer.
 
1.5. Interest Payments. The Borrower will pay interest on the principal amount
of the Term Loans outstanding from time to time, from the date hereof until
payment of the Term Loans and the Term Note in full and the termination of this
letter agreement. Interest on Floating Rate Loans will be payable monthly in
arrears on the first day of each month. Interest on each LIBOR Loan will be
payable in arrears on each applicable Interest Payment Date. In any event,
interest shall also be payable on the date of payment of the Term Loans in full.
Interest on Floating Rate Loans shall be payable at the Floating Rate. The rate
of interest payable on any LIBOR Loan will be the LIBOR Interest Rate applicable
thereto. Notwithstanding the foregoing, at any time after maturity of the Term
Loans or after the occurrence and during the continuance of any Event of
Default, the Term Loans will, at the option of the Bank, bear interest at a rate
per annum which at all times shall be equal to the sum of (i) four (4%) percent
per annum plus (ii) the per annum rate otherwise payable with respect thereto
under the Term Note (but in no event in excess of the maximum rate from time to
time permitted by then applicable law). All interest and fees payable under this
letter agreement and/or under the Term Note will be calculated on the basis of a
360-day year for the actual number of days elapsed.
 
1.6. Rate Determination Protection. In the event that:
 
(i)    the Bank shall determine that, by reason of circumstances affecting the
London interbank market or otherwise, adequate and reasonable methods do not
exist for ascertaining the LIBOR Interest Rate which would otherwise be
applicable during any Interest Period, or

-4-

--------------------------------------------------------------------------------

(ii)    the Bank shall determine that:
 
(A)    the making or continuation of any LIBOR Loan has been made impracticable
or unlawful by (1) the occurrence of any contingency that materially and
adversely affects the London interbank market or (2) compliance by the Bank with
any applicable law or governmental regulation, guideline or order or
interpretation or change thereof by any governmental authority charged with the
interpretation or administration thereof or with any request or directive of any
such governmental authority (whether or not having the force of law); or
 
(B)    reserve-adjusted LIBOR will not, in the reasonable determination of the
Bank, adequately and fairly reflect the cost to the Bank of funding the LIBOR
Loans for such Interest Period
 
then the Bank shall forthwith give notice of such determination (which shall be
conclusive and binding on the Borrower) to the Borrower. In such event the
obligations of the Bank to make LIBOR Loans shall be suspended until the Bank
determines that the circumstances giving rise to such suspension no longer
exist, whereupon the Bank shall notify the Borrower.
 
1.7. Prepayment of LIBOR Loans. The following provisions of this §1.7 shall be
effective only with respect to LIBOR Loans: The Borrower shall pay to the Bank,
upon request of the Bank, such amount or amounts as shall be sufficient (in the
reasonable opinion of the Bank) to compensate it for any loss, cost or expense
incurred as a result of: (i) any payment of a LIBOR Loan on a date other than
the last day of the Interest Period for such LIBOR Loan; (ii) any failure by the
Borrower to borrow a LIBOR Loan on the date specified in any LIBOR Loan Notice;
and/or (iii) any failure by the Borrower to pay a LIBOR Term Loan on the date
for payment specified in any notice given as to any prepayment. Without limiting
the foregoing, if, due to acceleration of the Term Note or due to voluntary
prepayment or mandatory repayment or prepayment or due to any other reason, the
Bank receives payment of any principal of a LIBOR Loan on any date prior to the
last day of the relevant Interest Period or if for any reason any LIBOR Loan is
converted to a Floating Rate Loan prior to the expiration of the relevant
Interest Period, the Borrower shall, upon demand and receipt of a Bank
Certificate from the Bank with respect thereto, pay forthwith to the Bank a
yield maintenance fee in an amount computed as follows: The current rate for
United States Treasury securities (bills on a discounted basis shall be
converted to a bond equivalent) with a maturity date closest to the last day of
the Interest Period applicable to the affected LIBOR Loan shall be subtracted
from the “fixed rate” component (i.e., reserve-adjusted LIBOR) of the LIBOR
Interest Rate in effect with respect to the relevant LIBOR Loan at the date of
such prepayment or conversion. If the result is zero or a negative number, there
shall be no yield maintenance fee. If the result is a positive number, then the
resulting percentage shall be multiplied by the amount of the principal balance
being prepaid. The resulting amount shall be divided by 360 and multiplied by
the number of days remaining in the relevant Interest Period. Said amount shall
be reduced to present value calculated by using the number of days remaining in
the relevant Interest Period and by using the above-referenced

-5-

--------------------------------------------------------------------------------

 
United States Treasury securities rate as the discount rate. The resulting
amount shall be the yield maintenance fee due to the Bank upon prepayment or
conversion of the applicable LIBOR Loan. Any acceleration of a LIBOR Loan due to
an Event of Default will give rise to a yield maintenance fee calculated with
the respect to such LIBOR Loan on the date of such acceleration in the same
manner as though the Borrower had exercised a right of prepayment at that date,
such yield maintenance fee being due and payable at that date.
 
1.8. Increased Costs; Capital Adequacy.
 
(i)    If the adoption, effectiveness or phase-in, after the date hereof, of any
applicable law, rule or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by the Bank with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency:
 
(A)    shall subject the Bank to any Imposition or other charge with respect to
any LIBOR Loan, the Term Note or the Bank’s agreement to make LIBOR Loans, or
shall change the basis of taxation of payments to the Bank of the principal of
or interest on any LIBOR Loan or any other amounts due under this letter
agreement in respect of LIBOR Loans or the Bank’s agreement to make LIBOR Loans
(except for changes in the rate of tax on the over-all net income of the Bank);
or
 
(B)    shall impose, modify or deem applicable any reserve, special deposit,
deposit insurance or similar requirement (including, without limitation, any
such requirement imposed by the Board of Governors of the Federal Reserve
System, but excluding, with respect to any LIBOR Loan, any such requirement
already included in the applicable Reserve Rate) against assets of, deposits
with or for the account of, or credit extended by, the Bank or shall impose on
the Bank or on the London interbank market any other condition affecting any
LIBOR Loans, the Term Note or the Bank’s agreement to make LIBOR Loans
 
and the result of any of the foregoing is to increase the cost to the Bank of
making or maintaining any LIBOR Loan or to reduce the amount of any sum received
or receivable by the Bank under this letter agreement or under the Term Note
with respect to any LIBOR Loan by an amount deemed by the Bank to be material,
then, upon demand by the Bank and receipt of a Bank Certificate from the Bank
with respect thereto, the Borrower shall pay to the Bank such additional amount
or amounts as the Bank certifies to be necessary to compensate the Bank for such
increased cost or reduction in amount received or receivable.
 
(ii)    If the Bank shall have determined that the adoption, effectiveness or
phase-in after the date hereof of any applicable law, rule or regulation
regarding

-6-

--------------------------------------------------------------------------------

capital requirements for banks or bank holding companies, or any change therein
after the date hereof, or any change after the date hereof in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity regarding
capital adequacy (whether or not having the force of law) has or would have the
effect of reducing the return on the Bank’s capital with respect to its
agreement hereunder to make Term Loans or with respect to any Term Loan (whether
or not then subject to any LIBOR Interest Rate) to a level below that which the
Bank could have achieved (taking into consideration the Bank’s policies with
respect to capital adequacy immediately before such adoption, effectiveness,
phase-in, change or compliance and assuming that the Bank’s capital was then
fully utilized) by any amount deemed by the Bank to be material: (A) the Bank
shall promptly after its determination of such occurrence deliver a Bank
Certificate with respect thereto to the Borrower; and (B) the Borrower shall pay
to the Bank as an additional fee from time to time on demand such amount as the
Bank certifies to be the amount that will compensate it for such reduction.
 
(iii)    A Bank Certificate of the Bank claiming compensation under this §1.8
shall be conclusive in the absence of manifest error. Such certificate shall set
forth the nature of the occurrence giving rise to such compensation, the
additional amount or amounts to be paid to the Bank hereunder and the method by
which such amounts are determined. In determining any such amount, the Bank may
use any reasonable averaging and attribution methods. Notwithstanding the
foregoing, the Bank will not claim compensation under this §1.8 for any
regulatory change or other circumstance described above unless the Bank is also
generally seeking such compensation from other similarly-situated borrowers
whose loan agreements contain similar provisions.
 
(iv)    No failure on the part of the Bank to demand compensation on any one
occasion shall constitute a waiver of its right to demand such compensation on
any other occasion and no failure on the part of the Bank to deliver any Bank
Certificate in a timely manner shall in any way reduce any obligation of the
Borrower to the Bank under this §1.8.
 
1.9. Illegality or Impossibility. Notwithstanding any other provision of this
letter agreement, if the introduction of or any change in or in the
interpretation or administration of any law or regulation applicable to the Bank
or the Bank’s activities in the London interbank market shall make it unlawful,
or any central bank or other governmental authority having jurisdiction over the
Bank or the Bank’s activities in the London interbank market shall assert that
it is unlawful, or otherwise make it impossible, for the Bank to perform its
obligations hereunder to make LIBOR Loans or to continue to fund or maintain
LIBOR Loans, then on notice thereof and demand therefor by the Bank to the
Borrower, (i) the obligation of the Bank to fund LIBOR Loans shall terminate and
(ii) all affected LIBOR Loans shall be deemed to have been converted into
Floating Rate Loans (with the Borrower to be responsible for any amount payable
under §1.7

-7-

--------------------------------------------------------------------------------

as a consequence of such conversion) at the last day on which such LIBOR Loans
may legally remain outstanding. Except as expressly provided in the immediately
preceding sentence, no LIBOR Loan may be converted into a Floating Rate Loan
prior to the end of the Interest Period applicable to such LIBOR Loan.
 
1.10. Advances and Payments. The proceeds of all Term Loans shall be credited by
the Bank to a general deposit account maintained by the Borrower with the Bank.
The proceeds of each Term Loan will be used by the Borrower solely to pay or
reimburse acquisition costs of Qualifying Equipment and/or Qualifying Leasehold
Improvements. All such Qualifying Equipment and/or Qualifying Leasehold
Improvements will be owned by the Borrower and not by any Subsidiary.
 
The Bank may charge any general deposit account of the Borrower at the Bank with
the amount of all payments of interest, principal and other sums due, from time
to time, under this letter agreement and/or the Term Note; and will thereafter
notify the Borrower of the amount so charged. The failure of the Bank so to
charge any account or to give any such notice shall not affect the obligation of
the Borrower to pay interest, principal or other sums as provided herein or in
the Term Note.
 
Whenever any payment to be made to the Bank hereunder or under the Term Note
shall be stated to be due on a day which is not a Business Day, such payment may
be made on the next succeeding Business Day, and interest payable on each such
date shall include the amount thereof which shall accrue during the period of
such extension of time. All payments by the Borrower hereunder and/or in respect
of the Term Note shall be made net of any Impositions or taxes and without
deduction, set-off or counterclaim, notwithstanding any claim which the Borrower
may now or at any time hereafter have against the Bank. All payments of
interest, principal and any other sum payable hereunder and/or under the Term
Note shall be made to the Bank, in lawful currency of the United States in
immediately available funds, at its office at 100 Federal Street, Boston, MA
02110 or to such other address as the Bank may from time to time direct. All
payments received by the Bank after 2:00 p.m. on any day shall be deemed
received as of the next succeeding Business Day. All monies received by the Bank
shall be applied first to fees, charges, costs and expenses payable to the Bank
under this letter agreement, the Term Note and/or any of the other Loan
Documents, next to interest then accrued on account of any Term Loans and only
thereafter to principal of the Term Loans; provided, however, that after the
occurrence and during the continuance of an Event of Default, payments will be
applied to obligations of the Borrower to the Bank as the Bank determines in its
sole discretion.
 
1.11. Conditions to Advance. Prior to the making of the initial Term Loan, the
Borrower shall deliver to the Bank duly executed copies of this letter
agreement, the Pledge, the Term Note and the documents and other items listed on
the Closing Agenda delivered herewith by the Bank to the Borrower, all of which,
as well as all legal matters incident to the transactions contemplated hereby,
shall be satisfactory in form and substance to the Bank and its counsel.

-8-

--------------------------------------------------------------------------------

 
Without limiting the foregoing, any Term Loan (including the initial Term Loan)
is subject to the further conditions precedent that on the date on which such
Term Loan is made (and after giving effect thereto):
 
(a) All statements, representations and warranties of the Borrower made in this
letter agreement and/or in the Pledge shall continue to be correct in all
material respects as of the date of such Term Loan.
 
(b) All covenants and agreements of the Borrower contained herein and/or in any
of the other Loan Documents shall have been complied with in all material
respects on and as of the date of such Term Loan.
 
(c) No event which constitutes, or which with notice or lapse of time or both
could constitute, an Event of Default shall have occurred and be continuing.
 
(d) No other material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.
 
Each request by the Borrower for any Term Loan, and each acceptance by the
Borrower of the proceeds of any Term Loan, will be deemed a representation and
warranty by the Borrower that at the date of such Term Loan and after giving
effect thereto all of the conditions set forth in the foregoing clauses (a)-(d)
of this §1.11 will be satisfied.
 
II. REPRESENTATIONS AND WARRANTIES
 
2.1. Representations and Warranties. In order to induce the Bank to enter into
this letter agreement and to make Term Loans hereunder, the Borrower warrants
and represents to the Bank as follows:
 
(a) The Borrower is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. The Borrower has full corporate power to
own its property and conduct its business as now conducted and as proposed to be
conducted, to grant the security interests contemplated by the Pledge and to
enter into and perform this letter agreement and the other Loan Documents. The
Borrower is duly qualified to do business and in good standing in Massachusetts
and in each other jurisdiction in which the Borrower maintains any plant,
office, warehouse or other facility and in each other jurisdiction where the
failure so to qualify could (singly or in the aggregate with all other such
failures) have a material adverse effect on the financial condition, business or
prospects of the Borrower, all such jurisdictions being listed on item 2.1(a) of
the attached Disclosure Schedule. Said item 2.1(a) also lists all Subsidiaries
of the Borrower at the date hereof. Each such Subsidiary is 100%-owned by the
Borrower. The Borrower is not a member of any partnership or joint venture
pursuant to which any other Person has the right to incur any Indebtedness on
behalf of the Borrower or to commit any assets of the Borrower.

-9-

--------------------------------------------------------------------------------

 
(b) At the date of this letter agreement, no Person is known by the Borrower to
own, of record and/or beneficially, more than 5% of the outstanding shares of
any class of the Borrower’s capital stock, except as set forth on item 2.1(b) of
the attached Disclosure Schedule.
 
(c) The execution, delivery and performance by the Borrower of this letter
agreement and each of the other Loan Documents in which the Borrower is named as
a party have been duly authorized by all necessary corporate and other action
and do not and will not:
 
(i) violate any provision of, or require as a prerequisite to effectiveness any
filing (other than filings under the Uniform Commercial Code), registration,
consent or approval under, any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to the Borrower;
 
(ii) violate any provision of the charter or by-laws of the Borrower, or result
in a breach of or constitute a default or require any waiver or consent under
any indenture or loan or credit agreement or any other material agreement, lease
or instrument to which the Borrower is a party or by which the Borrower or any
of its properties may be bound or affected or require any other consent of any
Person; or
 
(iii) result in, or require, the creation or imposition of any lien, security
interest or other encumbrance (other than in favor of the Bank), upon or with
respect to any of the properties now owned or hereafter acquired by the
Borrower.
 
(d) This letter agreement and each of the other Loan Documents has been duly
executed and delivered by the Borrower and each is the legal, valid and binding
obligation of the Borrower, enforceable against the Borrower in accordance with
its respective terms.
 
(e) Except as described on item 2.1(e) of the attached Disclosure Schedule,
there are no actions, suits, proceedings or investigations pending or, to the
knowledge of the Borrower, threatened by or against the Borrower before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which could hinder or prevent the
consummation of the transactions contemplated hereby or call into question the
validity of this letter agreement or any of the other Loan Documents or any
action taken or to be taken in connection with the transactions contemplated
hereby or thereby or which in any single case or in the aggregate may result in
any material adverse change in the business, prospects, condition, affairs or
operations of the Borrower.
 
(f) The Borrower is not in violation of any term of its charter or by-laws as
now in effect. The Borrower is not in material violation of any term of any
mortgage, indenture or judgment, decree or order, or any other material
instrument, contract or agreement to which it is a party or by which any of its
property is bound.
 
(g) The Borrower has filed all federal, foreign, state and local tax returns,
reports and estimates required to be filed by the Borrower. All such filed
returns, reports and estimates are proper and accurate and the Borrower has paid
all taxes, assessments, impositions, fees and other

-10-

--------------------------------------------------------------------------------

governmental charges required to be paid in respect of the periods covered by
such returns, reports or estimates. No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material tax liability or basis therefor.
 
(h) The Borrower is in compliance with all requirements of law, federal,
foreign, state and local, and all requirements of all governmental bodies or
agencies having jurisdiction over it, the conduct of its business, the use of
its properties and assets, and all premises occupied by it, failure to comply
with any of which could (singly or in the aggregate with all other such
failures) have a material adverse effect upon the assets, business, financial
condition or prospects of the Borrower. Without limiting the foregoing, the
Borrower has all the material franchises, licenses, leases, permits,
certificates and authorizations needed for the conduct of its business and the
use of its properties and all premises occupied by it, as now conducted, owned
and used and as proposed to be conducted, owned and used.
 
(i) The audited annual financial statements of the Borrower for the fiscal year
ended December 31, 2001 and the interim financial statements of the Borrower as
at March 31, 2002, each heretofore delivered to the Bank, are complete and
accurate and fairly present the financial condition of the Borrower as at the
dates thereof and for the periods covered thereby, except that the aforesaid
interim statements do not include notes and thus to not present the information
which would normally be contained in notes to financial statements. The Borrower
does not have any liability, contingent or otherwise, not disclosed in the
aforesaid December 31, 2001 financial statements that could materially affect
the financial condition of the Borrower. Since December 31, 2001, except as
disclosed on item 2.1(i) of the attached Disclosure Schedule, there has been no
material adverse development in the business, condition or prospects of the
Borrower, and (except for the acquisition of Maret Corporation) the Borrower has
not entered into any material transaction other than in the ordinary course.
 
(j) The principal place of business and chief executive offices of the Borrower
are located at 1365 Main Street, Waltham, MA 02451.
 
(k) The Borrower owns or has a valid right to use all of the patents,
copyrights, trademarks, trade names, know-how, trade secrets and other
intellectual property and all licenses and development rights relating to any of
the foregoing (collectively, “Intellectual Property”) now being used or
necessary to conduct its business. The conduct of the Borrower’s business as now
operated does not conflict with valid patents, copyrights, trademarks, trade
names, know-how, trade secrets or other intellectual property of others in any
manner that could materially adversely affect the business, prospects, assets or
condition, financial or otherwise, of the Borrower.
 
(l) None of the executive officers or key employees of the Borrower is subject
to any agreement in favor of anyone other than the Borrower which limits or
restricts that person’s right to engage in the type of business activity
conducted or proposed to be conducted by the Borrower or which grants to anyone
other than the Borrower any rights in any inventions or other ideas susceptible
to legal protection developed or conceived by any such officer or key employee.

-11-

--------------------------------------------------------------------------------

 
(m) The Borrower is not a party to any contract or agreement which now has or,
as far as can be reasonably foreseen by the Borrower at the date hereof, may
have a material adverse effect on the financial condition, business, prospects
or properties of the Borrower.
 
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
 
Without limitation of any other covenants and agreements contained herein or
elsewhere, the Borrower agrees that so long as the financing arrangements
contemplated hereby are in effect or all or any portion of any Term Loan or any
of the other Obligations shall be outstanding:
 
3.1. Legal Existence; Qualification; Compliance. The Borrower will maintain its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will remain qualified to do business and in good standing in
Massachusetts. The Borrower will qualify to do business and will remain
qualified and in good standing in each other jurisdiction where the Borrower
maintains any plant, office, warehouse or other facility and in each other
jurisdiction where the failure so to qualify could (singly or in the aggregate
with all other such failures) have a material adverse effect on the financial
condition, business or prospects of the Borrower. The Borrower will comply with
its charter documents and by-laws. The Borrower will comply with all applicable
laws, rules and regulations (including, without limitation, ERISA and those
relating to environmental protection) other than (i) laws, rules or regulations
the validity or applicability of which the Borrower shall be contesting in good
faith by proceedings which serve as a matter of law to stay the enforcement
thereof and (ii) those laws, rules and regulations the failure to comply with
any of which could not (singly or in the aggregate) have a material adverse
effect on the financial condition, business or prospects of the Borrower.
 
3.2. Maintenance of Property; Insurance. The Borrower will maintain and preserve
all of its properties in good working order and condition, making all necessary
repairs thereto and replacements thereof. The Borrower will maintain insurance
with respect to its property and business against such liabilities, casualties
and contingencies and of such types and in such amounts as shall be reasonably
satisfactory to the Bank from time to time and in any event all such insurance
as may from time to time be customary for companies conducting a business
similar to that of the Borrower in similar locales.
 
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge all
taxes, assessments and governmental charges or levies imposed upon it or upon
its income or property, including, without limitation, taxes, assessments,
charges or levies relating to real and personal property, franchises, income,
unemployment, old age benefits, withholding, or sales or use, prior to the date
on which penalties would attach thereto, and all lawful claims (whether for any
of the foregoing or otherwise) which, if unpaid, might give rise to a lien upon
any property of the Borrower, except any of the foregoing which is being
contested in good faith and by appropriate proceedings which serve as a matter
of law to stay the enforcement thereof and for which the Borrower has
established and is maintaining adequate reserves. The Borrower will pay, in a
timely manner, all lease obligations, material trade debt, purchase money
obligations and equipment lease obligations and all of its other material
Indebtedness. The Borrower will perform and fulfill all material covenants and
agreements under any leases of real estate,

-12-

--------------------------------------------------------------------------------

agreements relating to purchase money debt, equipment leases and other material
contracts. The Borrower will maintain in full force and effect, and comply with
the terms and conditions of, all permits, permissions and licenses necessary or
desirable for its business.
 
3.4. Accounts. The Borrower will maintain its principal depository and operating
accounts with the Bank.
 
3.5. Conduct of Business. The Borrower will conduct, in the ordinary course, the
business in which it is presently engaged. The Borrower will not, without the
prior written consent of the Bank, directly or indirectly (itself or through any
Subsidiary) enter into any other lines of business, businesses or ventures.
 
3.6. Reporting Requirements. The Borrower will furnish to the Bank:
 
(i) Within 90 days after the end of each fiscal year of the Borrower, a copy of
the Borrower’s Annual Report on Form 10-K for such fiscal year and, in any
event, the annual audit report for such fiscal year for the Borrower, including
therein consolidated balance sheets of the Borrower and Subsidiaries as at the
end of such fiscal year and related consolidated statements of income,
stockholders’ equity and cash flow for the fiscal year then ended. The annual
consolidated financial statements shall be certified by independent public
accountants selected by the Borrower and reasonably acceptable to the Bank, such
certification to be in such form as is generally recognized as “unqualified”.
The Borrower will also deliver to the Bank, within 90 days after the
commencement of each fiscal year projections (including balance sheet and income
statement projections on a quarterly basis) for the Borrower for such fiscal
year, prepared by the Borrower’s management and approved by the Borrower’s Board
of Directors, such projections to be in such detail as is reasonably
satisfactory to the Bank.
 
(ii) Within 45 days after the end of each fiscal quarter of the Borrower (other
than the fourth quarter in each fiscal year), a copy of the Borrower’s Quarterly
Report on Form 10-Q for such fiscal quarter and, in any event, the consolidated
balance sheets of the Borrower and Subsidiaries and related consolidated
statements of income and cash flow, unaudited but prepared in accordance with
generally accepted accounting principles consistently applied fairly presenting
the financial condition of the Borrower and Subsidiaries as at the dates thereof
and for the periods covered thereby (except that such quarterly statements need
not contain notes to the financial statements) and certified as complete by the
chief financial officer of the Borrower, such balance sheets to be as at the end
of such fiscal quarter and such statements of income and cash flow to be for
such fiscal quarter and for the fiscal year to date, in each case together with
a comparison to the results for the corresponding fiscal period of the
immediately prior fiscal year.
 
(iii) At the time of delivery of each annual or quarterly financial statement of
the Borrower, a certificate executed by the chief financial officer of the
Borrower stating that he or she has reviewed this letter agreement and the other
Loan Documents and has

-13-

--------------------------------------------------------------------------------

no knowledge of any Default or Event of Default or, if he or she has such
knowledge, specifying each such Default or Event of Default and the nature
thereof.
 
(iv) Promptly after receipt, a copy of all audits or reports submitted to the
Borrower by independent public accountants in connection with any annual,
special or interim audits of the books of the Borrower and any “management
letter” submitted by such accountants.
 
(v) As soon as possible and in any event within five days after the occurrence
of any Default or Event of Default, the statement of the Borrower setting forth
details of each such Default or Event of Default and the action which the
Borrower proposes to take with respect thereto.
 
(vi) Promptly after the commencement thereof, notice of all actions, suits and
proceedings before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, to which the Borrower is
a party.
 
(vii) Promptly upon filing any registration statement or listing application (or
any supplement or amendment to any registration statement or listing
application) with the SEC or with any stock exchange or with the National
Association of Securities Dealers quotations system, a copy of same.
 
(viii) As long as the Borrower has a class of securities which is
publicly-traded, a copy of each periodic or current report of the Borrower filed
with the SEC or any successor agency, of each press release or other
communication disseminated to the public generally, and of each annual report,
proxy statement and other communication sent by the Borrower to shareholders or
other securityholders generally, such copy to be provided to the Bank promptly
upon such filing with the SEC, such public dissemination or such communication
with shareholders or securityholders, as the case may be.
 
(ix) Promptly after the Borrower has knowledge thereof, written notice of any
development or circumstance which may reasonably be expected to have a material
adverse effect on the Borrower or its business, properties, assets, Subsidiaries
or condition, financial or otherwise.
 
(x) Promptly upon request, such other information respecting the financial
condition, operations or receivables of the Borrower as the Bank may from time
to time reasonably request.
 
3.7. Books and Records. The Borrower will maintain complete and accurate books,
records and accounts which will at all times accurately and fairly reflect all
of its transactions in accordance with generally accepted accounting principles
consistently applied. The Borrower will, at any reasonable time and from time to
time upon reasonable notice and during normal business hours (and without any
necessity for notice greater than 24 hours following the occurrence of an Event
of Default), permit the Bank, and any agents or representatives thereof, to

-14-

--------------------------------------------------------------------------------

examine and make copies of and take abstracts from the records and books of
account of, and visit the properties of the Borrower and to discuss its affairs,
finances and accounts with its officers, directors and/or independent
accountants, all of whom are hereby authorized and directed to cooperate with
the Bank in carrying out the intent of this §3.7. Each financial statement of
the Borrower hereafter delivered pursuant to this letter agreement will be
complete and accurate and will fairly present the financial condition of the
Borrower as at the date thereof and for the periods covered thereby.
 
3.8. Pledged Securities. The Borrower will maintain at all times cash or United
States treasury obligations, pledged to the Bank pursuant to the Pledge, with an
Aggregate Collateral Value (as defined in the Pledge) which is not less than the
then aggregate principal amount of the Term Loans.
 
IV. NEGATIVE COVENANTS
 
Without limitation of any other covenants and agreements contained herein or
elsewhere, the Borrower agrees that so long as the financing arrangements
contemplated hereby are in effect or all or any portion of any Term Loan or any
of the other Obligations shall be outstanding:
 
4.1. Merger. The Borrower will not, without the prior written consent of the
Bank, merge or consolidate with any Person, or sell, lease, transfer or
otherwise dispose of (whether in one or more transactions) any material portion
of its assets (including, without limitation, any material portion of its
Intellectual Property), other than (i) the sale of inventory in the ordinary
course; and (ii) licensing of any of its Intellectual Property in the ordinary
course of Borrower’s business to another Person on commercially reasonable
terms; provided, however, that the Borrower may merge or consolidate with any
corporation or other entity so long as (i) the Borrower is the surviving entity
or (ii) the surviving entity is a corporation, limited partnership or limited
liability company formed and existing under the laws of any state of the United
States and the surviving entity specifically assumes, by instruments
satisfactory to the Bank, the obligations of the Borrower hereunder and under
the other Loan Documents.
 
4.2. Change of Address, etc. The Borrower will not change its corporate name or
legal structure or its jurisdiction of incorporation, nor will the Borrower
change its chief executive offices or principal place of business from the
premises described in §2.1(j), without, in each instance, giving the Bank prompt
written notice of same and providing all such financing statements, certificates
and other documentation as the Bank may request in order to maintain the
perfection and priority of the security interests granted or intended to be
granted pursuant to the Pledge. The Borrower will not change its fiscal year or
materially change its methods of financial reporting unless, in each instance,
prior written notice of such change is given to the Bank and prior to such
change the Borrower enters into amendments to this letter agreement in form and
substance reasonably satisfactory to the Bank in order to preserve unimpaired
the rights of the Bank and the obligations of the Borrower hereunder.
 
4.3. Hazardous Waste. Except as provided below, the Borrower will not dispose of
or suffer or permit to exist any hazardous material or oil on any site or vessel
owned, occupied or

-15-

--------------------------------------------------------------------------------

operated by the Borrower, nor shall the Borrower store on any site or vessel
owned, occupied or operated by the Borrower, or transport or arrange the
transport of, any hazardous material or oil (the terms “hazardous material”,
“oil”, “site” and “vessel”, respectively, being used herein with the meanings
given those terms in Mass. Gen. Laws, Ch. 21E or any comparable terms in any
comparable statute in effect in any other relevant jurisdiction). The Borrower
shall provide the Bank with written notice of (i) the intended storage or
transport of any hazardous material or oil by the Borrower, (ii) any potential
or known release or threat of release of any hazardous material or oil at or
from any site or vessel owned, occupied or operated by the Borrower, and (iii)
any incurrence of any expense or loss by any government or governmental
authority in connection with the assessment, containment or removal of any
hazardous material or oil for which expense or loss the Borrower may be liable.
Notwithstanding the foregoing, the Borrower may use, store and transport, and
need not notify the Bank of the use, storage or transportation of, (x) oil in
reasonable quantities, as fuel for heating of its facilities or for vehicles or
machinery used in the ordinary course of its business and (y) hazardous
materials that are solvents, cleaning agents or other materials used in the
ordinary course of the business operations of the Borrower in reasonable
quantities, as long as in any case the Borrower has obtained and maintains in
effect any necessary governmental permits, licenses and approvals, complies with
all requirements of applicable federal, state and local law relating to such
use, storage or transportation, follows the protective and safety procedures
that a prudent businessperson conducting a business the same as or similar to
that of the Borrower would follow, and disposes of such materials (not consumed
in the ordinary course) only through licensed providers of hazardous waste
removal services.
 
4.4. No Margin Stock. No proceeds of any Term Loan shall be used directly or
indirectly to purchase or carry any margin stock as such term is defined in
Regulation U of the Board of Governors of the Federal Reserve System.
 
V. DEFAULT AND REMEDIES
 
5.1. Events of Default. The occurrence of any one of the following events shall
constitute an Event of Default hereunder:
 
(a) The Borrower shall fail to make any payment of principal of or interest on
the Term Note on or before the date when due; or
 
(b) Any representation or warranty of the Borrower contained herein shall at any
time prove to have been incorrect in any material respect when made or any
representation or warranty made by the Borrower in connection with any Term Loan
shall at any time prove to have been incorrect in any material respect when
made; or
 
(c) The Borrower shall default in the performance or observance of any agreement
or obligation under any of §§3.6 or §3.8 or any provision of Article IV; or
 
(d) The Borrower shall default in the performance of any other term, covenant or
agreement contained in this letter agreement and such default shall continue
unremedied for 30 days after written notice thereof shall have been given to the
Borrower; or

-16-

--------------------------------------------------------------------------------

 
(e) Any default on the part of the Borrower or any Subsidiary of the Borrower
shall exist, and shall remain unwaived or uncured beyond the expiration of any
applicable notice and/or grace period, under any other contract, agreement or
undertaking (including, without limitation, any Loan Document) now existing or
hereafter entered into with or for the benefit of the Bank (or any affiliate of
the Bank); or
 
(f) Any default shall exist and remain unwaived or uncured with respect to any
other Indebtedness of the Borrower for borrowed money or representing the
deferred purchase price of the property in excess of $100,000 in aggregate
principal amount or with respect to any instrument evidencing, guaranteeing,
securing or otherwise relating to any such Indebtedness, or any such
Indebtedness in excess of $100,000 in aggregate principal amount shall not have
been paid when due, whether by acceleration or otherwise, or shall have been
declared to be due and payable prior to its stated maturity, or any event or
circumstance shall occur which permits, or with the lapse of time or the giving
of notice or both would permit, the acceleration of the maturity of any such
Indebtedness by the holder of holders thereof; or
 
(g) The Borrower shall be dissolved, or the Borrower or any Subsidiary of the
Borrower shall become insolvent or bankrupt or shall cease paying its debts as
they mature or shall make an assignment for the benefit of creditors, or a
trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within 60 days following the institution thereof);
or
 
(h) The Borrower shall fail to meet its minimum funding requirements under ERISA
with respect to any employee benefit plan (or other class of benefit which the
PBGC has elected to insure) or any such plan shall be the subject of termination
proceedings (whether voluntary or involuntary) and there shall result from such
termination proceedings a liability of the Borrower to the PBGC which, in each
case, in the reasonable opinion of the Bank may have a material adverse effect
upon the financial condition of the Borrower; or
 
(i) The Pledge or any other Loan Document shall for any reason (other than due
to payment in full of all amounts secured or evidenced thereby or due to
discharge in writing by the Bank) not remain in full force and effect; or
 
(j) The security interests and liens of the Bank in and on any of the Collateral
covered or intended to be covered by the Pledge shall for any reason (other than
due to written release by the Bank) not be fully perfected liens and security
interests.
 
5.2. Rights and Remedies on Default. Upon the occurrence of any Event of
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank

-17-

--------------------------------------------------------------------------------

may exercise any one or more of the following rights and remedies (all of which
shall be cumulative):
 
(a) Declare the entire unpaid principal amount of the Term Note then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.
 
(b) Terminate the arrangements for Term Loans provided for by this letter
agreement.
 
(c) Exercise all rights and remedies hereunder, under the Pledge, under the Term
Note and under each and any other agreement with the Bank; and exercise all
other rights and remedies which the Bank may have under applicable law.
 
5.3. Set-off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral. As further security
for the Obligations, the Borrower also grants to the Bank a security interest
with respect to all its deposits and all securities or other property in the
possession of the Bank or any affiliate of the Bank from time to time, and, upon
the occurrence of any Event of Default, the Bank may exercise all rights and
remedies of a secured party under the Uniform Commercial Code. ANY AND ALL
RIGHTS TO REQUIRE THE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO
ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS PRIOR TO THE EXERCISE
BY THE BANK OF ITS RIGHT OF SET-OFF UNDER THIS SECTION ARE HEREBY KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.
 
VI. MISCELLANEOUS
 
6.1. Costs and Expenses. The Borrower agrees to pay, on demand, all reasonable
costs and expenses (including, without limitation, reasonable legal fees) of the
Bank in connection with the preparation, execution and delivery of this letter
agreement, the Pledge, the Term Note and all other instruments and documents to
be delivered in connection with any Term Loan and any amendments or
modifications of any of the foregoing, as well as the reasonable costs and
expenses incurred by the Bank in connection with the administration, default,
collection, waiver or amendment of any terms of the Loan Documents, or in
connection with the Bank’s exercise, preservation or enforcement of any of its
rights, remedies or options thereunder, including,

-18-

--------------------------------------------------------------------------------

without limitation, reasonable fees of outside legal counsel or the allocated
costs of in-house legal counsel, accounting, consulting, brokerage or other
similar professional fees or expenses, and any reasonable fees or expenses
associated with travel or other reasonable costs relating to any appraisals or
examinations conducted in connection with any Term Loan or any collateral
therefor, all whether or not legal action is instituted. In addition, the
Borrower shall be obligated to pay any and all stamp and other taxes payable or
determined to be payable in connection with the execution and delivery of this
letter agreement, the Pledge, the Term Note and all other instruments and
documents to be delivered in connection with any Obligation. Any fees, expenses
or other charges which the Bank is entitled to receive from the Borrower under
this Section shall bear interest from that date which is 30 days after the date
of any demand therefor until the date when paid at a rate per annum equal to the
highest rate applicable to any Term Loans (including any default rate).
 
6.2. Facility Fee. With respect to the Term Loans, the Borrower is paying to the
Bank, at the date of execution and delivery of this letter agreement, a
non-refundable facility fee in the amount of $30,000. The fee described in this
Section is in addition to any balances and fees required by the Bank or any of
its affiliates in connection with any other services now or hereafter made
available to the Borrower.
 
6.3. Other Agreements. The provisions of this letter agreement are not in
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank. No inconsistency in default provisions between this
letter agreement and any of the other Loan Documents or any such other agreement
will be deemed to create any additional grace period or otherwise derogate from
the express terms of each such default provision. No covenant, agreement or
obligation of the Borrower contained herein, nor any right or remedy of the Bank
contained herein, shall in any respect be limited by or be deemed in limitation
of any inconsistent or additional provisions contained in any of the other Loan
Documents or any such other agreement.
 
6.4. Addresses for Notices, etc. All notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:
 
If to the Borrower:
 
Essential Therapeutics, Inc.
1365 Main Street
Waltham, MA 02451
Attention: Paul J. Mellett, Chief Financial Officer

-19-

--------------------------------------------------------------------------------

 
If to the Bank:
 
Fleet National Bank
Technology & Communications Group
Mail Code: MA DE 10009G
100 Federal Street
Boston, MA 02110
Attention: Kimberly A. Martone, Managing Director
 
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid. If any
such notice, request, demand or other communication is hand-delivered, same
shall be effective upon receipted delivery.
 
6.5. Binding Effect; Assignment; Termination. This letter agreement shall be
binding upon the Borrower, its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective permitted successors
and assigns. The Borrower may not assign this letter agreement or any rights
hereunder without the express written consent of the Bank. The Bank may, in
accordance with applicable law, from time to time assign or grant participations
in this letter agreement, the Term Loans and/or the Term Note. Without
limitation of the foregoing generality,
 
(i) The Bank may at any time pledge all or any portion of its rights under the
Loan Documents (including any portion of the Term Note) to any of the 12 Federal
Reserve Banks organized under Section 4 of the Federal Reserve Act, 12 U.S.C.
Section 341. No such pledge or the enforcement thereof shall release the Bank
from its obligations under any of the Loan Documents.
 
(ii) The Bank shall have the unrestricted right at any time or from time to
time, and without the consent of or notice to the Borrower, to assign all or any
portion of its rights and obligations hereunder to one or more banks or other
financial institutions (each, an “Assignee”), and the Borrower agrees that it
shall execute, or cause to be executed, such documents, including, without
limitation, amendments to any documents, instruments and agreements executed in
connection herewith, as the Bank shall deem necessary to effect the foregoing.
In addition, at the request of the Bank and any such Assignee, the Borrower at
no cost to itself shall issue one or more new promissory notes, as applicable,
to any such Assignee and, if the Bank has retained any of its rights and
obligations hereunder following such assignment, to the Bank, which new
promissory notes shall be issued in replacement of, but not in discharge of, the
liability evidenced by the promissory note held by the Bank prior to such
assignment and shall reflect the amount of the respective commitments and loans
held by such Assignee and the Bank after giving effect to such assignment. Upon
the execution and delivery of appropriate

-20-

--------------------------------------------------------------------------------

assignment documentation, amendments and any other documentation required by the
Bank in connection with such assignment, and the payment by the Assignee of the
purchase price agreed to by the Bank and such Assignee, such Assignee shall be a
party to this letter agreement and shall have all of the rights and obligations
of the Bank hereunder (and under any and all other guaranties, documents,
instruments and agreements executed in connection herewith) to the extent that
such rights and obligations have been assigned by the Bank pursuant to the
assignment documentation between the Bank and such Assignee, and the Bank shall
be released from its obligations hereunder and thereunder to a corresponding
extent.
 
(iii) The Bank shall have the unrestricted right at any time and from time to
time, and without the consent of or notice to the Borrower, to grant to one or
more banks or other financial institutions (each, a “Participant”) participating
interests in the Bank’s obligation to lend hereunder and/or any or all of the
Term Loans held by the Bank hereunder. In the event of any such grant by the
Bank of a participating interest to a Participant, whether or not upon notice to
the Borrower, the Bank shall remain responsible for the performance of its
obligations hereunder and the Borrower shall continue to deal solely and
directly with the Bank in connection with the Bank’s rights and obligations
hereunder. The Bank may furnish any information concerning the Borrower in its
possession from time to time to prospective Assignees and Participants; provided
that the Bank shall require any such prospective Assignee or Participant to
agree in writing to maintain the confidentiality of such information to the same
extent as the Bank would be required to maintain such confidentiality.
 
The Borrower may terminate this letter agreement and the financing arrangements
made herein by giving written notice of such termination to the Bank; provided
that no such termination will release or waive any of the Bank’s rights or
remedies or any of the Borrower’s obligations under this letter agreement or any
of the other Loan Documents unless and until the Borrower has paid in full the
Term Loans and all interest thereon and all fees and charges payable in
connection therewith.
 
6.6. Consent to Jurisdiction. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the Term
Note. The Borrower irrevocably waives, to the fullest extent permitted by law,
any objection which it may now or hereafter have to the laying of venue of any
such suit, action or proceeding brought in such a court and any claim that any
such suit, action or proceeding has been brought in an inconvenient forum. The
Borrower agrees that final judgment in any such suit, action or proceeding
brought in such a court shall be enforced in any court of proper jurisdiction by
a suit upon such judgment, provided that service of process in such action, suit
or proceeding shall have been effected upon the Borrower in one of the manners
specified in the following paragraph of this §6.6 or as otherwise permitted by
law.
 
The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this §6.6
either (i) by mailing a copy thereof

-21-

--------------------------------------------------------------------------------

by registered or certified mail, postage prepaid, return receipt requested, to
it at its address set forth in §6.4 (as such address may be changed from time to
time pursuant to said §6.4) or (ii) by serving a copy thereof upon it at its
address set forth in §6.4 (as such address may be changed from time to time
pursuant to said §6.4).
 
6.7. Severability. In the event that any provision of this letter agreement or
the application thereof to any Person, property or circumstances shall be held
to any extent to be invalid or unenforceable, the remainder of this letter
agreement, and the application of such provision to Persons, properties or
circumstances other than those as to which it has been held invalid and
unenforceable, shall not be affected thereby, and each provision of this letter
agreement shall be valid and enforced to the fullest extent permitted by law.
 
6.8. Governing Law. This letter agreement and the Term Note shall be governed
by, and construed and enforced in accordance with, the laws of The Commonwealth
of Massachusetts, without giving effect to conflict of laws principles.
 
6.9. Replacement Note. Upon receipt of an affidavit of an officer of the Bank as
to the loss, theft, destruction or mutilation of the Term Note or of any other
Loan Document which is not of public record and, in the case of any such
mutilation, upon surrender and cancellation of the Term Note or other Loan
Document, the Borrower will issue, in lieu thereof, a replacement Term Note or
other Loan Document in the same principal amount (as to the Term Note) and in
any event of like tenor.
 
6.10. Usury. All agreements between the Borrower and the Bank are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the Term Note or otherwise, shall the
amount paid or agreed to be paid to the Bank for the use or the forbearance of
the Indebtedness represented by the Term Note exceed the maximum permissible
under applicable law. As used herein, the term “applicable law” shall mean the
law in effect as of the date hereof; provided, however, that in the event there
is a change in the law which results in a higher permissible rate of interest,
then this letter agreement and the Term Note shall be governed by such new law
as of its effective date. In this regard, it is expressly agreed that it is the
intent of the Borrower and the Bank, in the execution, delivery and acceptance
of the Term Note, to contract in strict compliance with the laws of The
Commonwealth of Massachusetts. If, under any circumstances whatsoever,
performance or fulfillment of any provision of the Term Note or any of the other
Loan Documents at the time such provision is to be performed or fulfilled shall
involve exceeding the limit of validity prescribed by applicable law, then the
obligation so to be performed or fulfilled shall be reduced automatically to the
limits of such validity, and if under any circumstances whatsoever the Bank
should ever receive as interest an amount which would exceed the highest lawful
rate, such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced by the Term Note and not to the
payment of interest. The provisions of this §6.10 shall control every other
provision of this letter agreement and of the Term Note.
 
6.11. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE

-22-

--------------------------------------------------------------------------------

RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS LETTER AGREEMENT, THE TERM NOTE OR ANY OTHER
LOAN DOCUMENTS OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE BANK RELATING TO THE ADMINISTRATION
OF THE TERM LOANS OR ENFORCEMENT OF THE LOAN DOCUMENTS, AND AGREE THAT NEITHER
PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A
JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. EXCEPT AS PROHIBITED BY LAW, THE
BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY
DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWER CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE BANK HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT THE BANK WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THE FOREGOING WAIVER. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR
THE BANK TO ENTER INTO THIS AGREEMENT AND TO MAKE TERM LOANS AS CONTEMPLATED
HEREIN.
 
6.12. Integration; Amendments. This Agreement, the Term Note and the other Loan
Documents are intended by the parties as the final, complete and exclusive
statement of the transactions evidenced by the Loan Documents. All prior or
contemporaneous promises, agreements and understandings, whether oral or
written, are deemed to be superseded by this Agreement and the other Loan
Documents. This Agreement may not be amended or modified except by a written
instrument setting forth such amendment or modification executed by the Borrower
and the Bank.
 
VII. DEFINED TERMS
 
7.1. Definitions. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
 
“Bank Certificate” – A certificate signed by an officer of the Bank setting
forth any additional amount required to be paid by the Borrower to the Bank
pursuant to §1.4, §1.7 or §1.8 of this letter agreement, which certificate shall
be submitted by the Bank to the Borrower in connection with each demand made at
any time by the Bank upon the Borrower with respect to any such additional
amount, and each such certificate shall, save for manifest error, constitute
presumptive evidence of the additional amount required to be paid by the
Borrower to the Bank upon each demand. A claim by the Bank for all or any part
of any additional amount required to be paid by the Borrower may be made before
and/or after the end of the period to which such claim relates or during which
such claim has arisen and before and/or after any payment hereunder to which
such claim relates. Each Bank Certificate shall set forth in reasonable detail
the basis for and the calculation of the claim to which it relates.
 
“Business Day” – Any day which is not a Saturday, nor a Sunday nor another day
on which banks in Boston, Massachusetts are authorized or directed to close;
provided however that

-23-

--------------------------------------------------------------------------------

if the applicable provision relates to a LIBOR Loan, then the term “Business
Day” shall not include any day on which dealings are not carried on in the
London interbank market or on which banks are not open for business in London.
 
“Collateral” – All property now or hereafter owned by the Borrower or in which
the Borrower now or hereafter has any interest which is now or hereafter
described as “Collateral” in the Pledge.
 
“Default” – Any event or circumstance which, with the passage of time or the
giving of notice or both, could become an Event of Default.
 
“ERISA” – The Employee Retirement Income Security Act of 1974, as amended.
 
“Eurocurrency Liabilities” – Has the meaning assigned to that term in Regulation
D of the Board of Governors of the Federal Reserve System (or any successor), as
in effect from time to time, or in any successor regulation relating to the
liabilities described in said Regulation D.
 
“Event of Default” – As defined in §5.1.
 
“Exchange Act” – The Securities Exchange Act of 1934, as amended, or any
successor statute.
 
“Floating Rate” – As defined in §1.4.
 
“Floating Rate Loan” – All or any portion of any Term Loan which bears interest
at a rate calculated with reference to the Prime Rate.
 
“Impositions” – All present and future taxes, levies, duties, impositions,
deductions, charges and withholdings applicable to the Bank with respect to any
LIBOR Loan, excluding, however, any taxes imposed directly on the Bank’s income
and any franchise taxes imposed on it by the jurisdiction under the laws of
which the Bank is organized or any political subdivision thereof.
 
“Indebtedness” – All obligations of a Person, whether current or long–term,
senior or subordinated, which in accordance with generally accepted accounting
principles would be included as liabilities upon such Person’s balance sheet at
the date as of which Indebtedness, is to be determined, and shall also include
guaranties, endorsements (other than for collection in the ordinary course of
business) or other arrangements whereby responsibility is assumed for the
obligations of others, whether by agreement to purchase or otherwise acquire the
obligations of others, including any agreement, contingent or otherwise, to
furnish funds through the purchase of goods, supplies or services for the
purpose of payment of the obligations of others.
 
“Intellectual Property” – As defined in §2.1(k).

-24-

--------------------------------------------------------------------------------

 
“Interest Payment Date” – As to each LIBOR Loan, the last day of the Interest
Period applicable to such LIBOR Loan.
 
“Interest Period” – As to each LIBOR Loan, the period commencing with the date
of the making of such LIBOR Loan (or the date on which a Floating Rate Loan is
converted into such LIBOR Loan or the date on which a prior LIBOR Loan is
continued as such LIBOR Loan) and ending one month, two months or three months
thereafter (as the Borrower may select in accordance with §1.4); provided that
(A) any such Interest Period which would otherwise end on a day which is not a
Business Day shall be extended to the next succeeding Business Day unless such
Business Day occurs in a new calendar month, in which case such Interest Period
shall end on the immediately preceding Business Day, (B) any such Interest
Period which begins on a day for which there is no numerically corresponding day
in the calendar month during which such Interest Period is to end shall end on
the last Business Day of such calendar month, and (C) no Interest Period may be
selected as to any principal amount of any Term Loan if such Interest Period
would end after the regularly–scheduled due date of such principal amount.
 
“LIBOR” – With respect to each Interest Period for a LIBOR Loan, that rate per
annum (rounded upward, if necessary, to the nearest one hundred-thousandth of a
percentage point) which represents the offered rate for deposits in U.S.
Dollars, for a period of time comparable to such Interest Period, which appears
on the Telerate page 3750 as of 11:00 a.m. (London time) on that day that is two
(2) London Banking Days preceding the first day of such Interest Period;
provided, however, that if the rate described above does not appear on the
Telerate System on any applicable interest determination date, LIBOR for such
Interest Period shall be the rate (rounded upwards as described above, if
necessary) determined on the basis of the offered rates for deposits in U.S.
Dollars for a period of time comparable to such Interest Period which are
offered by four major banks in the London interbank market at approximately
11:00 a.m., London time, on that day that is two (2) London Banking Days
preceding the first day of such Interest Period, as selected by the Bank. The
principal London office of each of four major London banks will be requested to
provide a quotation of its U.S. Dollar deposit offered rate. If at least two
such quotations are provided, the rate for that date will be the arithmetic mean
of the quotations. If fewer than two quotations are provided as requested, the
rate for that date will be determined on the basis of the rates quoted for loans
in U.S. Dollars to leading European banks for a period of time comparable to
such Interest Period offered by major banks in New York City at approximately
11:00 a.m., New York City time, on that day that is two London Banking Days
preceding the first day of such Interest Period. In the event that the Bank is
unable to obtain any such quotation as provided above, it will be deemed that
LIBOR for the proposed Interest Period cannot be determined. The Bank shall give
prompt notice to the Borrower of LIBOR as determined for each LIBOR Loan and
such notice shall be deemed conclusively correct, absent manifest error. “London
Banking Day” shall mean any date on which commercial banks are open for business
in London.
 
“LIBOR Interest Rate” – For any Interest Period applicable to a LIBOR Loan, an
interest rate per annum, expressed as a percentage, determined by the Bank
pursuant to the following formula:

-25-

--------------------------------------------------------------------------------

 
LIR =     LIBOR        + 1.0
    [1.00 – RR]
 
Where LIR
  
=
  
LIBOR Interest Rate
LIBOR
  
=
  
See definition of LIBOR
RR
  
=
  
Reserve Rate

 
The LIBOR Interest Rate will be adjusted during any Interest Period to reflect
any change in the Reserve Rate during such Interest Period.
 
“LIBOR Loan” – All or any portion of a Term Loan which bears interest at a
particular LIBOR Interest Rate.
 
“LIBOR Loan Notice” – As defined in §1.4.
 
“Loan Documents” – Each of this letter agreement, the Term Note, the Pledge and
each other instrument, document or agreement evidencing, securing, guaranteeing
or relating in any way to any of the Term Loans, all whether now existing or
hereafter arising or entered into.
 
“London” – The City of London in England.
 
“Obligations” – All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity.
 
“PBGC” – The Pension Benefit Guaranty Corporation or any successor thereto.
 
“Person” – An individual, corporation, partnership, limited partnership, limited
liability company, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
 
“Pledge” – As defined in §1.1.
 
“Prime Rate” – That variable rate of interest per annum designated by the Bank,
from time to time, as being its prime rate, it being understood that such rate
is merely a reference rate and does not necessarily represent the lowest or best
rate being charged to any customer.
 
“Qualifying Equipment” – Laboratory equipment and other capital equipment
purchased by the Borrower within the 90 days preceding the date of the Term Loan
relating to same for use in the Borrower’s business and meeting all of the
following criteria: (i) such equipment consists of one or more of the items
shown on the Equipment and Leasehold Improvements List heretofore delivered by
the Borrower to the Bank or has otherwise been approved by the Bank for use in
supporting a Term Loan, (ii) each item of such equipment has been delivered to
and installed at the Borrower’s premises in Waltham, MA and has become fully
operational, and

-26-

--------------------------------------------------------------------------------

(iii) the Borrower has paid in full for each item of such equipment and holds
title to same, free of all interests and claims of any other Person.
 
“Qualifying Leasehold Improvements” – Leasehold improvements affixed to,
installed in and/or made to the Borrower’s premises at 78 Fourth Avenue,
Waltham, MA within the 90-day period prior to the date of the advance of the
relevant Term Loan, all of which leasehold improvements must meet all of the
following criteria: (i) such leasehold improvements are shown on the Equipment
and Leasehold Improvements List heretofore delivered by the Borrower to the Bank
or otherwise have been approved by the Bank for use in supporting a Term Loan,
and (ii) the Borrower has paid in full for such leasehold improvements and holds
title to same, free of all interests and claims of any other Person. The Bank
acknowledges that such leasehold improvements are to be affixed to the
Borrower’s premises and may become so built into such premises that they become
part of the realty, with the result that the owner of the premises would have
rights thereto upon the termination of the Borrower’s lease.
 
“Reserve Rate” – The aggregate rate, expressed as a decimal, at which the Bank
would be required to maintain reserves under Regulation D of the Board of
Governors of the Federal Reserve System (or any successor or similar regulation
relating to such reserve requirements) against Eurocurrency Liabilities, as well
as any other reserve required of the Bank with respect to the LIBOR Loans. The
LIBOR Interest Rate shall be adjusted automatically on and as of the effective
date of any change in the Reserve Rate.
 
“SEC” – The Securities and Exchange Commission or any successor agency.
 
“Subsidiary” – Any corporation or other entity of which the Borrower and/or any
of its Subsidiaries, directly or indirectly, owns, or has the right to control
or direct the voting of, fifty (50%) percent or more of the outstanding capital
stock or other ownership interest having general voting power (under ordinary
circumstances).
 
Any defined term used in the plural preceded by the definite article shall be
taken to encompass all members of the relevant class. Any defined term used in
the singular preceded by “any” shall be taken to indicate any number of the
members of the relevant class.
 

-27-

--------------------------------------------------------------------------------

 
This letter agreement is executed, as an instrument under seal, as of the day
and year first above written.
 
 
Very truly yours,
 
ESSENTIAL THERAPEUTICS, INC.
By:
 
/s/ Mark Skaletsky

--------------------------------------------------------------------------------

   
Name: Mark Skaletsky
   
Title: Chief Executive Officer
     

 
 
 
Accepted and agreed:
 
FLEET NATIONAL BANK
 
By:
 
/s/ David E. Meagher         

--------------------------------------------------------------------------------

   
Name: David E. Meagher
   
Title: Assistant Vice President

-28-