Ex-10.24 Loan and Security Agreement dated as of May 15, 2006
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EX-10.24 2 b60583s1exv10w24.txt EX-10.24 LOAN AND SECURITY AGREEMENT DATED AS OF MAY 15, 2006 Exhibit 10.24 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT") dated as of May 15, 2006 (the "EFFECTIVE DATE") between SILICON VALLEY BANK, a California corporation and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 ("BANK"), and NXSTAGE MEDICAL, INC., a Delaware corporation ("BORROWER"), provides the terms on which Bank shall lend to Borrower and Borrower shall repay Bank. The parties agree as follows: 1 ACCOUNTING AND OTHER TERMS Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein. 2 LOAN AND TERMS OF PAYMENT 2.1 PROMISE TO PAY. Borrower hereby unconditionally promises to pay Bank the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement. 2.1.1 TERM ADVANCES. (a) Availability. Subject to the terms and conditions of this Agreement, during the Draw Period, Bank shall make advances (each, a "TERM ADVANCE" and, collectively, "TERM ADVANCES") not exceeding the Term Line. Term Advances may only be used to finance Eligible Products, and no Term Advance may exceed 50% of the total direct purchase price of the Eligible Products being financed, or, with respect to Eligible Products manufactured by Borrower, the total direct product cost to manufacture. Notwithstanding the foregoing, the initial Term Advance, which shall be requested by Borrower on the Effective Date, shall be equal to an amount requested by Borrower, which shall not exceed the aggregate of up to (i) any amount owed by Borrower or paid off by Borrower in connection with the Lighthouse Agreements (inclusive of any prepayment penalties, but in no event more than $3,460,000), and (b) 50% of the aggregate amount of the Eligible Products deployed by Borrower on or after January 1, 2006 but prior to the Effective Date. After repayment, no Term Advance may be reborrowed. (b) Repayment. Each Term Advance is payable in: (i) thirty-six (36) consecutive equal monthly installments of principal, calculated by the Bank, based upon (A) the amount of the Term Advance, and (B) an amortization schedule equal to thirty-six (36) months, plus (ii) interest on the outstanding principal amount of the Term Advance at the rate set forth in Section 2.2(a), beginning on the first Business Day of the calendar quarter following the Funding Date of such Term Advance and continuing thereafter on the first Business Day of each successive calendar month. All unpaid principal and accrued interest is due and payable in full on the Maturity Date. Payments received after 12:00 noon Eastern time are considered received at the opening of business on the next Business Day. A Term Advance may only be prepaid in accordance with Sections 2.1.1(c) and 2.1.1(d). (c) Mandatory Prepayment Upon an Acceleration. If the Term Advances are accelerated following the occurrence of an Event of Default, Borrower shall immediately pay to Bank an amount equal to the sum of: (i) all outstanding principal plus accrued interest, plus (ii) all other sums that shall have become due and payable, including interest at the Default Rate with respect to any past due amounts. (d) Permitted Prepayment of Loans. Borrower shall have the option to prepay at any time and from time to time, without premium or penalty, any portion of the Term Advances advanced by Bank under this Agreement, provided Borrower (i) provides written notice to Bank of its election to prepay such amount at least seven (7) days prior to such prepayment, and (ii) pays, on the date of such prepayment, all sums that shall have become due and payable. 2.2 PAYMENT OF INTEREST ON THE CREDIT EXTENSIONS. (a) Interest Rate. Subject to Section 2.2(b), the principal amount outstanding for each Term Advance shall accrue interest at a floating per annum rate equal to one-half of one percentage point (0.50%) above the Prime Rate, which interest shall be payable monthly in arrears. (b) Default Rate. Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is five percentage points above the rate effective immediately before the Event of Default (the "DEFAULT RATE"). Payment or acceptance of the increased interest rate provided in this Section 2.2(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank. (c) Adjustment to Interest Rate. Changes to the interest rate of any Credit Extension based on changes to the Prime Rate shall be effective on the effective date of any change to the Prime Rate and to the extent of any such change. (d) 360-Day Year. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed. (e) Debit of Accounts. Bank may debit any of Borrower's deposit accounts with Bank, including the Designated Deposit Account, for (i) principal and interest payments when due in accordance with this Agreement without notice or (ii) any other amounts Borrower owes Bank when due in accordance with this Agreement after Bank provides notice of such amounts. These debits shall not constitute a set-off. (f) Payments. Unless otherwise provided, interest is payable monthly on the first calendar day of each month. Payments of principal and/or interest received after 12:00 noon Eastern time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest, as applicable, shall continue to accrue. 2.3 FEES. Borrower shall pay to Bank: (a) Commitment Fee. A fully earned, non-refundable commitment fee of One Hundred Thousand Dollars ($100,000.00), on the Effective Date; (b) Unused Term Line Facility Fee. A fee (the "UNUSED TERM LINE FACILITY FEE"), payable quarterly, in arrears, on a calendar year basis, in an amount equal to (i) for the calendar year of 2006, 0.50% per annum of the average unused portion of the Term Line (for purposes of this provision, the Term Line shall mean the $10,000,000 potentially available to Borrower on and prior to December 31, 2006), as determined by Bank, (ii) also for the calendar year of 2006, 0.10% per annum of the average unused portion of the Term Line (for purposes of this provision, the Term Line shall mean the $10,000,000 only potentially available to Borrower on and after January 1, 2007), as determined by Bank, and (iii) for the calendar year of 2007, 0.50% per annum of the average unused portion of the Term Line (for purposes of this provision, the Term Line shall mean the $20,000,000 potentially available to Borrower), as determined by Bank. Borrower shall not be entitled to any credit, rebate or repayment of any Unused Term Line Facility Fee previously earned by Bank pursuant to this Section notwithstanding any termination of the Agreement or the suspension or termination in accordance with this Agreement of Bank's obligation to make loans and advances hereunder; and (c) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and expenses, plus expenses, for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due. 3 CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. Bank's obligation to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, such documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate, including, without limitation: -2- (a) Duly executed original signatures to the Loan Documents to which it is a party; (b) Duly executed original signatures to the Control Agreements with respect to each account maintained at a financial institution other than Bank; (c) Borrower shall have delivered its Operating Documents and a good standing certificate of Borrower certified by the Secretary of State of the State of Delaware as of a date no earlier than thirty (30) days prior to the Effective Date; (d) Duly executed original signatures to the completed Borrowing Resolutions for Borrower; (e) Borrower shall have delivered a payoff letter with respect to the Lighthouse Agreements, which payoff letter includes the outstanding amount owed to the lenders under the Lighthouse Agreements (along with a per diem rate, if applicable), is addressed to Bank and Borrower, and authorizes Bank and Borrower to terminate all UCC financing statements and all other liens in favor of the lenders under the Lighthouse Agreements once such lenders are repaid in full; (f) Bank shall have received certified copies, dated as of a recent date, of financing statement searches, as Bank shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released; (g) Intentionally omitted; (h) Borrower shall have delivered a legal opinion of Borrower's counsel dated as of the Effective Date together with the duly executed original signatures thereto; (i) Borrower shall have delivered the insurance policies and/or endorsements required pursuant to Section 6.5 hereof; and (j) Borrower shall have paid the fees and Bank Expenses then due as specified in Section 2.3 hereof. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following: (a) except as otherwise provided in Section 3.4, timely receipt of an executed Payment/Advance Form; (b) the representations and warranties in Section 5 shall be true in all material respects on the date of the Payment/Advance Form and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Default or Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrower's representation and warranty on that date that the representations and warranties in Section 5 remain true in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and (c) there has not been any material impairment in the business, operations, or condition (financial or otherwise) or the prospect of repayment of the Obligations, or there has not been any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Bank. -3- 3.3 COVENANT TO DELIVER. Borrower agrees to deliver to Bank each item required to be delivered to Bank under this Agreement as a condition to any Credit Extension. Borrower expressly agrees that the extension of a Credit Extension prior to the receipt by Bank of any such item shall not constitute a waiver by Bank of Borrower's obligation to deliver such item, and any such extension in the absence of a required item shall be in Bank's sole discretion. 3.4 PROCEDURES FOR BORROWING. Subject to the prior satisfaction of all other applicable conditions to the making of a Term Advance set forth in this Agreement, to obtain a Term Advance, Borrower must notify Bank (which notice shall be irrevocable) by electronic mail or facsimile no later than 12:00 noon Eastern time one (1) Business Day before the proposed Funding Date. The notice shall be a Payment/Advance Form, must be signed by a Responsible Officer or designee, and shall include confirmation acceptable to Bank of (i) total direct purchase price of any Eligible Products being financed, or, with respect to Eligible Products manufactured by Borrower, the total direct product cost to manufacture and (ii) that such costs constitute Eligible Products. 4 CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that may have superior priority to Bank's Lien under this Agreement). If Borrower shall acquire a commercial tort claim having a reasonably expected value in excess of One Hundred Thousand Dollars ($100,000.00) in the aggregate, Borrower shall promptly notify Bank in a writing signed by Borrower of the general details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank. If this Agreement is terminated, Bank's Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations and at such time as Bank's obligation to make Credit Extensions has terminated, Bank shall, at Borrower's sole cost and expense, release its Liens in the Collateral and all rights therein shall revert to Borrower. 4.2 AUTHORIZATION TO FILE FINANCING STATEMENTS. Borrower hereby authorizes Bank to file financing statements, without notice to Borrower, with all appropriate jurisdictions to perfect or protect Bank's interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code. 5 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each of its Subsidiaries are duly existing and in good standing, as Registered Organizations in their respective jurisdictions of formation and are qualified and licensed to do business and are in good standing in any jurisdiction in which the conduct of their business or their ownership of property requires that they be qualified except where the failure to do so could not reasonably be expected to have a material adverse effect on Borrower's business. In connection with this Agreement, Borrower has delivered to Bank a completed certificate signed by Borrower (the "Perfection Certificate"). Borrower represents and warrants to Bank that, except as may be set forth in any notice provided by Borrower after the Effective Date (but only with respect to (a) through (d) below), (a) Borrower's exact legal name is that indicated on the Perfection Certificate and on the signature page hereof; (b) Borrower is an organization of the type and is organized in the jurisdiction set forth in the Perfection Certificate; (c) the Perfection Certificate accurately sets forth Borrower's organizational identification number or accurately states that Borrower has none; (d) the Perfection Certificate accurately sets forth Borrower's place of business, or, if more than one, its chief executive office as well as Borrower's mailing address (if different than its chief executive office); (e) except as in accordance with Section 7.2, Borrower (and each of its predecessors) has not, in the past five (5) years, changed its jurisdiction of formation, -4- organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificate pertaining to Borrower and each of its Subsidiaries is accurate and complete in all material respects. If Borrower is not now a Registered Organization but later becomes one, Borrower shall promptly notify Bank of such occurrence and provide Bank with Borrower's organizational identification number. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's organizational documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound in which the default could reasonably be expected to have a material adverse effect on Borrower's business. 5.2 COLLATERAL. Borrower has good title to, has rights in, and the power to transfer each item of the Collateral upon which it purports to grant a Lien hereunder, free and clear of any and all Liens except Permitted Liens. Borrower has no deposit accounts other than the deposit accounts with Bank, the deposit accounts, if any, described in the Perfection Certificate delivered to Bank in connection herewith, or of which Borrower has given Bank notice and taken such actions as are necessary to give Bank a perfected security interest therein. The Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided in the Perfection Certificate or of which Borrower has given Bank notice and is in compliance with this Section 5.2. Notwithstanding the foregoing, Borrower shall deliver to Bank fully-executed bailee's waivers from Kuehne & Nagel, Inc., KMC and Medisystems, each within thirty (30) calendar days of the Effective Date. None of the components of the Collateral shall be maintained at locations other than as provided in the Perfection Certificate or as Borrower has given Bank notice pursuant to Section 7.2. In the event that Borrower, after the date hereof, intends to store or otherwise deliver any portion of the Collateral to a bailee (provided that, for clarity, this shall not apply to any of the Eligible Products which are in the field with Borrower's customers/end users), then Borrower will first receive the written consent of Bank and such bailee must execute and deliver a bailee agreement in form and substance satisfactory to Bank in its sole discretion. All Inventory is in all material respects of good and marketable quality, free from material defects. Borrower is the sole owner of its intellectual property, except for non-exclusive licenses granted to its customers in the ordinary course of business and any other Transfers permitted hereunder. Each patent which is required or necessary for the operation of Borrower's business is valid and enforceable, and no part of such intellectual property has been judged invalid or unenforceable, in whole or in part, and to the best of Borrower's knowledge, no claim has been made that any part of the intellectual property violates the rights of any third party except to the extent such claim could not reasonably be expected to have a material adverse effect on Borrower's business. Except as noted on the Perfection Certificate, Borrower is not a party to, nor is bound by, any material license or other agreement with respect to which Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a security interest in Borrower's interest in such license or agreement or any other property. Borrower shall provide written notice to Bank within ten (10) days of entering or becoming bound by any such license or agreement which is reasonably likely to have a material impact on Borrower's business or financial condition (other than over-the-counter software that is commercially available to the public). Borrower shall take such steps as Bank requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for all such licenses or contract rights to be deemed "Collateral" and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement (such consent or authorization may include a licensor's agreement to a contingent assignment of the license to Bank if Bank determines that is necessary in its good faith judgment), whether now existing or entered into in the future. 5.3 LITIGATION. There are no actions or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against Borrower or any of its Subsidiaries involving more than Two Hundred Fifty Thousand Dollars ($250,000.00). 5.4 NO MATERIAL DETERIORATION IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower and any of its Subsidiaries delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations as of the date thereof. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. -5- 5.5 SOLVENCY. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 5.6 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to have a material adverse effect on its business. None of Borrower's or any of its Subsidiaries' properties or assets has been used by Borrower or any Subsidiary in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each of its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted. 5.7 SUBSIDIARIES; INVESTMENTS. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments. 5.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely filed all required tax returns and reports, and Borrower and its Subsidiaries have timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower, unless the same are being contested in good faith. Borrower may defer payment of any contested taxes, provided that Borrower (a) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies Bank in writing of the commencement of, and any material development in, the proceedings with respect to amounts in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate, (c) posts bonds or takes any other steps required to prevent the governmental authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a "Permitted Lien". Borrower is unaware of any claims or adjustments proposed for any of Borrower's prior tax years which could reasonably be expected to result in additional taxes in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate becoming due and payable by Borrower. Borrower has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. 5.9 USE OF PROCEEDS. Borrower shall use the proceeds of the Credit Extensions solely to reimburse Borrower for the direct purchase price of Eligible Products and to repay obligations under the Lighthouse Agreements. 5.10 EIR MEDICAL, INC. EIR Medical, Inc. Borrower's wholly-owned Subsidiary, does not and will not have assets with an aggregate value of greater than Twenty Thousand Dollars ($20,000.00), other than cash and securities in accounts maintained at Bank or SVB Securities. 5.11 FULL DISCLOSURE. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank, as of the date such representations, warranties, or other statements were made, taken together with all such written certificates and written statements given to Bank, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results). 6 AFFIRMATIVE COVENANTS Borrower shall do all of the following: 6.1 GOVERNMENT COMPLIANCE. Maintain its and all its Subsidiaries' legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower's business or operations. Borrower shall comply, and have each Subsidiary comply, with all laws, ordinances and regulations to -6- which it is subject, the noncompliance with which could reasonably be expected to have a material adverse effect on Borrower's business. 6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Deliver to Bank: (i) as soon as available, but no later than forty-five (45) days after the last day of each quarter (other than the last quarter of each fiscal year), a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank; (ii) as soon as available, but no later than one hundred twenty (120) days after the last day of Borrower's fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm acceptable to Bank in its reasonable discretion; (iii) within five (5) days of delivery, copies of all statements, reports and notices made available to Borrower's security holders or to any holders of Subordinated Debt; (iv) in the event that Borrower becomes subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, within five (5) days of filing, all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission or a link thereto on Borrower's or another website on the internet (provided, for clarity, to the extent that any such filing is available on the publicly accessible website for the Securities and Exchange Commission, nothing additional needs to be provided); (v) a prompt report of any legal actions pending or threatened against Borrower or any of its Subsidiaries that could reasonably be expected to result in damages or costs to Borrower or any of its Subsidiaries of Fifty Thousand Dollars ($50,000.00) or more; (vi) Board projections, annually and as updated, promptly following Board approval, but in any event no later than January 31 of the subject year; and (vii) budgets, sales projections, operating plans and other financial information reasonably requested by Bank. (b) Within fifteen (15) days after the last day of each month, deliver to Bank an aged listing of accounts receivable (by invoice date). (c) Within fifteen (15) days after the last day of each month, deliver to Bank a duly completed Compliance Certificate signed by a Responsible Officer setting forth calculations showing compliance with the financial covenants set forth in this Agreement. (d) Allow Bank to audit Borrower's Collateral at Borrower's expense; provided that such audits shall be conducted no more often than once every twelve (12) months unless an Event of Default has occurred and is continuing. 6.3 INVENTORY; RETURNS. Keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its Account Debtors shall follow Borrower's customary practices as they exist at the Effective Date. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims that involve more than Two Hundred Fifty Thousand Dollars ($250,000.00). 6.4 TAXES; PENSIONS. Make, and cause each of its Subsidiaries to make, timely payment of all foreign, federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting pursuant to the terms of Section 5.8 hereof) and shall deliver to Bank, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms. 6.5 INSURANCE. Keep its business and the Collateral insured for risks and in amounts standard for companies in Borrower's industry and location and as Bank may reasonably request. All property policies shall have a loss payable endorsement showing Bank as the sole loss payee and waive subrogation against Bank, and all liability policies shall show, or have endorsements showing, Bank as an additional insured. All policies (or the loss payable and additional insured endorsements) shall provide that the insurer must give Bank at least twenty (20) days notice before canceling, amending, or declining to renew its policy. At Bank's request, Borrower shall deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy shall, at Bank's option, be payable to Bank on account of the Obligations. Notwithstanding the foregoing, (a) so long as no Event of Default has occurred and is continuing, Borrower shall have the option of applying the proceeds of any casualty policy up to One Million Dollars ($1,000,000.00), in the aggregate, toward the replacement or repair of destroyed or damaged property; provided that any such replaced or repaired property (i) shall be of equal or like value as the replaced or repaired Collateral and (ii) shall be deemed Collateral in which Bank has been granted a first priority security interest, and (b) after the occurrence and during the continuance of an Event of Default, all -7- proceeds payable under such casualty policy shall, at the option of Bank, be payable to Bank on account of the Obligations. If Borrower fails to obtain insurance as required under this Section 6.5 or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in this Section 6.5, and take any action under the policies Bank deems prudent. 6.6 OPERATING ACCOUNTS. (a) As of the date that is seven (7) calendar days after the Effective Date, and thereafter, maintain its primary operating accounts with Bank. In addition, as of the date that is seven (7) calendar days after the Effective Date, and thereafter, Borrower's domestic Subsidiaries shall maintain their domestic operating accounts with Bank. In addition, as a condition to the Bank making any Term Advance after the initial Term Advance to refinance the obligations under the Lighthouse Agreements, Borrower shall maintain unrestricted cash or securities at Bank or SVB Securities, in an amount equal or greater than Three Million Four Hundred Sixty Thousand Dollars ($3,460,000.00) in the aggregate, and shall continue to maintain such minimum amount as long as such Term Advance or Term Advances are outstanding, provided that, on the earlier of September 30, 2006 and the Capitalization Event, such minimum amount (inclusive of the $3,460,000.00 referenced above) shall be an amount equal to or greater than the greater of (i) Ten Million Dollars ($10,000,000.00), and (ii) the aggregate amount of outstanding Obligations. Borrower may maintain non-primary operating accounts and securities accounts with other financial institutions, provided that Borrower complies with the foregoing, and subject to Section 6.6(b) below. (b) Provide Bank five (5) days prior written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or its Affiliates. In addition, for each Collateral Account that Borrower at any time maintains, Borrower shall cause the applicable bank or financial institution (other than Bank) at or with which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Bank's Lien in such Collateral Account in accordance with the terms hereunder. The provisions of the previous sentence shall not apply to (i) deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrower's employees and identified to Bank by Borrower as such, or (ii) accounts with Comerica (provided that the exclusion in (ii) shall only apply until the date that is seven (7) calendar days after the Effective Date). 6.7 FINANCIAL COVENANTS. Borrower shall maintain at all times, to be tested as of the last day of each quarter, unless otherwise noted: (a) Liquidity Coverage. To be tested as of the last day of each month, a ratio of (a) unrestricted cash plus an amount equal to eighty percent (80.0%) of Borrower's Eligible Accounts to (b) the outstanding Obligations plus an amount equal to two (2) times the aggregate of Borrower's quarterly net loss for the most recent quarter then ended and Borrower's capital expenditures which are not financed by Bank, of greater than 1.00:1.00. (b) Maximum Net Losses; Minimum Net Profit. Borrower shall not negatively vary from the net loss/net profit requirements set forth below for the six-month period ending with the last day of each calendar quarter, beginning with the calendar quarter ending March 31, 2006, through the Maturity Date (each a "Testing Period"). (i) Borrower shall not suffer any net loss in excess of: (A) $18,388,200 for the Testing Period ending March 31, 2006, (B) $22,356,000 for the Testing Period ending June 30, 2006, (C) $22,795,200 for the Testing Period ending September 30, 2006, (D) $21,088,800 for the Testing Period ending December 31, 2006, and (E) for the Testing Period ending March 31, 2007 and for the Testing Period ending on the last day of each calendar quarter thereafter, $22,039,200. (ii) In addition, without limiting the provisions in (i) above, if the Board approved plan (including any updates or revisions thereto) for any Testing Period (including the specific dates referenced above): (A) projects a net profit, Borrower's net profit for such period shall not be less than eighty percent (80.0%) of the Board approved plan for net profit for such Testing Period, and (B) projects a net loss, Borrower's net loss for such Testing Period shall not be greater than (1) $22,039,200, or (2) one-hundred twenty percent (120%) of the Board approved plan for net loss for such Testing Period. (c) Patient Count. Borrower must have a number of Patients, as of the last day of each quarter, of at least (i) 357 as of the quarter ending March 31, 2006, (ii) 561 as of the quarter ending June 30, 2006, (iii) 830 as of the quarter ending September 30, 2006, (iv) 1,019 as of the quarter ending December 31, 2006, (v) as -8- of the quarter ending March 31, 2007 and as of the last day of each quarter ending thereafter, an amount equal to eighty percent (80.0%) of the Board approved plan with respect to Borrower's Patient count. 6.8 LITIGATION COOPERATION. From the date hereof and continuing through the termination of this Agreement, make available to Bank, without expense to Bank, Borrower and its officers, employees and agents and Borrower's books and records, to the extent that Bank may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Bank with respect to any Collateral or relating to Borrower. 6.9 ASSET OWNERSHIP. From the date hereof and continuing through the termination of this Agreement, at least eighty-five percent (85.0%) of the assets owned by Borrower and its Subsidiaries shall be owned by and in the name of Borrower. 6.10 FURTHER ASSURANCES. Borrower shall execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank's Lien in the Collateral or to effect the purposes of this Agreement. 7 NEGATIVE COVENANTS Borrower shall not do any of the following without Bank's prior written consent: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively, "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (a) of Inventory in the ordinary course of business; (b) of worn-out or obsolete Equipment that does not constitute Eligible Products; (c) in connection with Permitted Liens and Permitted Investments; (d) of non-exclusive licenses for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; (e) the sale and/or factoring of Borrower's accounts receivable and any security or collateral provided by such account debtor relating to the specific receivables sold or factored; and (f) either (i) in the ordinary course of Borrower's business for fair consideration, Eligible Products to end users, provided that new Eligible Products of equal value are placed in service with new Patients, or (ii) Eligible Products to end users for an amount equal to the unamortized portion of the Term Advance made based upon such Eligible Product, as calculated and determined by Bank in its reasonable discretion. Borrower shall not enter into an agreement with any Person other than Bank which restricts the subsequent granting of a security interest in the Intellectual Property. 7.2 CHANGES IN BUSINESS, MANAGEMENT, OWNERSHIP, CONTROL, OR BUSINESS LOCATIONS. (a) Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower and such Subsidiary, as applicable, or reasonably related thereto (it being understood that all renal replacement and fluid overload businesses are reasonably related thereto); or (b) liquidate or dissolve. Borrower shall not, without at least thirty (30) days prior written notice to Bank: (1) add any new offices or business locations, including Borrower-owned warehouses (unless such new offices or business locations contain less than Ten Thousand Dollars ($10,000.00) in Borrower's assets or property), (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, or (5) change any organizational number (if any) assigned by its jurisdiction of organization. 7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person. A Subsidiary may merge or consolidate into another Subsidiary or into Borrower. 7.4 INDEBTEDNESS. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts (except as provided in Section 7.1), or permit any of its Subsidiaries to do so, except for Permitted Liens, permit any Collateral not to be subject to the first priority security interest granted herein, or enter into any agreement, document, instrument or other arrangement (except with or in favor of Bank) with any Person which directly or indirectly prohibits or has the effect of prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of -9- Borrower's or any Subsidiary's intellectual property, except as is otherwise permitted in Section 7.1 hereof and the definition of "Permitted Lien" herein. 7.6 MAINTENANCE OF COLLATERAL ACCOUNTS. Maintain any Collateral Account except pursuant to the terms of Section 6.6.(b) hereof. 7.7 DISTRIBUTIONS; INVESTMENTS. (a) Directly or indirectly make any Investment other than Permitted Investments, or permit any of its Subsidiaries to do so; or (b) pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, provided that (i) Borrower may convert any of its convertible securities into other securities pursuant to the terms of such convertible securities or otherwise in exchange thereof, (ii) Borrower may pay dividends solely in common stock, and (iii) Borrower may repurchase the stock of former employees or consultants pursuant to stock repurchase agreements so long as an Event of Default does not exist at the time of such repurchase and would not exist after giving effect to such repurchase, provided such repurchases do not exceed One Hundred Thousand Dollars ($100,000.00) in the aggregate per fiscal year. 7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower, except for transactions (i) that are upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person, or (ii) that are disclosed in filings with the Securities and Exchange Commission. 7.9 SUBORDINATED DEBT. (a) Make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof or adversely affect the subordination thereof to Obligations owed to Bank. 7.10 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company", under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower's business, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. 8 EVENTS OF DEFAULT Any one of the following shall constitute an event of default (an "EVENT OF DEFAULT") under this Agreement: 8.1 PAYMENT DEFAULT. Borrower fails to (a) make any payment of principal or interest on any Credit Extension on its due date, or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable (which three day grace period will not apply to payments due on the Maturity Date). During the cure period, the failure to cure the payment default is not an Event of Default (but no Credit Extension will be made during the cure period); 8.2 COVENANT DEFAULT. (a) Borrower fails or neglects to perform any obligation in Sections 6.2, 6.6, 6.7, or violates any covenant in Section 7; or (b) Borrower fails or neglects to perform, keep, or observe any other term, provision, condition, covenant or agreement in any material respect contained in this Agreement, any Loan Documents, and as to any default (other than those specified in this Section 8 below) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after -10- diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Grace periods provided under this section shall not apply, among other things, to financial covenants or any other covenants set forth in subsection (a) above; 8.3 MATERIAL ADVERSE CHANGE. A Material Adverse Change occurs; 8.4 ATTACHMENT. (a) Any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in ten (10) days; (b) the service of process upon Bank (or Bank's Affiliate) in excess of One Hundred Thousand Dollars ($100,000.00) in the aggregate seeking to attach, by trustee or similar process, any funds of, or of any entity under control of Borrower (including a Subsidiary) on deposit with the Bank; (c) Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business; (d) a final judgment or other claim becomes a Lien on any of Borrower's assets; (e) a judgment or other claim in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) becomes a Lien on any of Borrower's assets; or (f) a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency and not paid within ten (10) days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions shall be made during the cure period); 8.5 INSOLVENCY (a) Borrower is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within forty-five (45) days (but no Credit Extensions shall be made while of any of the conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed); 8.6 OTHER AGREEMENTS. There is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) or that could reasonably be expected to have a material adverse effect on Borrower's business; 8.7 JUDGMENTS. A final judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Two Hundred Fifty Thousand Dollars ($250,000.00) (not covered by independent third-party insurance) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days after the entry thereof (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); 8.8 MISREPRESENTATIONS. Borrower or any Person acting for Borrower makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made; 8.9 SUBORDINATED DEBT. A default or breach occurs under any agreement for borrowed money between Borrower and any creditor of Borrower that signed a subordination, intercreditor, or other similar agreement with Bank involving amounts in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate, or any creditor that has signed such an agreement with Bank breaches any terms of such agreement; or 8.10 RESERVED. 9 BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. While an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank); -11- (b) stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; (c) settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any order that Bank considers advisable, notify any Person owing Borrower money of Bank's security interest in such funds, and verify the amount of such account; (d) make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. Borrower shall assemble the Collateral if Bank requests and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (e) apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower; (f) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. To the extent not in violation of any applicable and enforceable agreements requiring the consent of third parties who own or have rights to the following, Bank is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower's labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section, Borrower's rights under all licenses and all franchise agreements inure to Bank's benefit; (g) place a "hold" on any account maintained with Bank and/or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral; (h) demand and receive possession of Borrower's Books; and (i) exercise all rights and remedies available to Bank under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof). 9.2 POWER OF ATTORNEY. Borrower hereby irrevocably appoints Bank as its lawful attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of Default, to: (a) endorse Borrower's name on any checks or other forms of payment or security; (b) sign Borrower's name on any invoice or bill of lading for any Account or drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle, and adjust all claims under Borrower's insurance policies; (e) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (f) transfer the Collateral into the name of Bank or a third party as the Code permits. Borrower hereby appoints Bank as its lawful attorney-in-fact to sign Borrower's name on any documents necessary to perfect or continue the perfection of Bank's security interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations have been satisfied in full and Bank is under no further obligation to make Credit Extensions hereunder. Bank's foregoing appointment as Borrower's attorney in fact, and all of Bank's rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank's obligation to provide Credit Extensions terminates. 9.3 ACCOUNTS VERIFICATION; COLLECTION. After an Event of Default has occurred and is continuing, Bank may notify any Person owing Borrower money of Bank's security interest in such funds and verify the amount of such account. After the occurrence of an Event of Default, any amounts received by Borrower shall be held in trust by Borrower for Bank, and, if requested by Bank, Borrower shall immediately deliver such receipts to Bank in the form received from the Account Debtor, with proper endorsements for deposit. -12- 9.4 PROTECTIVE PAYMENTS. If Borrower fails to obtain the insurance called for by Section 6.5 or fails to pay any premium thereon or fails to pay any other amount which Borrower is obligated to pay under this Agreement or any other Loan Document, Bank may obtain such insurance or make such payment, and all amounts so paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then highest applicable rate, and secured by the Collateral. Bank will make reasonable efforts to provide Borrower with notice of Bank obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.5 APPLICATION OF PAYMENTS AND PROCEEDS. Unless an Event of Default has occurred and is continuing, Bank shall apply any funds in its possession, whether from Borrower account balances, payments, or proceeds realized as the result of any collection of Accounts or other disposition of the Collateral, first, to Bank Expenses, including without limitation, the reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Bank in the exercise of its rights under this Agreement; second, to the interest due upon any of the Obligations; and third, to the principal of the Obligations and any applicable fees and other charges, in such order as Bank shall determine in its sole discretion. Any surplus shall be paid to Borrower or other Persons legally entitled thereto; Borrower shall remain liable to Bank for any deficiency. If an Event of Default has occurred and is continuing, Bank may apply any funds in its possession, whether from Borrower account balances, payments, proceeds realized as the result of any collection of Accounts or other disposition of the Collateral, or otherwise, to the Obligations in such order as Bank shall determine in its sole discretion. Any surplus shall be paid to Borrower or other Persons legally entitled thereto; Borrower shall remain liable to Bank for any deficiency. 9.6 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of Bank, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage or destruction of the Collateral. 9.7 NO WAIVER; REMEDIES CUMULATIVE. Bank's failure, at any time or times, to require strict performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Bank thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by Bank and then is only effective for the specific instance and purpose for which it is given. Bank's rights and remedies under this Agreement and the other Loan Documents are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay in exercising any remedy is not a waiver, election, or acquiescence. 9.8 DEMAND WAIVER. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10 NOTICES All notices, consents, requests, approvals, demands, or other communication (collectively, "Communication") by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid and properly addressed; (b) upon transmission, when sent by electronic mail or facsimile transmission to the correct email address or facsimile number; (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid and properly addressed; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated below. Bank or Borrower may change its address or facsimile number by giving the other party written notice thereof in accordance with the terms of this Section 10. -13- If to Borrower: NXSTAGE MEDICAL, INC. 439 S. Union Street, 5th Floor Lawrence, Massachusetts 01843 Attn: Chief Financial Officer or Vice President and Corporate Controller Fax: (978) 687-4847 Email: ***@*** with a copy to: General Counsel of Borrower at the above address (and at the email address of ***@***); and to Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 Attn: Mitchel Appelbaum Fax: (617) 526-5000 Email: ***@*** If to Bank: Silicon Valley Bank One Newton Executive Park, Suite ###-###-#### Washington Street Newton, Massachusetts 02462 Attn: Ms. Bernadette Michaud Fax: (617) 969-5973 Email: ***@*** with a copy to: Riemer & Braunstein LLP Three Center Plaza Boston, Massachusetts 02108 Attn: David A. Ephraim, Esquire Fax: (617) 880-3456 Email: ***@*** -14- 11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER AND JUDICIAL REFERENCE Massachusetts law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Massachusetts; provided, however, that if for any reason Bank cannot avail itself of such courts in the Commonwealth of Massachusetts, Borrower accepts jurisdiction of the courts and venue in Santa Clara County, California. NOTWITHSTANDING THE FOREGOING, BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION NECESSARY IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE BANK'S RIGHTS AGAINST BORROWER OR ITS PROPERTY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 12 GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights or obligations under it without Bank's prior written consent (which may be granted or withheld in Bank's discretion). Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights, and benefits under this Agreement and the other Loan Documents. 12.2 INDEMNIFICATION. Borrower agrees to indemnify, defend and hold Bank and its directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Bank harmless against: (a) all obligations, demands, claims, and liabilities (collectively, "Claims") asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or arising from transactions between Bank and Borrower (including reasonable attorneys' fees and expenses), except for Claims and/or losses directly caused by Bank's gross negligence or willful misconduct. 12.3 RESERVED. 12.4 TIME OF ESSENCE. Time is of the essence for the performance of all Obligations in this Agreement. 12.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.6 AMENDMENTS IN WRITING; INTEGRATION. All amendments to this Agreement must be in writing signed by both Bank and Borrower. This Agreement and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents. 12.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.8 SURVIVAL. All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The obligation of Borrower in Section 12.2 to indemnify Bank shall survive until the statute of limitations with respect to such claim or cause of action shall have run. -15- 12.9 CONFIDENTIALITY. In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, and agrees that it will keep confidential, but disclosure of information may be made: (a) to Bank's Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any interest in the Credit Extensions (provided, however, Bank shall use commercially reasonable efforts to obtain such prospective transferee's or purchaser's agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order; (d) to Bank's regulators or as otherwise required in connection with Bank's examination or audit; and (e) as Bank considers appropriate in exercising remedies under this Agreement. Confidential information does not include information that either: (i) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (ii) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 12.10 RIGHT OF SET OFF. Borrower hereby grants to Bank, a lien, security interest and right of set off as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Bank (including a Bank subsidiary) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED. 13 DEFINITIONS 13.1 DEFINITIONS. As used in this Agreement, the following terms have the following meanings: "ACCOUNT" is any "account" as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower. "ACCOUNT DEBTOR" is any "account debtor" as defined in the Code with such additions to such term as may hereafter be made. "AFFILIATE" of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. "AGREEMENT" is defined in the preamble hereof. "BANK" is defined in the preamble hereof. "BANK EXPENSES" are all audit fees and expenses, costs, and expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower. "BOARD" means Borrower's board of directors. "BORROWER" is defined in the preamble hereof "BORROWER'S BOOKS" are all Borrower's books and records including ledgers, federal and state tax returns, records regarding Borrower's assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment containing such information. "BORROWING RESOLUTIONS" are, with respect to any Person, those resolutions adopted by such Person's Board of Directors and delivered by such Person to Bank approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary on behalf of -16- such Person certifying that (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that attached as Exhibit A to such certificate is a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Bank may conclusively rely on such certificate unless and until such Person shall have delivered to Bank a further certificate canceling or amending such prior certificate. "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which Bank is closed. "CAPITALIZATION EVENT" is the receipt by Borrower of proceeds of equity, in form and substance acceptable to Bank, resulting in unrestricted net cash proceeds to Borrower of at least $40,000,000.00. "CASH EQUIVALENTS" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor's Ratings Group or Moody's Investors Service, Inc., (c) Bank's certificates of deposit issued maturing no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition. "CODE" is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the Commonwealth of Massachusetts; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank's Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the Commonwealth of Massachusetts, the term "CODE" shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes on the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions. "COLLATERAL" is any and all properties, rights and assets of Borrower described on Exhibit A. "COLLATERAL ACCOUNT" is any Deposit Account, Securities Account, or Commodity Account. "COMMODITY ACCOUNT" is any "commodity account" as defined in the Code with such additions to such term as may hereafter be made. "COMMUNICATION" is defined in Section 10. "COMPLIANCE CERTIFICATE" is that certain certificate in the form attached hereto as Exhibit C. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement. "CONTROL AGREEMENT" is any control agreement entered into among the depository institution at which Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower maintains a Securities Account or a Commodity account, Borrower, and Bank pursuant to which Bank obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account. -17- "CREDIT EXTENSION" is any Term Advance, or any other extension of credit by Bank for Borrower's benefit. "DEFAULT" means any event which with notice or passage of time or both, would constitute an Event of Default. "DEFAULT RATE" is defined in Section 2.2(b). "DEPOSIT ACCOUNT" is any "deposit account" as defined in the Code with such additions to such term as may hereafter be made. "DESIGNATED DEPOSIT ACCOUNT" is Borrower's deposit account, account number _____________, maintained with Bank. "DOLLARS," "DOLLARS" and "$" each mean lawful money of the United States. "DRAW PERIOD" is the period of time from the Effective Date through the earliest to occur of (a) December 31, 2006 (or December 31, 2007 if the Capitalization Event has occurred), (b) an Event of Default, or (c) the existence of any Default. "EFFECTIVE DATE" is defined in the preamble of this Agreement. "ELIGIBLE ACCOUNTS" are Accounts which arise in the ordinary course of Borrower's business. Bank reserves the right, at any time and from time to time after the Effective Date but upon at least fifteen (15) days prior written notice from Bank, to adjust any of the criteria set forth below and to establish new criteria in its good faith business judgment. Unless Bank agrees otherwise in writing, Eligible Accounts shall not include: (a) Accounts for which the Account Debtor has not been invoiced; (b) Accounts that the Account Debtor has not paid within one hundred twenty (120) days of invoice date; (c) Accounts owing from an Account Debtor which does not have its principal place of business in the United States; and (d) Accounts owing from an Account Debtor which is a federal, state or local government entity or any department, agency, or instrumentality thereof. "ELIGIBLE PRODUCTS" shall mean System One and PureFlow SL products manufactured by Borrower, including, without limitation, all related warmer, cyclers, stands and other accessories and hardware, and deployed by Borrower in support of Patients originated in the same quarter in which the Term Advance was/is to be made. "EQUIPMENT" is all "equipment" as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "EVENT OF DEFAULT" is defined in Section 8. "FUNDING DATE" is any date on which a Credit Extension is made to or on account of Borrower which shall be a Business Day. "GAAP" is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. -18- "GENERAL INTANGIBLES" is all "general intangibles" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, any trade secret rights, including any rights to unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations. "INSOLVENCY PROCEEDING" is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "INVENTORY" is all "inventory" as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returned goods and any documents of title representing any of the above. "INVESTMENT" is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person. "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LIGHTHOUSE AGREEMENTS" means that certain Loan and Security Agreement, dated December 23, 2004, by and between Lighthouse Capital Partners V, L.P. and Borrower, and all agreements entered into in connection therewith, as the same may be amended, modified, supplemented or otherwise changed from time to time prior to the Effective Date. "LOAN DOCUMENTS" are, collectively, this Agreement, the Perfection Certificate, any note, or notes or guaranties executed by Borrower or any other party in connection with this Agreement, all as amended, restated, or otherwise modified. "MATERIAL ADVERSE CHANGE" is (a) a material impairment in the perfection or priority of Bank's Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower; (c) a material impairment of the prospect of repayment of any portion of the Obligations; or (d) Bank determines, based upon information available to it and in its reasonable judgment, that there is a substantial likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period. "MATURITY DATE" is, for each Term Advance, the earliest of (a) the first day of the month that is the thirty-fifth (35th) month in which Borrower makes its first payment of principal pursuant to Section 2.1.1(b), or (b) the occurrence of an Event of Default. "OBLIGATIONS" are Borrower's obligation to pay when due any debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, under this Agreement or any of the Loan Documents, including, without limitation, all obligations relating to letters of credit, cash management services, and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings, and the performance of Borrower's duties under the Loan Documents. -19- "OPERATING DOCUMENTS" are, for any Person, such Person's formation documents, as certified with the Secretary of State of such Person's state of formation on a date that is no earlier than 30 days prior to the Effective Date, and, its bylaws in current form, each of the foregoing with all current amendments or modifications thereto. "PATIENTS" are patients of Borrower pursuant to a performing contract, which contract is not in default. "PAYMENT/ADVANCE FORM" is that certain form attached hereto as Exhibit B. "PERFECTION CERTIFICATE" is defined in Section 5.1. "PERMITTED INDEBTEDNESS" is: (a) Borrower's Indebtedness to Bank under this Agreement and the other Loan Documents; (b) Indebtedness existing on the Effective Date and shown on the Perfection Certificate; (c) Subordinated Debt; (d) unsecured Indebtedness to trade creditors incurred in the ordinary course of business; (e) Indebtedness secured by Liens permitted under clause (c) of the definition of "Permitted Liens" herein; (f) Indebtedness in connection with the Transfers permitted under Section 7.1(e); (g) unsecured guarantees by Borrower of obligations of its direct or indirect Subsidiaries entered into in the ordinary course, provided that Borrower's maximum potential liability pursuant to such guarantees does not exceed Fifty Thousand Dollars ($50,000.00) in the aggregate; (h) Indebtedness of Borrower's Subsidiaries to Borrower or to another Subsidiary; and (i) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (h) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be. "PERMITTED INVESTMENTS" are: (a) Investments shown on the Perfection Certificate and existing on the Effective Date; (b) Cash Equivalents; (c) loans and advances to officers and employees of Borrower for business purposes, or relocation expenses, and other Investments, provided that the aggregate amount of Investments made pursuant to this subsection (c) shall not exceed Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate; (d) Investments in Borrower's Subsidiaries for the ordinary and necessary operating expenses of such Subsidiaries in an amount not to exceed Two Million Dollars ($2,000,000.00) in the aggregate per fiscal year; and (e) dividends paid by a Subsidiary (other than Borrower) to its parent. "PERMITTED LIENS" are: (a) Liens existing on the Effective Date and shown on the Perfection Certificate or arising under this Agreement and the other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank's Liens (except that such Liens (other than those liens relating to federal or state income -20- taxes) may have priority over Bank's Liens, provided that the taxes, fees, assessments or other governmental charges or levies in connection with such Liens do not exceed Twenty-Five Thousand Dollars ($25,000.00) in the aggregate); (c) purchase money Liens and Liens with respect to capital leases (i) on Equipment acquired or held by Borrower incurred for financing the acquisition of the Equipment (or refunding the amount incurred for the acquisition thereof) securing no more than One Million Dollars ($1,000,000.00) in the aggregate principal amount outstanding, or (ii) existing on Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the Equipment; (d) Liens in connection with Transfers permitted under Section 7.1(e) of this Agreement; (e) Liens with respect to judgments which are not Events of Default hereunder; (f) Liens to secure payment of worker's compensation, employment insurance, old age pensions or other social security obligations of Borrower on which Borrower is current and are in the ordinary course of its business, provided that such Liens do not have priority over Bank's Lien; (g) Liens constituting deposits for real or personal property; and (h) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (g), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase. "PERSON" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PRIME RATE" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "REGISTERED ORGANIZATION" is any "registered organization" as defined in the Code with such additions to such term as may hereafter be made "RESPONSIBLE OFFICER" is any of the Chief Executive Officer, President, Chief Financial Officer and Controller of Borrower. "SECURITIES ACCOUNT" is any "securities account" as defined in the Code with such additions to such term as may hereafter be made. "SUBORDINATED DEBT" is indebtedness incurred by Borrower subordinated to all of Borrower's now or hereafter indebtedness to Bank (pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Bank entered into between Bank and the other creditor), on terms acceptable to Bank. "SUBSIDIARY" means, with respect to any Person, any Person of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person. "TERM ADVANCE" or "TERM ADVANCES" is defined in Section 2.1.1. "TERM LINE" is a Term Advance or Term Advances, outstanding at any time, in the amount of up to (a) on and prior to December 31, 2006, $8,000,000 (provided that such amount shall increase to $10,000,000 after the occurrence of the Capitalization Event), and (b) on and after January 1, 2007, only if the Capitalization Event has occurred, $20,000,000 (inclusive of amounts in (a) above). "TRANSFER" is defined in Section 7.1. "UNUSED TERM LINE FACILITY FEE" is defined in Section 2.3(b). -21- Signature page follows. -22- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the Effective Date. BORROWER: NXSTAGE MEDICAL, INC. By: /s/ Jeffrey H. Burbank Name: Jeffrey H. Burbank Title: President and Chief Executive Officer BANK: SILICON VALLEY BANK By: /s/ Thomas W. Davies Name: Thomas W. Davies Title: Senior Relationship Manager EXHIBIT A The Collateral consists of all of Borrower's right, title and interest in and to the following personal property: All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles (except as provided below), commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and all Borrower's Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing. Notwithstanding the foregoing, the Collateral does not include any of the following, whether now owned or hereafter acquired, (i) any stock of direct subsidiaries of Borrower which are not organized under the laws of the United States of America or any state or political subdivision thereof, or (ii) any copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions, and continuations-in-part of the same, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, and the goodwill of the business of Borrower connected with and symbolized thereby, know-how, operating manuals, trade secret rights, rights to unpatented inventions, and any claims for damage by way of any past, present, or future infringement of any of the foregoing; provided, however, the Collateral shall include all Accounts, license and royalty fees and other revenues, proceeds, or income arising out of or relating to any of the foregoing. Pursuant to the terms of a certain negative pledge arrangement with Bank, Borrower has agreed not to encumber (except as otherwise permitted in the Agreement) any of its copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions, and continuations-in-part of the same, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, and the goodwill of the business of Borrower connected with and symbolized thereby, know-how, operating manuals, trade secret rights, rights to unpatented inventions, and any claims for damage by way of any past, present, or future infringement of any of the foregoing, without Bank's prior written consent. 1
