-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Eg+UNsh1MWd9DR+Vt3ksR2CqEsmuSUxvAWgeV4POg6diJGWBXURpqbM/KkLDPf40 lv8XQSR5KND6e9vqj6x+yg== 0000912057-02-022429.txt : 20020530 0000912057-02-022429.hdr.sgml : 20020530 20020530162722 ACCESSION NUMBER: 0000912057-02-022429 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 20020530 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLANETCAD INC CENTRAL INDEX KEY: 0000852437 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 841035353 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-89386 FILM NUMBER: 02666449 BUSINESS ADDRESS: STREET 1: 2425 55TH STREET STREET 2: STE 100 CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3034490649 MAIL ADDRESS: STREET 1: 2425 55TH STREET STREET 2: STE 100 CITY: BOULDER STATE: CO ZIP: 80301 FORMER COMPANY: FORMER CONFORMED NAME: SPATIAL TECHNOLOGY INC DATE OF NAME CHANGE: 19960708 S-4 1 a2080957zs-4.txt S-4 As filed with the Securities and Exchange Commission on May 30, 2002 Registration No. 333-________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------ PlanetCAD INC. (Exact name of registrant as specified in its charter) DELAWARE 7372 84-1035353 (State or Other (Primary Standard (I.R.S. Employer Jurisdiction of Incorporation Industrial Classification Identification No.) or Organization) Code Number) 2520 55TH STREET, SUITE 200 BOULDER, COLORADO 80301 (303) 209-9100 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------ DAVID HUSHBECK PRESIDENT AND CHIEF EXECUTIVE OFFICER PlanetCAD INC. 2520 55TH STREET, SUITE 200 BOULDER, COLORADO 80301 (303) 209-9100 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ------------ COPIES TO: WHITNEY HOLMES, ESQ. SHERYL N. STEPHENSON, ESQ. BRENT SLOSKY, ESQ. SHAPIRO SHER & GUINOT, P.A. HOGAN & HARTSON L.L.P. 36 SOUTH CHARLES STREET ONE TABOR CENTER, SUITE 1500 SUITE 2000 1200 SEVENTEENTH STREET BALTIMORE, MARYLAND 21201 DENVER, COLORADO 80202 (410) 385-0202 (303) 899-7300 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------- CALCULATION OF REGISTRATION FEE
=================================================================================================================================== PROPOSED MAXIMUM OFFERING AMOUNT OF TITLE OF EACH CLASS OF AMOUNT PRICE PER PROPOSED MAXIMUM REGISTRATION SECURITIES TO BE REGISTERED TO BE REGISTERED (2) COMMON SHARE (2) AGGREGATE OFFERING PRICE (3) FEE - ----------------------------------------------------------------------------------------------------------------------------------- common stock, $0.01 par value per N/A N/A $19,984.67 $1.84 share (1) - -----------------------------------------------------------------------------------------------------------------------------------
(1) Each share of PlanetCAD common stock is accompanied by a right to purchase Series A Junior Participating Preferred Stock. Prior to the occurrence of certain events, none of which has occurred as of this date, the rights will not be exercisable or evidenced separately from the common stock. (2) Pursuant to Securities Act Rule 457(o), this information is not included. (3) Estimated solely for purposes of calculating the registration fee required by Section 6(b) of the Securities Act and calculated pursuant to Rule 457(f) thereunder. Avatech is a privately held corporation, there is no market for its securities and it has an accumulated capital deficit. Therefore, pursuant to Securities Act Rule 457(f)(2), the proposed maximum aggregate offering price is based upon one-third of the par value of the Avatech common stock being acquired in the proposed merger, calculated as of the last practicable date prior to the filing of this registration statement. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MAY ___, 2002 [LOGO OF PLANETCAD] [LOGO OF AVATECH] PROXY STATEMENT/PROSPECTUS MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT Dear Stockholders: The boards of directors of PlanetCAD Inc. and Avatech Solutions, Inc. have approved a merger agreement that provides for the merger of Avatech with a wholly-owned subsidiary of PlanetCAD. As a result of the merger, Avatech will become a wholly-owned subsidiary of PlanetCAD. If we complete the merger, Avatech stockholders will receive shares of PlanetCAD common stock in exchange for their shares of Avatech common stock. The number of shares of PlanetCAD common stock each of them will receive is based on an exchange ratio that will be determined by dividing three times the number of shares of PlanetCAD common stock outstanding prior to the merger by the number of shares of Avatech common stock outstanding prior to the merger. As a result, Avatech stockholders will own 75% of the PlanetCAD common stock outstanding after the merger and PlanetCAD stockholders will own 25%. We cannot complete the merger unless it is approved by the affirmative vote of the holders of a majority of the PlanetCAD common stock (including common stock underlying PlanetCAD convertible preferred stock) and two-thirds of the Avatech common stock. The board of directors of PlanetCAD has scheduled an annual meeting of its stockholders to vote on the merger and certain other matters, and the Avatech board of directors has scheduled a special meeting of its stockholders to vote on the merger. Whether or not you plan to attend your meeting of stockholders, please take the time to vote by completing and mailing the enclosed proxy card or, in the case of PlanetCAD stockholders, by voting by telephone or through the Internet as instructed on your proxy card. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote in favor of the merger. If you do not return your card or you do not appoint a proxy by telephone or through the Internet, or you do not instruct your broker how to vote any shares held for you in "street name," it will have the same effect as a vote against the merger. THE PLANETCAD AND AVATECH BOARDS OF DIRECTORS HAVE APPROVED THE MERGER AGREEMENT AND RECOMMEND THAT THEIR STOCKHOLDERS APPROVE AND ADOPT THE MERGER AGREEMENT. Avatech stockholders who properly preserve their rights are entitled to an appraisal of and payment for their shares of Avatech common stock under Delaware law if the merger is completed. PlanetCAD common stock is listed on the American Stock Exchange under the trading symbol "PCD." On _______, 2002, the last reported sale price of PlanetCAD common stock was $______. THIS PROXY STATEMENT/PROSPECTUS PROVIDES YOU WITH DETAILED INFORMATION ABOUT THE MERGER, THE PLANETCAD ANNUAL MEETING AND THE AVATECH SPECIAL MEETING. YOU CAN ALSO GET INFORMATION FROM PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT CAREFULLY. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 13 OF THIS PROXY STATEMENT/PROSPECTUS. Sincerely, Sincerely, David Hushbeck Henry D. Felton PRESIDENT AND CHAIRMAN AND CHIEF EXECUTIVE OFFICER CHIEF EXECUTIVE OFFICER PLANETCAD INC. AVATECH SOLUTIONS, INC. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This proxy statement/prospectus is dated _________, 2002 and is first being mailed to PlanetCAD and Avatech stockholders on or about _______, 2002. PlanetCAD INC. 2520 55TH STREET, SUITE 200 BOULDER, COLORADO 80301 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON [_______], 2002 NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of PlanetCAD Inc., a Delaware corporation, will be held at 9:00 a.m., local time, on [_________], 2002, at 2520 55th Street, Suite 200, Boulder, Colorado 80301, for the following purposes: 1. To consider and vote upon a proposal to adopt the agreement and plan of merger dated as of May 1, 2002, by and among PlanetCAD Inc., Raven Acquisition Corporation, a wholly-owned subsidiary of PlanetCAD, and Avatech Solutions, Inc., as described in more detail in the proxy statement/prospectus that accompanies this notice. 2. To approve an amendment to PlanetCAD's certificate of incorporation to increase the number of authorized shares of PlanetCAD common stock to 90,000,000. 3. To approve an amendment to PlanetCAD's certificate of incorporation to change the name of PlanetCAD to Avatech Solutions, Inc. 4. To elect to the PlanetCAD board of directors five (5) directors to hold office until the next annual meeting of stockholders or until their respective successors have been elected and qualified. 5. To approve the PlanetCAD 2002 Stock Option Plan. 6. To transact such other business as may properly come before the PlanetCAD annual meeting or any adjournments or postponements thereof. The board of directors of PlanetCAD has fixed the close of business on [_________], 2002, as the record date for the determination of the stockholders entitled to notice of, and to vote at, the annual meeting and any adjournment or postponement of the annual meeting. A complete list of stockholders entitled to vote at the annual meeting will be open to examination by the stockholders, during regular business hours, for a period of ten days prior to the annual meeting at PlanetCAD's principal executive offices at 2520 55th Street, Suite 200, Boulder, Colorado 80301. PlanetCAD's 2001 Annual Report on Form 10-KSB accompanies this proxy statement/prospectus. THE BOARD OF DIRECTORS OF PLANETCAD HAS DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE BEST INTERESTS OF THE PLANETCAD STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE TO ADOPT THE MERGER AGREEMENT AND FOR THE OTHER MATTERS PROPOSED FOR APPROVAL AT THE ANNUAL MEETING. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES OF PLANETCAD COMMON STOCK (INCLUDING COMMON STOCK UNDERLYING PLANETCAD CONVERTIBLE PREFERRED STOCK) ON THE RECORD DATE IS REQUIRED TO ADOPT THE MERGER AGREEMENT. By Order of the Board of Directors, David Hushbeck PRESIDENT AND CHIEF EXECUTIVE OFFICER [__________], 2002 WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, OR VOTE BY TELEPHONE OR THROUGH THE INTERNET AS INSTRUCTED ON THE ENCLOSED PROXY CARD. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE THE VOTE IS TAKEN BY DELIVERING TO THE SECRETARY OF PLANETCAD A WRITTEN REVOCATION OR A PROXY WITH A LATER DATE OR BY VOTING YOUR SHARES IN PERSON AT THE ANNUAL MEETING. EACH VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD OR SUBMIT YOUR PROXY VIA THE INTERNET OR BY PHONE. AVATECH SOLUTIONS, INC. 11403 CRONHILL DRIVE, SUITE A OWINGS MILLS, MARYLAND 21117 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON _______, 2002 NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Avatech Solutions, Inc., a Delaware corporation, will be held at 9:00 a.m., local time, on [________], 2002, at 11403 Cronhill Drive, Suite A, Owings Mills, Maryland 21117, for the following purposes: 1. To consider and vote upon a proposal to adopt the agreement and plan of merger dated as of May 1, 2002, by and among PlanetCAD Inc., Raven Acquisition Corporation, a wholly-owned subsidiary of PlanetCAD, and Avatech Solutions, Inc., as described in more detail in the proxy statement/prospectus that accompanies this notice. 2. To approve an amendment to Avatech's certificate of incorporation to increase the total number of authorized shares of Avatech capital stock to 16,000,000 and authorize 8,000,000 shares of preferred stock. 3. To transact such other business as may properly come before the special meeting or any adjournment or postponement of the meeting. The board of directors of Avatech has fixed the close of business on _________, 2002, as the record date for the determination of the stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special meeting. A complete list of stockholders entitled to vote at the special meeting will be open to examination by the stockholders, during regular business hours, for a period of ten days prior to the special meeting at Avatech's principal executive offices at 11403 Cronhill Drive, Suite A, Owings Mills, Maryland 21117. Avatech stockholders who properly preserve their rights are entitled to an appraisal of and payment for their shares of Avatech common stock under Delaware law if the merger is completed. PlanetCAD's 2001 Annual Report on Form 10-KSB accompanies this proxy statement/prospectus. THE BOARD OF DIRECTORS OF AVATECH HAS DETERMINED THAT THE MERGER IS ADVISABLE AND IN THE BEST INTERESTS OF AVATECH STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE TO ADOPT THE MERGER AGREEMENT AND AMEND THE CERTIFICATE OF INCORPORATION AT THE SPECIAL MEETING. THE AFFIRMATIVE VOTE OF TWO-THIRDS OF THE OUTSTANDING SHARES OF AVATECH COMMON STOCK IS REQUIRED TO ADOPT THE MERGER AGREEMENT AND AMEND THE CERTIFICATE OF INCORPORATION. By Order of the Board of Directors, Henry D. Felton CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER _________, 2002 WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, AND WHETHER YOU OWN ONE OR MORE SHARES OF AVATECH COMMON STOCK, PLEASE COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE THE VOTE IS TAKEN BY DELIVERING TO THE SECRETARY OF AVATECH A WRITTEN REVOCATION OR A PROXY WITH A LATER DATE OR BY VOTING YOUR SHARES IN PERSON AT THE SPECIAL MEETING. EACH VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD. PLEASE DO NOT SEND YOUR AVATECH STOCK CERTIFICATES WITH YOUR PROXY CARD. REFERENCE TO ADDITIONAL INFORMATION This proxy statement/prospectus incorporates important business and financial information about PlanetCAD from documents that PlanetCad has filed with the Securities and Exchange Commission. That information is described under "Where You Can Find More Information." We will provide the information incorporated into this document without charge to you upon written or oral request, to the extent it does not already accompany this document. Requests should be made in writing or by telephone to the following: PlanetCAD Inc. 2520 55th Street, Suite 200 Boulder, Colorado 80301 Telephone number: (303) 209-9100 Attention: Chief Financial Officer IN ORDER TO ENSURE TIMELY DELIVERY OF THE INFORMATION PRIOR TO THE STOCKHOLDER MEETINGS, REQUESTS MUST BE RECEIVED BY _________, 2002. TABLE OF CONTENTS
PAGE ---- QUESTIONS & ANSWERS ABOUT THE MERGER..................................................................1 SUMMARY...............................................................................................4 The PlanetCAD Annual Meeting; Vote Required (see page 27)........................................4 The Avatech Special Meeting; Vote Required (see page 38).........................................4 Share Ownership of PlanetCAD's Management (see page 69)..........................................5 Share Ownership of Avatech's Management (see page 101)...........................................5 PlanetCAD Stockholders Voting Agreement (see page 63)............................................5 Avatech Stockholders Voting Agreement (see page 63)..............................................5 Dissenters' Rights (see page 39).................................................................5 The Merger (see page 43).........................................................................5 Recommendation of PlanetCAD and Avatech Boards of Directors (see pages 45 and 47)................5 Fairness Opinion of PlanetCAD's Financial Advisor (see page 48)..................................6 Management After the Merger (see page 58)........................................................6 The Merger Agreement (see page 60)...............................................................6 Conversion of Avatech Common Stock (see page 53).................................................6 Conditions to the Merger (see page 65)...........................................................6 Termination of the Merger Agreement; Termination Fees (see page 67)..............................7 Federal Income Tax Consequences (see page 55)....................................................7 Accounting Treatment (see page 57)...............................................................7 Interests of Certain Persons in the Merger (see page 53).........................................7 Governmental Approvals and Regulatory Requirements (see page 57).................................7 Restrictions on the Ability to Sell PlanetCAD Stock (see pages 57 and 58)........................7 Comparison of Stockholder Rights (see page 63)...................................................8 Where You Can Find More Information (see page 113)...............................................8 SELECTED FINANCIAL AND OTHER DATA.....................................................................9 Selected Historical Financial Data of PlanetCAD..................................................9 Selected Consolidated Financial Data of Avatech.................................................10 Summary Pro Forma Combined Condensed Financial Data.............................................10 Comparative Per Share Data......................................................................11 Market Price and Dividend Information...........................................................11 Recent Closing Prices...........................................................................12 Dividend Information............................................................................12 Number of Stockholders..........................................................................12 RISK FACTORS.........................................................................................13 Risks Related to the Merger.....................................................................13 Risks Related to PlanetCAD's Business...........................................................16 Risks Related to Avatech's Business.............................................................22 A WARNING ABOUT FORWARD-LOOKING STATEMENTS...........................................................26 THE PLANETCAD ANNUAL MEETING.........................................................................26 Date, Time and Place of the Annual Meeting......................................................26 Matters to be Considered at the Annual Meeting..................................................26 Stock Entitled to Vote..........................................................................26 Quorum..........................................................................................27 Voting Rights; Vote Required for Approval.......................................................27 Abstentions, Failures to Vote and Broker Non-Votes..............................................27 Voting by Proxy; Revocation of Proxy............................................................28 Certain Beneficial Owners.......................................................................28 Voting via the Internet or by Telephone.........................................................28 Solicitation of Proxies.........................................................................28 No Dissenters' Rights...........................................................................29 Election of Directors...........................................................................29 Amendment of PlanetCAD's Certificate of Incorporation to Increase the Number of Authorized Shares of Common Stock............................................................33 Amendment of PlanetCAD's Certificate of Incorporation to Change the name of PlanetCAD to Avatech Solutions, Inc.............................................................35 Approval of PlanetCAD 2002 Stock Option Plan....................................................35 THE AVATECH SPECIAL MEETING..........................................................................38 Date, Time and Place of the Special Meeting.....................................................38 Matters to be Considered at the Special Meeting.................................................38 Stock Entitled to Vote..........................................................................38 Quorum..........................................................................................38 Voting Rights; Vote Required for Approval.......................................................38 Abstentions, Failures to Vote...................................................................38 Voting by Proxy; Revocation of Proxy............................................................39 Certain Beneficial Owners.......................................................................39 Solicitation of Proxies.........................................................................39 i Dissenters' Rights..............................................................................39 THE MERGER...........................................................................................43 Background of the Merger........................................................................43 Recommendation of PlanetCAD's Board of Directors................................................45 PlanetCAD's Reasons for the Merger..............................................................45 Recommendation of Avatech's Board of Directors..................................................47 Avatech's Reasons for the Merger................................................................47 Opinion of PlanetCAD's Financial Advisor........................................................48 Interests of Certain Persons in the Merger......................................................53 Structure of the Merger and Conversion of Avatech Common Stock..................................53 Exchange of Avatech Stock Certificates for PlanetCAD Stock Certificates.........................54 Avatech Stock Options and Warrants..............................................................55 Material United States Federal Income Tax Consequences of the Merger............................55 Accounting Treatment of the Merger..............................................................57 Approvals Required to Complete the Merger.......................................................57 Restrictions on Sales by Significant Stockholders...............................................57 Additional Restrictions on Sales of PlanetCAD Shares by Affiliates of Avatech...................58 Listing on the American Stock Exchange of PlanetCAD common stock to be Issued in the Merger.....58 Management after the Merger.....................................................................58 Operations after the Merger.....................................................................58 THE MERGER AGREEMENT.................................................................................60 General Structure; Conversion of Securities.....................................................60 Closing; Effective Time of the Merger...........................................................60 Dissenters' Rights..............................................................................60 Representations and Warranties of PlanetCAD, Raven Acquisition Corporation and Avatech..........60 Conduct of Business before Completion of the Merger.............................................61 No Solicitation.................................................................................62 Additional Agreements...........................................................................63 Conditions to Completion of the Merger..........................................................65 Termination of the Merger Agreement.............................................................67 Extension, Waiver and Amendment of the Merger Agreement.........................................68 INFORMATION ABOUT THE COMPANIES......................................................................69 PlanetCAD Inc...................................................................................69 Security Ownership of Certain Beneficial Owners and Management of PlanetCAD.....................69 PlanetCAD Executive Compensation................................................................71 PlanetCAD - Certain Relationships and Related Transactions......................................74 Avatech Solutions, Inc..........................................................................78 Selected Consolidated Financial Data of Avatech.................................................83 Avatech Management's Discussion and Analysis of Financial Condition and Results of Operations...85 Directors and Executive Officers Following the Merger...........................................97 Avatech Executive Compensation..................................................................99 Option Grants in Last Fiscal Year...............................................................99 Option Exercises in Last Fiscal Year............................................................100 Avatech Employment Contracts, Change-in-Control and Indemnification Arrangements................100 Avatech - Certain Relationships and Related Transactions........................................100 Security Ownership of Certain Beneficial Owners and Management of Avatech.......................101 COMPARISON OF PLANETCAD COMMON STOCK AND AVATECH COMMON STOCK........................................103 Authorized Capital..............................................................................103 Board of Directors..............................................................................103 Committees of the Board of Directors............................................................104 Newly Created Directorships and Vacancies.......................................................105 Removal of Directors............................................................................105 Special Meetings of Stockholders................................................................106 Stockholder Action by Written Consent...........................................................106 ii Nomination of Directors.........................................................................106 Advance Notice of Stockholder-Proposed Business at Annual Meetings..............................107 Amendment of Governing Documents................................................................107 Supermajority Voting Requirements for Certain Business Combinations and Issuance of Stock.......107 Indemnification of Directors and Officers and Limitation of Liability...........................108 Compromises and Arrangements....................................................................109 DESCRIPTION OF SECURITIES............................................................................109 LEGAL MATTERS........................................................................................113 EXPERTS..............................................................................................113 OTHER MATTERS........................................................................................113 WHERE YOU CAN FIND MORE INFORMATION..................................................................113 WHAT INFORMATION YOU SHOULD RELY ON..................................................................115 INDEX TO FINANCIAL STATEMENTS........................................................................F-1 ANNEX A -- Agreement and Plan of Merger............................................................A-1 ANNEX B -- Voting Agreement with PlanetCAD Stockholders............................................B-1 ANNEX C -- Voting Agreement with Avatech Stockholders..............................................C-1 ANNEX D -- Section 262 of the Delaware General Corporation Law.....................................D-1 ANNEX E -- Fairness Opinion of Alliant Partners dated May 1, 2002..................................E-1 ANNEX F -- PlanetCAD 2002 Stock Option Plan........................................................F-1
iii QUESTIONS & ANSWERS ABOUT THE MERGER Q: WHY ARE PLANETCAD AND AVATECH PROPOSING THE MERGER? A: Both PlanetCAD and Avatech believe that the business potential for the combination of PlanetCAD and Avatech exceeds what they could accomplish by themselves as separate companies and that the combined company will be stronger than either company would be on a stand-alone basis. More specifically, we believe the merger provides the benefit of combining Avatech's nationwide distribution network with PlanetCAD's engineering and supply chain software products. In addition, Avatech stockholders will benefit by receiving the more readily-marketable PlanetCAD common stock. Q: HOW IS THIS TRANSACTION BEING STRUCTURED? A: If all conditions to the merger are satisfied (or waived), Raven Acquisition Corporation, a wholly-owned subsidiary of PlanetCAD, will be merged into Avatech. As a result of the merger, Raven Acquisition Corporation will cease to exist and Avatech will continue as the surviving corporation. Following the merger, Avatech will be a wholly-owned subsidiary of PlanetCAD. Q: WHAT WILL I RECEIVE FOR MY SHARES OF AVATECH COMMON STOCK? A: In the merger, your shares of Avatech common stock will be converted into the right to receive shares of PlanetCAD common stock. The number of shares of PlanetCAD common stock that you will receive for your shares of Avatech common stock will be determined by an exchange ratio. The exchange ratio will be determined by dividing three times the number of shares of PlanetCAD common stock outstanding prior to the merger by the number of shares of Avatech common stock outstanding prior to the merger. As a result, the stockholders of PlanetCAD will own 25% of the combined company and the stockholders of Avatech will own 75%. Based on current information and assumptions, the exchange ratio is expected to be approximately 7.43 to 1. Thus, if an Avatech stockholder owns 100 shares of Avatech common stock, he or she would receive 743 shares of PlanetCAD common stock. Q: WHY ARE SO MANY PLANETCAD SHARES BEING AUTHORIZED? A: Of the 90,000,000 shares being authorized, we anticipate that 59,393,884 will be outstanding after the merger. Another ______ shares will be held in reserve for issuance pursuant to exercise of outstanding options and warrants and for options to be issued under stock option plans. The remaining shares will be available for corporate purposes, including to raise equity capital and to issue in merger and acquisition activities. Q: WILL ANY FRACTIONAL SHARES OF PLANETCAD COMMON STOCK BE ISSUED IN THE MERGER? A: No. Cash, based on the closing price per share of PlanetCAD common stock on the closing date of the merger, will be paid instead of fractional shares. Q: WILL THE SHARES OF PLANETCAD COMMON STOCK ISSUED IN THE MERGER BE LISTED ON AN EXCHANGE? A: Yes. The shares of PlanetCAD common stock issued in the merger will be listed on the American Stock Exchange. Q: DO I GET TO VOTE ON THE MERGER AGREEMENT? A: If you held Avatech common stock at the close of business on _____________ ___, 2002, the Avatech record date, you may vote on the approval of the merger agreement. Similarly, if you held PlanetCAD common stock at the close of business on [_______], 2002, the PlanetCAD record date, you may vote on the merger agreement and the other matters to be considered at the PlanetCAD annual meeting. Q: WHAT AM I BEING ASKED TO VOTE UPON? A: PlanetCAD and Avatech stockholders are both being asked to approve the merger agreement, which provides for the merger of a wholly-owned subsidiary of PlanetCAD with and into Avatech. Approval of the merger agreement requires the affirmative vote of a majority of the outstanding shares of PlanetCAD common stock and of two-thirds of the outstanding shares of Avatech common stock. Avatech stockholders are also being asked to vote upon an amendment to the Avatech certificate of incorporation to increase the number of authorized shares of Avatech capital stock and authorize preferred stock. PlanetCAD stockholders are also being asked to vote upon amendments to the PlanetCAD certificate of incorporation to increase the number of authorized shares of PlanetCAD common stock and change the name of PlanetCAD to Avatech Solutions, Inc., as well as for the election of directors and the adoption of a new PlanetCAD stock option plan. THE PLANETCAD AND AVATECH BOARDS OF DIRECTORS HAVE APPROVED AND ADOPTED THE MERGER AGREEMENT AND RECOMMEND THAT THEIR STOCKHOLDERS VOTE FOR APPROVAL OF THE MERGER AGREEMENT. Q: DO STOCKHOLDERS HAVE DISSENTERS' RIGHTS? A: Avatech stockholders will be entitled to appraisal rights in connection with the merger provided that they give written demand for appraisal and comply with all relevant provisions of Section 262 of the Delaware General Corporation Law explained beginning on page 39 and attached as Annex D to this proxy statement/prospectus. PlanetCAD stockholders do not have appraisal rights in connection with the merger. Q: HOW SOON WILL THE MERGER OCCUR? A: If the merger agreement is approved at the PlanetCAD annual meeting and the Avatech special meeting, we anticipate that the merger will occur as soon as practicable after those meetings. Both PlanetCAD and Avatech hope to complete the merger in early August 2002. Because the merger is subject to various conditions, however, we cannot predict the exact timing of the closing. Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS OF AVATECH AND PLANETCAD? A: For United States federal income tax purposes, Avatech stockholders will not recognize any gain or loss on the exchange of their shares of Avatech common stock for shares of PlanetCAD common stock, except with respect to the cash, if any, received instead of fractional shares of PlanetCAD common stock. However, different tax consequences may apply to you because of your individual circumstances or because special tax rules apply to you. The merger will not have any tax consequences for PlanetCAD stockholders. Q : WHAT WILL MY TAX BASIS BE IN THE PLANETCAD COMMON STOCK I RECEIVE IN THE MERGER? A: Your tax basis in the total shares of PlanetCAD common stock you receive in the merger will equal your current tax basis in your total shares of Avatech common stock, reduced by the amount of basis allocable to fractional shares for which you receive cash. THE TAX CONSEQUENCES TO YOU WILL DEPEND ON YOUR PERSONAL SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU. Q: WHEN WILL PLANETCAD'S NAME CHANGE TO AVATECH SOLUTIONS, INC. OCCUR? A: We expect PlanetCAD's name will be changed to Avatech Solutions, Inc. upon completion of the merger. Q: WHAT DO I NEED TO DO NOW? A: After carefully reading and considering the information contained in this proxy statement/prospectus, please fill out and sign your proxy card. Then mail your completed, signed and dated proxy card in the enclosed return envelope as soon as possible so that your shares can be voted at the PlanetCAD annual meeting or the Avatech special meeting. In the alternative, PlanetCAD stockholders may appoint a proxy via the Internet or by telephone. If you sign and send in your proxy card and do not indicate how you want to vote, your proxy will be voted in favor of the proposal to approve the merger agreement. If you do not sign and send in your proxy card, do not appoint a proxy via the Internet or by telephone (in the case of the PlanetCAD annual meeting) or if you abstain, it will have the effect of a vote against the merger. Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD OR VOTED BY TELEPHONE OR OVER THE INTERNET? A: You may change your vote by sending a written notice stating that you would like to revoke your proxy or by completing and submitting a new, later-dated proxy card or by acting at a later date via the Internet or by telephone. You also may attend the PlanetCAD annual meeting or the Avatech special meeting and vote in person. Stockholders who are parties to voting agreements with PlanetCAD or Avatech, however, may not revoke the proxies they granted under those agreements. Q: IF MY PLANETCAD SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME? A: Your broker will vote your shares of PlanetCAD common stock only if you provide instructions on how to vote. You should instruct your broker how to vote your shares, following the directions your broker provides. If you do not provide instructions to your broker, your shares will not be voted and this will have the effect of voting against the merger. 2 Q: WHAT DOES IT MEAN TO HAVE SHARES "LOCKED-UP"? A: It is anticipated that certain shareholders will be subject to arrangements that limit the number of shares that they can sell in the public market after the merger. These arrangements include an agreement that prohibits resale of 75% of the securities acquired in the merger for up to 180 days following the merger closing, subject to any waiver by PlanetCAD. Of the remaining 25% of stock immediately available for resale, officers, directors and other insiders are limited by the trading restrictions under Rules 144 and 145 of the Securities Act of 1933. It is anticipated that approximately _____ shares of the combined company will be "locked-up" under these various arrangements. Q: SHOULD I SEND IN MY AVATECH STOCK CERTIFICATES NOW? A: No. You should not send in your Avatech stock certificates at this time. After the merger is completed, you will receive written instructions for exchanging your Avatech stock certificates for PlanetCAD stock certificates. Q: WHO CAN ANSWER MY OTHER QUESTIONS? A: PlanetCAD stockholders should contact Joy Godesiabois, PlanetCAD Inc., 2520 55th Street, Suite 200, Boulder, Colorado 80301, telephone: (303) 209-9242, e-mail: joy@planetcad.com. Avatech stockholders should contact Gary Rever, Avatech Solutions, Inc., 11403 Cronhill Drive, Suite A, Owings Mills, Maryland 21117, telephone: (410) 902-6900, e-mail: grever@avat.com. 3 SUMMARY THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT/PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE DETAILED INFORMATION THAT MAY BE IMPORTANT TO YOU. TO UNDERSTAND THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS TO WHICH WE REFER, INCLUDING THE MERGER AGREEMENT, WHICH IS ATTACHED AS ANNEX A TO THIS PROXY STATEMENT/PROSPECTUS. FOR MORE INFORMATION ABOUT PLANETCAD, SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 113. EACH ITEM IN THIS SUMMARY REFERS TO THE PAGES WHERE THAT SUBJECT IS DISCUSSED MORE FULLY. THE COMPANIES (SEE PAGE 69) PlanetCAD INC. 2520 55th Street, Suite 200 Boulder, Colorado 80301 (303) 209-9100 PlanetCAD develops, markets and supports cycle time reduction software solutions that integrate engineering processes and data for the manufacturing supply chain. PlanetCAD operates predominantly in the manufacturing industry with special focus on the computer-aided design (CAD), manufacturing (CAM) and engineering (CAE) markets, providing 24-hour technical and help desk support and resolving customer complaints. AVATECH SOLUTIONS, INC. 11403 Cronhill Drive, Suite A Owings Mills, Maryland 21117 (410) 902-6900 Avatech distributes design automation software and provides training and comprehensive technical services to the mechanical design, architectural engineering, construction and geographic information systems industries. Headquartered in Owings Mills, Maryland, Avatech offers complete technology solutions to customers through its national network of 20 locations coast-to-coast, backed by a professional services group, training centers and a national support center. These technology solutions enable Avatech's customers to enhance productivity, profitability and competitive position. Avatech is the largest Autodesk software provider in the U.S. THE PLANETCAD ANNUAL MEETING; VOTE REQUIRED (SEE PAGE 27) The annual meeting of PlanetCAD stockholders will be held on ___________, ___________, 2002 at 9:00 a.m., local time. At the annual meeting, PlanetCAD stockholders will be asked to vote to adopt and approve the merger agreement providing for the merger of a wholly-owned subsidiary of PlanetCAD into Avatech. The adoption and approval of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of PlanetCAD common stock entitled to vote at the PlanetCAD annual meeting, including shares of PlanetCAD common stock underlying PlanetCAD convertible preferred stock. PlanetCAD stockholders are also being asked to vote upon amendments to the PlanetCAD certificate of incorporation to increase the number of authorized shares of PlanetCAD common stock and change the name of PlanetCAD to Avatech Solutions, Inc., as well as for the election of directors and the adoption of a new PlanetCAD stock option plan. You can vote at the PlanetCAD annual meeting if you were a PlanetCAD stockholder at the close of business on ______________, 2002. THE AVATECH SPECIAL MEETING; VOTE REQUIRED (SEE PAGE 38) The special meeting of Avatech stockholders will be held on ___________, ___________, 2002 at 9:00 a.m., local time. At the special meeting, holders of shares of Avatech common stock will be asked to vote to adopt and approve the merger agreement providing for the merger of a wholly-owned subsidiary of PlanetCAD into Avatech. The adoption and approval of the merger agreement requires the affirmative vote of the holders of two-thirds of the outstanding shares of Avatech common stock entitled to vote at the Avatech special meeting. Avatech stockholders are also being asked to vote upon amendments to the Avatech certificate of incorporation to increase the total number of authorized shares of Avatech and to provide for authorized shares of Avatech preferred stock. You can vote at the special meeting of Avatech stockholders if you owned shares of Avatech common stock at the close of business on ______________, 2002. 4 SHARE OWNERSHIP OF PLANETCAD'S MANAGEMENT (SEE PAGE 69) As of the record date for the PlanetCAD annual meeting, the executive officers and directors of PlanetCAD and their affiliates beneficially owned ______ shares of PlanetCAD's common stock, representing approximately _____% of the outstanding shares of PlanetCAD common stock entitled to vote at the PlanetCAD annual meeting. SHARE OWNERSHIP OF AVATECH'S MANAGEMENT (SEE PAGE 101) As of the record date for the Avatech special meeting, the executive officers and directors of Avatech and their affiliates beneficially owned _________ shares of Avatech common stock, representing approximately __% of the outstanding shares of Avatech common stock entitled to vote at the Avatech special meeting. PLANETCAD STOCKHOLDERS VOTING AGREEMENT (SEE PAGE 63) Various stockholders of PlanetCAD (including members of management) have entered into a voting agreement with Avatech under which they have agreed to vote all of their shares of PlanetCAD common stock in favor of adoption and approval of the merger agreement. As of the record date for the PlanetCAD annual meeting, the stockholders that are parties to the voting agreement beneficially owned a total of ______ shares of PlanetCAD common stock, representing approximately [___]% of the outstanding shares of PlanetCAD common stock entitled to vote at the PlanetCAD annual meeting. The PlanetCAD Stockholders voting agreement is attached as Annex B to this proxy statement/prospectus. AVATECH STOCKHOLDERS VOTING AGREEMENT (SEE PAGE 63) Various stockholders of Avatech (including members of management) have entered into a voting agreement with PlanetCAD under which they have agreed to vote all of their shares of Avatech common stock in favor of adoption and approval of the merger agreement. As of the record date for the Avatech special meeting, the stockholders that are parties to the voting agreement beneficially owned a total of ______ shares of Avatech common stock, representing approximately [___]% of the outstanding shares of Avatech common stock entitled to vote at the Avatech special meeting. [Because ___% of the outstanding shares of Avatech common stock are covered by the voting agreement and because the adoption and approval of the merger agreement requires the affirmative vote of the holders of two-thirds of the outstanding shares of Avatech common stock entitled to vote at the Avatech special meeting, the approval of the merger agreement by Avatech stockholders is assured.] The Avatech Stockholders voting agreement is attached as Annex C to this proxy statement/prospectus. DISSENTERS' RIGHTS (SEE PAGE 39) Avatech stockholders have appraisal rights under Delaware law in connection with the merger. Avatech stockholders who do not vote for the merger and who satisfy certain other conditions described beginning on page 39 and in Annex D to this proxy statement/prospectus are entitled to be paid the "fair value" of their shares of Avatech common stock, as determined by the Delaware Chancery Court, in lieu of the merger consideration. Since appraisal rights are available only to Avatech stockholders who satisfy certain conditions, Avatech stockholders should carefully review the section of this proxy statement/prospectus titled "The Avatech Special Meeting - Dissenters' Rights" beginning on page 39 and the copy of the Delaware appraisal rights statute attached as Annex D to this proxy statement/prospectus. PlanetCAD stockholders do not have appraisal rights in connection with the merger. THE MERGER (SEE PAGE 43) In the merger, a wholly-owned subsidiary of PlanetCAD will merge with and into Avatech and that subsidiary will cease to exist. As a result of the merger, Avatech will become a wholly-owned subsidiary of PlanetCAD. RECOMMENDATION OF PLANETCAD AND AVATECH BOARDS OF DIRECTORS (SEE PAGES 45 AND 47) The PlanetCAD and Avatech boards of directors have approved and adopted the merger agreement and recommend that the PlanetCAD and Avatech stockholders vote FOR the adoption and approval of the merger agreement. Please see pages 45 through 46 for a description of the factors that the PlanetCAD board considered in determining whether to approve and adopt the merger agreement and 5 pages 47 through 48 for the factors that the Avatech board considered. FAIRNESS OPINION OF PLANETCAD'S FINANCIAL ADVISOR (SEE PAGE 48) In connection with the merger, Alliant Partners, PlanetCAD's financial advisor, delivered a written opinion to the PlanetCAD board of directors as to the fairness, from a financial point of view, to the PlanetCAD stockholders of the total consideration to be provided by PlanetCAD to the stockholders of Avatech pursuant to the merger agreement. The full text of Alliant Partners' written opinion, dated May 1, 2002, is attached to this proxy statement/prospectus as Annex E. You are encouraged to read this opinion carefully in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the review undertaken. Alliant Partners' opinion is addressed to the PlanetCAD board of directors and does not constitute a recommendation to any stockholder of either corporation as to any matters relating to the merger. MANAGEMENT AFTER THE MERGER (SEE PAGE 58) Immediately following the merger, all directors and officers of PlanetCAD will resign from their positions, except for Messrs. Eugene J. Fischer and James A. Fanella who will remain as directors of the combined company. At the same time, Messrs. Hindman, Felton, [_______], [_______] and [________] will be elected as directors of the combined company. It is currently expected that the executive officers of Avatech will serve after the merger as the executive officers of the combined company. THE MERGER AGREEMENT (SEE PAGE 60) The merger agreement is attached to this proxy statement/prospectus as Annex A. We urge you to carefully read the merger agreement in its entirety as it is the legal document that governs the merger. CONVERSION OF AVATECH COMMON STOCK (SEE PAGE 53) In the merger, shares of Avatech common stock will be converted into the right to receive PlanetCAD common stock. The number of shares of PlanetCAD common stock that Avatech stockholders will receive for their shares of Avatech common stock will be determined by an exchange ratio. The exchange ratio will be determined by dividing three times the number of shares of PlanetCAD common stock outstanding prior to the Merger by the number of shares of Avatech common stock outstanding prior to the merger. As a result, PlanetCAD stockholders will own 25% of the outstanding PlanetCAD common stock following the merger and Avatech stockholders will own 75%. We currently estimate that the exchange ratio will be approximately 7.43 shares of PlanetCAD common stock for each share of Avatech common stock. Cash based on the closing price of PlanetCAD common stock on the date of the merger will be paid instead of fractional shares. CONDITIONS TO THE MERGER (SEE PAGE 65) Before the merger can be completed, a number of conditions must be satisfied. These include: - approval of the merger agreement by the requisite vote of PlanetCAD and Avatech stockholders; - absence of legal impediments preventing the completion of the merger; - effectiveness of the registration statement on Form S-4 of which this proxy statement/prospectus is a part; - delivery of tax opinions that the merger qualifies as a reorganization under section 368(a) of the Internal Revenue Code; - the listing on the American Stock Exchange of the PlanetCAD common stock to be issued to Avatech stockholders; and - other customary closing conditions. Where the law permits, Avatech or PlanetCAD could decide to complete the merger even though one or more conditions were not satisfied. By law, neither Avatech nor PlanetCAD can waive (a) the requirement that the PlanetCAD and Avatech stockholders adopt and approve the merger agreement and the merger, or (b) any court order or law preventing completion of the merger. Whether any of the conditions would be waived would depend on the facts and circumstances as determined by the reasonable business judgment of the PlanetCAD or Avatech board of directors. It is a condition to the completion of the merger that Hogan & Hartson L.L.P., counsel to PlanetCAD, and Shapiro Sher & Guinot, P.A., counsel to Avatech, deliver opinions that the merger qualifies as a 6 reorganization under the provisions of section 368(a) of the Internal Revenue Code. This condition will not be waived. TERMINATION OF THE MERGER AGREEMENT; TERMINATION FEES (SEE PAGE 67) The merger agreement contains provisions addressing the circumstances under which Avatech or PlanetCAD may terminate the merger agreement. Generally, if either party terminates the agreement, it will be required to pay the expenses incurred by the other party in connection with the merger. FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 55) PlanetCAD and Avatech intend for the merger to qualify as a tax-free reorganization within the meaning of section 368(a) of the Internal Revenue Code of 1986, as amended. If the merger qualifies as a tax-free reorganization, then the holders of Avatech common stock will not recognize a gain or loss for United States federal income tax purposes as a result of the merger, except to the extent of the cash received as part of the merger consideration in lieu of fractional shares. However, different tax consequences may apply to you because of your individual circumstances or because special tax rules apply to you. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR A FULL UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU. ACCOUNTING TREATMENT (SEE PAGE 57) The merger will be treated as a purchase for financial accounting purposes, although Avatech's historical financial statements will be the financial statements of the post-merger combined company. INTERESTS OF CERTAIN PERSONS IN THE MERGER (SEE PAGE 53) When considering the recommendation of the PlanetCAD and Avatech boards of directors, you should be aware that some directors and officers of PlanetCAD and Avatech have the following interests in the merger that are different from, or in addition to, yours: - The combined company in the merger will maintain officers' and directors' liability insurance to cover liabilities of the former officers' and directors' of PlanetCAD for the next six years. - It is anticipated that Eugene J. Fischer and James A. Fanella, currently on PlanetCAD's board of directors, and Henry Felton and W. James Hindman, currently on Avatech's board of directors, will be appointed to the board of directors of the combined company. - As of March 31, 2002, the executive officers and directors of Avatech and their affiliates owned 3,543,111 shares of Avatech common stock. Additionally, as of March 31, 2002, the executive officers and directors of Avatech held options to purchase 159,830 shares of Avatech common stock. The shares of Avatech common stock are being converted into PlanetCAD shares in the merger, and PlanetCAD is assuming the options in the merger. - We anticipate that the current executive officers of Avatech will become the executive officers of the combined company and that W. James Hindman will be appointed to serve as chairman of the board of directors of the combined company, upon completion of the merger. As a result, these directors and officers may receive benefits from the merger different from the other stockholders. GOVERNMENTAL APPROVALS AND REGULATORY REQUIREMENTS (SEE PAGE 57) Other than compliance with applicable federal and state securities laws pursuant to the issuance of PlanetCAD common stock in connection with the merger, and compliance with applicable provisions of the Delaware General Corporation Law, no federal or state regulatory requirements must be satisfied in connection with the merger. RESTRICTIONS ON THE ABILITY TO SELL PLANETCAD STOCK (SEE PAGES 57 AND 58) All shares of PlanetCAD common stock that Avatech stockholders receive in connection with the merger will be freely transferable, unless the holder is considered an "affiliate" of Avatech for purposes of the Securities Act of 1933 or the holder executes a lock-up letter. Shares of PlanetCAD common stock held by affiliates may be sold only pursuant to an effective registration statement or an exemption from registration under the Securities Act of 1933 and 7 shares of PlanetCAD common stock subject to the lock-up letter may only be sold after the expiration of 180 days following the closing of the merger, subject to any waiver by PlanetCAD. COMPARISON OF STOCKHOLDER RIGHTS (SEE PAGE 103) PlanetCAD and Avatech are both Delaware corporations. Currently, the rights of stockholders of Avatech are determined by reference to Delaware law and Avatech's certificate of incorporation and bylaws. At the effective time of the merger, stockholders of Avatech will become stockholders of PlanetCAD. As a result, their rights as stockholders will then be determined by reference to Delaware law and PlanetCAD's certificate of incorporation and bylaws. There are differences between the two corporations' certificates of incorporation and bylaws. Please see the discussion beginning on page 103 for a description of these differences. WHERE YOU CAN FIND MORE INFORMATION (SEE PAGE 113) If you would like more information about PlanetCAD, you can find this information in documents filed by PlanetCAD with the SEC. Please see page 114 for instructions on how you can obtain copies of these documents. 8 SELECTED FINANCIAL AND OTHER DATA SELECTED HISTORICAL FINANCIAL DATA OF PLANETCAD The following tables set forth selected financial data of PlanetCAD. The PlanetCAD selected financial data for the years ended December 31, 2001 and 2000 and as of December 31, 2001, have been derived from PlanetCAD's consolidated financial statements, which have been audited by KPMG LLP, its independent auditors, and should be read in conjunction with PlanetCAD's consolidated financial statements and related notes included in Item 7 of its Annual Report on Form 10-KSB incorporated by reference together with this proxy statement/prospectus. The PlanetCAD selected financial data for the three months ended March 31, 2002 and 2001 and as of March 31, 2002, are unaudited, but, in the opinion of management of PlanetCAD, reflect all adjustments (consisting only of normal, recurring adjustments) necessary for fair presentation of results for such periods. Results for the period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002 (in thousands except per share data).
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ---------------------------------------- ------------------------------------- STATEMENT OF OPERATIONS DATA: 2001 2000 2002 2001 --------------- -------------- ------------- ------------- Revenue License fees...................... $ 522 $ 1,513 $ 40 $ 123 Services.......................... 1,279 587 270 214 --------------- -------------- ------------- ------------- Total revenue................. 1,801 2,100 310 337 --------------- -------------- ------------- ------------- Cost of revenue License fees...................... 512 818 10 176 Services.......................... 959 220 142 273 --------------- -------------- ------------- ------------- Total cost of revenue......... 1,471 1,038 152 449 --------------- -------------- ------------- ------------- Gross profit (loss).................... 330 1,062 158 (112) --------------- -------------- ------------- ------------- Operating expenses Sales and marketing............... 3,121 3,102 328 545 Research and development.......... 4,403 6,291 482 1,410 General and administrative........ 4,226 2,697 823 1,128 Restructuring costs............... 1,023 -- -- -- Acquired in-process research and development...................... -- 332 -- -- --------------- -------------- ------------- ------------- Total operating expenses...... 12,773 12,422 1,633 3,083 --------------- -------------- ------------- ------------- Interest income (expense), net......... 72 (46) 23 241 --------------- -------------- ------------- ------------- Net loss from continuing operations................... (12,371) (11,406) (1,452) (2,954) --------------- -------------- ------------- ------------- Discontinued operations: Income (loss) from discontinued operations, net of income tax.............................. -- (4,818) -- 447 Gain on sale of discontinued operations, net of income tax expense.......................... 1,021 17,379 -- -- --------------- -------------- ------------- ------------- Net earnings (loss)........... $ (11,350) $ 1,155 $ (1,452) $ (2,507) =============== ============== ============= ============= Earnings (loss) per common share, basic and diluted Continuing operations............. $ (0.99) $ (1.00) $ (0.12) $ (0.24) Discontinued operations........... 0.08 1.10 -- 0.04 --------------- -------------- ------------- ------------- Net earnings (loss) per share. $ (0.91) $ 0.10 $ (0.12) $ (0.20) =============== ============== ============= ============= Basic and diluted weighted average number of common shares outstanding... 12,416 11,439 12,436 12,406
9
DECEMBER 31, MARCH 31, BALANCE SHEET DATA 2001 2002 ----------------------------------------- Cash and cash equivalents....................... $ 5,411 $ 4,259 Working capital................................. 4,354 3,113 Total assets.................................... 7,932 6,395 Long-term debt and capital lease obligations.... -- -- Total stockholders' equity...................... 6,057 4,608
SELECTED CONSOLIDATED FINANCIAL DATA OF AVATECH The following summary of consolidated financial data is derived from Avatech's audited financial statements as of and for the three years ended June 30, 2001, 2000 and 1999 and from its unaudited financial statements as of and for the two years ended 1998 and 1997 and the nine months ended March 31, 2002 and 2001. The following consolidated financial data should be read in conjunction with "Avatech - Management's Discussion and Analysis of Financial Condition and Results of Operations" and Avatech's consolidated financial statements and related notes included elsewhere in this proxy statement/prospectus.
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ------------------------------------------------------------------- ------------------------- 2001 2000 1999 1998 1997 2002 2001 ----------- ----------- ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenue Product sales $23,546,131 $23,920,585 $28,432,471 $25,553,515 $20,955,527 $17,682,069 $17,418,388 Service revenues 6,049,275 7,519,169 6,871,010 5,936,998 4,197,082 4,606,581 4,454,214 Commission revenue 3,415,344 2,754,289 2,903,295 1,505,682 1,112,073 2,946,221 2,542,985 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Revenue 33,010,750 34,194,043 38,206,776 32,996,195 26,264,682 25,234,871 24,415,587 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Cost of revenue Cost of product sales 16,388,742 17,267,541 20,899,471 18,536,011 15,543,601 11,754,730 11,896,084 Cost of service revenues 3,813,635 4,664,518 4,980,225 3,315,193 2,598,838 3,227,757 3,487,621 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Cost of Revenue 20,202,377 21,932,059 25,879,696 21,851,204 18,142,439 14,982,487 15,383,705 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Gross Margin 12,808,373 12,261,984 12,327,080 11,144,991 8,122,243 10,252,384 9,031,882 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Other Expenses Selling, general and administrative 11,519,199 12,919,902 12,940,965 10,688,583 8,228,787 9,476,243 8,146,427 Depreciation and amortization 694,503 692,180 736,196 586,646 347,674 503,472 537,796 Goodwill impairment -- -- -- -- -- 283,000 -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total Other Expenses 12,213,702 13,612,082 13,677,161 11,275,229 8,576,461 10,262,715 8,684,223 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income/(Loss) From Operations 594,671 (1,350,098) (1,350,081) (130,238) (454,218) (10,331) 347,659 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Other Income/(Expense) Interest and other income/(expense) 61,488 (61,819) (18,703) 31,996 44,373 47,699 54,884 Interest expense (553,823) (641,320) (484,932) (234,318) (131,157) (348,416) (428,255) ----------- ----------- ----------- ----------- ----------- ----------- ----------- (492,335) (703,139) (503,635) (202,322) (86,784) (300,717) (373,371) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Income Taxes 102,336 (2,053,237) (1,853,716) (332,560) (541,002) (311,048) (25,712) Income Tax Expense 13,000 -- -- 22,049 (9,293) 40,000 11,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net Income (Loss) $ 89,336 $(2,053,237) $(1,853,716) $ (354,609) $ (531,709) $ (351,048) $ (36,712) =========== =========== =========== =========== =========== =========== =========== Earnings (loss) per Common Share - Basic and Diluted $ 0.01 $ (0.34) $ (0.31) $ (0.06) $ (0.16) $ (0.06) $ (0.01) =========== =========== =========== =========== =========== =========== =========== Weighted average number of common shares outstanding - Basic and Diluted 5,995,904 6,078,374 6,038,710 5,477,878 3,356,386 6,005,021 5,989,890 =========== =========== =========== =========== =========== =========== ===========
AS OF AS OF JUNE 30, MARCH 31, ------------------------------------------------------------------------------- ----------- 2001 2000 1999 1998 1997 2002 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Cash and cash equivalents $ 309,621 $ 423,307 $ 1,198,675 $ 900,461 $ 545,754 $ 175,264 Working capital (2,714,712) (1,257,780) 157,394 (959,977) (1,218,505) (4,523,338) Total assets 8,377,015 7,920,247 9,827,994 8,648,728 6,097,659 6,439,971 Total debt 6,480,880 5,750,883 6,492,239 3,205,274 1,174,700 5,546,911 Total stockholders deficiency (3,424,838) (3,427,041) (1,609,640) (132,431) (415,895) (3,841,415)
SUMMARY PRO FORMA COMBINED CONDENSED FINANCIAL DATA The following unaudited summary pro forma combined financial data have been prepared to give effect to the proposed purchase business combination between Avatech and PlanetCAD. The unaudited summary pro forma combined statement of operations data give effect to the proposed purchase business combination as if it had occurred on July 1, 2000. The unaudited summary pro forma combined balance sheet data gives effect to the proposed combination as if it had occurred on March 31, 2002. The following summary unaudited pro forma combined financial data has been derived from, and should be read together, with the unaudited pro forma combined financial statements and related notes included elsewhere herein as "Unaudited Pro Forma Combined Condensed Financial Information." This information is based on the historical consolidated balance sheets and related historical consolidated statements of operations of Avatech and PlanetCAD, giving effect to the merger using the purchase method of accounting for business combinations. The companies may have performed differently had they always been combined. You should not rely on the summary unaudited pro forma combined financial data as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience after the merger. This information is for illustrative purposes only.
Nine Months Ended Year Ended March 31, 2002 June 30, 2001 ------------------- --------------- Operating revenues.......................................... $ 26,631,575 $ 35,536,175 Operating loss.............................................. (6,176,353) (14,190,855) Net loss.................................................... (6,583,295) (14,103,365) Basic and diluted net loss per common share................. $ (0.11) $ (0.24) At March 31, 2002 ----------------- Total assets................................................ $ 11,948,347 Senior debt................................................. $ 903,870 Subordinated debt........................................... $ 840,582 Stockholders' equity........................................ $ 4,074,231
10 COMPARATIVE PER SHARE DATA The following table compares historical and pro forma earnings (loss) per share and book value per share information for PlanetCAD and Avatech. You should read the table together with the financial information for PlanetCAD and Avatech included or incorporated by reference in this proxy statement/prospectus. You should not rely on the pro forma financial information as an indication of the results that PlanetCAD would have achieved if the merger had taken place earlier or of the results that PlanetCAD will achieve after the merger.
Nine Months Ended Year Ended March 31, 2002 June 30, 2001 ----------------- ----------------- Avatech historical data, per common share: - -------------------------------------------------------------------------------- Income (Loss) per common share............................................ $(0.06) $ 0.01 Income (Loss) per common share - assuming dilution........................ (0.06) 0.01 Book value per common share at end of period.............................. (0.64) (0.57) Book value per common share - assuming dilution........................... (0.64) (0.57) Pro Forma combined data, per Avatech - equivalent common share: - -------------------------------------------------------------------------------- Loss per common share..................................................... $(0.11) $(0.24) Loss per common share - assuming dilution................................. (0.11) (0.24) Book value per common share at end of period.............................. 0.07 -- Book value per common share - assuming dilution........................... 0.07 -- Shares................................................................. 59,393,884 -- Fully diluted shares................................................... 59,393,884 --
MARKET PRICE AND DIVIDEND INFORMATION PLANETCAD MARKET PRICE DATA PlanetCAD common stock is listed on the American Stock Exchange under the symbol "PCD". The following table indicates the high and low sales prices per share, rounded to the nearest whole cent, reported by the American Stock Exchange, for the periods indicated.
PERIOD HIGH LOW ------ ---- --- 2000 First Quarter........................... $ 12.00 $ 3.88 Second Quarter.......................... 8.00 3.13 Third Quarter........................... 4.44 1.75 Fourth Quarter.......................... 3.25 0.50 2001 First Quarter........................... $ 1.38 $ 0.30 Second Quarter.......................... 0.75 0.40 Third Quarter........................... 0.55 0.15 Fourth Quarter.......................... 0.24 0.10 2002 First Quarter........................... $ 0.22 $ 0.17 Period commencing on April 1, 2002 and ending on ___________, 2002........... 0.xx 0.xx
11 Avatech stockholders are urged to obtain current quotations for the market prices of PlanetCAD common stock. No assurance can be given as to the market price of PlanetCAD common stock at the effective time of the merger. The merger is not contingent on the price of PlanetCAD's common stock. AVATECH MARKET PRICE DATA The Avatech common stock is not publicly traded and, therefore, no reliable quotations exist for Avatech common stock. Based upon the closing price of PlanetCAD common stock on [______], 2002, and the assumed exchange ratio of 7.43, each share of Avatech common stock would have an implied value of $[____]. RECENT CLOSING PRICES On May 1, 2002, the last trading day before the public announcement of the merger agreement, the closing price for PlanetCAD common stock as reported on the American Stock Exchange was $0.17. On _________, 2002, the closing price of PlanetCAD common stock as reported on the American Stock Exchange was $[___]. DIVIDEND INFORMATION Neither PlanetCAD nor Avatech has ever paid any cash dividends on its stock, and both anticipate that they will continue to retain any earnings for the foreseeable future for use in the expansion and operation of their respective businesses. If the merger is completed, the combined company intends to retain its earnings, if any, for the foreseeable future and, therefore, does not anticipate declaring dividends. NUMBER OF STOCKHOLDERS As of __________, 2002, there were _____ holders of record of PlanetCAD common stock and 101 holders of record of Avatech common stock. 12 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, TOGETHER WITH THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS, BEFORE DETERMINING WHETHER OR NOT TO VOTE IN FAVOR OF THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, PLANETCAD'S BUSINESS AND FINANCIAL CONDITION AND ITS RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED. IF THAT HAPPENS, THE VALUE OF PLANETCAD'S COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. RISKS RELATED TO THE MERGER FAILURE TO SATISFY OR WAIVE CERTAIN CONDITIONS COULD PREVENT THE MERGER FROM OCCURRING. The closing of the merger is contingent upon various conditions being satisfied or waived. If all the conditions are not satisfied or waived, the merger will not occur. The merger agreement provides that as a condition to the obligations of both PlanetCAD and Avatech to effect the merger, the PlanetCAD common stock to be issued in the merger be authorized for listing on the American Stock Exchange. If the staff of the American Stock Exchange recommends that the listing be denied, we cannot provide you with any assurances concerning the result of an appeal. Similarly, the merger agreement contains other conditions that may not be satisfied, including that the stockholders of both PlanetCAD and Avatech approve the merger, that there be no material adverse change with respect to either PlanetCAD or Avatech, that PlanetCAD develop a prototype product, that PlanetCAD have a minimum amount of current assets and that a limited number of Avatech stockholders exercise their dissenters' rights. If the merger is not completed for any reason, PlanetCAD may be subject to material risks, including the risk of a decline in the market price of PlanetCAD common stock to the extent current market prices reflect a market assumption that the merger will be completed. If, following termination of the merger agreement, the PlanetCAD board of directors determines to seek another merger or business combination, there can be no assurance that it will be able to find a partner willing to undertake a merger or business combination on equivalent or more attractive terms than would be provided by Avatech in the merger. DEPENDENCE UPON AVATECH BUSINESS, OPERATIONS AND MANAGEMENT. This transaction is a "reverse merger acquisition" in which the former Avatech stockholders will acquire 75% of the combined company. After the merger, PlanetCAD stockholders will own 25% of the combined company. In addition, following the merger, the combined company's business, operations and management will consist substantially of the business, operations and management of Avatech as existing prior to the merger. Although PlanetCAD and Avatech believe that the combined company will be able to realize value from PlanetCAD's tangible and intangible assets after the merger, there can be no assurance that the combined company will be able to do so. In addition, there can be no assurance that stockholders of PlanetCAD and Avatech will receive a greater return on their investment upon the merger than they would if PlanetCAD and Avatech were to remain independent companies. AVATECH STOCKHOLDERS WILL RECEIVE SHARES OF PLANETCAD COMMON STOCK BASED ON AN EXCHANGE RATIO UNRELATED TO THE MARKET VALUE OF PLANETCAD COMMON STOCK. In the merger, shares of common stock held by Avatech stockholders will be converted into the right to receive shares of PlanetCAD common stock. An exchange ratio will be used to determine the number of shares of PlanetCAD common stock that Avatech stockholders will receive for each share of Avatech common stock. The exchange ratio will be determined by dividing three times the number of shares of PlanetCAD common stock outstanding prior to the merger by the number of shares of Avatech common stock outstanding prior to the merger. The exchange ratio is unrelated to the market value of PlanetCAD common stock. As a result, the value of the shares of PlanetCAD common stock to be received for each share of Avatech common stock will fluctuate. We cannot predict the market prices for the PlanetCAD common stock and we encourage you to obtain current market quotations of the PlanetCAD common stock, which is listed on the American Stock Exchange under the symbol "PCD." 13 DEPARTURE OF KEY PERSONNEL OR THE FAILURE TO ATTRACT QUALIFIED EMPLOYEES MAY NEGATIVELY IMPACT THE BUSINESS OF THE COMBINED COMPANY. The ability of the combined company to maintain its competitive position will depend, in large part, on its ability to attract and retain highly qualified development, sales, professional services and managerial personnel. Competition for these persons is intense. While the merger will increase the combined company's human resources in this area, there is always a risk of departure of key employees due to the combination process. The announcement of the proposed merger may impede the combined company's ability to attract and retain personnel before and after the transaction. The loss of a significant group of key personnel would adversely affect the combined company's business efforts. LACK OF A PUBLIC MARKET FOR AVATECH COMMON STOCK MAKES IT DIFFICULT TO EVALUATE THE FAIRNESS OF THE EXCHANGE RATIO OR THE FUTURE MARKET PRICE OF THE SHARES OF COMMON STOCK OF THE COMBINED COMPANY. There is currently no public market for Avatech common stock, and as a result, the exchange ratio was primarily determined based on negotiations between the parties. Accordingly, it is difficult to predict how the stock of the combined company will trade following the merger. Avatech cannot determine whether an active trading market will develop for the stock of the combined company. Moreover, there can be no assurance that the stock of the combined company will continue to trade on the American Stock Exchange. Even if an active trading market does develop for the common stock of the combined company, there can be no assurance that the market will be sustained or that the market price initially established for the shares of common stock of the combined company will approximate the market value of the equivalent number of shares of PlanetCAD common stock prior to the merger, or that the market price of the common stock of the combined company will not decline in value. PLANETCAD'S AND AVATECH'S OFFICERS AND DIRECTORS HAVE CONFLICTS OF INTEREST THAT INFLUENCE THEM TO SUPPORT OR APPROVE THE MERGER. The officers and directors of both PlanetCAD and Avatech have interests in the merger that are different from, or in addition to, yours, including the following: - The merger agreement provides that the combined company in the merger will maintain officers' and directors' liability insurance to cover liabilities of the former officers' and directors' of PlanetCAD for the next six years. - It is anticipated that Eugene J. Fischer and James A. Fanella, currently on PlanetCAD's board of directors, and Henry Felton and W. James Hindman, currently on Avatech's board of directors, will be appointed to the board of directors of the combined company. - As of March 31, 2002, the executive officers and directors of Avatech and their affiliates owned 3,543,111 shares of Avatech common stock. Additionally, as of March 31, 2002, the executive officers and directors of Avatech held options to purchase 159,830 shares of Avatech common stock. The shares of Avatech common stock will be converted into PlanetCAD shares in the merger, and the options will be assumed by PlanetCAD in the merger. - The current executive officers of Avatech will become the executive officers of the combined company and W. James Hindman, currently a member of Avatech's board of directors, will be appointed to serve as chairman of the board of directors of the combined company, upon completion of the merger. IF THE MERGER FAILS TO QUALIFY AS A TAX-FREE REORGANIZATION YOU WILL RECOGNIZE GAIN OR LOSS ON YOUR AVATECH SHARES. Avatech and PlanetCAD have structured the merger to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. Although the Internal Revenue Service has not provided a ruling on the merger, Avatech and PlanetCAD each intend to obtain a legal opinion that the merger qualifies as a tax-free reorganization. These opinions neither bind the IRS nor prevent the IRS from adopting a contrary position. 14 If the merger fails to qualify as a tax-free reorganization, you would generally recognize gain or loss on each share of Avatech common stock exchanged in the merger in the amount of the difference between your basis in such share and the fair market value of the PlanetCAD common stock and cash you receive in exchange for such share of Avatech common stock at the time of the merger. SALES OF SUBSTANTIAL AMOUNTS OF PLANETCAD'S COMMON STOCK IN THE OPEN MARKET COULD DEPRESS PLANETCAD'S STOCK PRICE. Sales of a large number of shares of PlanetCAD common stock in the public market following the completion of the merger, or even the belief that such sales could occur, could cause a drop in the market price of PlanetCAD common stock and could impair PlanetCAD's ability to raise capital through offerings of PlanetCAD's equity securities. Based on current assumptions, we estimate that, immediately after the merger, there will be approximately 59.4 million shares of PlanetCAD common stock outstanding. All of the shares issued to Avatech stockholders will be freely tradable without restrictions or further registration under the Securities Act of 1933, unless such shares are held by any person who was an "affiliate" of Avatech prior to the merger, as that term is defined in Rule 144 under the Securities Act of 1933. The term "affiliate" would include directors and some officers and principal stockholders of Avatech. See "The Merger -- Additional Restrictions on Sales of Shares by Affiliates of Avatech" on page ____. Certain stockholders of Avatech and PlanetCAD have agreed to hold most of their shares for 180 days after the merger. The aggregate number of shares subject to this "lock-up" agreement is approximately ______, which is approximately ___% of the total number of shares of common stock to be outstanding after the merger. See "The Merger - --Restrictions on Sales by Significant Stockholders." PLANETCAD AND AVATECH MAY ENCOUNTER DIFFICULTIES IN THE INTEGRATION AND DEVELOPMENT OF THEIR BUSINESSES. PlanetCAD and Avatech will face technical, operational and strategic challenges that may prevent them from successfully integrating their businesses. The merger involves risks related to the integration and management of acquired technology, operations and personnel. PlanetCAD's integration with Avatech may disrupt PlanetCAD's and Avatech's businesses if not completed in a timely and efficient manner. Following the merger, PlanetCAD and Avatech must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices. The combined company may encounter substantial difficulties, costs and delays involved in integrating the operations of PlanetCAD and Avatech, including: - potential incompatibility of business cultures; - potential difficulties in coordinating geographically separated organizations, with Avatech's operations located in 20 geographically dispersed offices plus a headquarters in Owings Mills, Maryland, and PlanetCAD's operations in Boulder, Colorado; - potential adverse changes in business focus, whether perceived or actual; - potential conflicts in third-party relationships; and - the loss of key employees and diversion of the attention of management from other ongoing business concerns. GENERAL UNCERTAINTY RELATED TO THE MERGER COULD HARM THE COMBINED COMPANY. PlanetCAD's or Avatech's customers may, in response to the announcement of the proposed merger, delay or defer purchasing decisions. If PlanetCAD's or Avatech's customers delay or defer purchasing decisions, the combined company's revenues could materially decline. Similarly, PlanetCAD's and Avatech's employees may experience uncertainty about their future role with the combined company. This may harm the combined company's ability to attract and retain key management, sales, marketing and technical personnel. Also, speculation regarding the likelihood of the completion of the merger could increase the volatility of PlanetCAD's stock price. The disruption of the businesses of PlanetCAD and Avatech caused by these issues could cause quarterly and annual operating results to be lower than expected. 15 THE COSTS OF THE MERGER AND THE COSTS OF INTEGRATING PLANETCAD'S AND AVATECH'S OPERATIONS ARE SUBSTANTIAL AND WILL MAKE IT MORE DIFFICULT FOR THE COMBINED COMPANY TO ACHIEVE PROFITABILITY. PlanetCAD and Avatech will incur substantial costs in connection with the merger that may make it more difficult to achieve profitability in the future. PlanetCAD and Avatech expect that they will incur costs associated with the merger, consisting of transaction fees for investment bankers, attorneys, accountants and other related costs and additional nonrecurring restructuring charges, in an amount currently estimated to be approximately $1,300,000. PlanetCAD and Avatech may, however, incur merger related costs in excess of these amounts. RISKS RELATED TO PLANETCAD'S BUSINESS PLANETCAD HAS A HISTORY OF LOSSES AND EXPECTS LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE. As of March 31, 2002, PlanetCAD had an accumulated deficit of $31.6 million. PlanetCAD has experienced operating losses in each quarterly period since its inception. PlanetCAD expects to continue to incur net losses for the foreseeable future because its expected operating and marketing expenses will increase as it attempts to grow its business. With increased expenses, PlanetCAD will need to generate significant additional revenue to achieve profitability. As a result, PlanetCAD may never become profitable. Even if PlanetCAD does achieve profitability in any period, it may not be able to sustain or increase profitability on a quarterly or an annual basis. PLANETCAD IS IMPLEMENTING A NEW AND UNPROVEN BUSINESS MODEL. PlanetCAD's business model is new and unproven and may never be successful. The success of the business plan depends on a number of factors. These factors include: - competition from other supply chain management software developers, most of whom are significantly larger or have significantly greater financial and marketing resources than PlanetCAD does; - PlanetCAD's ability to introduce and sell its products, specifically SCS|Envoy, to supply chain manufacturers of its existing customers; - PlanetCAD's ability to differentiate its product offerings, specifically SCS|Envoy, from those of its competitors; - acceptance by customers of supply chain management functionality with engineering integration as a differentiator; - PlanetCAD's ability to continue to differentiate and support its PrescientQA(TM) line of products; and - PlanetCAD's ability to implement new and additional services useful to the engineering software and supply chain manufacturing markets. PlanetCAD will need to develop new products and enhance existing products, services and software that stimulate and satisfy customer demand. If PlanetCAD fails to achieve these objectives, its business may not be viable. End-users and mid-market supply chain manufacturers may fail to adopt PlanetCAD's supply chain management products and application services for a number of reasons, including: - lack of information technology budget to allocate for the purchase of PlanetCAD enterprise software solutions and services; - lack of confidence in PlanetCAD's long-term strength as a service provider; 16 - lack of knowledge and understanding of the return on investment and benefits provided with supply chain management applications with integrated engineering data exchange; - the look and feel of supply chain management products, quality and other manufacturing industry-related applications and services; and - actual or perceived limitations in selection and availability of supply chain management products, quality and other manufacturing industry-related applications and services. PLANETCAD MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL ON FAVORABLE TERMS OR AT ALL. PlanetCAD may need to raise additional capital to fund operating losses, develop and enhance its services and products, fund expansion, respond to competitive pressures or acquire complementary products, businesses or technologies. PlanetCAD may not be able to raise additional financing on favorable terms, if at all. If PlanetCAD raises additional funds through the issuance of equity or convertible debt securities, the percentage ownership of PlanetCAD stockholders will be reduced and the securities issued may have rights, preferences or privileges senior to those of PlanetCAD common stock. If PlanetCAD cannot raise adequate funds on acceptable terms, its ability to fund growth, take advantage of business opportunities, develop or enhance services or products or otherwise respond to competitive pressures will be significantly limited. In that event, its business could be harmed, its operating results and financial condition could be adversely affected and the market price for PlanetCAD common stock could decline. PLANETCAD IS HIGHLY DEPENDENT ON THE SUCCESS OF ITS SUPPLY CHAIN MANAGEMENT SOFTWARE. The market for SCS|Envoy, PlanetCAD's supply chain management software, and its related services is at an early stage of development. PlanetCAD's success depends on a significant number of buying organizations and marketplaces implementing its products and services. The implementation of PlanetCAD's products by these organizations is often perceived as complex, time consuming and expensive. In many cases, these organizations must change established business practices and conduct business in new ways. PlanetCAD's ability to attract additional customers for its products and services will depend in large part on its ability to use its existing customers as reference accounts. Unless a critical mass of buying organizations, their suppliers and marketplaces adopt PlanetCAD's supply chain management solutions, its products and services may not achieve widespread market acceptance and its business could be materially adversely affected. PlanetCAD began marketing SCS|Envoy in late January 2002 and, as of May 28, 2002, has not made any sales. PLANETCAD HAS A LIMITED OPERATING HISTORY. Although PlanetCAD has existed since July 1986, the PlanetCAD division was not introduced until June 1999 and its first PlanetCAD application service was not launched until November 1999. In November of the following year, PlanetCAD sold its component software division, the division around which it was founded, to a wholly-owned subsidiary of Dassault Systemes Corp. Since that time, with the acquisition in June 2001 of PlanetCAD's supply chain management application services capabilities, PlanetCAD has changed the focus of its operations from providing Web-based applications services to providing cycle time reduction services and solutions for the manufacturing supply chain. The limited history and continuing evolution of the PlanetCAD operations makes it difficult to evaluate PlanetCAD's business and prospects. PlanetCAD's prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies with limited resources attempting to use technology to change long-established businesses and consumer behavior. These risks and uncertainties are discussed throughout this section. If PlanetCAD fails to address these risks and uncertainties, it may be unable to grow its business, increase its revenue or become profitable. THE COMPETITION IN PLANETCAD'S INDUSTRY IS INTENSE. The markets for PlanetCAD's products and services are highly competitive, rapidly changing and subject to constant technological innovation. Participants in these markets face constant pressure to accelerate the release of new products, enhance existing products, introduce new product features and reduce prices. Most of PlanetCAD's 17 competitors or potential competitors have significantly greater financial, managerial, technical and marketing resources than PlanetCAD does. Actions by competitors that could materially adversely affect its business, financial condition and results of operations include: - a reduction in prices for their products or services; - increased promotional and marketing expenses; - accelerated introduction of, or the announcement of, new or enhanced products, services or features; - acquisitions of competitive software applications or technologies from third parties; or - product or service giveaways or bundling. In addition, its present and future competitors may be able to develop comparable or superior products or respond more quickly to new technologies or evolving standards. Accordingly, PlanetCAD may be unable to consistently compete effectively in its markets, competition might intensify or future competition may develop, all of which could materially adversely affect its business, financial condition, results of operations or market for PlanetCAD common stock. PLANETCAD MAY FAIL TO MEET EXPECTATIONS BECAUSE OF THE IMPACT OF CHANGING GLOBAL ECONOMIC CONDITIONS ON ITS CUSTOMERS. PlanetCAD's operating results can vary significantly based upon the impact of changes in global economic conditions on its customers. More specifically, the macro-economic environment of 2001 proved more uncertain than in recent prior periods. The revenue growth and profitability of PlanetCAD's business depends on the overall demand for supply chain management software and services, particularly in the markets in which it competes. Because PlanetCAD's sales are primarily to corporate customers whose businesses fluctuate with general economic and business conditions, a softening of demand for computer software caused by a weakening economy may result in decreased revenue and lower growth rates. Customers may defer or reconsider purchasing PlanetCAD's products if they experience a downturn in their business or if there is a downturn in the general economy. PLANETCAD'S REVENUE MAY FLUCTUATE BECAUSE OF UNPREDICTABLE ECONOMIC CYCLES AND UNCERTAIN DEMAND FOR ITS SUPPLY CHAIN MANAGEMENT CAPABILITIES. Demand for PlanetCAD's supply chain management and other services is affected by the general level of economic activity in the markets in which it operates, both in the United States and abroad. PlanetCAD's customers and the markets in which PlanetCAD competes to provide its products and services are likely to experience periods of economic decline from time to time. Adverse economic conditions may decrease PlanetCAD's customers' willingness to make capital expenditures or otherwise reduce their spending to purchase its products and services, which could result in diminished revenue and margins for its business. In addition, adverse economic conditions could alter the overall mix of services that PlanetCAD's customers seek to purchase, and increased competition during a period of economic decline could force it to accept contract terms that are less favorable to it than it might be able to negotiate under other circumstances. Changes in PlanetCAD's product offering mix or a less favorable contracting environment may cause its revenue and margins to decline. PLANETCAD'S PRODUCTS MAY CONTAIN UNDETECTED ERRORS. PlanetCAD's business depends on complex computer software, both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when new versions are released. Although PlanetCAD conducts extensive testing, it may not discover software defects that affect its new or current products and services or enhancements until after they are deployed. In the past, PlanetCAD has discovered software errors in some new products and enhancements after their introduction. PlanetCAD may find errors in current or future new products or releases after commencement of commercial use. If PlanetCAD markets products and services that contain errors or that do not function properly, it may experience negative publicity, loss of or delay in market acceptance, or claims against it by customers, any of which could harm 18 its current and future sales, or result in expenses and liabilities that could reduce its operating results and adversely affect its financial condition and market for its common stock. PLANETCAD DEPENDS ON SWIFT AND TIMELY INTRODUCTIONS OF NEW PRODUCTS. PlanetCAD competes in an industry continuously faced with evolving standards and rapid technological developments. New products are introduced frequently and customer requirements change with technology developments. PlanetCAD's success will depend upon its ability to anticipate evolving standards, technological developments and customer requirements and accordingly to enhance its existing products. PlanetCAD has experienced delays in the development of certain new products and product versions. Additionally, PlanetCAD uses third party development partners to facilitate the development of product enhancements and extensions. Delays in product development may adversely affect PlanetCAD's business, financial condition and operating results. Negative reviews of new products or product versions could also materially adversely affect market acceptance. PLANETCAD IS DEPENDENT UPON KEY PERSONNEL AND THE ABILITY TO HIRE ADDITIONAL PERSONNEL. PlanetCAD's executive officers and key employees are vital assets. PlanetCAD depends on the ability to attract, retain and motivate high quality personnel, especially management, skilled development personnel and sales personnel. Competition for skilled development personnel with specialized experience and training relevant to supply chain management software is intense. There are a limited number of experienced people in the United States with the skills and training PlanetCAD requires. The loss of any of PlanetCAD's key employees could materially adversely affect its business, financial condition or operating results. PlanetCAD's failure to recruit executive officers or key sales, management or development personnel would similarly harm its growth and competitiveness. PLANETCAD MAY NOT BE ABLE TO EFFECTIVELY EXPAND ITS OPERATIONS. PlanetCAD's future success will depend, in part, upon its ability to: - introduce competitive products on a timely basis; - continue to enhance its suite of products; - respond to competitive developments; - expand its sales and marketing efforts; and - attract, train, motivate and retain qualified management, software development and engineering personnel. Although PlanetCAD believes its systems and controls are adequate for its current level of operations, it may need to add personnel and expand and upgrade its systems and controls to meet these challenges. Failure to do so could have a material adverse effect upon its business, financial condition and results of operations. PLANETCAD MAY NOT BE ABLE TO EFFECTIVELY INTEGRATE RECENT ACQUISITIONS OR FUTURE STRATEGIC ACQUISITIONS. In June 2001 PlanetCAD completed the acquisition of its supply chain management software solutions. In the future, PlanetCAD may find it necessary or desirable to acquire additional complementary businesses, products or technologies. If PlanetCAD identifies an appropriate acquisition candidate, it may not be able to negotiate the terms of the acquisition successfully, finance the acquisition, or integrate the acquired business, products or technologies into its existing business and operations. If PlanetCAD's efforts are not successful, its business could be materially adversely affected. Completing any future acquisitions, and integrating PlanetCAD's recent product acquisition could cause significant diversions of management time and resources. Managing acquired businesses entails numerous operational and financial risks. These risks include difficulty in assimilating acquired operations, diversion of 19 management's attention and the potential loss of key employees or customers of acquired operations. PlanetCAD may not be able to effectively integrate any such acquisitions, and its failure to do so could result in lost revenue or materially reduce its operating results. Furthermore, if PlanetCAD consummates one or more significant future acquisitions in which the consideration consists of PlanetCAD stock or other securities, its equity could be significantly diluted. If PlanetCAD consummates any significant future acquisitions in which the consideration consists of cash, a substantial portion of its cash available for operations could be depleted. Financing for future acquisitions may not be available on favorable terms, or at all. PLANETCAD MAY BE EXPOSED TO RISKS OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS INFRINGEMENT. PlanetCAD's proprietary technologies are critical to its success and ability to compete. PlanetCAD relies on trade secret and copyright laws to protect its proprietary technologies, but its efforts may be inadequate to protect these proprietary rights or to prevent others from claiming violations of their proprietary rights. PlanetCAD has no patents with respect to the technology it uses. Further, effective trade secret and copyright protection may not be available in all foreign countries. PlanetCAD generally enters into confidentiality or license agreements with employees and consultants. Additionally, it seeks to control access to and distribution of its proprietary software, documentation and other information. Despite PlanetCAD's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of its products or to obtain and use information that it regards as proprietary. Monitoring and restricting unauthorized use of its proprietary information is difficult. The unauthorized misappropriation of PlanetCAD's technology could have a material adverse effect on its business, financial condition, results of operations and market for PlanetCAD common stock. If PlanetCAD resorts to legal proceedings to enforce its proprietary rights, the proceedings could be burdensome and expensive and could involve a high degree of risk. PlanetCAD may also be subject to claims alleging that it has infringed third party proprietary rights. Litigating such claims, whether meritorious or not, is costly and could materially adversely affect its results of operations. These claims might require it to enter into royalty or license agreements with terms unfavorable to it. If PlanetCAD were found to have infringed upon the proprietary rights of third parties, it could be required to pay damages, cease sales of the infringing products or redesign or discontinue such products, any of which could materially reduce its sales and results of operations and cause a decline in the market price for PlanetCAD common stock. PLANETCAD'S CERTIFICATE OF INCORPORATION, BYLAWS AND ANTI-TAKEOVER PROTECTIONS COULD DELAY OR PREVENT AN ACQUISITION OR SALE OF PLANETCAD. Certain provisions of PlanetCAD's restated certificate of incorporation, as amended, and bylaws, as well as certain provisions of the General Corporation Law of the State of Delaware, may deter, discourage or make more difficult a change in control, even if such a change in control would benefit PlanetCAD stockholders. In particular: - its certificate of incorporation authorizes the board of directors to issue one or more classes of preferred stock having such designations, rights and preferences as they determine, which issuances may have a material adverse effect on the rights of holders of common stock; - PlanetCAD stockholders have no right to take action by written consent; - only stockholders owning not less than two-thirds of the outstanding shares may call special meetings of stockholders; - its bylaws contain advance notice provisions for presentation of new business and nominations of directors at meetings of stockholders; and 20 - its bylaws may be amended only by the board of directors or by the affirmative vote of sixty-six and two-thirds percent of the voting power of all of the then-outstanding shares of PlanetCAD voting stock. In addition, under the terms of PlanetCAD's recently adopted stockholder rights plan, in general, if a person or group acquires more than 15% of the outstanding shares of PlanetCAD common stock, all of its other stockholders would have the right to purchase securities from it at a discount to such securities' fair market value, thus causing substantial dilution to the holdings of that acquiring person or group. The stockholder rights plan may inhibit a change in control and, therefore, could materially adversely affect PlanetCAD stockholders' ability to realize a premium over the then-prevailing market price for PlanetCAD common stock in connection with such a transaction. Delaware law may also discourage, delay or prevent someone from acquiring or merging with PlanetCAD. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction. PlanetCAD's board of directors could use this provision to prevent or delay takeovers. These provisions could discourage potential acquisition proposals and could delay or prevent a change of control transaction. As a result, they may limit the price investors may be willing to pay for PlanetCAD stock in the future. PLANETCAD'S STOCK PRICE IS HIGHLY VOLATILE. The market price of PlanetCAD common stock has been highly volatile and is likely to continue to be volatile. Factors affecting its stock price may include: - fluctuations in its sales or operating results; - announcements of technological innovations or new software standards by it or its competitors; - published reports of securities analysts; - developments in patent or other proprietary rights; - changes in its relationships with development partners; and - general market conditions, especially regarding the general performance of comparable technology stocks. Many of these factors are beyond PlanetCAD's control. These factors may materially adversely affect the market price of PlanetCAD common stock, regardless of its operating performance. IMPACT OF PCD INVESTMENTS, LLC'S ACTIONS ON PLANETCAD AND ITS CUSTOMER AND EMPLOYEE RELATIONS. Beginning in December 2001, PCD Investments, LLC, which began acquiring PlanetCAD common stock in October 2001 and is now PlanetCAD's largest stockholder, has made various proposals to purchase PlanetCAD outstanding shares of common stock, including a potential hostile tender offer. PCD Investments subsequently announced that it did not plan to commence the tender offer, but that it intended to nominate at the 2002 annual meeting six individuals to serve as members of PlanetCAD's board of directors. The uncertainty arising from PCD Investments' actions and threatened actions has disrupted PlanetCAD's operations, diverted management's attention and affected PlanetCAD's relationships with its customers and employees. The continuing uncertainty may have a material adverse effect on its business, financial results and customer and employee relations, and may adversely affect the market for PlanetCAD common stock. Moreover, if PCD Investments proceeds with its efforts to replace PlanetCAD's board, the competing proxy solicitations could impair PlanetCAD's ability to obtain stockholder approval of the merger. 21 PLANETCAD FACES DIFFICULTIES DOING BUSINESS IN INTERNATIONAL MARKETS. PlanetCAD's ability to sell its products and services in international markets will depend in part on risks inherent in doing business on an international level. Factors that may affect its international expansion efforts include: - its inability to obtain or resolve uncertainties concerning territorial rights to software; - copyright laws that are not uniform, or uniformly enforced, in all countries; - export restrictions; - export controls relating to encryption technology; - longer payment cycles; - ability to attract, maintain and effectively manage its non-U.S. reselling partners; - problems in collecting accounts receivable; - political and economic instability; and - potentially adverse tax consequences. PlanetCAD strategically focuses its marketing efforts on developing long-term relationships with large and multinational companies in targeted industries. As a result, PlanetCAD derives a substantial portion of its revenues from relatively few clients. PlanetCAD cannot assure you that it will not become more dependent on a few significant clients, that it will be able to retain any of its largest clients, that the volumes or profit margins of its most significant programs will not be reduced, or that it would be able to replace such clients or programs with clients or programs that generate a comparable amount of profits. Consequently, the loss of one or more of PlanetCAD's significant clients could have a material adverse effect on the business, results of operations or financial condition of PlanetCAD. RISKS RELATED TO AVATECH'S BUSINESS AVATECH HAS A HISTORY OF LOSSES. In five fiscal years of operation, Avatech has reported a net profit only in the most recent fiscal year ending June 30, 2001. For the nine-month period ended March 31, 2002, Avatech reported a loss and may report a loss for the fiscal year ending June 30, 2002. Avatech expects to incur net losses for the foreseeable future because its expected operating and marketing expenses will increase as it attempts to grow its business. With increased expenses, Avatech will need to generate significant additional revenue to achieve profitability. As a result, Avatech may never become profitable. Even if Avatech does achieve profitability in any period, it may not be able to sustain or increase profitability on a quarterly or an annual basis. AVATECH HAS A DEFICIENCY OF WORKING CAPITAL THAT RAISES SUBSTANTIAL DOUBT ABOUT AVATECH'S ABILITY TO CONTINUE AS A GOING CONCERN. At March 31, 2002, Avatech had a deficiency of working capital of $4,523,338 and a stockholders' deficiency of $3,841,415. Avatech reported net losses of $351,048, $2,053,237 and $1,853,716 for the nine-month period ended March 31, 2002 and the years ended June 30, 2000 and 1999, respectively. Avatech's current liabilities include borrowings from a lender under a revolving line of credit that expires in October 2003, but is payable within 60 days of demand by the lender. The balance under this line of credit at March 31, 2002 was $903,870. Avatech also has outstanding borrowings from a lender in the amount of $2,960,646 at March 31, 2002. Avatech is in default of certain financial covenants and payment provisions of the lending arrangement. As a condition to completion of the proposed merger with PlanetCAD, a lender will extinguish Avatech's $3.0 million obligation for a cash payment of $1.0 million at the merger closing. Because of the demand provisions of these financing arrangements, and uncertainties surrounding Avatech's ability to obtain the needed cash if the loans were required to be repaid in the near term, there is substantial doubt about Avatech's ability to continue as a going concern if the lenders exercise their demand repayment rights under the agreements. Although management cannot control the actions of these lenders, it believes that they will not demand repayment of outstanding borrowings in the next 12 months. In addition, upon consummation of the merger contemplated in this proxy statement/prospectus, Avatech expects to have a more favorable working capital position. 22 AVATECH HAS A LIMITED OPERATING HISTORY. Avatech began operations in 1997, with the association of four founding companies. Since that time, Avatech has acquired seven additional companies, all of which haven been operating together for less than four years. Management has been working to successfully integrate these businesses and their disparate operations, employees and managements. These activities may adversely impact Avatech's business, financial condition and results of operations and may also delay the integration of companies to be acquired in the future. The limited history and continuing evolution of Avatech's operations makes it difficult to evaluate Avatech's business and prospects. Avatech's prospects must be considered in light of the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development. If Avatech fails to address these risks and uncertainties, it may be unable to grow its business, increase its revenue or become profitable. GENERAL ECONOMIC CONDITIONS MAY REDUCE AVATECH'S NET REVENUES AND HARM ITS BUSINESS. As Avatech's business has grown, it has become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. Because of the recent slowdown in the U.S. economy, many customers are delaying or reducing technology purchases. The impact of this slowdown on Avatech is difficult to predict, but it may result in reductions in sales of its services, longer sales cycles, slower adoption of new technologies, and increased price competition. In addition, weakness in the end-user market could negatively affect the cash flow of Avatech's customers who could, in turn, delay paying their obligations to Avatech, which would increase Avatech's credit risk exposure. Any of these events would likely harm Avatech's business, results of operations and financial condition. AVATECH'S OPERATING RESULTS FLUCTUATE FROM QUARTER TO QUARTER MAKING ITS FUTURE REVENUES AND OPERATING RESULTS DIFFICULT TO PREDICT. Avatech's quarterly operating results have fluctuated in the past and are likely to do so in the future. Some of the factors that could cause Avatech's operating results to fluctuate include, among other things, the timing of the introduction of new products or delays in product releases by its major software vendors such as Autodesk, changes in marketing or operating expenses, changes in a major software vendor's pricing or product mix, changes in compensation practices, the timing of large solution sales or implementation, and general economic conditions. Additionally, Avatech's operating expenses are based in part on its expectations for future revenues and are relatively fixed in the short term. Accordingly, any revenue shortfall below expectations could have an immediate and significant adverse effect on Avatech's profitability. AVATECH MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL ON FAVORABLE TERMS OR AT ALL. Avatech may need to raise additional capital to fund operating losses, develop and enhance its services and products, fund expansion, respond to competitive pressures or acquire complementary businesses or technologies. Avatech may not be able to raise additional financing on favorable terms, if at all. If Avatech raises additional funds through the issuance of equity or convertible debt securities, the percentage ownership of Avatech stockholders will be reduced and the securities issued may have rights, preferences or privileges senior to those of Avatech common stock. If Avatech cannot raise adequate funds on acceptable terms, its ability to fund growth, take advantage of business opportunities, develop or enhance services or products or otherwise respond to competitive pressures will be significantly limited. In that event, its business could be harmed and its operating results and financial condition could be adversely affected. Insufficient funds may require Avatech to scale-back or eliminate some or all of its plans for growth. 23 COMPETITION IN THE DESIGN SOFTWARE MARKET MAY REDUCE AVATECH'S NET REVENUES AND PROFITS. The software industry has limited barriers to entry, and the availability of desktop computers with continually expanding capacity at progressively lower prices contributes to the ease of competitive market entry. The design software market in particular is fairly mature and characterized by vigorous competition in each of the vertical markets in which Avatech competes, both by entry of competitors with innovative technologies and by consolidation of companies with complementary products and technologies. In addition, some of Avatech's competitors have greater financial, technical, sales and marketing and other resources. Furthermore, the availability of third-party application software is a competitive factor within the computer aided design market. Because of these and other factors, competitive conditions in the industry are likely to intensify in the future. Increased competition could result in price reductions, reduced net revenues and profit margins and loss of market share, any of which would likely harm Avatech's business. AVATECH'S RELIANCE ON THE SALE OF A LIMITED NUMBER OF SOFTWARE VENDORS' PRODUCTS COULD ADVERSELY AFFECT ITS NET REVENUES. Avatech derives a substantial portion of its net revenues from sales and integration of Autodesk products and upgrades to those products. As such, any factor adversely affecting sales of Autodesk products and upgrades (or design system software, generally), including product life cycle, market acceptance, product performance and reliability, reputation, price competition and the availability of third-party applications, would likely harm Avatech's operating results and adversely affect its profitability. AVATECH'S RELATIONSHIP WITH AUTODESK MUST BE RENEWED EACH YEAR. Avatech's continued growth and future success are largely dependent upon maintaining its relationship with Autodesk. While Avatech's current relationship with Autodesk is amicable, there can be no assurance that this relationship will continue. Under the terms of the Autodesk Channel Partner Agreement, this relationship must be renewed each year. Autodesk's failure to renew would likely harm Avatech's results of operations and could materially adversely affect Avatech's overall financial condition. AVATECH MAY NOT BE ABLE TO SUCCESSFULLY EXPAND THROUGH STRATEGIC ACQUISITION. A key element of Avatech's strategy is to pursue strategic acquisitions that either expand or complement its business. Avatech may not be able to identify additional attractive acquisition candidates on terms favorable to Avatech or in a timely manner. Acquisitions involve a number of special risks, including the diversification of management's attention to the assimilation of the operations and personnel of the acquired companies, adverse short-term effects on a company's operating results and the potential inability to integrate financial and management reporting systems. A significant portion of Avatech's capital resources could be used for these acquisitions. Avatech may require additional debt or equity financing for future acquisitions, which may not be available on terms favorable to Avatech, if at all. Moreover, Avatech may not be able to successfully integrate any acquired businesses into its business or to operate any acquired businesses profitably. In addition, such investments and acquisitions may contribute to potential fluctuations in Avatech's quarterly results of operations. The fluctuations could arise from merger-related costs and charges associated with eliminating redundant expenses or write-offs of impaired assets recorded in connection with acquisitions. These costs or charges could negatively impact results of operations for a given period or cause lack of a consistent increase quarter to quarter in our operating results. AVATECH DEPENDS UPON KEY PERSONNEL AND THE ABILITY TO HIRE ADDITIONAL PERSONNEL. Avatech's operations are dependent upon the efforts of its senior management and highly skilled employees. Avatech will likely also be dependent on the senior management of companies that may be acquired in the future. The loss of key employees or the inability to recruit new employees would negatively impact Avatech's business. In addition, Avatech may experience increased compensation costs to attract and retain skilled personnel. 24 IF AVATECH IS NOT ABLE TO ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS, ITS BUSINESS COULD BE HARMED. Avatech relies on a combination of copyright, trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights, but Avatech's efforts may be inadequate to protect these proprietary rights or to prevent others from claiming violations of their proprietary rights. Avatech does not own any patents with respect to the technology it develops or uses. Furthermore, Avatech's means of protecting its proprietary rights may not be adequate, and its competitors may independently develop similar technology. Avatech generally enters into confidentiality or license agreements with its employees and consultants. Additionally, Avatech seeks to control access to and distribution of its proprietary software, documentation and other information. Despite Avatech's efforts to protect its proprietary rights, unauthorized parties may attempt to obtain and use information that it regards as proprietary. Monitoring and restricting unauthorized use of Avatech's proprietary information is difficult. The unauthorized misappropriation of Avatech's technology could have a material adverse effect on its business, financial condition and results of operations. If Avatech resorts to legal proceedings to enforce its proprietary rights, the proceedings could be burdensome and expensive and could involve a high degree of risk. Avatech may also be subject to claims alleging that it has infringed a third-party's intellectual property rights. Litigating such claims, whether with merit or not, is costly and could materially adversely affect Avatech's results of operations. These claims might require us to enter into royalty or license agreements with terms that are unfavorable to us. If Avatech were found to have infringed upon the proprietary rights of third-parties, it could be required to pay damages, redesign or discontinue use of such infringing products or services, any of which could materially reduce its sales and results of operations. 25 A WARNING ABOUT FORWARD-LOOKING STATEMENTS PlanetCAD and Avatech have each made forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) in this document and in documents that are incorporated by reference in this document that are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of PlanetCAD and Avatech. Also, statements including words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions are forward-looking statements. Stockholders should note that many factors, some of which are discussed elsewhere in this document and in the documents incorporated by reference in this document, could affect the future financial results of PlanetCAD and Avatech and could cause actual results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements in this proxy statement/prospectus include, among others, the factors set forth under the caption "Risk Factors," general economic, business and market conditions, changes in laws and increased competitive pressure in the customer management and product support industry. THE PLANETCAD ANNUAL MEETING DATE, TIME AND PLACE OF THE ANNUAL MEETING The annual meeting of the PlanetCAD stockholders is scheduled to be held on [______], 2002, at 9:00 a.m. local time, at 2520 55th Street, Suite 200, Boulder, Colorado 80301. MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING The purpose of the PlanetCAD annual meeting is: 1. To consider and vote upon a proposal to adopt the agreement and plan of merger dated as of May 1, 2002, by and among PlanetCAD Inc., Raven Acquisition Corporation, a wholly-owned subsidiary of PlanetCAD, and Avatech Solutions, Inc. 2. To approve an amendment to PlanetCAD's certificate of incorporation to increase the number of authorized shares of PlanetCAD common stock to 90,000,000. 3. To approve an amendment to PlanetCAD's certificate of incorporation to change the name of PlanetCAD to Avatech Solutions, Inc. 4. To elect to the PlanetCAD board of directors five (5) directors to hold office until the next annual meeting of stockholders or until their respective successors have been elected and qualified. 5. To approve the PlanetCAD 2002 Stock Option Plan. 6. To transact such other business as may properly come before the PlanetCAD annual meeting or any adjournments or postponements thereof. STOCK ENTITLED TO VOTE The board of directors of PlanetCAD has fixed the close of business on [_________], 2002, as the record date for the determination of the stockholders entitled to notice of, and to vote at, the annual meeting and any adjournment or postponement of the annual meeting. A complete list of stockholders entitled to vote at the annual meeting will be open to examination by the stockholders, during regular business hours, for a period of ten days 26 prior to the annual meeting at PlanetCAD's principal executive offices at 2520 55th Street, Suite 200, Boulder, Colorado 80301. As of the record date, [____________] shares of PlanetCAD common stock were outstanding. QUORUM The presence of a majority of PlanetCAD common stock entitled to vote (including shares of PlanetCAD common stock underlying PlanetCAD convertible preferred stock), present in person or represented by proxy, is necessary to constitute a quorum. PlanetCAD will count shares of PlanetCAD common stock present at the meeting that abstain from voting or that are the subject of broker non-votes as present for purposes of determining a quorum. A broker non-vote occurs when a nominee holding PlanetCAD common stock for a beneficial owner does not vote on a particular matter because the nominee does not have discretionary voting power with respect to that item and has not received voting instructions from the beneficial owner. VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL Each PlanetCAD stockholder on the record date is entitled to one vote for each share of PlanetCAD common stock and two votes for each share of PlanetCAD convertible preferred stock with regard to each matter that may properly come before the PlanetCAD annual meeting. The affirmative vote of the holders of a majority of the outstanding shares of PlanetCAD common stock (including shares of PlanetCAD common stock underlying PlanetCAD convertible preferred stock) is required to adopt the merger agreement, approve the amendments to the PlanetCAD certificate of incorporation and approve the PlanetCAD 2002 Stock Option Plan. The affirmative vote of the holders of a plurality of the shares of PlanetCAD common stock (including shares of PlanetCAD common stock underlying PlanetCAD convertible preferred stock) present in person or represented by proxy at the annual meeting is required for the election of directors. The affirmative vote of the holders of a majority of the shares of PlanetCAD common stock (including shares of PlanetCAD common stock underlying PlanetCAD convertible preferred stock) present in person or represented by proxy at the annual meeting is required to take action on any other matter that is properly brought before the annual meeting. ABSTENTIONS, FAILURES TO VOTE AND BROKER NON-VOTES Because the affirmative vote of a majority of the outstanding shares of PlanetCAD common stock (including shares of PlanetCAD common stock underlying PlanetCAD convertible preferred stock) is required for adoption of the merger agreement and approval of the amendments to the PlanetCAD certificate of incorporation and PlanetCAD 2002 Stock Option Plan, a proxy marked "ABSTAIN" with respect to the adoption of the merger agreement, approval of the amendments to the PlanetCAD certificate of incorporation and approval of the PlanetCAD 2002 Stock Option Plan will have the effect of a vote "AGAINST" the adoption or approval of the applicable proposal. In addition, the failure of a PlanetCAD stockholder to return a proxy or vote in person at the PlanetCAD annual meeting or by other permitted means will have the effect of a vote "AGAINST" the adoption or approval of the applicable proposal. Brokers who hold shares in street name for customers have the authority to vote on "routine" proposals when they have not received instructions from beneficial owners. Brokers are precluded from exercising their voting discretion with respect to proposals for non-routine matters such as the adoption of the merger agreement and approval of the amendments to the PlanetCAD certificate of incorporation and PlanetCAD 2002 Stock Option Plan. Thus, absent specific instructions from the beneficial owner of PlanetCAD common stock, brokers are not permitted to vote these shares with respect to the adoption of the merger agreement. Since the affirmative vote described above is required for adoption of the merger agreement, a broker non-vote will have the effect of a vote "AGAINST" adoption or approval of the applicable proposal. BECAUSE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE AMENDMENTS TO THE PLANETCAD CERTIFICATE OF INCORPORATION AND PLANETCAD 2002 STOCK OPTION PLAN REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES OF PLANETCAD COMMON STOCK (INCLUDING SHARES OF PLANETCAD COMMON STOCK UNDERLYING PLANETCAD CONVERTIBLE PREFERRED STOCK), ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS NEGATIVE VOTES. THE FAILURE TO APPOINT A PROXY OR VOTE YOUR SHARES IN PERSON WILL ALSO HAVE THE SAME EFFECT AS A NEGATIVE VOTE. ACCORDINGLY, THE PLANETCAD BOARD OF DIRECTORS URGES YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE, OR TO APPOINT A PROXY BY INTERNET OR BY TELEPHONE IN ACCORDANCE WITH THE INSTRUCTIONS ON THE PROXY FORM. 27 VOTING BY PROXY; REVOCATION OF PROXY You may vote shares either in person or by duly authorized proxy. In addition, you may appoint a proxy by telephone or through the Internet by following the instructions provided on the enclosed proxy card. You may use the proxy accompanying this proxy statement/prospectus if you are unable to attend the PlanetCAD annual meeting in person or if you wish to have your shares voted by proxy even if you do attend the PlanetCAD annual meeting. You may revoke any proxy given by you in response to this solicitation at any time before the proxy is voted at the PlanetCAD annual meeting by delivering to PlanetCAD a written notice of revocation, by delivering to PlanetCAD a subsequently dated, properly executed proxy or appointing a proxy as of a later date, or by attending the PlanetCAD annual meeting and electing to vote in person. Your attendance at the PlanetCAD annual meeting, by itself, will not constitute a revocation of a proxy. You should address any written notices of proxy revocation to: PlanetCAD Inc., 2520 55th Street, Suite 200, Boulder, Colorado 80301, Attention: Secretary. All shares represented by the effective proxies on the accompanying PlanetCAD proxy card received by PlanetCAD at or before the PlanetCAD annual meeting, and not revoked before they are exercised, will be voted at the PlanetCAD annual meeting in accordance with their terms. If no instructions are given, signed PlanetCAD proxies will be voted "FOR" the adoption of the merger agreement and all other matters listed on the proxy card and at the discretion of the proxy holders on any other matters that properly come before the PlanetCAD annual meeting. The PlanetCAD board of directors is not aware of any other matters to be presented at the PlanetCAD annual meeting other than matters incidental to the conduct of the PlanetCAD annual meeting. CERTAIN BENEFICIAL OWNERS Various stockholders of PlanetCAD, who collectively beneficially own approximately [___]% of the outstanding shares of PlanetCAD common stock as of the record date, have entered into agreements with Avatech in which they have agreed to vote their shares "FOR" adoption of the merger agreement and the other matters listed on the proxy card. See "The Merger Agreement -- Additional Agreements -- The Voting Agreements" on page 63 for more information about these agreements. VOTING VIA THE INTERNET OR BY TELEPHONE A number of brokers and banks are participating in programs provided through ADP Investor Communication Services and Wells Fargo Bank Minnesota, National Association, PlanetCAD's transfer agent, that offer telephone and Internet voting options. If your shares are held in an account with a broker or bank participating in either of these programs, or if your shares are registered in your name, you may vote those shares telephonically by calling the telephone number shown on the proxy card received from your broker or bank or from Wells Fargo, or via the Internet at either ADP Investor Communication Services' voting Web site (www.proxyvote.com) or Wells Fargo's voting Web site (www.[_______].com). You may revoke any proxy or voting instructions submitted via the Internet or by telephone in response to this solicitation at any time before the proxy is voted or votes are cast at the PlanetCAD annual meeting by using the same program used to appoint your proxy or submit your voting instructions via the Internet or by telephone. Proxies or voting instructions submitted via the Internet or by telephone using the program provided by ADP Investor Communication Services must be received by ________ _.m. ________ time on _________, 2002. Submitting your proxy via the Internet or by telephone will not affect your right to vote in person should you decide to attend the PlanetCAD annual meeting. THE TELEPHONE AND INTERNET VOTING PROCEDURES ARE DESIGNED TO AUTHENTICATE STOCKHOLDERS' IDENTITIES, TO ALLOW STOCKHOLDERS TO GIVE THEIR VOTING INSTRUCTIONS AND TO CONFIRM THAT STOCKHOLDERS' INSTRUCTIONS HAVE BEEN RECORDED PROPERLY. STOCKHOLDERS USING THE INTERNET SHOULD UNDERSTAND THAT THERE MAY BE COSTS ASSOCIATED WITH ELECTRONIC ACCESS, SUCH AS USAGE CHARGES FROM INTERNET ACCESS PROVIDERS AND TELEPHONE COMPANIES THAT MUST BE BORNE BY THE STOCKHOLDER. SOLICITATION OF PROXIES 28 PlanetCAD will bear the entire cost of the solicitation of proxies for the PlanetCAD annual meeting. However, expenses of printing and mailing this proxy statement/prospectus will be divided equally between PlanetCAD and Avatech. In addition to the solicitation of proxies by mail, officers, directors, employees and agents of PlanetCAD may solicit proxies by correspondence, telephone, e-mail, facsimile or other electronic means, or in person, but without extra compensation. PlanetCAD will request banks, brokers and other record holders to send proxies and proxy materials to the beneficial owners of PlanetCAD common stock and secure their voting instructions and will reimburse their reasonable charges and expenses incurred in forwarding the proxies and proxy materials. Further solicitation of proxies may be made by telephone, e-mail or in person with some PlanetCAD stockholders following the original solicitation. All further solicitation will be made by officers and other employees of PlanetCAD who will not be additionally compensated for their activities. NO DISSENTERS' RIGHTS PlanetCAD is incorporated under Delaware law. Under the Delaware General Corporation Law, PlanetCAD stockholders do not have any right to a court determination, in a proceeding known as an appraisal, of the fair value of their shares in connection with the proposed merger with Avatech. ELECTION OF DIRECTORS In accordance with PlanetCAD's bylaws, the board of directors of PlanetCAD has established by resolution that seven directors comprise PlanetCAD's board of directors. Notwithstanding the resolution, the board of directors has nominated only five persons to serve as directors and only five directors are to be elected at the annual meeting. Each director elected will serve on our board for a one-year term expiring on the date of our annual meeting of stockholders to be held in 2003, although if the merger with Avatech is completed, only Messrs. Fischer and Fanella will remain on the PlanetCAD board following the merger. For more information, see "The Merger - -- Management After the Merger" on page [___]. If the merger is not completed, PlanetCAD may conduct a search to fill the two director vacancies that were created by director resignations during 2001 and 2002. Shares of PlanetCAD voting stock cannot be voted for a greater number of persons than the number of nominees named in this proxy statement/prospectus. Each of the nominees is an incumbent director and has consented to be named herein and to serve on the board if elected. If any of the director nominees set forth in this proxy statement/prospectus should be unavailable for election at the time of the meeting, which is not anticipated, the proxies will be voted for such other person as may be recommended by the PlanetCAD board of directors in place of each such nominee. A plurality of the votes of the common shares present in person or represented by proxy at the PlanetCAD annual meeting and entitled to vote is required for election of the PlanetCAD directors. Cumulative voting is not permitted in the election of directors. Consequently, PlanetCAD stockholders are entitled to one vote for each share of PlanetCAD common stock held in their name for as many persons as there are directors to be elected, and for whose election they have the right to vote. YOUR BOARD RECOMMENDS A VOTE FOR THE ELECTION OF EACH OF THE FIVE NOMINEES FOR DIRECTOR. NOMINEES FOR ELECTION AS PLANETCAD DIRECTORS Set forth below is information as of May 28, 2002, with respect to each nominee for director. For additional information concerning each of the nominees, see "Security Ownership of Certain Beneficial Owners, Directors and Management" and "Executive Compensation" beginning on pages [___] and [___], respectively, of this proxy statement/prospectus.
NAME AGE POSITION HELD WITH PlanetCAD - ---- --- ---------------------------- David W. Hushbeck..........45 President, Chief Executive Officer and Director Eugene J. Fischer (1)......55 Chairman of the Board of Directors Philip E. Barak (1)(2).....50 Director James A. Fanella...........44 Director H. Robert Gill (1)(2)......65 Director
- ---------- (1) Member of the Compensation Committee (2) Member of the Audit Committee 29 There are no family relationships among any of the directors or executive officers of PlanetCAD. DAVID W. HUSHBECK has served as PlanetCAD's President and Chief Executive Officer since January 2002 and as a director since February 2002. From May 2001 until December 2001, Mr. Hushbeck served as Vice President and General Manager of PlanetCAD's supply chain solutions business unit. From June 2000 to April 2001, Mr. Hushbeck served as Chief Operating Officer of Castalink.com, a supply chain solution software provider originally responsible for creating the technology that PlanetCAD acquired in June 2001. Before joining Castalink, Mr. Hushbeck served in various positions at Hewlett Packard over a period of 11 years, including as Worldwide Supply Chain Manager for Hewlett Packard's Imaging and Printing Systems unit. Mr. Hushbeck holds a B.S. in Industrial Engineering from California State Polytechnic University. EUGENE J. FISCHER has served as a director since March 2000. Mr. Fischer co-founded Capstone Management LLC, a venture capital firm, in July 1996, and is an executive officer in Capstone's affiliated entities. His investment experience includes Internet, software, health care service and other technology-enabled service companies. Mr. Fischer began his venture capital career in October 1983 with Technology Funding and opened Pathfinder Ventures Inc.'s West Coast office in 1988. Prior to 1983 he was the head of Bank of America's Sunnyvale Corporate Banking Group, managing a $250 million loan portfolio with clients ranging from venture-backed start-ups to Apple Computer, as well as several venture capital funds. Mr. Fischer holds a B.S. from the University of Minnesota and an M.S. from the University of California, Davis. PHILIP E. BARAK has served as a director since October 1994. Mr. Barak joined Nazem & Company in July 1983 as Chief Financial Officer. Mr. Barak has served as a director of various public and privately held companies. Mr. Barak holds a B.S. in Accounting from Rider University and is a Certified Public Accountant. JAMES A. FANELLA has served as a director since October 2001. Mr. Fanella is currently Senior Vice President, Enterprise Solutions at Yahoo!, a position he has held since August 2001. From September 2000 until July 2001, Mr. Fanella served as a group president and general manager of global services at CommerceOne. From November 1999 until September 2000, he served as a group president at AppNet, Inc., which was acquired by CommerceOne. Prior to his experience at AppNet, Mr. Fanella was a managing principal at the Unisys Corporation. H. ROBERT GILL has served as a director since December 1996. Mr. Gill is currently serving a second term as President of the Topaz Group, a provider of board consulting services, a position he has held since August 2001. Between May 1997 and July 2001, Mr. Gill was President, Chairman of the board of directors and Chief Executive Officer of MobileForce Technologies, Inc., a company that provides systems for managing vehicle fleets. Between April 1996 and May 1997, Mr. Gill served as President of the Topaz Group. Before joining the Topaz Group, Mr. Gill served as Senior Vice President and President, Enhanced Products Group of Frontier Corporation following its merger with ALC Communications Corporation in December 1995. From January 1989 until December 1995, Mr. Gill served as President and Chief Executive Officer of ConferTech International. Mr. Gill is currently a director of QualMark Corporation (Nasdaq SmallCap: QMRK) and Universal Access Global Holdings, Inc. (Nasdaq: UAXS). Mr. Gill holds a B.E.E. from Indiana Institute of Technology, an M.S.E.E. from Purdue University and an M.B.A. from Pepperdine University. The executive officers of PlanetCAD are as follows:
NAME AGE POSITION HELD WITH PlanetCAD ---- --- ---------------------------- David W. Hushbeck (1) 45 President and Chief Executive Officer Joy M. Godesiabois 46 Chief Financial Officer, Vice President and Secretary
- ---------- (1) The biography of Mr. Hushbeck is set forth above under "--Nominees for Election as PlanetCAD Directors" beginning on page 29. 30 JOY M. GODESIABOIS has served as PlanetCAD's Chief Financial Officer, Vice President and Secretary since May 2001. From November 1999 to April 2001, Ms. Godesiabois served as Chief Financial Officer of Vroom Technologies, Inc., a Denver, Colorado-based provider of sales and marketing effectiveness solutions for the telecommunications industry. In May 2001, subsequent to Ms. Godesiabois' departure, Vroom Technologies filed a petition for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Colorado (In re: Vroom Technologies, Inc. Case No. 01-16685 ABC Chapter 7). From September 1997 to July 1999, Ms. Godesiabois served as Chief Financial Officer of Rodeer Systems, Inc., a provider of outsourced medical transcription services to hospitals and other healthcare providers. From March 1990 to August 1997, Ms. Godesiabois served in various financial related positions with Intergraph Corporation, a worldwide provider of technical solutions, systems integration, and services to various industries. Ms. Godesiabois holds a B.S. in Business Administration from Colorado State University and a Masters in Business Administration from Southern Methodist University. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires PlanetCAD's directors and executive officers, and persons who own more than 10% of a registered class of PlanetCAD's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of PlanetCAD common stock and other equity securities. Executive officers, directors and holders of greater than 10% of PlanetCAD's common stock are required by regulations of the Securities and Exchange Commission to furnish PlanetCAD with copies of all Section 16(a) reports they file. To the knowledge of PlanetCAD, based solely upon a review of the copies of such reports furnished to it and written representations that no other reports were required to be filed during the fiscal year ended December 31, 2001, all of PlanetCAD's executive officers, directors and holders of greater than 10% of PlanetCAD common stock complied with the applicable filing requirements of Section 16(a), except that Mr. Chuck Bay, a former non-employee director, failed to file a Form 5. COMMITTEES AND MEETINGS OF THE PLANETCAD BOARD OF DIRECTORS During the fiscal year ended December 31, 2001, the PlanetCAD board of directors held 11 meetings. During 2001, each of the board members and committee members attended at least 75% of the total number of meetings held by the board and by the committees of the board on which he served during the period for which he was a director or committee member. The board has an audit committee, the charter of which was attached as an appendix to the proxy statement sent in 2000, and a compensation committee but does not have a nominating committee. The audit committee is composed of Messrs. Barak and Gill, and the compensation committee is composed of Messrs. Fisher, Barak and Gill, all of whom are non-employee directors. The audit committee met three times and the compensation committee each met twice during the fiscal year ended December 31, 2001. The functions of both committees are briefly described below. AUDIT COMMITTEE - Reviews and recommends independent auditors to be selected by the board of directors; - Reviews the scope and procedures of the audit with the auditors and our financial managers; - Reviews the effectiveness of and elicits recommendations for improvement of our accounting and financial controls; - Reviews financial statements to be included in our annual report to stockholders with the auditors and our management; - Reviews our accounting and financial human resources and succession planning; and - Investigates any matter brought to the committee's attention within the scope of its duties and, when it deems appropriate, retains outside counsel to assist in any such investigation. 31 COMPENSATION COMMITTEE - Reviews and recommends to the board compensation of management personnel; and - Reviews and recommends to the board executive incentive and benefit plans. COMPENSATION OF PLANETCAD DIRECTORS Each PlanetCAD director is entitled to be reimbursed for reasonable out-of-pocket expenses incurred in connection with attendance at each meeting of the board. Additionally, each non-employee director receives $1,000 per month and $500 for each committee meeting of the board at which he is in attendance. Each non-employee director also receives stock option grants pursuant to the 1996 Non-Employee Directors' Stock Option Plan. Only directors who are not otherwise PlanetCAD employees or affiliates are eligible to receive such options. Each non-employee director is automatically granted a non-discretionary option to purchase 15,000 shares of PlanetCAD common stock on the date such non-employee director is elected to the board. Additionally, on the date of each annual meeting of PlanetCAD stockholders subsequent to election, each non-employee director who has been a non-employee director continuously for the preceding year is automatically granted an option to purchase 7,500 shares of PlanetCAD common stock. Each other non-employee director is automatically granted an option to purchase a number of shares of our common stock equal to 7,500 multiplied by a fraction, the numerator of which is the number of days served as a non-employee director and the denominator of which is 365. The exercise price of options granted to non-employee directors is the fair market value of the PlanetCAD common stock on the date of grant. Options granted pursuant to the plan vest in four equal annual installments beginning one year from the date of grant and are immediately exercisable, subject to repurchase by us prior to the vesting of such shares upon the optionee's cessation of service with us. AUDIT COMMITTEE REPORT The PlanetCAD audit committee reviews the PlanetCAD financial reporting process on behalf of the board of directors. The audit committee is comprised of the two members identified below, each of whom is an "independent director" as defined in Section 121(A) of the American Stock Exchange's listing standards. Each member is financially literate, and Mr. Barak has accounting and financial management expertise. The committee has adopted a written charter and has re-evaluated it in connection with the filing of our 2001 Annual Report on Form 10-KSB with the Securities and Exchange Commission. In fulfilling its responsibilities, the committee has reviewed and discussed the audited financial statements contained in the 2001 Annual Report with PlanetCAD management and KPMG LLP, its independent auditors. Management is responsible for the financial statements and the reporting process, including the system of internal controls. KPMG LLP is responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States. Our responsibility is to monitor and review these processes. It is not our duty or our responsibility to conduct auditing or accounting reviews or procedures. We are not employees of PlanetCAD and we may not be, and we may not represent ourselves to be or to serve as, accountants or auditors by profession or experts in the fields of accounting or auditing. Therefore, we have relied, without independent verification, on management's representation that the financial statements have been prepared with integrity and objectivity and in conformity with accounting principles generally accepted in the United States of America and on the representations of KPMG LLP included in their report on PlanetCAD's financial statements. Our oversight does not provide us with an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or policies, or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, our considerations and discussions with management and the independent auditors do not assure that PlanetCAD's financial statements are presented in accordance with generally accepted accounting principles, that the audit of PlanetCAD's financial statements has been carried out in accordance with generally accepted auditing standards or that PlanetCAD's independent accountants are in fact "independent." The committee discussed with KPMG LLP the matters requiring discussion by Statement on Auditing Standards No. 61 (Codification of Statements on Auditing Standards, AU ss.380), Communication with Audit Committees, as modified or supplemented, and all other matters required to be discussed with the auditors. In 32 addition, the committee has received the written disclosures and the letter from KPMG LLP required by Independence Standard Board No. 1, Independence Discussions with Audit Committees, as may be modified or supplemented, and discussed with KPMG LLP their independence from us and our management. The committee has also considered whether the independent auditors' provision of other non-audit services to us is compatible with the auditors' independence. For the year ended December 31, 2001, PlanetCAD incurred fees for services from KPMG LLP as discussed below. - AUDIT FEES. The aggregate fees billed for professional services rendered by KPMG LLP for the audit of PlanetCAD's annual financial statements and the review of the financial statements included in PlanetCAD's quarterly reports on Forms 10-QSB were approximately $123,000. - FINANCIAL INFORMATION SYSTEM DESIGN AND IMPLEMENTATION FEES. KPMG LLP did not perform any financial information system design and implementation services for us during 2001. - ALL OTHER FEES. The aggregate fees billed for all other services rendered by KPMG LLP, including services rendered in connection with the filing of a registration statement on Form S-3, were approximately $103,000. Based on the reviews and discussions referred to above, the audit committee recommended to the PlanetCAD board (and the board has approved) that the audited financial statements be included in our 2001 Annual Report on Form 10-KSB for the year ended December 31, 2001, for filing with the Securities and Exchange Commission. Respectfully submitted by the members of the audit committee of the board of directors: Philip E. Barak H. Robert Gill AMENDMENT OF PLANETCAD'S CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK INTRODUCTION PlanetCAD's certificate of incorporation currently authorizes the issuance of 22,500,000 shares of PlanetCAD common stock and 2,500,000 shares of PlanetCAD preferred stock. The PlanetCAD board has adopted a resolution proposing that the PlanetCAD certificate of incorporation be amended to increase the authorized number of shares of PlanetCAD common stock to 90,000,000, subject to stockholder approval of the amendment. As of May 24, 2002, 12,443,544 shares of PlanetCAD common stock were outstanding, approximately 3,970,572 shares were reserved for issuance upon exercise of outstanding options and warrants and 2,404,926 shares were reserved for issuance upon conversion of PlanetCAD preferred stock. Based upon the foregoing number of outstanding and reserved shares of PlanetCAD common stock, PlanetCAD currently has approximately 3,680,957 shares of common stock remaining available for other purposes. Based upon the current estimate of the exchange ratio, approximately 44,545,413 shares of PlanetCAD common stock will be issued pursuant to the merger to Avatech stockholders. Therefore, unless the authorized PlanetCAD common stock is increased, PlanetCAD will be unable to consummate the merger with Avatech. PROPOSED AMENDMENT The following is the text of the first paragraph of Article IV of the PlanetCAD certificate of incorporation, as proposed to be amended: "A. This corporation is authorized to issue two classes of stock to be designated, respectively, "common stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is 33 ninety million (90,000,000) shares. Eighty-seven million five hundred thousand (87,500,000) shares shall be common stock, each having a par value of one cent ($0.01). Two million five hundred thousand (2,500,000) shares shall be Preferred Stock, each having a par value of one cent ($0.01)." PURPOSE AND EFFECT OF THE PROPOSED AMENDMENT One of the conditions to the obligation of each of PlanetCAD and Avatech to consummate the merger is that PlanetCAD increase the authorized number of shares of PlanetCAD common stock. The PlanetCAD board believes that the availability of additional authorized but unissued shares will provide the combined company with the flexibility to issue PlanetCAD common stock for other proper corporate purposes which may be identified in the future, such as to raise equity capital, issuance in merger and acqusition activities, and to adopt additional employee benefit plans or reserve additional shares for issuance under such plans. PlanetCAD does not currently have plans to issue any shares of common stock, other than the shares issued pursuant to the merger. No additional action or authorization by PlanetCAD's stockholders would be necessary prior to the issuance of such additional shares, unless required by applicable law or the rules of any stock exchange or national securities association trading system on which the PlanetCAD common stock is then listed or quoted. Under PlanetCAD's certificate of incorporation, PlanetCAD's stockholders do not have preemptive rights with respect to PlanetCAD common stock. Thus, if the PlanetCAD board were to elect to issue additional shares of PlanetCAD common stock, existing stockholders would not have any preferential rights to purchase such shares. In addition, if the PlanetCAD board elects to issue additional shares of PlanetCAD common stock, such issuance could have a dilutive effect on the earnings per share, voting power, and share holdings of current stockholders. The proposed amendment to increase the authorized number of shares of PlanetCAD common stock could, under certain circumstances, have an anti-takeover effect, although this is not the intention of this proposal. For example, in the event of a hostile attempt to take over control of PlanetCAD, it may be possible for PlanetCAD to endeavor to impede the attempt by issuing shares of the PlanetCAD common stock, thereby diluting the voting power of the other outstanding shares and increasing the potential cost to acquire control of PlanetCAD. The amendment therefore may have the effect of discouraging unsolicited takeover attempts. By potentially discouraging initiation of any such unsolicited takeover attempt, the proposed amendment may limit the opportunity for PlanetCAD's stockholders to dispose of their shares at the higher price generally available in takeover attempts or that may be available under a merger proposal. The proposed amendment may have the effect of permitting PlanetCAD's then current management to retain its position, and place it in a better position to resist changes that stockholders may wish to make if they are dissatisfied with the conduct of PlanetCAD's business. However, the PlanetCAD board has not presented this proposal with the intent that it be utilized as a type of anti-takeover device. Rather, the board is proposing the amendment to facilitate the consummation of the merger. VOTE NECESSARY TO APPROVE THE AMENDMENT Each holder of PlanetCAD common stock on the record date is entitled to one vote per share held. The affirmative vote of holders of a majority of the outstanding shares of PlanetCAD common stock (including shares of PlanetCAD common stock underlying PlanetCAD convertible preferred stock) is required for approval of the amendment to increase the authorized number of shares of PlanetCAD common stock. In the event that a quorum is not present or represented at the PlanetCAD annual meeting, the stockholders entitled to vote at the meeting present in person or by proxy shall have power to adjourn the PlanetCAD annual meeting until a quorum shall be present or represented. Proxies solicited by the PlanetCAD board will be voted for approval of the amendment to increase the authorized number of shares of PlanetCAD common stock, unless otherwise instructed. RECOMMENDATION OF THE PLANETCAD BOARD The PlanetCAD board recommends a vote "FOR" the proposal to amend PlanetCAD's certificate of incorporation to increase the number of authorized shares of PlanetCAD common stock from 22,500,000 to 90,000,000. Unless a contrary choice is specified, proxies solicited by the PlanetCAD board will be voted "FOR" approval of the amendment to increase the authorized PlanetCAD common stock. 34 THE PLANETCAD BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDMENT TO INCREASE THE AUTHORIZED PlanetCAD COMMON STOCK. AMENDMENT OF PLANETCAD'S CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF PLANETCAD TO AVATECH SOLUTIONS, INC. INTRODUCTION The PlanetCAD board has determined that it is advisable to change PlanetCAD's name to "Avatech Solutions, Inc.", and has voted to recommend that the PlanetCAD stockholders adopt an amendment to PlanetCAD's certificate of incorporation effecting the proposed name change. PURPOSE OF THE PROPOSED NAME CHANGE One of the conditions to the consummation of the merger is that PlanetCAD change its name to "Avatech Solutions, Inc.", which PlanetCAD believes is consistent with the fact that the Avatech stockholders will own 75% of the combined company following the merger. PRINCIPAL EFFECTS OF THE NAME CHANGE PlanetCAD common stock is currently traded on the American Stock Exchange under the symbol PCD. If the proposed name change is approved by the PlanetCAD stockholders, the common stock of the combined company following the merger will trade under the new symbol [____]. There will be no interruption in trading due to the name change or the symbol change. VOTE NECESSARY TO APPROVE THE NAME CHANGE Each holder of PlanetCAD common stock on the record date is entitled to one vote per share held. The affirmative vote of holders of a majority of the outstanding shares of PlanetCAD common stock (including shares of PlanetCAD common stock underlying PlanetCAD convertible preferred stock) is required for approval of the amendment to change the name of PlanetCAD to "Avatech Solutions, Inc." In the event that a quorum is not present or represented at the PlanetCAD annual meeting, the stockholders entitled to vote at the meeting present in person or by proxy shall have power to adjourn the PlanetCAD annual meeting until a quorum shall be present or represented. Proxies solicited by the PlanetCAD board will be voted "FOR" approval of the amendment to change the name, unless otherwise instructed. RECOMMENDATION OF THE PLANETCAD BOARD The PlanetCAD board recommends a vote "FOR" the proposal to amend PlanetCAD's certificate of incorporation to change the name of PlanetCAD to "Avatech Solutions, Inc." Unless a contrary choice is specified, proxies solicited by the PlanetCAD board will be voted "FOR" approval of the amendment to change the name. THE PLANETCAD BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDMENT TO CHANGE PLANETCAD'S NAME. In the event that the amendment to change the name of PlanetCAD is approved by the PlanetCAD stockholders but the merger or the amendment to increase the authorized PlanetCAD common stock is not approved by the PlanetCAD stockholders, PlanetCAD will take no action to implement the amendment to change the name. APPROVAL OF PLANETCAD 2002 STOCK OPTION PLAN PlanetCAD's stockholders are being asked to approve the implementation of PlanetCAD's 2002 Stock Option Plan. PlanetCAD's board of directors adopted the 2002 plan on ________________, 2002, subject to stockholder approval at the annual meeting. The 2002 plan will become effective on the date the merger with Avatech is consummated. 35 The 2002 plan is designed to allow the combined company to utilize stock options to attract and retain the services of key individuals essential to the combined company's long-term growth and financial success. The grant of stock options plays a significant role in PlanetCAD's efforts to remain competitive in the market for talented individuals, and PlanetCAD relies on those stock options as a means to attract and retain highly qualified individuals in the positions vital to PlanetCAD's success. The 2002 plan shall be in addition to the PlanetCAD existing stock plans which include the 2000 Stock Incentive Plan, 1996 Non-Employee Directors' Stock Option Plan, 1996 Equity Incentive Plan, 1998 Non-Officer Stock Option Plan; Amended and Restated 1987 Stock Option Plan. If the merger is completed, the 2000 Stock Incentive Plan and the 1996 Non-Employee Directors' Stock Option Plan will automatically terminate. The following is a summary of the material terms of the 2002 plan, and it is qualified in its entirety by reference to the 2002 plan, which is attached to this proxy statement/prospectus as Annex F and is incorporated herein by reference. We urge you to read the 2002 plan carefully as it is a legal document that governs the 2002 plan. OPTION PROGRAMS; ADMINISTRATION. Under the 2002 plan, both incentive and non-statutory stock options may be granted. A committee of PlanetCAD's board of directors will have the exclusive authority to grant options to PlanetCAD's employees and non-employee board members. SHARE RESERVE. The number of shares of common stock initially reserved for issuance under the term of the 2002 plan will be limited to 3,100,000 shares. The shares of PlanetCAD common stock issuable under the 2002 plan may be drawn from shares of PlanetCAD's authorized but unissued common stock or from shares of PlanetCAD's common stock which PlanetCAD acquires, including shares purchased on the open market. Shares subject to any outstanding options under the 2002 plan which expire or otherwise terminate prior to exercise will be available for subsequent issuance. Unvested shares issued under the 2002 plan and subsequently repurchased by PlanetCAD, at the option exercise price, pursuant to PlanetCAD's purchase rights under the 2002 plan will be added back to the number of shares reserved for issuance under the 2002 plan and will accordingly be available for subsequent issuance. ELIGIBILITY. Employees and board members in PlanetCAD's service or in the service of its subsidiaries (whether now existing or subsequently established) will be eligible to participate in the 2002 plan. VALUATION. The fair market value per share of PlanetCAD's common stock on any relevant date under the 2002 plan will be deemed to be equal to the mean between the highest and lowest sale prices reported by the American Stock Exchange and traded on the date prior to the grant date. On May ____, 2002, the fair market value per share of PlanetCAD's common stock determined on that basis was $_____. OPTION GRANTS. The committee will have complete discretion under the 2002 plan to determine which eligible individuals are to receive option grants, the time or times when those grants are to be made, the number of shares subject to that grant, the status of any granted option as either an incentive stock option or a non-statutory option under the federal tax laws, the vesting schedule (if any) to be in effect for the option grant and the maximum term for which any granted option is to remain outstanding. Each granted option will have an exercise price per share determined by the committee, but the exercise price will not be less than 100% of the fair market value of the option shares on the grant date, if the grant is an incentive stock option, and not less than 110% if the optionee owns more than 10% of the voting power of all classes of stock of the company. No granted option will have a term in excess of ten years. The shares subject to each option will generally vest in one or more installments over a specified period of service measured from the grant date. However, one or more options may be structured so that they will be immediately exercisable for any or all of the option shares. 36 Upon cessation of service, the optionee will have a limited period of time in which to exercise his or her outstanding options to the extent exercisable for vested shares. The committee will have complete discretion to extend the period following the optionee's cessation of service during which his or her outstanding options may be exercised (up to the expiration of the option term) and/or to accelerate the exercisability or vesting of those options in whole or in part. That discretion may be exercised at any time while the options remain outstanding, whether before or after the optionee's actual cessation of service. EQUITY COMPENSATION PLAN INFORMATION The following table sets forth information regarding PlanetCAD's stock incentive plans as of December 31, 2001:
Number Of Securities Remaining Available For Number Of Securities To Be Weighted-Average Exercise Future Issuance Under Issued Upon Exercise Of Price Of Outstanding Equity Compensation Plans Outstanding Options, Options, Warrants And (Excluding Securities Warrants And Rights Rights Reflected In Column (a)) Plan Category (a) (b) (c) - -------------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by security holders 2,427,232 $1.69 1,694,250 - -------------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved by security holders 0 0.00 0 - -------------------------------------------------------------------------------------------------------------------- Total 2,427,232 $1.69 1,694,250 - --------------------------------------------------------------------------------------------------------------------
The following table sets forth information regarding Avatech's stock option plans, which are being assumed by PlanetCAD in the merger:
Number Of Securities Remaining Available For Number Of Securities To Be Weighted-Average Exercise Future Issuance Under Issued Upon Exercise Of Price Of Outstanding Equity Compensation Plans Outstanding Options, Options, Warrants And (Excluding Securities Warrants And Rights Rights Reflected In Column (a)) Plan Category (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------------- (1) Avatech Solutions - 1998 Stock Option Plan 95,150 $4.25 154,850 (2) Avatech Solutions - 2000 Stock Option Plan 465,136 $4.25 34,864 - ---------------------------------------------------------------------------------------------------------------------- Equity Compensation Plans approved by security holders 560,286 $4.25 189,714 - ---------------------------------------------------------------------------------------------------------------------- Equity Compensation Plans not 0 0 0 approved by security holders - ---------------------------------------------------------------------------------------------------------------------- Total 560,286 $4.25 189,714 - ----------------------------------------------------------------------------------------------------------------------
37 THE AVATECH SPECIAL MEETING DATE, TIME AND PLACE OF THE SPECIAL MEETING The special meeting of the Avatech stockholders is scheduled to be held on [_________], 2002, at 9:00 a.m. local time, at 11403 Cronhill Drive, Suite A, Owings Mills, Maryland 21117. MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING The purpose of the special meeting is: 1. To consider and vote upon a proposal to adopt the agreement and plan of merger dated as of May 1, 2002, by and among PlanetCAD Inc., Raven Acquisition Corporation, a wholly-owned subsidiary of PlanetCAD, and Avatech Solutions, Inc. 2. To approve an amendment to Avatech's certificate of incorporation to increase the total number of authorized shares of Avatech capital stock to 16,000,000 and authorize 8,000,000 shares of preferred stock. 3. To transact such other business as may properly come before the special meeting or any adjournment or postponement of the meeting. STOCK ENTITLED TO VOTE The board of directors of Avatech has fixed the close of business on _________, 2002, as the record date for the determination of the stockholders entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of the special meeting. A complete list of stockholders entitled to vote at the special meeting will be open to examination by the stockholders, during regular business hours, for a period of ten days prior to the special meeting at Avatech's principal executive offices at 11403 Cronhill Drive, Suite A, Owings Mills, Maryland 21117. As of the record date, 5,995,402 shares of Avatech common stock were outstanding. QUORUM The presence of a majority of Avatech common stock entitled to vote, present in person or represented by proxy, is necessary to constitute a quorum. Avatech will count shares of Avatech common stock present at the meeting that abstain from voting as present for purposes of determining a quorum. VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL Each Avatech stockholder is entitled to one vote for each share of Avatech common stock held on the record date with regard to the proposal to adopt the merger agreement and with regard to each other matter that may properly come before the Avatech special meeting. The affirmative vote of the holders of a two-thirds of the outstanding shares of Avatech common stock is required to adopt the merger agreement. ABSTENTIONS, FAILURES TO VOTE Because the affirmative vote of two-thirds of the outstanding shares of Avatech common stock is required for adoption of the merger agreement, a proxy marked "ABSTAIN" with respect to the adoption of the merger agreement will have the effect of a vote "AGAINST" the adoption of the merger agreement. In addition, the failure of an Avatech stockholder to return a proxy or vote in person at the Avatech special meeting will have the effect of a vote "AGAINST" the adoption of the merger agreement. BECAUSE ADOPTION OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF TWO-THIRDS OF THE OUTSTANDING SHARES OF AVATECH COMMON STOCK, ABSTENTIONS WILL HAVE THE SAME EFFECT AS NEGATIVE VOTES. THE FAILURE TO APPOINT A PROXY OR VOTE YOUR SHARES IN PERSON WILL ALSO HAVE THE SAME EFFECT AS A NEGATIVE VOTE. ACCORDINGLY, THE AVATECH BOARD OF DIRECTORS URGES YOU TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PAID ENVELOPE. 38 VOTING BY PROXY; REVOCATION OF PROXY You may vote shares either in person or by duly authorized proxy. You may use the proxy accompanying this proxy statement/prospectus if you are unable to attend the Avatech special meeting in person or if you wish to have your shares voted by proxy even if you do attend the Avatech special meeting. You may revoke any proxy given by you in response to this solicitation at any time before the proxy is voted at the Avatech special meeting by delivering to Avatech a written notice of revocation, by delivering to Avatech a subsequently dated, properly executed proxy or appointing a proxy as of a later date, or by attending the Avatech special meeting and electing to vote in person. Your attendance at the Avatech special meeting, by itself, will not constitute a revocation of a proxy. You should address any written notices of proxy revocation to: Avatech Solutions, Inc., 11403 Cronhill Drive, Suite A, Owings Mills, Maryland 21117, Attention: Secretary. All shares represented by the effective proxies on the accompanying Avatech proxy card received by Avatech at or before the Avatech special meeting, and not revoked before they are exercised, will be voted at the Avatech special meeting in accordance with their terms. If no instructions are given, signed Avatech proxies will be voted "FOR" the adoption of the merger agreement and at the discretion of the proxy holders on any other matters that properly come before the Avatech special meeting. The Avatech board of directors is not aware of any other matters to be presented at the Avatech special meeting other than matters incidental to the conduct of the Avatech special meeting. CERTAIN BENEFICIAL OWNERS Various stockholders of Avatech, who collectively beneficially own approximately [___]% of the outstanding shares of Avatech common stock as of the record date, have entered into agreements with PlanetCAD in which they have agreed to vote their shares "FOR" adoption of the merger agreement. See "The Merger Agreement -- The Voting Agreements" on page ___ for more information about these agreements. [Accordingly, even if all other stockholders were to vote against the adoption of the merger agreement, the adoption of the merger agreement at the Avatech special meeting is assured.] SOLICITATION OF PROXIES Avatech will bear the entire cost of the solicitation of proxies for the Avatech special meeting. However, expenses of printing and mailing this proxy statement/prospectus will be divided equally between Avatech and PlanetCAD. In addition to the solicitation of proxies by mail, officers, directors, employees and agents of Avatech may solicit proxies by correspondence, telephone, e-mail, facsimile or other electronic means, or in person, but without extra compensation. DISSENTERS' RIGHTS The Delaware General Corporation Law grants appraisal rights in the merger to the holders of Avatech common stock. Under Section 262 of the Delaware General Corporation Law, Avatech stockholders may object to the merger and demand in writing that Avatech pay to them the fair value of their shares of Avatech common stock. Fair value takes into account all relevant factors but excludes any appreciation or depreciation in anticipation of the applicable merger. Stockholders who elect to exercise appraisal rights must comply with all of the procedures set forth in Section 262 to preserve their appraisal rights. We have attached a copy of Section 262 of the Delaware General Corporation Law (which sets forth the appraisal rights) as Annex D to this proxy statement/prospectus. Section 262 sets forth the required procedure a stockholder requesting appraisal must follow. Making sure that you actually perfect your appraisal rights can be complicated. The procedural rules are specific and must be followed completely. Failure to comply with the procedure set forth in Section 262 may cause a termination of your appraisal rights. We are providing you only with a summary of your appraisal rights and the procedure. The following information is qualified in its entirety by the provisions of Section 262, a copy of which is attached as Annex D to this proxy statement/prospectus. Please review Section 262 carefully for the complete procedure. Avatech will not give you any notice other than as described in this proxy statement/prospectus and as required by the Delaware General Corporation Law. 39 APPRAISAL RIGHTS PROCEDURES If you are an Avatech stockholder and you wish to exercise your appraisal rights, you must satisfy the provisions of Section 262 of the Delaware General Corporation Law. Section 262 requires the following: YOU MUST MAKE A WRITTEN DEMAND FOR APPRAISAL. You must deliver a written demand for appraisal to Avatech before the vote on the merger agreement and the merger is taken at the Avatech special meeting. This written demand for appraisal must be provided to Avatech separately from your proxy. In other words, a vote against the Avatech merger agreement and the merger will not alone constitute a valid demand for appraisal. Additionally, this written demand must reasonably inform Avatech of your identity and of your intention to demand the appraisal of your shares of Avatech common stock. YOU MUST REFRAIN FROM VOTING FOR APPROVAL OF THE MERGER. You must not vote for approval of the merger agreement and the merger. If you vote, by proxy or in person, in favor of the merger agreement and the merger, this will terminate your right to appraisal. You can also terminate your right to appraisal if you return a signed proxy and (1) fail to vote against approval of the merger agreement and the merger or (2) fail to note that you are abstaining from voting. Your appraisal rights will be terminated even if you previously filed a written demand for appraisal. YOU MUST CONTINUOUSLY HOLD YOUR AVATECH COMMON STOCK. You must continuously hold your shares of Avatech common stock, from the date you make the demand for appraisal through the effective date of the merger. If you are the record holder of Avatech common stock on the date the written demand for appraisal is made but thereafter transfer the shares prior to the effective date of the merger, you will lose any right to appraisal in respect of those shares. You should read the paragraphs below for more details on making a demand for appraisal. A written demand for appraisal of Avatech common stock is effective only if it is signed by, or for, the stockholder of record who owns such shares at the time the demand is made. The demand must be signed as the stockholder's name appears on his/her/its stock certificate(s). If you are the beneficial owner of Avatech common stock, but not the stockholder of record, you must have the stockholder of record sign a demand for appraisal. If you own Avatech common stock in a fiduciary capacity, such as a trustee, guardian or custodian, you must disclose the fact that you are signing the demand for appraisal in that capacity. If you own Avatech common stock with more than one person, such as in a joint tenancy or tenancy in common, all of the owners must sign, or have signed for them, the demand for appraisal. An authorized agent, which could include one or more of the joint owners, may sign the demand for appraisal for a stockholder of record; however, the agent must expressly disclose the identity of the stockholder of record and the fact that the agent is signing the demand as that stockholder's agent. If you are an Avatech stockholder who elects to exercise appraisal rights, you should mail or deliver a written demand to: Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, Maryland 21117 Attention: Secretary It is important that Avatech receive all written demands for appraisal before the vote concerning the merger agreement and the merger is taken at the special meeting. As explained above, this written demand should be signed by, or on behalf of, the stockholder of record. The written demand for appraisal should specify the stockholder's name and mailing address, the number of shares of stock owned, and that the stockholder is thereby demanding appraisal of that stockholder's shares. 40 If you fail to comply with any of these conditions and the merger becomes effective, you will only be entitled to receive shares of PlanetCAD common stock and cash for fractional shares as provided in the merger agreement. WRITTEN NOTICE. Within ten days after the effective date of the merger, Avatech must give written notice that the merger has become effective to each stockholder who has fully complied with the conditions of Section 262. PETITION WITH THE CHANCERY COURT. Within 120 days after the effective date of the merger, either the surviving corporation or any stockholder who has complied with the conditions of Section 262, may file a petition in the Delaware Court of Chancery. This petition should request that the chancery court determine the value of the shares of stock held by all of the stockholders who are entitled to appraisal rights. If you intend to exercise your rights of appraisal, you should file such a petition in the chancery court. Avatech has no intention at this time to file such a petition. Because Avatech has no obligation to file such a petition, if you do not file such a petition within 120 days after the effective date of the merger, you will lose your rights of appraisal. WITHDRAWAL OF DEMAND. If you change your mind and decide you no longer want appraisal rights, you may withdraw your demand for appraisal rights at any time within 60 days after the effective date of the merger. You may also withdraw your demand for appraisal rights after 60 days after the effective date of the merger, but only with the written consent of Avatech. If you effectively withdraw your demand for appraisal rights, you will receive shares of PlanetCAD common stock and cash for fractional shares as provided in the merger agreement. REQUEST FOR APPRAISAL RIGHTS STATEMENT. If you have complied with the conditions of Section 262, you are entitled to receive a statement from Avatech. This statement will set forth the number of shares that have demanded appraisal rights, and the number of stockholders who own those shares. In order to receive this statement, you must send a written request to Avatech within 120 days after the effective date of the merger. After the merger, Avatech has 10 days after receiving a request to mail the statement to you. CHANCERY COURT PROCEDURES. If you properly file a petition for appraisal in the chancery court and deliver a copy to Avatech, Avatech will then have 20 days to provide the chancery court with a list of the names and addresses of all stockholders who have demanded appraisal rights and have not reached an agreement with Avatech as to the value of their shares. The chancery court will then send notice to all of the stockholders who have demanded appraisal rights. If the chancery court thinks it is appropriate, it has the power to conduct a hearing to determine whether the stockholders have fully complied with Section 262 of the Delaware General Corporation Law and whether they are entitled to appraisal rights under that section. The chancery court may also require you to submit your stock certificates to the Registry in Chancery so that it can note on the certificates that an appraisal proceeding is pending. If you do not follow the chancery court's directions, you may be dismissed from the proceeding. APPRAISAL OF SHARES. After the chancery court determines which stockholders are entitled to appraisal rights, the chancery court will appraise the shares of stock. To determine the fair value of the shares, the chancery court will consider all relevant factors except for any appreciation or depreciation due to the anticipation or accomplishment of the merger. After the chancery court determines the fair value of the shares, it will direct Avatech to pay that value to the stockholders who are entitled to appraisal rights. The chancery court can also direct Avatech to pay interest, simple or compound, on that value if the chancery court determines that the payment of interest is appropriate. In order to receive the fair value of your shares, you must then surrender your Avatech stock certificates to Avatech. The chancery court could determine that the fair value of your shares of Avatech stock is more than, the same as, or less than the merger consideration. In other words, if you demand appraisal rights, you could receive less consideration than you would under the merger agreement. COSTS AND EXPENSES OF APPRAISAL PROCEEDING. The costs and expenses of the appraisal proceeding may be assessed against Avatech and the stockholders participating in the appraisal proceeding, as the chancery court deems equitable under the circumstances. You can request that the chancery court determine the amount of interest, if any, Avatech should pay on the value of stock owned by stockholders entitled to the payment of interest. You may also 41 request that the chancery court allocate the expenses of the appraisal action incurred by any stockholder pro rata against the value of all of the shares entitled to appraisal. LOSS OF STOCKHOLDER'S RIGHTS. If you demand appraisal rights, from and after the effective date of the merger you will not be entitled to: - vote your shares of Avatech stock, for any purpose, for which you have demanded appraisal rights; - receive payment of dividends or any other distribution with respect to such shares, except for dividends or distributions, if any, that are payable to holders of record as of a record date prior to the effective time of the merger; or - receive payment of the consideration provided for in the merger agreement (unless you properly withdraw your demand for appraisal). If no petition for an appraisal is filed within 120 days after the effective date of the merger, your right to an appraisal will cease. You may withdraw your demand for appraisal and accept the merger consideration by delivering to Avatech a written withdrawal of your demand, except that (1) any attempt to withdraw your demand for appraisal made more than 60 days after the effective date of the merger will require the written approval of Avatech, and (2) an appraisal proceeding in the chancery court cannot be dismissed unless the chancery court approves such dismissal. If you fail to comply strictly with the procedures described above you will lose your appraisal rights. Consequently, if you wish to exercise your appraisal rights, we strongly urge you to consult a legal advisor before attempting to exercise your appraisal rights. If you do not vote in favor of the merger and fail to properly demand appraisal rights, or if for some reason your right to appraisal is withdrawn or lost, your shares will, upon surrender as described above at the effective time of the merger, be converted into the right to receive the shares of PlanetCAD common stock and cash for fractional shares as provided in the merger agreement. AMENDMENT OF AVATECH'S CERTIFICATE OF INCORPORATION TO INCREASE THE TOTAL NUMBER OF AUTHORIZED SHARES OF CAPITAL STOCK INTRODUCTION Avatech's certificate of incorporation currently authorizes the issuance of 10,000,000 shares of Avatech common stock and no shares of Avatech preferred stock. The Avatech board has adopted a resolution proposing that the Avatech certificate of incorporation be amended to increase the authorized number of shares of Avatech capital stock to 16,000,000. The number of authorized shares of common stock would become 8,000,000 and 8,000,000 shares of preferred stock would be authorized, subject to stockholder approval of the amendment. As of May 24, 2002, 5,995,402 shares of Avatech common stock were outstanding and approximately 786,985 shares were reserved for issuance upon exercise of outstanding options and warrants. Based upon the offering to current holders of Avatech's 10% subordinated notes to exchange their notes for shares of a new series of convertible preferred stock and assuming the market price of PlanetCAD's common stock is $0.25 on the effective date of the merger, up to approximately 6,400,000 shares of Avatech preferred stock could be issued pursuant to the exchange offer. Therefore, unless Avatech preferred stock is authorized, Avatech will be unable to issue the Avatech preferred stock contemplated in the exchange offer. PROPOSED AMENDMENT The following is the text of ARTICLE FOURTH of the Avatech certificate of incorporation, as proposed to be amended: "ARTICLE FOURTH. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is sixteen million (16,000,000) shares. Eight million (8,000,000) shares shall be Common Stock, each having a par value of one cent ($0.01). Eight million (8,000,000) shares shall be Preferred Stock, each having a par value of one cent ($0.01). Neither the holders of the Common Stock nor the Preferred Stock shall have preemptive rights to subscribe for any shares of any class of stock of the Corporation whether now or hereafter authorized. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law, to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. PURPOSE AND EFFECT OF THE PROPOSED AMENDMENT In order to issue shares of preferred stock in exchange for outstanding Avatech 10% subordinated notes, preferred stock must be authorized in the Avatech certificate of incorporation. The Avatech board believes that the exchange of debt for preferred stock will positively affect Avatech's financial statements, by showing a decrease in debt and an increase in stockholders equity. Avatech does not currently have plans to issue any shares of preferred stock or common stock, other than the shares of preferred stock to be issued to the current debt holders who choose to exchange their notes for preferred stock upon consummation of the merger. No additional action or authorization by Avatech's stockholders would be necessary prior to the issuance of such preferred shares, unless required by applicable law or the rules of any stock exchange or national securities association trading system on which the Avatech common stock is then listed or quoted. Under Avatech's certificate of incorporation, Avatech's stockholders do not have preemptive rights with respect to Avatech common stock. Thus, if the Avatech board were to elect to issue shares of Avatech preferred stock, existing stockholders would not have any preferential rights to purchase such shares. In addition, if the Avatech board elects to issue shares of Avatech preferred stock, such issuance could have a dilutive effect on the earnings per share, voting power, and share holdings of current stockholders. The issuance of Avatech preferred stock is not anticipated to affect the Avatech common stockholders in connection with the merger. The issuance of the preferred stock is not expected to have any effect on the exchange ratio contemplated with respect to the merger. VOTE NECESSARY TO APPROVE THE AMENDMENT Each holder of Avatech common stock is entitled to one vote per share held. The affirmative vote of holders of two-thirds of the outstanding shares of Avatech common stock is required for approval of the amendment to increase the authorized number of shares of Avatech capital stock and authorize preferred stock. In the event that a quorum is not present or represented at the Avatech annual meeting, the stockholders entitled to vote at the meeting present in person or by proxy shall have power to adjourn the Avatech annual meeting until a quorum shall be present or represented. Proxies solicited by the Avatech board will be voted for approval of the amendment to increase the authorized number of shares of Avatech capital stock, unless otherwise instructed. RECOMMENDATION OF THE AVATECH BOARD The Avatech board recommends a vote "FOR" the proposal to amend Avatech's certificate of incorporation to increase the number of authorized shares of Avatech capital stock from 10,000,000 to 16,000,000 and to authorize 8,000,000 shares of preferred stock. Unless a contrary choice is specified, proxies solicited by the Avatech board will be voted "FOR" approval of the amendment to increase the authorized Avatech capital stock. THE AVATECH BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE AMENDMENT TO INCREASE THE AUTHORIZED AVATECH CAPITAL STOCK. 42 THE MERGER THIS SECTION OF THE PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN ASPECTS OF THE MERGER, INCLUDING THE MERGER AGREEMENT AND THE VOTING AGREEMENTS. WHILE WE BELIEVE THAT THE DESCRIPTION COVERS THE MATERIAL TERMS OF THE MERGER AND THE RELATED TRANSACTIONS, THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ CAREFULLY THE ENTIRE MERGER AGREEMENT AND THE OTHER DOCUMENTS WE REFER TO FOR A MORE COMPLETE UNDERSTANDING OF THE MERGER. BACKGROUND OF THE MERGER As a regular part of their business plans, Avatech and PlanetCAD have from time to time each considered opportunities for expanding and strengthening their technology, products, and development capabilities and distribution channels, including strategic acquisitions, business combinations, licensing and development agreements. Additionally, in light of the rapid changes in the software design implementation industry, including industry consolidation, the Avatech board of directors regularly met with Avatech senior management to review Avatech's position relative to its peers and new entrants in the industry, as well as the strategic alternatives available to Avatech in order for it to remain competitive and enhance shareholder value. At its Board meeting on May 17, 2000, Avatech management was encouraged to seek a strategic investor in its search for new capital. Throughout the rest of 2000 and 2001, the Avatech board of directors regularly discussed additional funding alternatives and strategic partners. On October 17, 2001, Avatech renewed its engagement with Bentley Securities to act as its financial advisor in this effort. In early December 2001, Avatech's financial advisor solicited Eugene Fischer, PlanetCAD's chairman, in his position as a general partner in Capstone Ventures, a venture capital firm, about Capstone's interest in providing financing to Avatech. Mr. Fischer called Avatech's financial advisor to suggest a possible strategic transaction between Avatech and PlanetCAD. Avatech's financial advisor had subsequent telephone discussions with each of Henry Felton, Avatech's chairman, Mr. Fischer and PlanetCAD board member, H. Robert Gill. On December 13, 2001, Mr. Fischer met with Avatech's financial advisor, and Avatech and PlanetCAD entered into a mutual confidentiality and non-disclosure agreement. On December 18, 2001, the management of each of PlanetCAD and Avatech had several telephone conversations to discuss financial and product information. Throughout late December 2001, PlanetCAD and Avatech continued to share financial and other business information with each other. As part of the continuing discussions, each of PlanetCAD and Avatech proposed and answered a round of formal questions and, on January 16, 2002, Larry Oliva, Avatech Vice President of Professional Services, made a site visit to PlanetCAD's offices in Boulder, Colorado. On January 23, 2002, Mr. Fischer and Mr. Gill visited the corporate offices of Avatech in Baltimore, Maryland. During the visit, discussions focused on the expected synergies that would flow from a merger of the two companies. Following this meeting, Avatech undertook an investigation of the PlanetCAD product offerings to determine their suitability for Avatech's customer base. After eliminating foreign companies from the PlanetCAD database, the Avatech marketing department compared the remaining 168 account names to the names in the Avatech customer accounts database, finding 88 names on both lists, representing a 52% correlation of major account customers. Furthermore, those matching customers used, on average, 50% more Autodesk seat licenses than those who did not match. In addition, through a permission e-mail survey of its customers, Avatech determined that there would be a market for PlanetCAD's Prescient QA product for use with two Autodesk products, AutoCAD and Inventor. 43 In subsequent discussions, PlanetCAD and Avatech determined that a PQA/Inventor Product could be economically developed and sold. The selection of the PQA/Inventor product line was reinforced through a subsequent meeting with Autodesk executive officers and other Autodesk officials on April 17, 2002, at which such potential product development was discussed. On January 29, 2002, David Hushbeck, PlanetCAD's chief executive officer, met with several members of Avatech management to discuss products and marketing. On March 1, 2002, Avatech provided PlanetCAD with additional financial information. On March 6, 2002, at the regular monthly PlanetCAD board meeting, Mr. Felton made a presentation about Avatech, its business and prospects and how Avatech and PlanetCAD's businesses could be combined. Mr. Felton was accompanied by a representative of Avatech's financial advisor. PlanetCAD's board was given the opportunity to ask questions of Mr. Felton, and then Mr. Felton and the representative of Avatech's financial advisor left the meeting. A representative from Alliant then reviewed for the PlanetCAD board a preliminary analysis of Avatech's proposal. During the meeting, a representative of Hogan & Hartson L.L.P. discussed with the PlanetCAD board their fiduciary duties in this type of acquisition transaction. At the end of the March 6, 2002 PlanetCAD board meeting, the PlanetCAD board of directors authorized Mr. Fischer to proceed with negotiations with Avatech, in consultation with PlanetCAD's legal and financial advisors, and to commence a due diligence investigation of Avatech. On March 7, 2002 Avatech's financial advisor called PlanetCAD's chief executive officer to discuss Avatech's interest in the merger. On March 25, 2002, the chief financial officers of Avatech and PlanetCAD held a call to discuss combined forecasts. On March 26, 2002 to March 29, 2002, a representative of PlanetCAD conducted a due diligence investigation at the offices of Avatech. Between April 2, 2002 and April 18, 2002, PlanetCAD, Avatech and their counsel negotiated the terms of a non-binding term sheet that outlined the substantive terms of the proposed merger. On April 3, 2002, a representative of Avatech conducted a due diligence review at PlanetCAD's office, and on April 10, 2002, the chief financial officers of Avatech and PlanetCAD held a call to discuss combined forecasts. On April 16, 2002, at the regular monthly PlanetCAD board meeting, Mr. Fischer, Mr. Hushbeck and Ms. Godesiabois updated the board on the status of the negotiations with Avatech and discussed transition plans and timing. On April 18, 2002, PlanetCAD's counsel distributed the first draft of the proposed merger agreement. Throughout the day on April 24, 2002, representatives of PlanetCAD and Avatech, together with their counsel, negotiated most of the terms of the merger agreement. On April 25, 2002, Mr. Fischer and Mr. Felton discussed the merger during a telephone call and reached agreement on most of the remaining issues relating to the merger agreement. On April 29, 2002, the Avatech board held a special telephonic meeting during which Mr. Nicholson discussed the proposed merger agreement and Mr. Fischer presented the rationale for the merger (see "Avatech's Reasons for the Merger," on page __). The Avatech board deemed it advisable and in the best interests of Avatech to enter into the merger agreement with PlanetCAD in order to effect a reverse triangular merger with Avatech remaining as a wholly-owned subsidiary of PlanetCAD. To that end, the Avatech board authorized Mr. Felton to negotiate additional and final terms of the merger agreement, to execute the merger agreement (the closing of which is contingent upon Avatech stockholder approval), and directed the officers of Avatech to close the merger promptly upon approval of Avatech stockholders. Final negotiations between the parties occurred on May 1, 2002, at which time the parties reached agreement on the remaining open issues relating to the merger agreement. Also on May 1, 2002, as part of 44 PlanetCAD's due diligence, Mr. Fischer met with a representative of Avatech's principal supplier. Late in the afternoon, the PlanetCAD board held a special telephonic meeting to review and discuss the terms of the definitive merger agreement. Alliant Partners made a financial presentation regarding the financial terms of the proposed merger. Alliant Partners' discussion included a discussion of certain analyses described under " - Opinion of PlanetCAD's Financial Advisor." Alliant Partners then rendered its oral opinion, subsequently confirmed in writing, that the total consideration to be provided by PlanetCAD to the stockholders of Avatech pursuant to the merger agreement was fair, from a financial point of view, to PlanetCAD stockholders. PlanetCAD's counsel then reviewed for the board the proposed merger agreement. After discussion of the foregoing, the PlanetCAD board determined that the merger was fair to, and in the best interests of, PlanetCAD and the PlanetCAD stockholders, that the merger agreement and the transactions contemplated thereby were advisable and that the board should recommend that the PlanetCAD stockholders approve the merger agreement and approved and adopted the merger agreement, the merger, the ancillary agreements and related matters. Following the meeting, Mr. Fischer and Mr. Felton agreed upon a minor wording change, and in the evening of May 1, 2002, the parties executed and delivered the merger agreement. PlanetCAD and Avatech jointly announced the merger the morning of May 2, 2002, prior to the opening of trading on the American Stock Exchange. RECOMMENDATION OF PLANETCAD'S BOARD OF DIRECTORS After careful consideration, the PlanetCAD board of directors has determined the merger agreement and the merger to be fair to, and in the best interests of, the PlanetCAD stockholders. The PlanetCAD board of directors recommends that PlanetCAD stockholders vote for the proposal to adopt and approve the merger agreement. In considering the recommendation of the PlanetCAD board of directors with respect to the merger agreement, you should be aware that certain directors and officers of PlanetCAD have certain interests in the merger that are different from, or are in addition to the interests of PlanetCAD stockholders generally. Please see the section entitled "--Interests of Certain Persons in the Merger" on page ____. PLANETCAD'S REASONS FOR THE MERGER The PlanetCAD board of directors believes that the terms of the merger are in the best interests of PlanetCAD and its stockholders, and has approved the merger and the merger agreement. The PlanetCAD board of directors views the merger as a means of helping achieve PlanetCAD's long term strategic and financial goals. In reaching its conclusion to approve the merger, the PlanetCAD board of directors also considered the following factors: - information concerning the financial performance and condition, business operations and prospects of Avatech, and Avatech's projected future performance and prospects on a combined basis with PlanetCAD; - information concerning the business operations and prospects of PlanetCAD on a stand-alone basis; - current industry, economic and market conditions; - the structure of the transaction and the terms of the merger agreement and the merger consideration, which were the result of arms' length negotiations between PlanetCAD and Avatech; - the analysis prepared by Alliant Partners and presented to the PlanetCAD board that the total consideration to be provided by PlanetCAD to the Avatech stockholders pursuant to the merger agreement is fair, from a financial point of view, to PlanetCAD's stockholders, as described more fully in the text of the entire opinion attached as Annex E to this proxy statement/prospectus; 45 - PlanetCAD's stockholders will have the opportunity to participate in the potential for growth of the combined company after the merger and to benefit from the potential appreciation in the value of PlanetCAD common stock; - the ability to leverage the marketing of PlanetCAD's products using Avatech's nationwide distribution network; - the historical performance and reputation of Avatech; and - the likelihood that the merger would be completed. The PlanetCAD board also identified and considered a variety of potential risks and other negative factors in its deliberations concerning the merger, including, but not limited to: - the risk to PlanetCAD's stockholders that the value of PlanetCAD common stock could decline as a result of the merger; - the loss of control over the future operations of PlanetCAD following the merger; - the impact of the merger on PlanetCAD's employees and customers; - the risk that the potential benefits sought in the merger might not be fully realized; - the possibility that the merger might not be completed; - the potential adverse effects of the public announcement of the merger on PlanetCAD's business; - the risk that the attention of PlanetCAD's management may be diverted from PlanetCAD's business operations; - the transaction costs expected to be incurred in connection with the merger; and - the other risks described in this proxy statement/prospectus under the heading "Risk Factors Relating to the Merger and an Investment in PlanetCAD common stock" beginning on page __. The PlanetCAD board also considered other alternatives to the merger, including continuing as a stand-alone company. In light of the factors described above, the PlanetCAD board determined that the value and benefits available to PlanetCAD stockholders from the merger exceeded the value and potential benefits they might realize from any other alternative available to PlanetCAD. The foregoing discussion of the information and factors considered by the PlanetCAD board is not intended to be exhaustive but is believed to include all material factors considered by PlanetCAD's board. In view of the complexity and wide variety of information and factors, both positive and negative, considered by the PlanetCAD board, it did not find it practical to quantify, rank or otherwise assign relative or specific weights to the factors considered. In addition, the PlanetCAD board did not reach any specific conclusion with respect to each of the factors considered, or any aspect of any particular factor, but, rather, conducted an overall analysis of the factors described above, including discussions with PlanetCAD's management and legal and financial advisors. In considering the factors described above, individual members of the PlanetCAD board may have given different weight to different factors. The PlanetCAD board considered all these factors as a whole and believes that the merger is fair to, and in the best interests of, PlanetCAD and its stockholders and recommends that the stockholders of PlanetCAD approve the merger. 46 RECOMMENDATION OF AVATECH'S BOARD OF DIRECTORS After careful consideration, the Avatech board of directors has determined the merger agreement and the merger to be fair to, and in the best interests of, the Avatech stockholders. The Avatech board of directors recommends that Avatech stockholders vote for the proposal to adopt and approve the merger agreement. In considering the recommendation of the Avatech board of directors with respect to the merger agreement, you should be aware that certain directors and officers of Avatech have certain interests in the merger that are different from, or are in addition to the interests of Avatech stockholders generally. Please see the section entitled "--Interests of Certain Persons in the Merger" on page ____. AVATECH'S REASONS FOR THE MERGER The Avatech board of directors consulted with Avatech's senior management, as well as Avatech's legal counsel, independent accountants and financial advisors, in reaching its decision to approve the merger agreement and the merger and recommend that the stockholders of Avatech approve the merger agreement. During the course of its deliberations, Avatech's board considered a number of factors that it believes make the merger attractive to Avatech's stockholders and could contribute to the success of the combined companies, including: - the merger will offer the stockholders of the combined company the potential benefits described below under the heading "PlanetCAD's Reasons for the Merger;" - the merger will make available to Avatech additional cash and the greater flexibility in obtaining financing available to publicly held companies; - the merger will create a combined company with potentially greater financial, technological and human resources to develop and market new products and services; - in the merger, Avatech stockholders will receive securities listed on the American Stock Exchange, thereby permitting them to obtain liquidity for their investment, in contrast to the illiquid nature of their present holdings in Avatech common stock; - the terms and conditions of the merger agreement, including the expected tax-free treatment to Avatech's stockholders; and - the merger will give Avatech the ability to offer shares of stock in a public corporation that can be listed on the American Stock Exchange, instead of cash, as currency for potential acquisition transactions. The Avatech board also identified and considered a variety of potential risks and other negative factors in its deliberations concerning the merger, including, but not limited to: - the risk to Avatech's stockholders that the value to be received in the merger could decline significantly if the value of PlanetCAD's common stock were to fall prior to or following the closing of the merger; - the impact of the loss of Avatech's status as an independent company on its stockholders, employees and customers; - the greater costs associated with operating as a publicly held company; - the risk that the potential benefits sought in the merger might not be fully realized; - the possibility that the merger might not be completed; 47 - the risk that, despite the efforts of PlanetCAD and Avatech, key technical, sales and management personnel might not remain employees of the combined company following the completion of the merger; - the risk that the attention of Avatech's management may be diverted from Avatech's business operations; - the transaction costs expected to be incurred in connection with the merger; and - the other risks described in this proxy statement/prospectus under the heading "Risk Factors Relating to the Merger and an Investment in PlanetCAD common stock" beginning on page __. The Avatech board also considered what alternatives existed to the merger, including reviewing the prospects for Avatech as an independent company. In light of the factors described above, the Avatech board determined that the value and benefits available to Avatech stockholders from the merger exceeded the value and potential benefits they might realize from Avatech continuing as an independent company. The foregoing discussion of the information and factors considered by the Avatech board is not intended to be exhaustive but is believed to include all material factors considered by Avatech's board. In view of the complexity and wide variety of information and factors, both positive and negative, considered by the Avatech board, it did not find it practical to quantify, rank or otherwise assign relative or specific weights to the factors considered. In addition, the Avatech board did not reach any specific conclusion with respect to each of the factors considered, or any aspect of any particular factor, but, rather, conducted an overall analysis of the factors described above, including discussions with Avatech's management and legal and financial advisors. In considering the factors described above, individual members of the Avatech board may have given different weight to different factors. The Avatech board considered all these factors as a whole and believes that the merger is fair to, and in the best interests of, Avatech and its stockholders and recommends that the stockholders of Avatech approve the merger and the merger agreement. OPINION OF PLANETCAD'S FINANCIAL ADVISOR PlanetCAD retained Alliant Partners to render an opinion regarding the fairness of the proposed merger between Avatech and a subsidiary of PlanetCAD, from a financial point of view, to the stockholders of PlanetCAD. By teleconference on the afternoon of May 1, 2002, Alliant Partners delivered to the PlanetCAD board of directors its opinion that, as of May 1, 2002, and based on the matters described in the opinion, the total consideration to be issued by PlanetCAD to the stockholders of Avatech in connection with the merger was fair, from a financial point of view, to the stockholders of PlanetCAD. No limitations were imposed by PlanetCAD on the scope of Alliant Partners' investigations or the procedures to be followed by Alliant Partners in rendering its fairness opinion. The full text of the fairness opinion letter, which sets forth, among other things, assumptions made, matters considered and limitations on the review undertaken by Alliant Partners in connection with the opinion is attached to this proxy statement/prospectus as Annex E. Stockholders of PlanetCAD are urged to read Alliant Partners' fairness opinion letter in its entirety. The fairness opinion was prepared for the benefit and use of the PlanetCAD board of directors in its consideration of the merger and does not constitute a recommendation to stockholders of PlanetCAD as to how they should vote in connection with the merger. The fairness opinion does not address the relative merits of the merger or any other transactions or business strategies discussed by the PlanetCAD board of directors as alternatives to the merger agreement or the underlying business decision of the PlanetCAD board of directors to proceed with or effect the merger, except with respect to the fairness of the total consideration to be issued by PlanetCAD to the stockholders of Avatech, from a financial point of view, to the stockholders of PlanetCAD. The summary of Alliant Partners' fairness opinion set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of Alliant Partners' fairness opinion letter. 48 In connection with the preparation of Alliant Partners' fairness opinion, Alliant Partners, among other things: - reviewed and discussed the terms of the merger agreement dated May 1, 2002 with the managements of both PlanetCAD and Avatech; - reviewed financial statements and other financial and operating data concerning Avatech and PlanetCAD prepared by their respective managements; - compared some aspects of the financial performance of Avatech and PlanetCAD with comparable public companies and the prices paid for securities in those publicly traded companies; - analyzed available public information concerning other mergers and acquisitions comparable in whole or in part to the merger; - assessed Avatech's and PlanetCAD's values based on forecasts of future cash flows for each company using discounted cash flow analyses; - assessed Avatech's and PlanetCAD's relative contribution to the combined organization based on current and projected financial performance; and - participated in discussions with PlanetCAD and Avatech management concerning the operations, business strategy, financial performance and prospects for PlanetCAD and Avatech as a combined organization. In conducting its review and arriving at its fairness opinion, Alliant Partners relied on and assumed the accuracy and completeness of the financial statements and other information provided by PlanetCAD and Avatech or otherwise made available to Alliant Partners and did not assume independent responsibility to verify the information. Alliant Partners further relied on the assurances of PlanetCAD's and Avatech's respective managements that the information provided was prepared on a reasonable basis in accordance with industry practice and, with respect to financial planning data, reflected the best currently available estimates and good faith judgments of PlanetCAD's and Avatech's respective managements as to the expected future financial performance of the combined organization as well as assurances that PlanetCAD management was not aware of any information or facts that would make the information provided to Alliant Partners incomplete or misleading. In arriving at the fairness opinion, Alliant Partners did not perform any appraisals or valuations of specific assets or liabilities of PlanetCAD or Avatech and was not furnished with any appraisals or valuations. Alliant Partners did not undertake any independent analysis of any pending or threatened litigation, possible unasserted claims or other contingent liabilities to which PlanetCAD, Avatech or any of their respective affiliates was a party or may be subject. At PlanetCAD's direction and with its consent, Alliant Partners did rely upon certain information provided by PlanetCAD regarding the possible assertion of claims, outcomes or damages arising out of those matters relating to pending or threatened litigation, possible unasserted claims or other contingent liabilities to which PlanetCAD may be subject in the future. Although developments following the date of Alliant Partners' fairness opinion may affect the opinion, Alliant Partners assumed no obligation to update, revise or reaffirm the opinion. Following is a summary explanation of the various sources of information and valuation methodologies employed by Alliant Partners in conjunction with rendering its opinion to the PlanetCAD board of directors. BUSINESS VALUATION OF PLANETCAD COMPARABLE PUBLIC COMPANY ANALYSIS FOR AVATECH. Alliant Partners compared some financial information and valuation ratios relating to Avatech to corresponding publicly available data and ratios from a group of selected publicly traded companies deemed comparable to Avatech. The comparable companies selected included six 49 publicly traded companies in the business of reselling design software and providing related software training and support services. Financial information reviewed by Alliant Partners included each company's: (a) enterprise value, calculated as the market capitalization of the selected company, plus the company's long term debt, less the company's excess cash; (b) trailing twelve month, or TTM, revenue as reported as of the date of Alliant Partners' fairness opinion; (c) TTM pro forma operating income; (d) revenue for calendar years 2000 and 2001; and (e) projected calendar year revenue estimates for 2002. Comparable companies included: Ansys, Inc; Autodesk; Canterbury Consulting; Intergraph; Parametric Technology; and Rand Technology. Some adjustments for differences in performance, marketability and size and application of an acquisition control premium were made to the valuation multiples before reaching an implied average enterprise value of $25.3 million for Avatech through this methodology. COMPARABLE TRANSACTION ANALYSIS FOR AVATECH. Alliant Partners reviewed eight comparable merger and acquisition transactions from March 2000 through November 2001 that involved sellers that share some characteristics with Avatech, including companies in the business of selling design software and providing related software training and support services. Those comparable merger and acquisition transactions of companies included: Keane's acquisition of Metro Information Services; CIBER's acquisition of Aris Corp.; Electronic Data Systems' acquisition of Structural Dynamics; Novell's acquisition of Cambridge Technology Partners; Convergys' acquisition of Keane's Help Desk business; Dimension Data Learning Solutions' acquisition of Colorado Computer Training Institute; Thomson Corp.'s acquisition of Wave Technologies International; and Dassault's acquisition of EAI Delta GmbH (subsidiary of Engineering Animation). Estimated multiples paid in the comparable merger and acquisition transactions were based on information obtained from public filings, public company disclosures, press releases, industry and popular press reports, databases and other sources. The transaction values were adjusted to account for changes in each respective acquiror's stock price since the transaction effective date. Some additional adjustments for differences in liquidity and size were made to the valuation multiples before reaching an implied enterprise value of $17.0 million for Avatech through this comparable transactions methodology. No company, transaction or business utilized as a comparison in the comparable public company analysis or the comparable transaction analysis is identical to PlanetCAD, Avatech or the merger. In evaluating the comparable companies, Alliant Partners made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of PlanetCAD or Avatech. Accordingly, an analysis of the results of the foregoing is not entirely mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition, public trading and other values of the comparable companies, comparable transactions or the business segment, companies or transactions to which they are being compared. DISCOUNTED CASH FLOW ANALYSIS FOR AVATECH. Alliant estimated the present value of the projected future cash flows of Avatech on a stand-alone basis based on projections for its fiscal years ending June 30, 2002 through June 30, 2004 and an appropriate discount rate. Alliant Partners obtained a terminal valuation based on application of an adjusted projected revenue multiple to terminal year projected revenues. Based on this methodology, Avatech has an implied enterprise value of $16.5 million. EQUITY VALUATION SUMMARY FOR AVATECH. To reach a value range for the equity value of Avatech, Alliant Partners utilized a weighted average of the value indications implied by the three methodologies of $19.7 million, weighting each methodology equally. After making adjustments to account for long term debt obligations on Avatech's balance sheet expected as of the closing of the merger, the implied equity valuation for Avatech as of May 1, 2002 was $16.1 million, with a valuation range of $14.5 million to $17.7 million. BUSINESS VALUATION OF PLANETCAD Per the terms of the merger agreement, PlanetCAD will provide common stock in exchange for all outstanding shares of Avatech such that post-merger, Avatech stockholders will hold 75% and PlanetCAD stockholders will hold 25% of the outstanding stock of the joint entity. 50 PlanetCAD management has for some time not believed that PlanetCAD's market price has represented the intrinsic market value for the Company. Accordingly, a valuation analysis was performed in order to reach a value indication for PlanetCAD as of May 1, 2002. COMPARABLE COMPANY ANALYSIS FOR PLANETCAD. Alliant Partners compared some financial information and valuation ratios relating to PlanetCAD to corresponding publicly available data and ratios from a group of selected publicly traded companies deemed comparable to PlanetCAD. The comparable companies selected included seven publicly traded companies in the business of providing computer-aided design and engineering software and related support and collaboration services. Financial information reviewed by Alliant Partners included each company's: (a) enterprise value, calculated as the market capitalization of the selected company, plus the company's long term debt, less the company's excess cash; (b) trailing twelve month, or TTM, revenue as reported as of the date of Alliant Partners' fairness opinion; (c) TTM pro forma operating income; (d) revenue for calendar years 2000 and 2001; and (e) projected calendar year revenue estimates for 2002. Comparable companies included: Ansys, Inc.; Autodesk; Dassault Systemes; Manugistics Group; MatrixOne; MSC.Software; and Parametric Technology. Some adjustments for differences in performance and size and application of an acquisition control premium were made to the valuation multiples before reaching an implied average enterprise value of $3.5 million for PlanetCAD through this methodology. COMPARABLE TRANSACTION ANALYSIS FOR PLANETCAD. Alliant Partners reviewed thirteen comparable merger and acquisition transactions from March 2000 through April 2002 that involved sellers that share some characteristics with PlanetCAD, including companies providing design and engineering software and related services. These comparable transactions of companies included: MSC.Software's acquisition of Mechanical Dynamics; Electronic Data Systems' acquisition of Unigraphics Solutions; Electronic Data Systems' acquisition of Structural Dynamics; Autodesk's acquisition of Buzzsaw.com; EXE Technologies' acquisition of AllPoints Systems; Dassault Systemes' acquisition of the Component Software division of Spatial Technology (now PlanetCAD); Manhattan Associates' acquisition of Intrepa; Unigraphics Solutions' acquisition of Engineering Animation; Ansys' acquisition of ICEM CFD Engineering; Spatial Technology's (now PlanetCAD) acquisition of Prescient Technologies; i2 Technologies' acquisition of Aspect Development; Aspen Technology's acquisition of PetrolSoft; and Dassault Systemes' acquisition of EAI Delta GmbH (subsidiary of Engineering Animation). Estimated multiples paid in the comparable transactions were based on information obtained from public filings, public company disclosures, press releases, industry and popular press reports, databases and other sources. The transaction values were adjusted to account for changes in the respective acquiror's stock prices since the effective date of the transaction. An additional adjustment for difference in size was made to the valuation multiples before reaching an implied enterprise value of $3.3 million for PlanetCAD through this methodology. DISCOUNTED CASH FLOW ANALYSIS FOR PLANETCAD. Alliant estimated the present value of the projected future cash flows of PlanetCAD on a stand-alone basis based on projections for the years ending December 31, 2002 through December 31, 2004 and an appropriate discount rate. Alliant Partners obtained a terminal valuation based on application of an adjusted projected revenue multiple to terminal year projected revenues. Based on this methodology, PlanetCAD has an implied enterprise value of $2.1 million. EQUITY VALUATION SUMMARY FOR PLANETCAD. To reach a value range for the equity value of PlanetCAD, Alliant Partners utilized a weighted average of the value indications implied by the three methodologies of $2.9 million, weighting each methodology equally. After making adjustments to account for excess cash on PlanetCAD's balance sheet expected as of the close of the merger, the implied equity valuation for PlanetCAD is $4.5 million, with a valuation range of $4.0 million to $4.9 million. RELATIVE CONTRIBUTION ANALYSIS Alliant Partners analyzed PlanetCAD's and Avatech's relative contributions to the combined organization based on analysis of each company's current and projected revenue contribution to the combined organization for calendar years 2002 through 2004 as well as contributions based on each company's most recent balance sheet figures. To reach a range for the percentage contributions of PlanetCAD and Avatech to the combined organization, Alliant Partners utilized a weighted average of the percentage contributions indicated by the analysis of the 51 combined income statements and balance sheets. The indicated income statement contributions were weighed higher than the indicated balance sheet contributions; the income statement is seen as providing the best indication of both PlanetCAD's and Avatech's contribution to the combined organization going forward, as it is based upon both present and expected future financial performance. The relative contribution analysis yielded an implied weighted average percentage contribution range for PlanetCAD of 21% to 26% and an implied weighted average percentage contribution range for Avatech of 69% to 84%, consistent with the respective percentage ownership interests in the joint entity expected at the completion of the merger. CONSIDERATION PROVIDED As stated previously, per the terms of the merger agreement, PlanetCAD will provide common stock in exchange for all outstanding shares of Avatech such that post-merger, Avatech stockholders will hold 75% and PlanetCAD stockholders will hold 25% of the outstanding stock of the joint entity. Based on the implied equity valuations of $16.1 million for Avatech and $4.5 million for PlanetCAD, the combined equity valuation of the two companies totals $20.6 million, of which Avatech comprises 78% and PlanetCAD comprises 22%. Accordingly, the consideration to be provided to Avatech resulting in 75% Avatech ownership in the joint entity post-merger is below Avatech's 78% contribution to the combined equity valuation. Based upon and subject to the foregoing, it was the opinion of Alliant Partners that, as of May 1, 2002, the total consideration to be provided by PlanetCAD to the stockholders of Avatech pursuant to the merger agreement is fair, from a financial point of view, to the stockholders of PlanetCAD. CONCLUSION While the foregoing summarizes the analyses and factors that Alliant Partners deemed material, it is not a comprehensive description of all analyses and factors considered by Alliant Partners. The preparation of a fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Alliant Partners believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, would create an incomplete view of the evaluation process underlying Alliant Partners' fairness opinion. The conclusions reached by Alliant Partners may involve significant elements of subjective judgment and qualitative analysis. In performing its analyses, Alliant Partners considered general economic, market and financial conditions and other matters, many of which are beyond the control of PlanetCAD and Avatech. Pursuant to its letter agreement with PlanetCAD, Alliant Partners is to receive a fee for the fairness opinion rendered to the PlanetCAD board of directors. PlanetCAD has also agreed to reimburse Alliant Partners for its out-of-pocket expenses and to indemnify and hold harmless Alliant Partners and its affiliates and any person, director, employee or agent acting on behalf of Alliant Partners or any of its affiliates, or any person controlling Alliant Partners or its affiliates, for losses, claims, damages, expenses and liabilities relating to or arising out of services provided by Alliant Partners as financial advisor to PlanetCAD. The terms of the fee arrangement with Alliant Partners, which PlanetCAD and Alliant Partners believe are customary in transactions of this nature, were negotiated at arm's-length between Alliant Partners and PlanetCAD and the PlanetCAD board of directors was aware of any fee arrangements. Alliant Partners was retained based on Alliant Partners' experience as a financial advisor. As part of its investment banking business, Alliant Partners is frequently engaged in the valuation of technology businesses and their securities in connection with mergers and acquisitions, sales and divestitures, joint ventures and strategic partnerships, private financings and other specialized studies. 52 INTERESTS OF CERTAIN PERSONS IN THE MERGER When considering the recommendation of the PlanetCAD and Avatech boards of directors that the stockholders of PlanetCAD and Avatech adopt the merger agreement, you should be aware that the directors and officers of PlanetCAD and Avatech have certain interests in the merger and have certain arrangements that are different from, or are in addition to, those of PlanetCAD and Avatech stockholders generally. These include: VOTING AGREEMENTS Certain stockholders of Avatech and PlanetCAD, including members of management, have entered into voting agreements with Avatech and PlanetCAD. Under the voting agreements, these stockholders have agreed to vote all of their shares of Avatech common stock and PlanetCAD voting stock owned of record by each of them, or that they otherwise have the power to vote: - for adoption and approval of the merger agreement; and - in favor of any other matter necessary for completion of the transactions contemplated by the merger agreement that is considered at any Avatech or PlanetCAD stockholders' meeting, and to execute any documents which are necessary or appropriate in order to consummate the transactions contemplated by the merger agreement. See the section entitled "The Merger Agreement -- Additional Agreements -- The Voting Agreements" for more information about these agreements. The voting agreements are attached as Annexes B and C to this proxy statement/prospectus and are incorporated herein by reference. RETENTION OF DIRECTORS AND EXECUTIVE OFFICERS It is anticipated that Eugene J. Fischer and James A. Fanella, currently on PlanetCAD's board of directors, and Henry Felton and W. James Hindman, currently on Avatech's board of directors, will be appointed to the board of directors of the combined company. Additionally, we anticipate that the current executive officers of Avatech will become the executive officers of the combined company and that W. James Hindman will be appointed to serve as chairman of the board of directors of the combined company, upon completion of the merger. ASSUMPTION OF OUTSTANDING AVATECH OPTIONS As of March 31, 2002, the executive officers and directors of Avatech and their affiliates owned 3,543,111 shares of Avatech common stock. Additionally, as of March 31, 2002, the executive officers and directors of Avatech held options to purchase 159,830 shares of Avatech common stock. The shares of Avatech common stock will be converted into PlanetCAD shares in the merger, and the options will be assumed by PlanetCAD in the merger. INDEMNIFICATION AND OFFICERS' AND DIRECTORS' LIABILITY INSURANCE PlanetCAD and Avatech have agreed that all rights to indemnification and limitations on liability under the PlanetCAD charter documents will survive the merger. Subject to limitations, directors' and officers' liability insurance coverage substantially equivalent to levels of coverage currently in effect under PlanetCAD's existing directors' and officers' liability insurance will be maintained for six years. See "The Merger Agreement -- Indemnification; Directors' and Officers' Insurance." STRUCTURE OF THE MERGER AND CONVERSION OF AVATECH COMMON STOCK Pursuant to the terms and conditions of the merger agreement and subject to approval of the merger agreement by the PlanetCAD and Avatech stockholders, Raven Acquisition Corporation, a newly formed and wholly-owned subsidiary of PlanetCAD, will be merged with and into Avatech. As a result of the merger, the separate corporate existence of Raven Acquisition Corporation will cease and Avatech will survive the merger as a wholly-owned subsidiary of PlanetCAD. 53 In the merger, holders of Avatech common stock will receive the right to convert each share of Avatech common stock into a number of fully paid and non-assessable shares of PlanetCAD common stock that is determined by an exchange ratio. The exchange ratio is equal to three times the number of shares of PlanetCAD common stock outstanding prior to the merger divided by the number of shares of Avatech common stock outstanding prior to the merger. As a result, Avatech stockholders will own 75% of the common stock outstanding after the merger and PlanetCAD stockholders will own 25%. Based on current information and certain assumptions, PlanetCAD and Avatech estimate that Avatech stockholders will receive approximately 7.43 shares of PlanetCAD common stock for each share of Avatech common stock they own. The number of shares of PlanetCAD common stock issuable in the merger will be proportionately adjusted for any stock split, stock dividend or similar event with respect to Avatech common stock or PlanetCAD common stock effected between the date of the merger agreement and the completion of the merger. No certificate or scrip representing fractional shares of PlanetCAD common stock will be issued in connection with the merger. Instead, Avatech stockholders will receive cash, without interest, in lieu of any fraction of a share of PlanetCAD common stock they would otherwise receive. The amount of cash payable in exchange for any fractional share interest of PlanetCAD common stock will be calculated by multiplying the fractional share interest the Avatech stockholder would otherwise be entitled to by closing price of PlanetCAD common stock on the date of the merger. Based on the number of shares of PlanetCAD common stock and Avatech common stock currently outstanding and an assumed exchange ratio of 7.43, the former stockholders of Avatech would hold, following the merger, approximately 44.5 million shares of PlanetCAD common stock or 75% of the then outstanding shares of PlanetCAD common stock. The merger will become effective when a certificate of merger is duly filed with the Secretary of State of the State of Delaware or at such later time as will be specified in the certificate of merger. The closing of the merger will occur within two business days after the last condition in the merger agreement has been satisfied or waived, unless the parties agree otherwise. EXCHANGE OF AVATECH STOCK CERTIFICATES FOR PLANETCAD STOCK CERTIFICATES When the merger is completed, PlanetCAD's exchange agent will mail to Avatech stockholders a letter of transmittal and instructions for use in surrendering Avatech stock certificates in exchange for PlanetCAD stock certificates. When Avatech stockholders deliver Avatech stock certificates to the exchange agent along with an executed letter of transmittal and any other required documents, they will receive PlanetCAD stock certificates representing the number of whole shares of PlanetCAD common stock to which they are entitled under the merger agreement. Avatech stockholders will receive payment in cash, without interest, in lieu of any fractional shares of PlanetCAD common stock that would have been otherwise issuable to them in the merger. AVATECH STOCKHOLDERS SHOULD NOT SUBMIT AVATECH STOCK CERTIFICATES FOR EXCHANGE UNLESS AND UNTIL THEY RECEIVE THE TRANSMITTAL INSTRUCTIONS AND A FORM OF LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT Avatech stockholders are not entitled to receive any dividends or other distributions on PlanetCAD common stock until the merger is completed and they have surrendered their Avatech stock certificates in exchange for PlanetCAD stock certificates. Subject to the effect of applicable laws, promptly following surrender of Avatech stock certificates and the issuance of the corresponding PlanetCAD certificates, Avatech stockholders will be paid the amount of dividends or other distributions, without interest, with a record date after the completion of the merger that were previously paid with respect to their whole shares of PlanetCAD common stock. PlanetCAD will only issue Avatech stockholders a PlanetCAD stock certificate or a check in lieu of a fractional share in a name in which the surrendered Avatech stock certificate is registered. If you wish to have your certificate issued in another name you must present the exchange agent with all documents required to show and effect the unrecorded transfer of ownership and show that you paid any applicable stock transfer taxes. 54 TREATMENT OF AVATECH STOCK OPTIONS AND WARRANTS When the merger is completed, PlanetCAD will assume all outstanding options to purchase Avatech common stock and convert them into options to purchase PlanetCAD common stock. PlanetCAD will convert each assumed Avatech option into an option to purchase that number of shares of PlanetCAD common stock equal to the number of shares of Avatech common stock purchasable pursuant to the Avatech option immediately prior to the effective time of the merger, multiplied by the exchange ratio, rounded down to the nearest whole number of shares of PlanetCAD common stock. The exercise price per share will be equal to the exercise price per share of Avatech common stock divided by the exchange ratio, rounded up to the nearest whole cent. Each assumed option will be subject to all other terms and conditions set forth in the applicable documents evidencing each Avatech option immediately prior to the effective time of the merger, including any repurchase rights or vesting provisions. As of May 24, 2002, options for 702,985 shares of Avatech common stock were outstanding under Avatech's 1998 and 2000 stock option plans, all with an exercise price of $4.25 per share. Assuming an exchange ratio of 7.43 shares of PlanetCAD common stock for each share of Avatech common stock, it is anticipated that the Avatech options assumed by PlanetCAD will be converted into options to purchase approximately 5,223,000 shares of PlanetCAD common stock at an exercise price of $0.58 per share. PlanetCAD will file a registration statement on Form S-8 with the Securities and Exchange Commission, to the extent available, for the shares of PlanetCAD common stock issuable with respect to Avatech options assumed by PlanetCAD in connection with the merger. As of May 24, 2002, warrants for 80,213 shares of Avatech common stock were outstanding. Warrants to purchase 64,000 shares have an exercise price of $5.75 per share and 16,213 have a nominal exercise price per share. Assuming an exchange ratio of 7.43 shares of PlanetCAD common stock for each share of Avatech common stock, it is anticipated that the Avatech warrants will be converted into the right to purchase approximately 595,982 shares of PlanetCAD common stock; 475,520 of which will have an exercise price of $0.77 per share and 120,462 of which will have a nominal exercise price per share. MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER The following summary discusses the material anticipated federal income tax consequences of the merger. The summary is based on the Internal Revenue Code of 1986, as amended, referred to in this section as the Internal Revenue Code, applicable U.S. Treasury regulations under the Internal Revenue Code, administrative rulings and judicial authority, all as of the date of this proxy statement/prospectus. All of the foregoing authorities are subject to change, and any change could affect the continuing validity of this summary. The summary assumes that the holders of shares of Avatech common stock hold their shares as a capital asset. The summary does not address the tax consequences that may be applicable to particular Avatech stockholders in light of their individual circumstances or to Avatech stockholders who are subject to special tax rules, like tax-exempt organizations, dealers in securities, financial institutions, mutual funds, insurance companies, non-United States persons, stockholders who acquired shares of Avatech common stock from the exercise of options or otherwise as compensation or through a qualified retirement plan and stockholders who hold shares of Avatech common stock as part of a straddle, hedge, or conversion transaction, stockholders who are subject to the alternative minimum tax provisions of the Internal Revenue Code and stockholders whose shares are qualified small business stock for purposes of Section 1202 of the Internal Revenue Code. This summary also does not address any consequences arising under the tax laws of any state, locality, or foreign jurisdiction. Furthermore, the following discussion does not address (i) the tax consequences of transactions effectuated before, after or at the same time as the merger, whether or not they are in connection with the merger, including, without limitation, transactions in which Avatech shares are acquired or PlanetCAD shares are disposed of; or (ii) the tax consequences of the receipt of PlanetCAD shares other than in exchange for Avatech shares. ACCORDINGLY, AVATECH STOCKHOLDERS ARE ADVISED AND EXPECTED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES AND THE CONSEQUENCES UNDER STATE, LOCAL AND FOREIGN TAX LAWS. One of the conditions for the merger to take place is that PlanetCAD must receive an opinion from Hogan & Hartson L.L.P. and Avatech must receive an opinion from Shapiro Sher & Guinot, P.A., that the merger will qualify for federal income tax purposes as a tax-free reorganization within the meaning of section 368(a) of the 55 Internal Revenue Code. The opinions must be reasonably satisfactory to PlanetCAD and Avatech. The opinions will be based on the Internal Revenue Code, the U.S. Treasury regulations promulgated under the Internal Revenue Code and related administrative interpretations and judicial decisions, all as in effect as of the effective date of the merger, on several assumptions, stated in the opinions, including the assumption that the merger takes place as described in the merger agreement, and on representations to be provided to Hogan & Hartson L.L.P. and Shapiro Sher & Guinot, P.A. by PlanetCAD and Avatech that relate to the satisfaction of specific requirements to a reorganization within the meaning of section 368(a) of the Internal Revenue Code, including limitations on repurchases by PlanetCAD of shares of PlanetCAD common stock to be issued upon the merger. Unlike a ruling from the Internal Revenue Service, an opinion of counsel is not binding on the Internal Revenue Service and there can be no assurance that the Internal Revenue Service will not take a position contrary to one or more of the positions reflected in the opinions or that these positions will be upheld by the courts if challenged by the Internal Revenue Service. - Assuming that the merger is treated for federal income tax purposes as a tax-free reorganization within the meaning of section 368(a) of the Internal Revenue Code, the following tax consequences will result: - PlanetCAD and Avatech will not recognize any gain or loss solely as a result of the merger. - Except as discussed below regarding cash received instead of a fractional share of PlanetCAD common stock, an Avatech stockholder will recognize no gain or loss upon the exchange of Avatech common stock for PlanetCAD common stock in the merger. - The tax basis of PlanetCAD common stock received by an Avatech stockholder in the merger will be the same as the stockholder's aggregate tax basis in Avatech common stock surrendered in exchange therefor. - The holding period of PlanetCAD common stock received by an Avatech stockholder in the merger will include the holding period of Avatech common stock surrendered in exchange therefor, assuming such Avatech common stock was held as a capital asset. - The receipt by an Avatech stockholder of cash instead of fractional shares of PlanetCAD common stock will be treated as if the fractional shares were distributed as part of the merger and then were redeemed for cash by PlanetCAD. Generally, these cash payments will result in capital gain or loss equal to the difference between the basis allocable to the fractional share and the cash received. - An Avatech stockholder who exercises statutory dissenters' rights with respect to a share of Avatech common stock and receives a cash payment for such share generally should recognize capital gain or loss measured by the difference between the stockholder's basis in such share and the amount of cash received, provided that such payment is not "essentially equivalent to a dividend" within the meaning of Section 302 of the Internal Revenue Code nor has the effect of a distribution of a dividend within the meaning of Section 356(a)(2) of the Internal Revenue Code after giving effect to the constructive ownership rules of the Internal Revenue Code (collectively, a "Dividend Equivalent Transaction"). A sale of shares pursuant to an exercise of dissenters' rights generally will not be a Dividend Equivalent Transaction if, as a result of such exercise, the stockholder exercising the dissenters' rights owns no shares of capital stock of PlanetCad (either actually or constructively within the meaning of Section 318 of the Internal Revenue Code) immediately after the Merger. With respect to a cash payment received by an Avatech stockholder in lieu of a fractional share of PlanetCAD common stock, a noncorporate stockholder of Avatech may be subject to backup withholding at a rate of 31%. However, backup withholding will not apply to a stockholder who either (i) furnishes a correct taxpayer identification number and certifies that he or she is not subject to backup withholding by completing the substitute U.S. Treasury Form W-9 that will be included as part of the transmittal letter, or (ii) otherwise proves to PlanetCAD and its exchange agent that the stockholder is exempt from backup withholding. 56 Each Avatech stockholder who receives PlanetCAD common stock in the merger will be required to file a statement with his or her federal income tax return setting forth his or her basis in the Avatech common stock surrendered and the fair market value of the PlanetCAD common stock and cash, if any, received in the merger, and to retain permanent records of these facts relating to the merger. A successful challenge by the IRS to the status of the merger as a tax-free reorganization within the meaning of section 368(a) of the Internal Revenue Code would result in significant adverse tax consequences to the Avatech stockholders. If the merger were not treated as a reorganization, the Avatech shareholders would recognize taxable gain or loss with respect to each share of Avatech common stock surrendered equal to the difference between each stockholder's basis in such share and the fair market value, as of the date of the merger, of the PlanetCAD common stock received in exchange therefor. In such event, an Avatech stockholder's aggregate basis in the PlanetCAD common stock so received would equal its fair market value, and the holding period of such stock would begin the day after the date of the merger. THIS DISCUSSION IS ONLY A GENERAL SUMMARY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY BE DIFFERENT FROM THOSE SUMMARIZED ABOVE, BASED ON YOUR INDIVIDUAL SITUATION. THE STOCKHOLDERS OF AVATECH ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS, AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS. Warrants to purchase Avatech common stock that are outstanding at the effective date of the merger will be converted into a right to purchase PlanetCAD common stock based on the exchange ratio. See "The Merger -- Treatment of Avatech Stock Options and Warrants" on page __. The conversion of the Avatech warrants should not be a taxable event and holders of Avatech warrants that are exercisable to purchase PlanetCAD common stock after the merger should be subject to the same federal income tax treatment upon exercise of those warrants as would have applied if they had exercised their Avatech warrants. HOLDERS OF AVATECH WARRANTS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS, AVAILABLE ELECTIONS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX LAWS, AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS. ACCOUNTING TREATMENT OF THE MERGER In the merger, PlanetCAD will be acquiring all of the outstanding shares of Avatech common stock and the combination will be accounted for under the purchase method of accounting. However, for financial accounting purposes the transaction will be accounted for as a "reverse merger" and Avatech's historical financial statements will be the financial statements of the post-merger combined company. Under the purchase method of accounting, PlanetCAD's results of operations will be combined with those of Avatech from and after the effective time of the merger, and PlanetCAD's specific tangible and identifiable intangible assets and liabilities will be recorded in Avatech's financial statements at their respective fair values at the effective time. The excess of the purchase price over the fair value of PlanetCAD's specific tangible and identifiable intangible assets and liabilities, if any, will be recorded as goodwill. The fiscal year end of the combined company will be June 30. APPROVALS REQUIRED TO COMPLETE THE MERGER PlanetCAD and Avatech believe that they will obtain all required approvals, other than stockholder approvals, prior to the PlanetCAD annual meeting and the Avatech special meeting. However, it is not certain that all such approvals will be received by such time, or at all, and parties whose approval is required may impose unfavorable conditions for granting the required approvals. RESTRICTIONS ON SALES BY SIGNIFICANT STOCKHOLDERS The merger agreement provides that each of Avatech and PlanetCAD will use its commercially reasonable efforts to obtain lock-up agreements from each Avatech and PlanetCAD stockholder who, following the merger, will 57 own more than two percent of the outstanding common stock of the combined company and from certain other PlanetCAD stockholders. The lock-up agreements provide that 75% of the shares held by each such stockholder may not be sold for a period of 180 days following the merger, subject to any waiver by PlanetCAD. The number of shares that will be subject to the lock-up agreements is approximately _____ shares, which is approximately ___% of the total shares of common stock to be outstanding after the merger. ADDITIONAL RESTRICTIONS ON SALES OF PLANETCAD SHARES BY AFFILIATES OF AVATECH The shares of PlanetCAD common stock to be issued in connection with the merger will be registered under the Securities Act and will be freely transferable under the Securities Act, except for shares of PlanetCAD common stock issued to any person who is deemed to be an "affiliate" of Avatech under the Securities Act at the time of the Avatech special meeting. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or are under common control with Avatech and may include directors and executive officers, as well as principal stockholders of Avatech. Affiliates may not sell their shares of PlanetCAD common stock acquired in connection with the merger except pursuant to: - an effective registration statement under the Securities Act covering the resale of those shares; - an exemption under paragraph (d) of Rule 145 under the Securities Act; or - another applicable exemption under the Securities Act. The merger agreement requires that Avatech use all reasonable best efforts to cause each of its affiliates to execute a written agreement to the effect that such persons will not offer, sell or otherwise dispose of any of the shares of PlanetCAD common stock issued to them in the merger in violation of the Securities Act or the related SEC rules. PlanetCAD has the right to place legends on the certificates evidencing shares of PlanetCAD common stock issued to Avatech affiliates in the merger summarizing the restrictions under Rule 145 until a sale, transfer, pledge or other disposition of the shares of PlanetCAD common stock represented by these certificates has been registered under the Securities Act or is made in compliance with Rule 145 or another exemption under the Securities Act. This proxy statement/prospectus does not cover resales of PlanetCAD common stock received by any person who may be deemed to be an affiliate of Avatech or PlanetCAD. LISTING ON THE AMERICAN STOCK EXCHANGE OF PLANETCAD COMMON STOCK TO BE ISSUED IN THE MERGER It is a condition to the closing of the merger that the shares of PlanetCAD common stock to be issued in the merger be approved for listing on the American Stock Exchange, subject to official notice of issuance. MANAGEMENT AFTER THE MERGER Immediately following the merger, all directors and officers of PlanetCAD will resign from their positions, except for Messrs. Fischer and Fanella, who will remain as directors of the combined company. At the same time, Messrs. Hindman, Felton, [_______], [_______] and [________] will be elected as directors of the combined company. It is currently expected that the executive officers of Avatech will serve after the merger as the executive officers of the combined company. OPERATIONS AFTER THE MERGER Following the merger, Avatech will continue its operations as a wholly-owned subsidiary of PlanetCAD. The stockholders of Avatech will become stockholders of PlanetCAD, and their rights as stockholders will be governed by the PlanetCAD certificate of incorporation, the PlanetCAD bylaws and the Delaware General 58 Corporation Law. See the section entitled "Comparison of PlanetCAD Common Stock and Avatech Common Stock" on page _____. 59 THE MERGER AGREEMENT THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS OF THE MERGER AGREEMENT, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, WHICH IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS AS ANNEX A AND IS INCORPORATED BY REFERENCE. WE URGE YOU TO READ THE MERGER AGREEMENT CAREFULLY AS IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER. GENERAL STRUCTURE; CONVERSION OF SECURITIES The terms of the merger agreement related to the structure of the merger and the conversion and exchange of Avatech common stock are described above under the headings "Structure of the Merger and Conversion of Avatech Common Stock" and "Exchange of Avatech Stock Certificates for PlanetCAD Stock Certificates." CLOSING; EFFECTIVE TIME OF THE MERGER The completion of the merger will occur no later than the second business day after the satisfaction or waiver of the conditions set forth in the merger agreement, or at such other date or time as may be agreed upon by PlanetCAD and Avatech. As soon as practicable after all conditions to the completion of the merger are satisfied (or waived, if waivable), the parties will execute and file a certificate of merger with the Secretary of State of the State of Delaware. The merger will become effective upon the filing of the certificate of merger with the Secretary of State of the State of Delaware, or upon such later time as is specified in the certificate of merger. In no event, however, will the effective time of the merger be later than 30 days after the certificate of merger is filed. DISSENTERS' RIGHTS If an Avatech stockholder does not vote in favor of the merger and otherwise complies with the provisions of applicable Delaware law related to the exercise of dissenters' rights, such stockholder shall not be entitled to receive the merger consideration. Instead, the Avatech common stock held by a dissenting stockholder will be converted into the right to receive payment from Avatech after the completion of the merger with respect to that stock in accordance with applicable law. If a dissenting holder, however, fails to perfect, effectively withdraws or loses his or her dissenters' rights under applicable law, then that holder will receive the merger consideration. Avatech agrees to give PlanetCAD prompt notice of any demands received by Avatech for the payment of fair value for shares, and PlanetCAD will have the right to participate in all negotiations and proceedings with respect to such demands. Avatech will not, except with the prior written consent of PlanetCAD, make any payment with respect to, or settle or offer to settle, such demands. REPRESENTATIONS AND WARRANTIES OF PLANETCAD, RAVEN ACQUISITION CORPORATION AND AVATECH The merger agreement contains customary representations and warranties by each of PlanetCAD, Raven Acquisition Corporation and Avatech relating to, among other things: - due organization, good standing and qualification; - capitalization; - authorization to enter into the merger agreement and to perform the transactions contemplated by the merger agreement; - enforceability of the merger agreement; - required governmental and third-party consents and no breach of organizational documents or material agreements as a result of the merger agreement; 60 - compliance with generally accepted accounting principles and no undisclosed liabilities; - absence of certain changes or events that would have a material adverse effect; - possession of necessary permits and compliance with laws; - tax matters; - no material legal proceedings; - having taken any action, failed to take action or knowledge of facts that would jeopardize the agreed upon tax treatment of the merger; - intellectual property matters; - environmental matters; - insurance policies; - transactions with affiliates; - litigation; - brokers; - title to and sufficiency of assets; - employee benefits and labor matters; - suppliers and distributors; - material contracts; and - no required votes of PlanetCAD and Avatech to adopt the merger agreement other than votes of their common stockholders. In addition, PlanetCAD and Raven Acquisition Corporation also made customary representations and warranties to Avatech relating to, among other things: - the validity, due authorization, nonassessability and other customary representations and warranties related to the character of the common stock being offered by PlanetCAD in the merger; and - compliance with SEC reporting and registration requirements. We urge you to carefully read the sections of the merger agreement entitled "Representations and Warranties of Parent and Sub" and "Representations and Warranties of the Company." CONDUCT OF BUSINESS BEFORE COMPLETION OF THE MERGER Subject to the fiduciary obligations of their directors and officers and except as otherwise expressly contemplated in the merger agreement, PlanetCAD and Avatech have agreed that until the completion of the merger or termination of the merger agreement they and their subsidiaries will, among other things: 61 - conduct, in all material respects, their operations in the ordinary course of business as conducted on the date of the merger agreement; and - use commercially reasonable efforts to preserve intact their business organizations, to keep available the services of their officers and key employees and preserve their relationships with customers, suppliers and others having business dealings with them. Unless the parties to the merger agreement otherwise agree and except as otherwise expressly contemplated by the merger agreement, PlanetCAD and Avatech have also agreed that until the completion of the merger or termination of the merger agreement they and their subsidiaries will NOT, among other things: - declare, set aside or pay any dividend on, or make any actual, constructive or deemed distributions with respect to, their outstanding stock; - other than in the case of a reverse split of the common stock of PlanetCAD, split, combine or reclassify their capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of their capital stock, or purchase, redeem or otherwise acquire any shares of their capital stock and other securities thereof or any rights, warrants or options to acquire any such shares or other securities; - authorize for issuance, issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of their capital stock, any other voting securities or equity equivalent or any securities convertible into, or any rights, warrants or options to acquire any such shares, voting securities, equity equivalent or convertible securities, other than the issuance of shares of capital stock upon the exercise of stock options outstanding on the date of the merger agreement; - merge, consolidate with, purchase a substantial portion of the assets of or equity in, or by any other manner, acquire any assets for an amount exceeding $50,000 in the aggregate, in the case of Avatech or $25,000 in the aggregate, in the case of PlanetCAD; - other than advances under Avatech's line of credit, incur, guarantee or prepay any material indebtedness, or loan, advance or invest in any other person, other than in amounts of less than $50,000 in the aggregate, in the case of Avatech and $25,000 in the aggregate, in the case of PlanetCAD, or effect any such transactions with or among their respective subsidiaries, except in the ordinary course of business and subject to the agreed upon numerical limitations; or - authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. In addition, PlanetCAD and Avatech have promised to confer, subject to compliance with applicable law, on a regular and frequent basis with each other to report on the status of ongoing operations and to discuss the preparations for the operation of PlanetCAD after the merger. PlanetCAD and Avatech have also committed that they will not, unless the other parties to the merger agreement otherwise agree, take or fail to take any action that would jeopardize the agreed upon tax treatment of the merger. NO SOLICITATION PlanetCAD and Avatech have agreed that they will not solicit or initiate or otherwise engage in discussions with any person with respect to a takeover proposal. The merger agreement defines the subject of a "takeover proposal" as a merger, recapitalization, consolidation, or other similar business combination, or the acquisition of the outstanding capital stock or substantial portion of the assets of PlanetCAD, Avatech or their subsidiaries. In addition, PlanetCAD and Avatech agreed to refrain from entering into any agreement that would require them to terminate or fail to consummate the merger. The merger agreement also provides that to the extent required by the fiduciary duties of their directors under applicable law, PlanetCAD and Avatech may furnish information to, and negotiate or otherwise engage in discussions with, any party who delivers an unsolicited bona fide written takeover proposal, provided that (a) the third party enters into an appropriate confidentiality agreement and (b) the applicable 62 board of directors determines in good faith by a majority vote that such proposal could reasonably be expected to lead to a more favorable transaction to its company and its stockholders than the merger. Finally, the merger agreement permits PlanetCAD to comply with Rule 14e-2 under the Exchange Act of 1934. ADDITIONAL AGREEMENTS STOCKHOLDER APPROVAL AND PREPARATION OF THE REGISTRATION STATEMENT AND PROXY STATEMENT. PlanetCAD and Avatech agreed that each company would hold a stockholder meeting to consider approval and adoption of the merger agreement and the other matters that are contained in this proxy statement/prospectus. PlanetCAD and Avatech also agreed to cooperate and to take such actions as were necessary to file and cause this proxy statement/prospectus to become effective. PlanetCAD and Avatech promised to cooperate to file any necessary amendments or supplements to this prospectus/proxy statement, and have each made representations and warranties to the other regarding the character of the information provided by each and included in this proxy statement/prospectus and related filings. THE VOTING AGREEMENTS Various stockholders of Avatech and PlanetCAD, including members of management, have entered into voting agreements with Avatech and PlanetCAD. Under the voting agreements, these stockholders have agreed to vote all of their shares of Avatech common stock and PlanetCAD voting stock owned of record by each of them, or that they otherwise have the power to vote: - for adoption and approval of the merger agreement; and - in favor of any other matter necessary for completion of the transactions contemplated by the merger agreement that is considered at any Avatech or PlanetCAD stockholders' meeting, and to execute any documents which are necessary or appropriate in order to consummate the transactions contemplated by the merger agreement. As of the record date for the Avatech special meeting, the stockholders that are parties to the voting agreement beneficially owned a total of ______ shares of Avatech common stock, representing approximately [___]% of the outstanding shares of Avatech common stock entitled to vote at the Avatech special meeting. As of the record date for the PlanetCAD annual meeting, the stockholders that are parties to the voting agreement beneficially owned a total of ______ shares of PlanetCAD common stock, representing approximately [___]% of the outstanding shares of PlanetCAD common stock entitled to vote at the PlanetCAD annual meeting. The voting agreements are attached as Annexes B and C to this proxy statement/prospectus and are incorporated herein by reference. ACCESS TO INFORMATION. Subject to any contractual or legal restrictions and until completion of the merger, PlanetCAD and Avatech have further agreed to: - afford to the other party and its representatives reasonable access to their respective properties, books, contracts, commitments and records; - furnish promptly to the other party (a) a copy of each document filed by it during the period commencing on the date of the merger agreement and ending upon completion of the merger as required by federal or state securities laws and (b) all other requested information concerning its business, properties and personnel; and - promptly make available to the other party upon request all personnel of it and its subsidiaries that are knowledgeable about matters relevant to inspections of the other party. RULE 145 LETTERS. Avatech agreed to use all reasonable efforts to deliver or cause to be delivered to PlanetCAD an executed agreement from each person who may reasonably be determined to be an affiliate of Avatech agreeing to be bound by the provisions of Rule 145. In addition, PlanetCAD will give a stop transfer instruction to its transfer agent with respect to any PlanetCAD common stock received by affiliates of Avatech. The stock certificates of the Avatech affiliates will bear a legend prohibiting transfer of the certificates, unless they are transferred in accordance with Rule 145 or the affiliate furnishes an opinion of counsel to the effect that the desired transfer would be exempt from registration under the Securities Act. STOCK OPTIONS. The merger agreement provides that, PlanetCAD will assume all outstanding options to purchase Avatech common stock and convert them into options to purchase PlanetCAD common stock. PlanetCAD will convert each assumed Avatech option into an option to purchase that number of shares of PlanetCAD common stock equal to the number of shares of Avatech common stock purchasable pursuant to the Avatech option immediately prior to the effective time of the merger, multiplied by the exchange ratio, rounded down to the nearest whole number of shares of PlanetCAD common stock. The exercise price per share will be equal to the exercise price per share of Avatech common stock divided by the exchange ratio, rounded up to the nearest whole cent. The merger agreement also provides that PlanetCAD will file a registration statement on Form S-8 with the Securities and Exchange Commission, to the extent available, for the shares of PlanetCAD common stock issuable with respect to Avatech options assumed by PlanetCAD. The merger agreement also states the intention of PlanetCAD and Avatech that, following the Merger, the number of shares of PlanetCAD common stock reserved for issuance upon the exercise of stock options be equal to the sum of (i) the number of shares of PlanetCAD common stock underlying the Avatech stock options assumed pursuant the merger, (ii) the number of shares of PlanetCAD common stock underlying any PlanetCAD stock options that remain outstanding following the merger; and (iii) 3,100,000 shares of PlanetCAD common stock reserved for issuance pursuant to a new option plan to be considered at the PlanetCAD annual meeting to which this proxy statement/prospectus relates. EFFORTS REQUIRED. PlanetCAD and Avatech have agreed to use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in 63 doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the merger and the other transactions contemplated by the merger agreement, including the following: - obtaining all necessary actions or non-actions, waivers, consents and approvals and the making of all necessary registrations and filings; - taking all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid or vigorously defend an action or proceeding by, any governmental entity; - enlisting the cooperation of PlanetCAD's largest stockholder; - defending any lawsuits or other legal proceedings, whether judicial or administrative, challenging the merger agreement or the consummation of the transactions contemplated by the merger agreement, including seeking to have any stay or temporary restraining order entered by any court or other governmental entity vacated or reversed; and - executing and delivering any additional instruments necessary to consummate the transactions contemplated by the merger agreement. In addition, no party to the merger agreement may consent to any voluntary delay of the consummation of the merger at the behest of any governmental entity without the consent of the other parties to the merger agreement, which consent shall not be unreasonably withheld, conditioned or delayed. INDEMNIFICATION; DIRECTOR AND OFFICERS INSURANCE. In the merger agreement, PlanetCAD agrees to indemnify from and after the effective time of the merger its and its subsidiaries current and former directors and officers for acts or omissions of those persons occurring at or prior to the date of the merger, including acts or omissions related to the merger. This indemnification will be to the same extent as provided to those persons by PlanetCAD as of the date of the merger agreement for acts or omissions occurring at or prior to the date of the merger. In addition, for a period of not less than six years after the date of the merger, PlanetCAD will provide its directors and officers as of the date of the merger agreement with an insurance and indemnification policy that covers events occurring prior to the date of the merger. The insurance and indemnification policy will be substantially equivalent to PlanetCAD's policy at the date of the merger, or if substantially equivalent insurance coverage is unavailable, the best available coverage. BOARD OF DIRECTORS, OFFICERS AND EMPLOYEES OF PLANETCAD AFTER MERGER. The merger agreement provides that the board of directors of PlanetCAD will take all actions necessary so that immediately following the completion of the merger, PlanetCAD's board of directors will consist of seven persons, not less than two of whom will be members of PlanetCAD's board of directors before the merger and two of whom will be designated by Avatech. One of Avatech's initial board designees will be Mr. Felton, Avatech's chief executive officer. By agreement of the parties, Mr. Felton will also serve as chief executive officer of PlanetCAD immediately following the merger. In addition, PlanetCAD will honor the change of control severance agreements in place before the merger. NOTIFICATION OF CERTAIN MATTERS. PlanetCAD and Avatech have agreed to use commercially reasonable efforts to give prompt notice to the other of the occurrence, or non-occurrence, of any condition or event that would be reasonably likely (a) to cause any representation or warranty made by it to be untrue or inaccurate in any material respect, (b) to cause any covenant, condition or agreement made by it not to be complied with or satisfied in a timely manner, or (c) to prevent the consummation of the merger and the other transactions contemplated in the merger agreement. In addition, PlanetCAD and Avatech have agreed to notify each other of any change or event that would be reasonably likely to have a material adverse effect. LOCK-UP AND STANDSTILL AGREEMENTS. PlanetCAD and Avatech agreed to use commercially reasonable efforts to obtain, as promptly as practicable after the date of the merger agreement, lock-up agreements from the stockholders of each company who will beneficially own more than two percent of the outstanding common stock of PlanetCAD immediately following the merger and from certain other PlanetCAD stockholders. In addition, Avatech agreed not to, and will use commercially reasonable efforts to ensure that its directors, executive officers 64 and significant stockholders do not, directly or indirectly, purchase or otherwise acquire any ownership or other interest in PlanetCAD's common stock until the earlier of 90 days after the termination of the merger agreement and the effective time of the merger. FEES AND EXPENSES. PlanetCAD and Avatech have agreed to share equally the expenses associated with printing and obtaining stockholder approval of the merger and all filing fees. Generally, all other expenses associated with the merger will be paid by the party who incurs the expense. OTHER MATTERS. The parties to the merger agreement have agreed to not issue any press release related to the merger agreement and the transactions contemplated by the merger agreement without first consulting with the other parties. PlanetCAD has agreed to use commercially reasonable efforts to list on the American Stock Exchange the shares of its common stock that will be issued in the merger. PlanetCAD will also take any action required to be taken under applicable state securities laws in connection with the issuance of its common stock in the merger, except qualifying to do business in any jurisdiction in which it was not qualified as of the date of the merger agreement. Avatech agreed to furnish all information concerning its stockholders as PlanetCAD may reasonably request to comply with state securities laws. CONDITIONS TO COMPLETION OF THE MERGER CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The respective obligations of PlanetCAD, Raven Acquisition Corporation and Avatech to complete the merger are subject to the satisfaction or waiver of the following conditions: - approval of the merger agreement by the requisite vote of the stockholders of PlanetCAD and Avatech and approval by the stockholders of PlanetCAD of the other matters presented for their consideration in this proxy statement; - PlanetCAD's common stock continues to be listed on the American Stock Exchange, and the PlanetCAD common stock issuable in the merger is authorized for listing on that exchange; - Avatech makes appropriate arrangements to obtain debt reduction of approximately $2,000,000; - all authorizations, consents, orders, declarations or approvals of, or filings with, or terminations or expirations of waiting periods imposed by any governmental entity or any other third party, are obtained, are made or have occurred, and no rights to acquire Avatech common stock will remain outstanding following the completion of the merger; - the registration statement on Form S-4 of which this proxy statement/prospectus forms a part becomes effective; - all necessary state securities or blue sky authorizations are received; - no court or other governmental entity enacts, issues, promulgates, enforces or enters any law, rule, regulation, executive order, decree, injunction or other order that has the effect of restraining, prohibiting or restricting the merger or any of the transactions contemplated by the merger agreement; - PlanetCAD takes appropriate actions to ensure that either (a) the merger will not enable or require its preferred stock purchase rights to be exercised, distributed or triggered or (b) it will have redeemed all of such outstanding rights and terminated the agreement related to such rights; - PlanetCAD receives the Rule 145 affiliate agreements; - PlanetCAD receives the lock-up agreements; and - the holders of no more than 50,000 shares of Avatech common stock provide notice of their intent to exercise dissenter's rights. 65 CONDITIONS TO THE OBLIGATIONS OF AVATECH TO EFFECT THE MERGER In addition, the obligation of Avatech to complete the merger is subject to the satisfaction or waiver of the following conditions: - each of PlanetCAD and Raven Acquisition Corporation perform in all material respects each of its agreements and covenants contained in the merger agreement; - the representations and warranties of PlanetCAD and Raven Acquisition Corporation contained in the merger agreement that are qualified by materiality are true and correct when made, and are true and correct on and as of the date of the merger as if made on and as of that date (other than representations and warranties that address matters only as of a certain date, which shall be true and correct as of that date); - each of the representations and warranties that is not qualified by materiality is true and correct in all material respects when made, and is true and correct in all material respects on and as of the date of the merger as if made on and as of that date (other than representations and warranties that address matters only as of a certain date, which shall be true and correct in all material respects as of that date); - Since the date of the merger agreement, there has been no material adverse change with respect to PlanetCAD; - Avatech receives certificates signed on behalf of each of PlanetCAD and Raven Acquisition Corporation by one of its officers certifying to the matters in the foregoing four paragraphs; - PlanetCAD develops a prototype PQA product for the Autodesk Inventor or the AutoCAD platform that is reasonably acceptable to Avatech; - Avatech receives a written opinion from its counsel to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code; and - PlanetCAD has certified that PlanetCAD's cash, cash equivalents and accounts receivable, minus its accounts payable and the estimated transaction expenses of both PlanetCAD and Avatech related to the merger is not less than $2,000,000. CONDITIONS TO THE OBLIGATIONS OF PLANETCAD TO EFFECT THE MERGER The obligation of PlanetCAD to complete the merger is also subject to the satisfaction or waiver of the following conditions: - Avatech performs in all material respects each of its agreements and covenants contained in the merger agreement; - the representations and warranties of Avatech contained in the merger agreement that are qualified by materiality are true and correct when made, and are true and correct on and as of the date of the merger as if made on and as of such date (other than representations and warranties that address matters only as of a certain date, which shall be true and correct as of that date); - each of the representations and warranties that is not qualified by materiality is true and correct in all material respects when made, and is true and correct in all material respects on and as of the date of the merger as if made on and as of such date (other than representations and warranties that address matters only as of a certain date, which shall be true and correct in all material respects as of such that date); 66 - Since the date of the merger agreement, there has been no material adverse change with respect to Avatech; - PlanetCAD receives a certificate signed by one of Avatech's officers certifying to the matters in the foregoing four paragraphs; - PlanetCAD receives a written opinion from its financial advisor to the effect that the merger is fair to PlanetCAD's stockholders from a financial point of view; and - PlanetCAD receives a written opinion from its counsel to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, and such opinion is not withdrawn. TERMINATION OF THE MERGER AGREEMENT RIGHT TO TERMINATE The merger agreement may be terminated at any time before the completion of the merger, whether before or after approval of the merger by the stockholders of PlanetCAD and Avatech, only as follows: - by mutual written consent of PlanetCAD and Avatech; - by either PlanetCAD or Avatech if: - the merger has not been completed on or before September 30, 2002, or such later date upon which PlanetCAD and Avatech mutually agree; however, neither PlanetCAD nor Avatech may terminate the merger agreement if its failure to fulfill any of its obligations contained in the merger agreement is the cause of, or resulted in, the failure of the parties to complete the merger; - a court or other governmental entity having jurisdiction over one of the parties to the merger agreement takes action to enjoin, restrain or otherwise prohibit the transactions contemplated by the merger agreement and such order, decree, ruling or other action is final and nonappealable; - if the other party fails to comply in any material respect with any of its covenants or agreements contained in the merger agreement, or if the other party breaches a representation, warranty, covenant or obligation that gives rise to a failure to fulfill a condition of closing, in either case only if the failure to comply or the breach is not cured within 10 days following receipt of written notice of such failure to comply or breach; and - its board of directors determines in good faith by a majority vote that a takeover proposal is more favorable to it and its stockholders; however, before terminating the merger agreement for this reason, it must provide the other party with (a) two business days' written notice that it intends to terminate the merger agreement, which notice identifies the more favorable transaction and describes accurately its material terms and (b) written notice on the date of termination. - and by PlanetCAD if: - a tender offer or exchange offer for 20% or more of its outstanding common stock is commenced by a third party that is not an affiliate of PlanetCAD, and PlanetCAD's board of directors fails to recommend against acceptance of such tender offer or exchange offer by its stockholders (including by taking no position with respect to the acceptance of such tender offer or exchange offer by its stockholders). 67 EFFECT OF TERMINATION Except for provisions in the merger agreement regarding confidentiality of non-public information, payment of fees and expenses, and the purchase of PlanetCAD common stock by Avatech and its officers, directors and significant stockholders, if the merger agreement is terminated as described above, the merger agreement will become void and have no effect. In addition, if the merger agreement is so terminated, there will be no liability on the part of PlanetCAD, Raven Acquisition Corporation, or Avatech, except liability arising out of a willful breach of the merger agreement. If, however, PlanetCAD terminates the agreement as provided above and Avatech remains willing and able to proceed with the merger, then PlanetCAD must reimburse Avatech for all of Avatech's transaction expenses and up to $50,000 of Avatech's actual expenses related to the development of a marketing plan for PlanetCAD's products. Similarly, if Avatech terminates the agreement as provided above and PlanetCAD remains willing and able to proceed with the merger, Avatech must reimburse PlanetCAD for all of PlanetCAD's transaction expenses. EXTENSION, WAIVER AND AMENDMENT OF THE MERGER AGREEMENT At any time before the completion of the merger, the parties may, in writing: - extend the time for the performance of any of the obligations of the other party; - waive any inaccuracies in the representations and warranties of the other party contained in the merger agreement or in any document delivered pursuant to the merger agreement; or - waive compliance with any of the agreements or conditions of the other party contained in the merger agreement. The merger agreement may be amended by the parties in writing at any time. Following approval of the merger agreement by the parties' stockholders, however, no amendment may be made that by law or the rules of the American Stock Exchange requires stockholder approval, unless such approval is obtained. 68 INFORMATION ABOUT THE COMPANIES PLANETCAD INC. PlanetCAD develops, markets and supports cycle time reduction software solutions that integrate engineering processes and data for the manufacturing supply chain. PlanetCAD operates predominantly in the manufacturing industry with special focus on the computer-aided design (CAD), manufacturing (CAM) and engineering (CAE) markets. PlanetCAD provides software tools and applications that enhance the value of engineering data in the manufacturing design and procurement supply chain by enabling cycle time reduction. During the traditional manufacturing process, if the supply chain manufacturer receives a product's specifications and design electronically, important data may be lost if the supply chain manufacturer does not use the same software application used by the data originator. In that event, a sample manufactured product is provided to the end-user or OEM for approval or modification. If the sample does not meet the end-user's or OEM's specifications, it must be modified by the supply chain manufacturer and sent again for approval or modification. This process is often repeated several times and is costly. "Cycle time" is a term used to describe the cycle of trial-and-error iterations it takes for the supply chain manufacturer to produce an end product satisfactory to the end-user or OEM. PlanetCAD's cycle time reduction solutions enhance engineering processes and reduce product time-to-market by addressing product data quality, communication and downstream data interoperability. This includes, but is not limited to, computer-aided design, data translation and data movement and data tracking that enables communication of engineering data with varying formats and precision, and data quality assurance tools that improve design quality and reduce or even eliminate iterations from electronic design to the finished product meeting the electronic design standards. PlanetCAD's technology and products are based on JAVA, which is a cross-platform, highly-scalable and internet-enabled development software programming platform. PlanetCAD's JAVA-based technology and products enable efficient engineering information exchange and integration for professional manufacturing and design engineers worldwide. Engineers and managers can benefit from lower costs of production and accelerated introduction of products to market. PlanetCAD's enterprise software products include PrescientQA, IntraVision and our new SCS|Envoy supply chain solution software. In addition, we offer professional services that help implement a transparent integration of cycle time reduction solutions with existing manufacturing systems in corporate product design and production processes SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF PlanetCAD The following table sets forth certain information regarding the ownership of PlanetCAD common stock as of May 24, 2002 by (i) each PlanetCAD director, (ii) each of the PlanetCAD executive officers named in the summary compensation table, (iii) all of such named executive officers and directors as a group, and (iv) all those known by PlanetCAD to be beneficial owners of more than five percent of PlanetCAD common stock.
BENEFICIAL OWNERSHIP(1) ----------------------- NAME AND ADDRESS OF NUMBER OF PERCENT OF BENEFICIAL OWNER SHARES TOTAL (2) - ---------------- --------- ------------ PCD Investments, LLC (3) .............................. 1,863,809 12.55% 1871 Folsom Street, Suite 106 Boulder, CO 80302 Dassault Systemes Corp. (4) ........................... 1,353,369 9.01% 9 Quai Marcel Dassault BP 310 2150 Suresnes Cedex, France 69 New York Life Insurance Company ....................... 918,871 6.19% 51 Madison Avenue, Room 206 New York, New York 10010 Eugene J. Fischer (5) ................................. 1,511,961 9.90% 3000 Sand Hill Road Building 1, Suite 290 Menlo Park, CA 94025 Capstone Ventures SBIC, L.P. (6) ...................... 1,484,786 9.74% 3000 Sand Hill Road Building 1, Suite 290 Menlo Park, CA 94025 The Roser Partnership III, SBIC, L.P. (7) ............. 1,196,726 7.92% 1105 Spruce Street Boulder, CO 80302 Richard M. Sowar (8) .................................. 451,968 3.00% Jim Bracking (9) ...................................... 125,000 * Philip E. Barak (10) .................................. 66,059 * H. Robert Gill (11) ................................... 48,000 * Joy M. Godesiabois (12) ............................... 31,250 * James A. Fanella (13) ................................. 15,000 * David W. Hushbeck (14) ................................ 31,250 * All executive officers and directors as a group (eight persons) (15) .................................. 2,249,238 14.26%
- ---------- * Less than one percent. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of PlanetCAD common stock subject to options and warrants currently exercisable within 60 days of May 24, 2002, are deemed outstanding for purposes of computing the percentage of the person or entity holding such securities but are not deemed outstanding for purposes of computing the percentage of any other person or entity. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. (2) Percentage of ownership is based on 14,848,471 shares of outstanding common stock which includes 2,404,926 shares of common stock to be issued on the automatic conversion of the PlanetCAD convertible preferred stock upon the closing of the merger. (3) PCD Investments, LLC, Eric A. Weissmann and Gary M. Jacobs have together filed a Schedule 13D pursuant to which they report sole or shared voting and investment power over an aggregate of 1,863,809 shares owned as of March 19, 2002. (4) Includes 348,538 shares underlying convertible preferred stock and 173,913 shares of common stock issuable upon exercise of outstanding warrants. 70 (5) Includes 27,535 shares subject to stock options that are exercisable within 60 days of May 24, 2002, 786,856 shares held of record by Capstone Ventures SBIC, L.P. (including 609,944 shares underlying convertible preferred stock) and 392,598 shares of common stock issuable upon exercise of outstanding warrants held by Capstone. Mr. Fischer is the president of the general partner of Capstone. Mr. Fischer shares voting and dispositive power with respect to the shares held by Capstone with Barbara L. Santry. (6) Includes 609,944 shares underlying convertible preferred stock and 392,598 shares of common stock issuable upon exercise of outstanding warrants. (7) Includes 522,812 shares underlying convertible preferred stock and 260,870 shares of common stock issuable upon exercise of outstanding warrants. (8) Includes 230,833 shares subject to stock options that are exercisable within 60 days of May 24, 2002 and 33,332 shares of common stock held in custodian accounts for the benefit of his children. Mr. Sowar disclaims beneficial ownership of the 33,332 shares of common stock held in custodian accounts for the benefit of his children. (9) Includes 125,000 shares subject to stock options that are exercisable within 60 days of May 24, 2002. (10) Includes 52,500 shares subject to stock options that are exercisable within 60 days of May 24, 2002. (11) Includes 48,000 shares subject to stock options that are exercisable within 60 days of May 24, 2002. (12) Includes 31,250 shares subject to stock options that are exercisable within 60 days of May 24, 2002. (13) Includes 15,000 shares subject to stock options that are exercisable within 60 days of May 24, 2002. (14) Includes 31,250 shares subject to stock options that are exercisable within 60 days of May 24, 2002. (15) Includes 609,944 shares underlying convertible preferred stock and an aggregate of 953,966 shares subject to warrants and stock options that are exercisable within 60 days of May 24, 2002. PLANETCAD EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth, for the fiscal years indicated, certain compensation awarded or paid to, or earned by, the person who served as PlanetCAD's Chief Executive Officer during the fiscal year 2001, PlanetCAD's only other executive officer as of December 31, 2001, and one former executive officer who would have been disclosed had he been an executive officer at the end of the fiscal year 2001.
LONG-TERM COMPENSATION -------------- AWARDS -------------- ANNUAL COMPENSATION(1) SECURITIES NAME AND PRINCIPAL ---------------------- UNDERLYING ALL OTHER POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)(2) COMPENSATION ($) --------------------------- ---- ---------- --------- -------------- ---------------- Jim Bracking (3).................... 2001 $225,000 $ 476 -- $ 300(10) President, Chief Executive Officer 2000 9,375 (4) -- 400,000 -- and Secretary 1999 -- -- -- -- Joy M. Godesiabois (5).............. 2001 103,077 (6) -- 125,000 -- Chief Financial Officer, Vice 2000 -- -- -- -- President and Secretary 1999 -- -- -- -- Richard M. Sowar (7)................ 2001 161,538 (8) -- 50,000 235,288(9) Vice President, Engineering and 2000 178,187 62,500 -- 535(10) 71 Chief Technology Officer 1999 150,000 13,125 -- 240(10)
- ---------- (1) Columns of this table related to compensation in connection with restricted stock and long-term incentive plans have been deliberately omitted because PlanetCAD has not made any grants with respect to such plans. (2) Options are stock options granted under PlanetCAD's equity incentive plans. (3) Mr. Bracking's employment as President and Chief Executive Officer terminated effective January 2002. (4) Amount paid was based on an annual salary of $225,000. (5) Ms. Godesiabois was appointed Chief Financial Officer, Vice President and Secretary in May 2001. (6) Amount paid was based on an annual salary of $160,000. (7) Mr. Sowar's employment as Vice President, Engineering and Chief Technology Officer terminated effective October 1, 2001. (8) Amount paid was based on an annual salary of $200,000 and includes the value of accrued and unused vacation time. (9) Includes a $200,000 severance payment and the amount of a loan payable to PlanetCAD that was forgiven, both under the terms of a separation and release agreement entered into with Mr. Sowar in October 2001 and a $600 matching payment made by PlanetCAD to his account under its 401(k) plan. (10) Represents matching payments made by PlanetCAD to the individual's account under its 401(k) plan. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information regarding options granted during the fiscal year ended December 31, 2001 to each of the PlanetCAD executive officers named in the summary compensation table.
PERCENT OF NUMBER OF TOTAL SHARES OPTIONS UNDERLYING GRANTED TO EXERCISE OPTIONS EMPLOYEES IN PRICE EXPIRATION NAME GRANTED 2001(%)(1) ($/SHARE)(2) DATE - ------ ------- ------------ ------------ ------------- Jim Bracking -- -- -- -- Joy M. Godesiabois 125,000 (3) 9.2% 0.61 May 2011 Richard M. Sowar 50,000 (4) 3.7% 0.59 April 2011
- ---------- (1) Based on 1,357,511 options granted in fiscal year 2001. (2) The exercise price per share of options granted was equal to the fair market value of the common stock on the date of grant. (3) Under the terms of the original grant to Ms. Godesiabois, 31,250 of the shares underlying her option will become exercisable in May 2002. The remaining shares will vest and become exercisable at the rate of 1/48th of the total grant per month for the three years following May 2002. Ms. Godesiabois' change in control agreement contains additional terms related to the exercisability of her option. Her change in control agreement is described below under the heading "Employment Contracts and Termination of Employment Agreements." (4) Under the terms of the original grant to Mr. Sowar, 12,500 of the shares underlying his option would have become exercisable in April 2002. The remaining shares would have vested and become exercisable in equal 72 installments at the end of each calendar quarter for the three years following April 2002. Mr. Sowar's separation and release agreement contains additional terms related to the exercisability of his option. His separation and release agreement is summarized below under the heading "Employment Contracts and Termination of Employment Agreements." AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to (i) the exercise of stock options by the executive officers named in the summary compensation table above during the fiscal year ended December 31, 2001, (ii) the number of securities underlying unexercised options held by such named executive officers as of December 31, 2001, and (iii) the value of unexercised in-the-money options (that is, options for which the fair market value of the common stock at December 31, 2001 exceeded the exercise price) as of December 31, 2001.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS AT SHARES FISCAL YEAR-END (1) (2) ACQUIRED ON VALUE ----------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE - ---- -------- -------- ----------- ------------- Jim Bracking -- -- 100,000 300,000 Joy M. Godesiabois -- -- -- 125,000 Richard M. Sowar -- -- 230,833 --
- ---------- (1) None of the named executive officers held unexercised in-the-money options at fiscal year end, whether exercisable or unexercisable, based on the $0.18 price of PlanetCAD common stock as reported on the American Stock Exchange as of December 31, 2001, the last trading day of fiscal year 2001. (2) For purposes of this table, valuation is based on vested options for each named executive officer. Certain options granted to such individuals include early exercise provisions, the value of which is not included in this table. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS We entered into a separation and release agreement with Mr. Sowar that was made effective as of October 1, 2001. Under the terms of the agreement, we paid Mr. Sowar for all accrued and unused vacation through October 1, 2001 and a lump sum payment of $200,000. In addition, we agreed to pay the premium cost of continuing Mr. Sowar's medical, vision and dental benefits through September 30, 2002, or until Mr. Sowar becomes eligible for coverage under another plan. As part of the agreement, we amended the terms of Mr. Sowar's stock option grants to provide that all of Mr. Sowar's options would become fully exercisable on October 8, 2001 and remain exercisable until October 1, 2006. We also forgave the principal and interest on a loan payable to us in the amount of $34,688. The lump sum payment, continuation of insurance benefits, option provisions and forgiveness of the loan were all conditioned on Mr. Sowar not exercising has right to revoke the agreement. Mr. Sowar agreed to provide consulting services to us for a period of six months and not to compete with us during that time. Finally, we entered into with Mr. Sowar a mutual release and waiver of any current or future claims that one of us may have against the other. We entered into change in control agreements with Mr. Hushbeck and Ms. Godesiabois effective November 2001. The agreements expire by their terms in November 2002, unless our board of directors exercises its right to extend the terms for an additional year. The agreements provide that if Mr. Hushbeck and Ms. Godesiabois' employment is continued during the one-year period after a change in control or threatened change in control, their employment must be continued on terms that are at least as favorable as the terms of their employment prior to the change in control or threatened change in control. If their employment is not continued for the entire one-year period following a change in control or threatened change in control, Mr. Hushbeck and Ms. Godesiabois could become entitled to receive as severance payment all accrued and unused vacation time, continuation of their medical, vision and dental benefits for a period of six months, or until they become eligible for coverage under another plan, lump-sum payments equal to four months of their respective salary rate in effect at that time, 73 accelerated vesting of their then outstanding options and an extension to 30 months of the period during which they can exercise certain of their options. Mr. Hushbeck and Ms. Godesiabois only become entitled to receive the severance if their employment is terminated without cause or if they resign for good reason. In exchange for the foregoing accommodations, Mr. Hushbeck and Ms. Godesiabois agreed not to compete with us or otherwise interfere with our business for a period of one year following the termination of their employment with us for any reason. We also entered into a change in control agreement with Mr. Bracking effective November 2001. Mr. Bracking's change in control agreement was superseded by a separation and release agreement that we entered into with Mr. Bracking when his employment with us terminated in January 2002. Mr. Bracking's change in control agreement provided that if Mr. Bracking's employment was continued during the one-year period after a change in control or threatened change in control, his employment would be continued on terms that were at least as favorable as the terms of his employment prior to the change in control or threatened change in control. His agreement further provided that if his employment was not continued for the entire one-year period following a change in control or threatened change in control, Mr. Bracking could become entitled to receive as severance payment all accrued and unused vacation time, continuation of his medical, vision and dental benefits for a period of twelve months, or until he became eligible for coverage under another plan, lump-sum payments equal to six months of his respective salary rate in effect at that time, accelerated vesting of his then outstanding options and an extension to 36 months of the period during which he could exercise certain of his options. Mr. Bracking only was entitled to receive the severance if his employment was terminated without cause or if he resigned for good reason. In exchange for the foregoing accommodations, Mr. Bracking agreed not to compete with us or otherwise interfere with our business for a period of one year following the termination of his employment with us for any reason. We entered into a separation and release agreement with Mr. Bracking that was made effective as of January 25, 2002. Under the terms of the agreement, we paid Mr. Bracking for all accrued and unused vacation through January 25, 2002 and severance payments totaling $65,625. We paid one-half of the total severance amount in a lump-sum payment and the other half in seven semimonthly installments. In addition, we agreed to pay the premium cost of continuing Mr. Bracking's medical, vision and dental benefits through July 31, 2002. As part of the agreement, we agreed that his option under his incentive option agreement dated December 14, 2000 would remain exercisable until January 25, 2003. Mr. Bracking agreed not to compete with us for a period of six months from the effective date of the agreement. Finally, we entered into with Mr. Bracking a mutual release and waiver of any current or future claims that one of us may have against the other. PLANETCAD - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The following is a brief description of the transactions entered into during the last two years between PlanetCAD and the related parties identified below. COMPENSATION OF PLANETCAD'S NEW PRESIDENT AND CEO Mr. Hushbeck was appointed as PlanetCAD's President and Chief Executive Officer in January 2002 and has served as a director since February 2002. For the fiscal year 2002, we have agreed to pay Mr. Hushbeck a salary of $200,000. In February 2002, we granted Mr. Hushbeck an option to purchase 175,000 shares of our common stock at $0.19 per share. Subject to the terms of his change in control agreement described above, the option granted in 2002 will vest and become exercisable as to 25% of the underlying shares of common stock in February 2003. The remaining shares will vest and become exercisable in equal installments at the end of each calendar quarter for the three years following February 2003. ISSUANCE OF WARRANTS TO 5% STOCKHOLDER AND DIRECTOR'S AFFILIATE Under the terms of an asset purchase agreement dated June 1, 2001, we purchased certain supply chain solution software and related assets from Capstone Ventures and AI Research Corporation. As consideration for the purchased assets, we paid Capstone Ventures and AI Research Corporation a total of $200,000 and issued them warrants to purchase up to 125,000 shares of our common stock for $1.00 per share. Of that consideration, we issued warrants to purchase 88,250 shares of common stock to Capstone Ventures and paid them $76,130. Capstone Ventures holds shares of our common stock equal to more than 5% of our total outstanding common stock, and Mr. 74 Fischer, our chairman of the board, is the president of the general partner of Capstone Ventures. The warrants expire on June 1, 2004. Capstone Ventures and AI Research acquired the assets on March 12, 2001 when they foreclosed on secured promissory notes issued by Castalink that were in default. In total, Capstone Ventures invested more than $2,000,000 in Castalink through various debt and equity financings. COMPONENT SOFTWARE DIVISION DISPOSITION On November 14, 2000, we sold our component software division to a subsidiary of Dassault Systemes Corp., which owns more than 5% of our common stock, for approximately $24.5 million. The sale was effected pursuant to a purchase agreement dated July 4, 2000, as amended September 2, 2000, among us, Spatial Components, LLC, and Dassault, pursuant to which we formed Spatial Components as a wholly-owned subsidiary and capitalized it with all of the assets and certain of the liabilities of our component software division. At the closing of the sale, we transferred all of the membership interests in Spatial Components to Spatial Corp., a wholly-owned subsidiary of Dassault and the assignee of Dassault under the purchase agreement. Upon the completion of the transfer, Dassault, through its wholly-owned subsidiary Spatial Corp., became the sole owner of Spatial Components and, therefore, the component software division. INTELLECTUAL PROPERTY AGREEMENTS ENTERED INTO WITH DASSAULT As part of the sale of our component software division, we obtained licenses from Dassault for the right to use certain Dassault software and other intellectual property, and, in exchange, we licensed to Dassault the right to use software that we did not sell to Dassault. In order to define our relationship with Dassault, we entered into the intellectual property agreements described below. Each of the following intellectual property agreements represents a direct relationship, or indirect relationship through a wholly-owned subsidiary of Dassault, between the parties identified. Under the terms of a settlement agreement with Dassault dated on or about December 19, 2001, all of the following agreements, except the IntraVision license agreement, were terminated. The IntraVision agreement remains in effect under its original terms. CROSS-LICENSE AGREEMENT Under the Cross-License Agreement, Dassault granted us a perpetual, non-exclusive license to use certain computer software programs sold to Dassault with the component software division, including ACIS and IVSDK. In consideration for Dassault's license, we agreed to pay Dassault a royalty equal to a specified percentage of our net revenue resulting from any products or services we sold that utilized or were based on the Dassault software. The royalty was subject to a minimum annual payment. We agreed to pay a separate royalty to Dassault in connection with the distribution of IVSDK and the ACIS Open Viewer Plug-Ins application software. We agreed to grant Dassault a perpetual, royalty-free, non-exclusive license to use and modify internally certain of our data translation and data exchange application software, including IGES and STEP Toolkits. Dassault also had the right to distribute the software in run-time or object code format as component products and/or stand-alone software products or in connection with providing application service provider and other enterprise services to Dassault's customers. Dassault agreed to develop CATIA/SAT translator software and grant us a perpetual, royalty-free, non-exclusive license to use and modify the translator software as an underlying application for our Internet services and to distribute run-time versions of the translator software in connection with our Internet services. Each party agreed to provide the other with maintenance in connection with the licensed software. CO-BRANDING AGREEMENT Under the Co-Branding Agreement, we agreed with Dassault to jointly market translation and healing application services, similar to those offered on our Web sites under the product name "3Dshare.com," via one or more Dassault Web sites. We granted Dassault a royalty-free, non-exclusive license to use our Web service infrastructure software for the purpose of providing the Co-Branded Service to its customers. We agreed to host the Co-Branded Service and made the Co-Branded Service accessible from any Dassault Web site that Dassault requested. In consideration of the infrastructure license and performance of our obligations under the Co-Branding Agreement, we were entitled to a percentage of the net revenues derived from the sale of the Co-Branded Service. 75 SERVER SOFTWARE LICENSE AGREEMENT Under the Server Software License Agreement, we granted Dassault a non-transferable, non-exclusive license to certain of our Web site infrastructure applications software. Dassault had the right to use and modify the Server Software internally to provide application services and related Internet services to its customers. In addition, Dassault had the right to distribute the Server Software in connection with those Dassault software products and services into which it had incorporated the Server Software. In consideration for the license of the Server Software, Dassault agreed to pay us a royalty equal to a specified percentage of the net revenue resulting from the sale of any products or services offered by Dassault incorporated or facilitated by the Server Software. Dassault also agreed to pay us an initial license fee for use of the Server Software, which offset a percentage of the royalty payments due from Dassault. In consideration for the license fee and royalty payments, we agreed to provide Dassault with maintenance and support services for the Server Software for four years. WEB SERVICES AGREEMENT Under the Web Services Agreement, Dassault granted us the right to market and distribute, via our 3Dshare.com and PlanetCAD.com Web sites, certain Web services using Dassault's application software. We agreed to assist Dassault in adapting these applications for Internet use by providing a fixed amount of technical support at no charge to Dassault and further support, if necessary, at a discount from our standard consulting rate. We also agreed to develop the Web pages and functions needed to market and distribute the agreed upon Dassault Web services at our own expense. We agreed to spend a minimum percentage of the revenue generated through the distribution of each Web service on advertising programs related to that service for 30 months after the implementation of each service and a minimum amount on advertising in the first year of each service. As consideration for marketing and distributing the Web services, we received a percentage of net revenues generated by sales of the Web services on our Web sites. JOINT SOFTWARE LICENSE AGREEMENT Under the Joint Software License Agreement, we granted Dassault a perpetual, royalty-free license to use, modify and distribute certain translator and healing software jointly developed by us and certain third parties and to use and distribute certain software licensed to us by certain third parties. The license was exclusive to Dassault for use of the jointly developed software as component products and non-exclusive for all other purposes. We agreed to provide Dassault with maintenance and support services for the Joint Software for five years from the date of the agreement at no cost to Dassault. MASTER SOFTWARE RESELLER AGREEMENT Under the Master Software Reseller Agreement, we granted Dassault a non-exclusive, non-transferable license to market, promote, reproduce for distribution, distribute and sublicense certain software products and to use a reasonable number of copies of those products for demonstration and training purposes only. We also agreed to provide Dassault with reasonable quantities of standard product marketing materials and product related training. INTRAVISION LICENSE AGREEMENT Under the IntraVision License Agreement, Dassault granted us a worldwide, exclusive license to use, maintain, support, access and reproduce the IntraVision source code for the purposes of developing and offering to our customers end-user products. The license does not permit us to create software that is similar to or that competes with the IVSDK. In consideration of the exclusive IntraVision distribution and source code development licenses granted by Dassault, we agreed to pay to Dassault certain royalties relating to the net revenue recognized by us as a result of the licenses. ISSUANCE OF SHARES TO DASSAULT On November 14, 2000, we issued 555,556 shares of common stock to Dassault for a purchase price of $2 million, or approximately $3.60 per share, pursuant to the terms of a share purchase agreement, dated as of November 14, 2000, by and between us and Dassault. 76 ISSUANCE OF SHARES TO 5% STOCKHOLDERS AND DIRECTOR'S AFFILIATE On May 24, 2002, PlanetCAD issued shares of its Series B Convertible Preferred Stock to the investors who participated in PlanetCAD's February 2000 private placement in exchange for certain claims the investors had relating to the registration of the PlanetCAD common stock they acquired in the private placement. The investors included: Dassault, which was issued 174,269 shares of convertible preferred stock in exchange for its claim of $62,737; Capstone Ventures (an affiliate of Mr. Fischer), which was issued 304,972 shares for its claim of $109,790; and The Roser Partnership, which was issued 261,406 shares for its claim of $94,106. Each share of this preferred stock will automatically convert into two shares of PlanetCAD common stock upon the completion of the merger. RAVEN ACQUISITION CORPORATION Raven Acquisition Corporation is a newly formed, wholly-owned subsidiary of PlanetCAD. It is a Delaware corporation that was incorporated on May 1, 2002 solely for the purpose of completing the merger with Avatech. It has transacted no business to date other than in connection with the merger agreement. 77 AVATECH SOLUTIONS, INC. INTRODUCTION Avatech is a leading design automation solutions provider. Avatech provides high value solutions to its customers through the reselling of design automation software combined with the integration of training, technical support and professional services. Our customers are private companies, public corporations, government agencies and educational institutions throughout the United States having industry specific focuses such as Architecture, Engineering, and Construction (AEC), Mechanical Design, Engineering Document Management (EDM), Geographic Information Systems (GIS), and Facilities Management. Avatech's product sales are primarily the resale of packaged design software programs that are installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to design, modeling, drafting, mapping, rendering, and facilities management tasks. Avatech is the largest domestic reseller of design software developed by Autodesk, Inc. (Autodesk), one of the world's leading design software and digital content companies for architectural design and land development, manufacturing, utilities, telecommunications, and media and entertainment. Avatech differentiates itself from traditional product resellers through the wide range of value-add services we can provide as part of an overall business solutions engagement. Its services are structured around three areas: training, technical support, and professional services - and are often bundled with the associated software products that support them. Education classes are offered through Avatech's 30 training classroom facilities or directly at a customer site, and include basic through advanced product training and customized company-specific training curriculum. Avatech's instructors are application engineers and product specialists who have formal training or industry experience in the course content. Technical support services are provided primarily through Avatech's telephone support center located in Omaha, Nebraska. Through its staff of full time consultants, Avatech provides assistance to customers with questions or issues concerning the suite of software products Avatech resells, and those associated with the professional services engagements we perform. Professional services include project-focused offerings that are fulfilled primarily with Avatech's own application engineers and programmers and include software customization, data migration, computer aided design standards consulting, workflow analysis, and implementation assistance for complex software products. Avatech's strategic focus is in responding to its customers' requests for interoperability and product lifecycle management solutions that address broader, enterprise-wide initiatives. More than 90% of Avatech's total revenue arises from the resale of Autodesk's software, and the delivery of related services from the sales of these products. Avatech is required to enter into annual channel partner agreements with Autodesk and other software developers that it represents. These agreements grant Avatech authorization to sell certain software products to certain customers in certain geographic areas of the United States. There are no clauses in these agreements that limit or restrict the services that Avatech can offer to customers. Avatech has a national sales and service delivery network of approximately 170 personnel operating out of 20 business offices across the country. Avatech's sales database has over 180,000 point-of-contact names collected over a 15-year time span, and an active customer list of approximately 18,000 firms, and federal, state and local agencies. Avatech's executive offices are located at 11403 Cronhill Drive, Suite A, Owings Mills, Maryland, 21117, and our telephone number is (410) 902-6900. INDUSTRY BACKGROUND Today's increasingly competitive business environment has forced many companies in diverse industries to increase efficiencies while improving flexibility and responsiveness to changing market conditions. In addition to facing higher competitive standards with respect to product quality, variety and price, businesses also recognize the need to shorten lead times, adjust production for frequent changes in customer requirements and quote more 78 accurate and reliable delivery dates. Furthermore, a company's trading network may span multiple continents, requiring suppliers in one part of the world to collaborate with a plant in another. These forces are prompting companies to collaborate with technology transparency, across a broad range of suppliers and customers to improve efficiencies within multi-enterprise value chains and market places. The development and proliferation of communications, desktop automation, and software applications, including applications for specific industry focuses such as AEC, Mechanical Design, EDM, GIS, and Facilities Management are accelerating many companies' efforts to increase efficiencies by enabling a platform-independent communications network. This platform independence and demands for interoperability has prompted demands for a dynamic, open and integrated environment among customers, suppliers, and designers. In response to these evolving market forces, many companies are seeking business solutions that include re-engineering their business process to reduce manufacturing cycle times, shifting from mass production to order-driven manufacturing, increasing the use of outsourcing and sharing information more readily with vendors and customers over the Internet. MARKETS The AEC market is comprised of design services focused on the construction of large physical assets such as buildings, roads, factories, utility companies and commercial infrastructure projects. Architects, builders and civil engineers use design automation systems to create detailed three dimensional construction drawings, material specifications, and maintenance records. Digital files are created and shared by multiple architects, engineers, and suppliers of services and raw materials throughout the construction schedule and subsequent operations of the asset. The Mechanical Design and Manufacturing market is primarily focused on the design, tooling, assembly, and testing of instruments, electronic devices, machines, mechanical devices and power-driven equipment. Inventors, engineers, technicians and designers use design automation software as basic tools in the overall form, fit and function, creation and refinement of the product or item. Given the physical and electronic complexity of most items invented today, software and services are critical to achieving tight production schedules and cost targets. EDM systems provide methodical and organized processes involved with the storage, retrieval, management and versioning of design files, drawings and related documents such as customer correspondence, inventory lists, digital images, and other items. These products are based on a client /server architecture, and are scalable from a departmental solution to a division level infrastructure system. GIS software permits users to link together disparate data files (maps, aerial photos, tax records, marketing data, etc.) and provide the user with a unified image and knowledge base of a specific geographic location or building location. This software can also be used to develop emergency exit and disaster rescue plans by providing detailed information about employee locations, communication information, distances to the closest stairwells and elevators, fire hose connection points, etc. New technology based on powerful desktop computer hardware has enabled software developers to offer products that are easier to use and less expensive than the previous applications, thus expanding the volume of purchases, installation and level of usage from the traditional civil engineering, utilities, public works and transportation logistics markets and into the emergency services and Homeland Security segments. Facilities Management applications enable facility managers and physical plant staff to efficiently operate and utilize all aspects of a facility's operational systems (heating, cooling, power, communications, security, etc.) including it's internal and external space and infrastructure. When integrated with Internet browsers, GIS and document management tools, users are able to have substantial knowledge about their buildings, their neighborhoods and their documents, which leads to better effectiveness and cost containment. SOLUTIONS AND PRODUCTS As a design automation company, Avatech sells software packages developed by third party software developers. Avatech provides a variety of services to assist our customers in maximizing the benefits from these software applications. These services include training, technical support and professional services. 79 Our product sales are primarily composed of packaged software programs that are installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to design, drafting, manufacturing, workflow automation, and document management activities. Product offerings include a full range of design automation software packages from several industry leaders, including Autodesk and Bentley Systems, Incorporated, and workflow and document management software from Cyco, Inc. TRAINING SERVICES. Avatech has a curriculum of over 30 different subjects offered at our 30 training facilities, and through mobile labs that can be sent to a customer site. Our employees serve as class instructors and have formal training or successful industry experience in the topics they are teaching. All instructors must take and pass annual subject-matter exams required by Autodesk and other software providers to retain their product-based teaching certifications. Avatech also provides training services that are highly tailored to meet the needs of a particular customer, including company-specific operational topics, customized product usage, and other general technology or process training. TECHNICAL SUPPORT SERVICES. Avatech provides end-user and corporate technical support services through our National Support Center (NSC) located in Omaha, NE. A staff of fulltime product and technology consultants assists customers calling with questions about product features, functions, usability issues and configurations - as well as from our professional services engagements. The NSC offers services through multiple access levels including prepaid services, actual elapsed time, and annual support contracts. Customers can communicate with the NSC through e-mail, telephone and fax channels. Standard NSC support services are offered on a 12-hour by 5-day basis, with premium pricing for extended coverage hours. PROFESSIONAL SERVICES. Professional Services are project-focused offerings that include software customization, data migration, computer aided design standards consulting, supplemental staffing for design work, drawing digitization, symbol library development, and GIS database development. Avatech also provides technology interoperability, engineering collaboration and workflow improvement solutions with design automation and manufacturing organizations. CHANNEL SALES AGREEMENTS WITH AUTODESK AND BENTLEY Avatech's revenues are primarily derived from the resale of vendor software products and services. These resells are made pursuant to channel sales agreements whereby Avatech is granted authority to purchase and resell the vendor products and services. Under these agreements, Avatech either resells software directly to its customers or acts as a sales agent for various vendors and receives commissions for its sales efforts. Below is a brief description of the material channel sales agreements with Avatech's two largest vendors. AUTODESK CHANNEL PARTNER AGREEMENT. Avatech entered into an Authorized Channel Partner Agreement with Autodesk, Inc. whereby Autodesk appointed Avatech as a non-exclusive partner to market, distribute and support Autodesk software products. Avatech and its subsidiaries collectively must achieve a yearly minimum revenue in the amount of $300,000.00 from the sale of Autodesk's software products in order to be eligible to purchase such products directly from Avatech. This Agreement was recently amended and will expire on January 31, 2003. BENTLEY RESELLER AGREEMENT. Under the Bentley Reseller Agreement, Avatech, Avatech was granted a non-transferable, non-exclusive right to promote the sale and distribution of Bentley software products and services. In order for Avatech to maintain its right to purchase and resell Bentley software products, Avatech must attain minimum standards and requirements as set forth by Bentley from time to time. By attaining certain minimum quarterly and/or year-to-date quotas, Avatech may receive product performance bonuses. This Agreement will expire on June 11, 2003, unless renewed for successive 1-year terms by mutual written consent. SALES AND MARKETING Avatech's merger and acquisition growth strategy coupled with post merger marketing efforts has provided it with a sales database of over 180,000 point-of-contact names and an active customer base of 18,000 organizations. 80 Avatech sells its software products and solutions services through a direct sales organization consisting of sales representatives, many with engineering degrees and industry experience, and pre-sales technical consultants. Many of our customers were successfully transitioned from acquired companies, as dedicated sales representatives worked diligently to retain their customer relationships. Avatech utilizes a customer relationship system (CRM) to manage customer communications that is deployed at all offices via a wide-area network. Avatech also uses a sophisticated electronic marketing system for permission-based, automated, one to one marketing communications and regular electronic publications. The features include automatic customized e-mail messages to prospects with interest in our products and services, as well as automated lead distribution directly to the sales force. In addition, Avatech has a comprehensive and scaleable Web site, which supports secure transactions and serves streaming media demonstrations and technical tips on a 24x7 on-demand basis. CUSTOMERS Avatech markets its products to private companies, public corporations, government agencies and educational institutions throughout the United States. In fiscal year 2001, the revenues generated by Avatech's top 10 customers represented approximately 5% of total revenues. Avatech has a national sales and service delivery network that is comprised of 20 business offices and 30 training classrooms across the country. Avatech's customers include: AOL Time Warner Communications AT&T Baltimore Gas & Electric Baseland Bechtel Becton Dickenson Bell Atlantic Bouck & Lee Engineers Carter & Burgess Caterpillar Centex Homes Champion Industries City of Baltimore City of Roseville, CA Colorado Springs Utilities Consumers Energy Dewberry & Davis Ford Motor Company General Electric General Mills Goodyear Hellmuth, Obata & Kassabaum, Inc. Honeywell INTEL JCPenney John Deere Johnson & Johnson Kimley-Horn & Associates Lucent Technologies MBNA Media One Michigan Department of Transportation NASA National Park Service Newport News Shipbuilding Nestle Nolte Engineering Norfolk Naval Air Station Oceana Naval Base Ozark Aircraft Pacific Bell Parker Hannifan Parsons Brinckerhoff Pioneer Hybrid Quade & Douglas, Inc. Royal Caribbean International Rockwell Qwest Communications RTKL Associates SBC Sacramento Regional Transit Siemens Medical Systems Siemens Texas Instruments Texaco Trane The Sports Authority URS Greiner Union Pacific US Bureau of Land Management Verizon 81 COMPETITION Avatech competes in the design automation channel, a market historically composed of small niche, regionally focused companies. Since Avatech began operations in 1997, the Autodesk reseller channel has changed radically. The number of Autodesk channel participants has declined significantly from approximately 400 at the time of our formation to approximately 200 currently. The many new products and their increased complexity have made it very difficult for small companies to compete. The vast majority of smaller resellers lack the technical talent, financial resources and business management skills to transition from the old, single-application product model to one offering complete solutions. Also, profit margins are being squeezed in some of the smaller resellers as they must now purchase products through Autodesk's two national distributors at a higher net cost than a larger resellers like ourself, which continues to buy direct from Autodesk. While several, small, reseller competitors exist in the various geographic territories where Avatech conducts business, no particular reseller represents a significant threat. Avatech is the largest Autodesk design automation company in the United States, and believes that it is approximately 30 times the size of the average Autodesk reseller. There are two national competitors that could be compared to Avatech in scale, size, geographical reach and target markets for the resale of Autodesk products. Those competitors are INCAT International, Inc. (INCAT) and RAND A Technology Corporation (RAND). INCAT is a systems integrator for design automation products. They have 30 offices in nine countries with worldwide headquarters in the United Kingdom. They have 15 offices in the United States. They have approximately 800 employees worldwide with approximately 65 percent in consulting, design engineering and technical support. While INCAT is larger than Avatech, we estimate that the Autodesk portion of its business is less than one-fourth as large as Avatech's Autodesk business. RAND is the largest computer-aided design and engineering technology company worldwide. However, we estimate that its Autodesk related business is less than fifty percent as large as Avatech's. It operates in 104 offices located in 27 countries with headquarters in Canada. It has 38 offices in the United States. As of December 31, 2000, it reported having over 1,300 employees worldwide, of which approximately 650 were engineers. INTELLECTUAL PROPERTY Avatech regards its technology and other proprietary rights as essential to its business. While Avatech relies on copyright, trade secret, confidentiality procedures, contract provisions and trademark law to protect our technology and intellectual property, Avatech believes that the technological skills of its employees and reliable service maintenance are also critical to establishing and maintaining an intellectual property leadership position. Avatech owns two federal trademarks, including "AVATECH SOLUTIONS" and "AVANEWS", and has no trademark applications pending. Avatech has no patents or patent applications pending. Avatech has entered into confidentiality agreements with its employees, consultants and corporate partners and intends to control access to, and distribution of its products, documentation and other proprietary information. EXCHANGE OFFER RELATING TO 10% SUBORDINATED NOTES On May 24, 2002 Avatech commenced an offering of up to $1.6 million in aggregate principal amount of convertible preferred stock to existing holders of five-year, 10% subordinated notes. Avatech believes that all 23 of the current note holders are accredited investors. The offer will remain open until June 30, 2002, unless extended by Avatech, with closing of the exchange contingent upon consummation of the merger. Note holders may tender all, some or none of their existing notes. As of May 28, 2002, Avatech had received binding commitments to exchange $800,000 in principal amount of the notes for shares of Series A Convertible Preferred Stock. The notes will be exchanged for the number of shares of preferred stock equal to (i) the amount of the note exchanged divided by the closing per share price of PlanetCAD common stock on the effective date of the merger (but not less than $.25 or more than $.75). The preferred stock is convertible into shares of PlanetCAD common stock at a rate of 1.1 shares of common stock for every 1 share of preferred stock. The preferred stock will automatically convert into common stock on the earlier to occur of (i) 24 months after issuance of the preferred stock or (ii) immediately preceding a liquidating event, which includes a sale of all or substantially all of the assets of Avatech, a merger or consolidation of Avatech with any other entity that results in the existing common stockholders of Avatech owning less than 50% of the combined entities or a liquidation, dissolution or winding-up of Avatech. Dividends on the preferred stock will accrue at a rate of 10% per year. EMPLOYEES As of March 31, 2002, Avatech had approximately 170 full time employees located in 21 offices throughout the United States. Many of Avatech's current employees formerly were employees of the companies that it acquired. Approximately 43 are located in Maryland where Avatech has its corporate headquarters, as well as two sales and training locations. Maryland is also the location of Avatech's centralized accounting, order processing, and marketing functions. Approximately 62 of Avatech's total work force is engaged in sales and marketing activities, and approximately 60 employees are engaged in service fulfillment. Avatech's future success depends in significant part upon the continued services of its key sales, technical, and senior management personnel and its ability to attract and retain highly qualified sales, technical and managerial personnel. None of our employees are represented by collective bargaining agreements, and we have never experienced a work stoppage. We believe our employee relations are good. 82 PROPERTIES Avatech's corporate offices are located in Owings Mills, Maryland where we lease approximately 3,000 square feet of office space pursuant to a lease that expires June 30, 2003. These facilities house our executive and primary administrative offices as well as accounting, order processing operations, IT, and marketing. Avatech also leases office space at the following locations:
LOCATION SQUARE FOOTAGE TERM -------- -------------- ---- California - Roseville 2,877 06/30/2003 Colorado - Englewood 7,250 03/31/2005 Connecticut - Milford 5,342 07/30/2002 Florida - Sarasota 2,500 07/31/2003 Florida - Tampa 2,290 12/31/2003 Illinois - Chicago 3,816 11/30/2002 Iowa - Cedar Rapids 2,525 05/31/2003 Iowa - Clive 4,310 04/30/2004 Maryland - Owings Mills 10,010 05/31/2004 Maryland - Rockville 2,616 04/01/2003 Michigan - Ann Arbor 5,543 02/28/2003 Minnesota - St. Paul 2,782 09/30/2002 Nebraska - Omaha 7,150 Month to month New Jersey - East Brunswick 2,000 03/31/2003 New York - Liverpool 2,105 05/14/2003 Ohio - Dayton 1,410 09/30/2002 Texas - Austin 2,125 10/31/2004 Texas - Irving 10,522 12/31/2002 Virginia - Richmond 2,250 03/31/2006 Virginia - Virginia Beach 5,000 12/31/2002
The commercial real estate market is volatile and unpredictable in terms of available space, rental fees, and occupancy rates and preferred locations. Avatech cannot be certain that additional space will be available when we require it, or that it will be affordable or in a preferred location LEGAL PROCEEDINGS On May 21, 2002, a former employee filed a lawsuit against Avatech alleging breach of employment contract in connection with the former employee's dismissal. The lawsuit alleges damages in the amount of $187,500. Management believes that the lawsuit is without merit. SELECTED CONSOLIDATED FINANCIAL DATA OF AVATECH The following summary of consolidated financial data is derived from Avatech's audited financial statements as of and for the three years ended June 30, 2001 and from its unaudited financial statements as of and for the nine months ended March 31, 2002. The following consolidated financial data should be read in conjunction with "Avatech - Management's Discussion and Analysis of Financial Condition and Results of Operations" and Avatech's consolidated financial statements and related notes included elsewhere in this proxy statement/prospectus. Avatech was formed as a Delaware corporation on September 9, 1996. On June 20, 1997, CADWORKS, Inc., a company conducting its operations principally in Texas providing design automation software, training, technical support and professional services to corporations, was merged into Avatech, with such merger being accounted for as a recapitalization. On June 30, 1997, Premier Design Systems, Inc., a company with similar operations principally in Maryland, was merged with a wholly-owned subsidiary of Avatech in a business combination accounted for as a pooling-of-interests. All outstanding common stock of CADWORKS, Inc. was exchanged for 593,525 shares of voting common stock of Avatech. All outstanding common stock of Premier Design Systems, Inc. was exchanged for 665,575 shares of voting common stock of Avatech. 83 During fiscal years 1998 through 1999, Avatech consummated business combinations with nine companies that provided design automation software, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United States. Seven of the business combinations were each consummated by the exchange of all of the outstanding shares of voting common stock of the acquired company for shares of voting common stock of Avatech and were accounted for as pooling-of-interests. A summary of the mergers accounted for as pooling-of-interests is as follows:
Acquired Company Location Date of Merger Shares Exchanged - ---------------- -------- -------------- ---------------- NECAD, Inc. Nebraska July 18, 1997 608,625 CAD-PRO Systems, Inc Colorado Sept. 24, 1997 416,725 Florida Design Automation, Inc Florida March 31, 1998 100,000 PKD Enterprises, Inc. Texas April 22, 1998 105,882 MicroCAD Managers, Inc. New York May 15, 1998 36,435 CAD Assist, Inc & CAD Assist West Virginia June 30, 1998 817,079 OrthoCADD Services, Inc. Connecticut Sept. 17, 1998 231,294
Two of the business combinations were accounted for as purchases. Effective April 15, 1998, Avatech acquired all of the outstanding stock of APPA Business Computers, Inc. ("APPA") in a business combination accounted for as a purchase. APPA provided design automation software, hardware, training, technical support, and professional services to corporations and government agencies in Michigan, Louisiana, and Ohio. The total purchase price of APPA of approximately $1,070,000 consisted of 235,294 shares of voting common stock valued at $1,000,000 and approximately $70,000 of direct acquisition costs. Goodwill of approximately $1,129,000 was recorded. Effective August 6, 1998, we acquired all of the outstanding stock of New Jersey-based Configured System, Inc. Configured Systems, Inc. provided design automation software, hardware, training, technical support, and professional services to corporations and government agencies in New Jersey. The total purchase price of Configured Systems, Inc. consisted of cash of $400,000. Goodwill of approximately $366,000 was recorded. The consolidated financial data presented below includes Avatech Solution, Inc., an operating company, and the following wholly-owned subsidiaries: Avatech of California, Inc. Avatech Solutions of Colorado, Inc. Avatech of Connecticut, Inc. Avatech of Florida, Inc. Avatech of Maryland, Inc. Avatech of Michigan, Inc. Avatech of Nebraska, Inc. Avatech of New Jersey, Inc. Avatech of New York, Inc. Avatech of Virginia, Inc. Technical Learningware Company, Inc.
NINE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, --------------------------------------------------------------------------------------- 2001 2000 1999 2002 2001 ----------------- ----------------- ---------------- ----------------- ---------------- STATEMENT OF OPERATIONS DATA: Revenue Product sales........................ $ 23,546,131 $ 23,920,585 $ 28,432,471 $ 17,682,069 $ 17,418,388 Service revenues..................... 6,049,275 7,519,169 6,871,010 4,606,581 4,454,214 Commission revenue................... 3,415,344 2,754,289 2,903,295 2,946,221 2,542,985 ----------------- ----------------- ---------------- ----------------- ---------------- Total revenue.................... 33,010,750 34,194,043 38,206,776 25,234,871 24,415,587 ----------------- ----------------- ---------------- ----------------- ---------------- Cost of Revenue Cost of product sales................ 16,388,742 17,267,541 20,899,471 11,754,730 11,896,084 Cost of service revenues............. 3,813,635 4,664,518 4,980,225 3,227,757 3,487,621 ----------------- ----------------- ---------------- ----------------- ---------------- 84 Total cost of revenue............ 20,202,377 21,932,059 25,879,696 14,982,487 15,383,705 ----------------- ----------------- ---------------- ----------------- ---------------- Gross Margin.............................. 12,808,373 12,261,984 12,327,080 10,252,384 9,031,882 ----------------- ----------------- ---------------- ----------------- ---------------- Other Expenses Selling, general and administrative.. 11,519,199 12,919,902 12,940,965 9,476,243 8,146,427 Depreciation and amortization........ 694,503 692,180 736,196 503,472 537,796 Goodwill impairment.................. - - - 283,000 - ----------------- ----------------- ---------------- ----------------- ---------------- Total other expenses............. 12,213,702 13,612,082 13,677,161 10,262,715 8,684,223 ----------------- ----------------- ---------------- ----------------- ---------------- Income/(Loss) From Operations............. 594,671 (1,350,098) (1,350,081) (10,331) 347,659 ----------------- ----------------- ---------------- ----------------- ---------------- Other Income/(Expense) Interest and other income/(expense).. 61,488 (61,819) (18,703) 47,699 54,884 Interest expense..................... (553,823) (641,320) (484,932) (348,416) (428,255) ----------------- ----------------- ---------------- ----------------- ---------------- (492,335) (703,139) (503,635) (300,717) (373,371) ----------------- ----------------- ---------------- ----------------- ---------------- Income (Loss) Before Income Taxes......... 102,336 (2,053,237) (1,853,716) (311,048) (25,712) Income tax expense........................ 13,000 - - 40,000 11,000 ----------------- ----------------- ---------------- ----------------- ---------------- Net Income (Loss)......................... $ 89,336 $ (2,053,237) $ (1,853,716) $ (351,048) $ (36,712) ================= ================= ================ ================= ================ Earnings (Loss) per Common Share - - Basic and Diluted....................... 0.01 (0.34) (0.31) (0.06) (0.01) ================= ================= ================ ================= ================ Weighted average number of common shares outstanding - Basic and Diluted.... 5,995,904 6,078,374 6,038,710 6,005,021 5,989,890 ================= ================= ================ ================= ================ AS OF MARCH 31, AS OF JUNE 30, ------------------------ 2001 2000 1999 2002 ------------------------------------------------------------------------------ BALANCE SHEET DATA: Cash and cash equivalents............. $ 309,621 $ 423,307 $ 1,197,675 $ 175,264 Working capital (deficiency).......... (2,714,712) (1,257,780) 157,394 (4,523,338) Total assets.......................... 8,377,015 7,920,247 8,648,728 6,439,971 Total debt............................ 6,480,880 5,750,883 6,492,239 5,546,911 Total stockholders' deficiency........ (3,424,838) (3,427,041) (1,609,640) (3,841,415)
AVATECH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AVATECH SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS". SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISK, UNCERTAINTIES AND OTHER FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN THIS PROXY STATEMENT/PROSPECTUS, THAT MAY CAUSE AVATECH'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. GIVEN THESE UNCERTAINTIES, INVESTORS AND PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE 85 ON SUCH FORWARD-LOOKING STATEMENTS. AVATECH DISCLAIMS ANY OBLIGATION TO UPDATE INFORMATION CONTAINED IN ANY FORWARD-LOOKING STATEMENT. OVERVIEW Avatech is a leading design automation solutions provider. Avatech resells design automation software and supports its customers in the integration of this software by offering training, technical support and professional services. Avatech sales are to corporations, government agencies and educational institutions throughout the United States having industry specific focuses such as Architecture, Engineering, and Construction (AEC); Manufacturing; Location Services, Geographic Information Systems (GIS), and Electronic Document Management (EDM). PRODUCT SALES Avatech product sales are primarily the resale of packaged design software programs that are installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to design, modeling, drafting, mapping, rendering, and facilities management tasks. Avatech is the largest domestic reseller of design software developed by Autodesk, one of the world's leading design software and digital content companies for architectural design and land development, manufacturing, utilities, telecommunications, and media and entertainment. Approximately 76.0% of Avatech's total product revenues are related to Autodesk products. Product sales also include hardware that Avatech may purchase for the convenience of its customers. During fiscal 1999, Avatech made a strategic decision to de-emphasize the resale of hardware products as the future profit margins for these offerings were deteriorating. Product hardware sales do not represent a significant percentage of total revenues for Avatech in any of the periods presented. SERVICE REVENUE Avatech provides services in the form of training, technical support, and professional services. Product and process education classes are offered at Avatech's training facilities or directly at a customer site. Avatech's class instructors are application engineers who have formal training or industry experience in the course content. Technical support services are provided primarily through Avatech's telephone support center located in Omaha, Nebraska. Through its staff of full time consultants, Avatech provides assistance to customers making inquiries concerning software products that it sells. Professional services are project-focused offerings that are fulfilled primarily with Avatech's own application engineers and programmers and can include software customization, data migration, computer aided design standards consulting, workflow analysis, and implementation assistance for complex software products. COMMISSION REVENUE Avatech generates sales from the resale of Autodesk software to various customers of which a portion are considered major accounts. Autodesk considers certain customers to be major accounts based on specified criteria primarily sales volume. These customers typically receive certain volume discounts. Avatech is responsible for managing and reselling product to these accounts; however, the software product is shipped directly from Autodesk to the customer. Avatech receives a commission ranging from 17% to 26% on the product sales price depending upon the product type and volume. Commission revenues are recognized upon shipment of the product from Autodesk to the customer. COST OF PRODUCT SALES Cost of product sales consists of Avatech's cost of purchasing the products from the software suppliers or hardware manufacturers. Additionally, the associated shipping and handling costs are included in cost of product sales. COST OF SERVICE REVENUE 86 Cost of service revenue includes the direct costs associated with the implementation of software and hardware solutions as well as training, support services, and professional services. These costs consist primarily of compensation, benefits, travel and the costs of third-party contractors engaged by Avatech. Cost of service revenue does not include an allocation of overhead costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense consists primarily of compensation and other expenses associated with management, finance, human resources and information systems. Additionally, advertising and public relations expense as well as expenses for facilities such as rent and utilities are included in selling, general and administrative expense. During fiscal 2000, Avatech instituted an expense reduction program which attributed to a $1.4 million reduction in average annualized selling, general and administrative expense. DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense represents the period costs associated with Avatech's investment in property and equipment consisting principally of computer equipment, software, furniture and fixtures, and leasehold improvements. Depreciation and amortization expense is computed using the straight-line method. Additionally, Avatech leases all of its facilities and depreciates leasehold improvements over the lesser of the lease term or the useful life of the asset. Goodwill is the excess of the purchase price paid over the value of the identifiable net assets acquired in purchase business combinations and is amortized over the expected period of benefit primarily 15 years. On a periodic basis, Avatech evaluates goodwill for impairment by comparing its best estimate of undiscounted future cash flows with the carrying value of goodwill. INTEREST EXPENSE Interest expense consists primarily of interest on Avatech's revolving line-of-credit and subordinated debt, which it incurred to fund operations over the past three years. CRITICAL ACCOUNTING POLICIES GENERAL. Avatech's consolidated financial statements are impacted by the accounting policies used, and the estimates and assumptions made, by management during their preparation. Critical accounting policies and estimates that impact the consolidated financial statements are those that relate to software revenue recognition, estimates of bad debts and estimates of the recoverability of goodwill. A summary of the significant accounting policies can be found in the Notes to the Consolidated Financial Statements. Presented below is a description of the accounting policies that Avatech believes are most critical to understanding the consolidated financial statements. SOFTWARE REVENUE RECOGNITION. Avatech derives most of our revenue from the resale of packaged software programs. Product sales also include hardware that may be purchased for the convenience of customers. Historically, Avatech has not experienced significant customer returns. Avatech also earns service revenue from training and other professional services for the products that are sold. These services are not essential to the functionality of the software. Additionally, Avatech offers annual support contracts to its customers for the software products that it sells. Maintenance and support services are also sold under hourly billing arrangements. Revenue from software arrangements is recognized in accordance with the provisions of Statement of Position No. 97-2, SOFTWARE REVENUE RECOGNITION, as amended by SOP No 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. Prior to recognizing any revenue under these arrangements, (1) persuasive evidence of an arrangement must exist, (2) delivery of the software or service must have occurred, (3) all fees must be assessed as fixed or determinable and (4) all fees must be probable of collection. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in 87 conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Avatech's customer arrangements can involve the sale of two or more elements. When this occurs, revenue is allocated to each element based on the relative fair value of each element. Avatech limits the assessment of fair value to the price that is charged when the element is sold separately. All of the elements included in the multiple element arrangements have been analyzed, which may include products that are resold, training and other professional services, and support services. Avatech has determined that sufficient evidence of the fair value based on these separate sales exists to allocate revenue to the specified elements. Training and other professional services revenue is recognized as services are delivered and support revenue is recognized ratably over the respective contract term. All unrecognized fees that have been billed are included in deferred revenue. BAD DEBTS. Avatech maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to pay for products and services that are sold or for disputes that affect its ability to fully collect its accounts receivable. Avatech estimates this allowance by reviewing the status of past-due accounts and recording general reserves based on historical bad debt expense. Avatech's actual experience has not varied significantly from its estimates. However, if the financial condition of Avatech's customers were to deteriorate, resulting in their inability to pay for products or services, Avatech may need to record additional allowances in future periods. Mitigating this risk is that Avatech performs ongoing credit evaluations of its customers. RECOVERABILITY OF GOODWILL. Avatech has remaining goodwill of $0.75 million at March 31, 2002 that was recorded in connection with two business combinations that were completed in 1998. Goodwill is amortized over its estimated useful life of 15 years. In assessing the recoverability of goodwill, Avatech makes assumptions regarding estimated undiscounted future cash flows from business units that gave rise to the goodwill. If the undiscounted cash flows are insufficient to recover the remaining goodwill over the remaining amortization period, Avatech estimates the fair value of the business units associated with the goodwill using discounted cash flows and records an impairment charge in an amount equal to the difference between the fair value and the book value of the net assets of the business unit. In March 2002, Avatech recorded a goodwill impairment charge of $283,000 as a result of applying its impairment assessment policy. Because of the subjectivity of cash flow estimates and related assumptions, and changes in the operations of business units with recorded goodwill, Avatech may be required to record additional impairment charges for goodwill in future periods. Avatech will adopt a new accounting standard issued by the Financial Accounting Standards Board in July 2002 that will no longer allow for the amortization of goodwill. Rather, Avatech will make annual assessments of the fair value of its goodwill. In making these assessments, Avatech must make subjective judgments regarding estimated future cash flows and other factors to determine the fair value of the reporting units of its business that are associated with its remaining goodwill. It is possible that these judgments may change over time as market conditions or strategies change, and these changes may cause Avatech to record additional impairment charges to adjust goodwill to its estimated fair value. RESULTS OF OPERATIONS NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO NINE MONTHS ENDED MARCH 31, 2001 The following table sets forth the percentages of total revenues represented by selected items reflected in our unaudited Consolidated Statements of Operations included elsewhere in this proxy statement/prospectus. The quarter-to-quarter comparisons of financial results are not necessarily indicative of future results.
NINE MONTHS ENDED MARCH 31, --------------------------- 2002 2001 ------------- ----------- Revenue: Product sales................................... 70.0% 71.4% Service revenue................................. 18.3% 18.2% Commission revenue.............................. 11.7% 10.4% ------------- ----------- 88 Total revenue:..................................... 100.0% 100.0% ------------- ----------- Cost of revenue Cost of product sales........................... 46.6% 48.7% Cost of service revenue......................... 12.8% 14.3% ------------- ----------- Total cost of revenue:............................. 59.4% 63.0% ------------- ----------- Gross margin:...................................... 40.6% 37.0% ------------- ----------- Other expenses: Selling, general and administrative............. 37.5% 33.5% Depreciation and amortization................... 2.0% 2.2% Goodwill impairment............................. 1.1% 0.0% ------------- ----------- Total other expenses:.............................. 40.6% 35.7% ------------- ----------- Income/(loss) from operations...................... 0.0% 1.3% ------------- ----------- Other income/(expense): Interest and other income/(expense) ............ 0.2% 0.2% Interest expense................................ (1.4)% (1.8)% ------------- ----------- (1.2)% (1.6)% ------------- ----------- Loss before income taxes........................... (1.2)% (0.3)% Income tax expense................................. 0.2% 0.0% ------------- ----------- Net income (loss).................................. (1.4)% (0.3)% ============= ===========
REVENUES Total revenues for the nine months ended March 31, 2002 increased $819,000,or 3.4%, to $25.2 million, compared to $24.4 million for the same period in 2001. Overall, the gross margin percentage increased to 40.6% in the nine months ended March 31, 2002, compared to 37.0% in the same period in 2001. For the nine months ended March 31, 2002, revenues in all three categories - product sales, service revenue and commission revenue increased as a result of a realigned sales organization and a renewed focus by Avatech as a full solution, service provider for its customers. Avatech realigned its sales organization in September 2000 and has improved sales forecasting to better exploit sales opportunities on high margin software products as well as sales to major accounts, which attributed to an increase in commission revenues. Product sales for the nine months ended March 31, 2002 increased $264,000, or 1.5%, to $17.7 million, compared to $17.4 million in the same period in 2001. The increase in product sales is attributed to a growth in sales of software products, which increased product sales by $764,000, or 4.6% in the period of 2002. In June 2001, Autodesk announced the release of an upgrade to it most popular version of Computer Aided Design ("CAD") software. Sales support on the former version of CAD software was phased out in January 2002, which resulted in most major customers purchasing the software upgrades in 2002. The software sales growth was partially offset by a decline in the resale of hardware products of $373,000, or 48.5% in the period of 2002. The Company has de-emphasized the resale of hardware products to its customers. Service revenue for the nine months ended March 31, 2002 increased $152,000, or 3.4%, to $4.6 million, compared to $4.5 million in the same period in 2001. The increase in service revenue is a direct result of growth in training and technical support services during 2002, which was partially offset by a decrease in revenues from professional services. Avatech's training and technical support services have received additional sales focus as Avatech transitions to a full solution, service provider of software and services for its customers. 89 Commission revenue for the nine months ended March 31, 2002 increased $403,000, or 15.9%, to $2.9 million, compared to $2.5 million in the same period in 2001. The increase in commission revenues resulted from Avatech's realigned sales organization, which has improved sales to major accounts that provide for commission revenue. COST OF REVENUES AND EXPENSES COST OF REVENUE Cost of product sales for the nine months ended March 31, 2002 decreased $141,000, or 1.2%, to $11.8 million, compared to $11.9 million for the same period in 2001. Cost of product sales as a percentage of related revenue for the nine months ended March 31, 2002 decreased to 46.6% from 48.7% in the same period in 2001. The decrease in cost of product sales as a percentage of related revenues is attributed to an increase in sales of high margin software products. Cost of service revenue for the nine months ended March 31, 2002 decreased $260,000, or 7.5%, to $3.2 million compared to $3.5 million for the same period in 2001. Cost of service revenue as a percentage of related revenue for the nine months ended March 31, 2002 decreased to 12.8% from 14.3% in the same period in 2001. The decrease in cost of service revenue as a percentage of revenues is attributed to enhanced efforts to sell higher margin training and professional services rather than lower margin installations of hardware products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense for the nine months ended March 31, 2002 increased $1.3 million, or 16.3%, to $9.5 million, compared to $8.1 million for the same period in 2001. Selling, general and administrative expense as a percent of total revenues was 37.6% during the nine months ended March 31, 2002, and 33.4% during the same period in 2001. The increase in selling, general and administrative expense is attributable to the expansion of Avatech's sales force and technical support staff in its existing locations, as well as the costs associated with opening three new offices in Chicago, IL, St. Paul, MN, and Tampa, FL, during the third and fourth quarters of 2001. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the nine months ended March 31, 2002 decreased $34,000 or 6.4%, to $503,000, compared to $538,000 for the same period in 2001. Depreciation and amortization expense of property and equipment increased as a result of additional capital expenditures for computer equipment and software to support the volume of sales and development activity. GOODWILL IMPAIRMENT For the nine months ended March 31, 2002, Avatech recorded an impairment charge for the write down of unamortized goodwill to its net realizable value. During the period, Avatech evaluated goodwill for its past business combinations by comparing its best estimate of undiscounted future cash flows with the carrying value of goodwill. As the carrying value of goodwill exceeded the estimate of undiscounted future cash flows, a discounted cash flow analysis was performed which attributed to the goodwill impairment charge of $283,000 or the amount by which the carrying value exceeded the fair value of the unamortized goodwill balance at March 31, 2002. OTHER INCOME (EXPENSE) Other expense for the nine months ended March 31, 2002 decreased $73,000, or 19.5%, to $301,000, compared to $373,0000 for the same period in 2001. The reduction in other expense in 2002 is primarily attributable to a reduction in interest expense resulting from a decrease in the variable interest rate associated with the revolving line-of-credit. YEARS ENDED JUNE 30, 2001, 2000 AND 1999 90 The following table sets forth the percentages of total revenues represented by selected items reflected in Avatech's Consolidated Statements of Operations. The year-to-year comparisons of financial results are not necessarily indicative of future results.
YEAR ENDED JUNE 30, ---------------------------------- 2001 2000 1999 ----------- ------------- -------- REVENUE Product sales.................................... 71.4% 69.9% 74.4% Service revenue.................................. 18.3% 22.0% 18.0% Commission revenue............................... 10.3% 8.1% 7.6% ----------- ------------- -------- Total revenue.................................... 100.0% 100.0% 100.0% ----------- ------------- -------- COST OF REVENUE Cost of product sales............................ 49.6% 50.5% 54.7% Cost of service revenue.......................... 11.6% 13.6% 13.0% ----------- ------------- -------- Total cost of revenue............................ 61.2% 64.1% 67.7% ----------- ------------- -------- Gross margin .................................... 38.8% 35.9% 32.3% ----------- ------------- -------- OTHER EXPENSES Selling, general and administrative.............. 34.9% 37.8% 33.9% Depreciation and amortization.................... 2.1% 2.0% 1.9% Total other expenses............................. 37.0% 39.8% 35.8% ----------- ------------- -------- Income/(loss) from operations.................... 1.8% (3.9)% (3.5)% ----------- ------------- -------- OTHER INCOME/(EXPENSE) Interest and other income/(expense) ............. 0.2% (0.2)% 0.0% Interest expense................................. (1.7)% (1.9)% 1.3)% ----------- ------------- -------- (1.5)% (2.1)% (1.3)% ----------- ------------- -------- Income (loss) before income taxes................ 0.3% (6.0)% (4.8)% Income tax expense............................... 0.0% 0.0% 0.0% ----------- ------------- -------- Net income (loss) ............................... 0.3% (6.0)% (4.8)% =========== ============= ========
YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000 REVENUES Total revenues for the year ended June 30, 2001 decreased $1.2 million, or 3.5%, to $33.0 million compared to $34.2 million in the same period in 2000. For the year ended June 30, 2001, revenues in two of the three categories - product sales and service revenue - decreased as a result of the general economic slowdown experienced in the forth quarter of fiscal 2000 as well as the culmination of the Y2K technology spending. Additionally, the sales cycle for Autodesk's most popular CAD software product concluded in February 2000, which contributed to the overall decline in product sales for fiscal 2001. While revenues declined for the year ended June 2001, the gross margin percentage increased to 38.8% in 2001 from 35.9% in 2000 principally due to Avatech's strategic decision to discontinue reselling the low margin hardware products and focus on selling higher margin software products on both a direct and agency basis. Product sales for the year ended June 30, 2001 decreased $374,000, or 1.6%, to $23.5 million, compared to $23.9 million in the same period in 2000. The decrease in product sales is attributed to the culmination of the Y2K technology spending and the conclusion of the sales cycle for AutoDesk's most popular CAD software product in 91 February 2000. Additionally, Avatech made a strategic decision to discontinue reselling the low margin hardware products and focus on selling higher margin software products. As a result, Avatech experienced a $1.9 million, or 66.8%, decline in hardware sales, which was partially offset by an increase in software sales. Software product sales increased $1.4 million, or 6.8%, for the year ended June 30, 2001 as Avatech continued to sell various Autodesk products to its existing customers. Service revenue for the year ended June 30, 2001 decreased $1.5 million, or 19.5%, to $6.0 million, compared to $7.5 million in the same period in 2000. The decrease in service revenue is primarily attributed to a $829,000, or 17.5%, reduction in training service revenue in 2001. The decline is service revenue is a result of limited resources available to focus on selling training services. During fiscal 2000, Avatech experienced exceptional results from training services due to intense promotional efforts and sales force focus. These efforts were not sustained in 2001 due to the implementation of certain cost containment measures. Additionally, support services revenue for the year ended June 30, 2001 decreased $348,000, or 18.9%, due to changes associated with the strategic decision to discontinue selling hardware. Commission revenues for the year ended June 30, 2001 increased $661,000, or 24.0%, to $3.4 million compared to $2.8 million in the same period in 2000. The increase of $661,000 in commission revenue during 2001 resulted from the integration of past business combinations, which provided Avatech with the national network to service and sell to major accounts. COST OF REVENUE AND EXPENSES COST OF REVENUE Cost of product sales for the year ended June 30, 2001 decreased $879,000, or 5.1%, to $16.4 million compared to $17.3 million for the same period in 2000. Cost of product sales as a percentage of related revenue decreased to 49.6% in 2001 from 50.5% in 2000. The decrease in cost of product sales as a percentage of revenues is attributable to the application of earn-backs and other rebates received from Autodesk as a result of Avatech achieving its sales quotas in fiscal 2001. These earn-backs and rebates are offset against cost of product sales in the period in which they are earned. Cost of service revenue for the year ended June 30, 2001 decreased $851,000, or 18.2%, to $3.8 million compared to $4.7 million for the same period in 2000. Cost of service revenue as a percentage of related revenue decreased to 11.6% in 2001 from 13.6% in 2000 as a result of enhanced efforts to sell higher margin training and professional services rather than lower margin installations of hardware. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense for the year ended June 30, 2001 decreased $1.4 million, or 10.8%, to $11.5 million, compared to $12.9 million for the same period in 2000. Selling, general and administrative expense as a percent of total revenues was 34.9% in 2001 compared 37.8% in 2000. The reduction in selling, general and administrative expense in 2001 is attributable to an expense reduction program that was implemented in the fourth quarter of 2000. The expense reduction program coupled with a 3.5% decrease in total revenues attributed to the favorable decline in the ratio of selling, general and administrative expenses to revenues for the year ended June 30, 2001 in comparison to the year ended June 30, 2000. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the year ended June 30, 2001 increased $3,000, or 0.3%, to $695,000 compared to $692,000 for the same period in 2000. Depreciation and amortization expense for 2001 remained consistent with 2000 as few additions to property and equipment were needed. 92 OTHER INCOME (EXPENSE) Other expense for the year ended June 30, 2001 decreased $211,000, or 30.0%, to $492,000 compared to $703,000 for the same period in 2000. The reduction in other expense is primarily attributable to a decrease in interest expense of 13.6% or $87,000 in 2001. The reduction in interest expense is a result of refinancing of Avatech's revolving line-of-credit to provide for a lower interest rate. YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999 REVENUES Total revenues for the year ended June 30, 2000 decreased $4.0 million, or 10.5%, to $34.2 million compared to $38.2 million in the same period in 1999. For the year ended June 30, 2000, revenues in two of the three categories - product sales and commission revenue - decreased as a result of Avatech's strategic decision to exit the low margin hardware business and focus on selling higher margin software products which occurred in the second quarter of fiscal 1999. Additionally, Avatech was integrating the operations of significant acquisitions made in 1999, which limited the focus on a consolidated sales effort. While revenues declined for the year ended June 2000, gross margin increased to 35.9% in 2000 from 32.3% in 1999. Product sales for the year ended June 30, 2000 decreased $4.5 million, or 15.9%, to $23.9 million, compared to $28.4 million in the same period in 1999. The decrease in product sales is attributed to Avatech's strategic decision to exit the low margin hardware business and focus on selling higher margin software products. As a result, Avatech experienced a $3.8 million, or 71.6%, decline in hardware sales for the year ended June 30, 2000. Service revenue for the year ended June 30, 2000 increased $648,000, or 9.4%, to $7.5 million, compared to $6.9 million in the same period in 1999. The increase in service revenue is primarily attributed to an increase in training service revenue in 2000. The growth in service revenue is a result of the enhanced sales focus on these services coupled with an intense promotional effort. Commission revenues for the year ended June 30, 2000 decreased $149,000, or 5.1%, to $2.8 million compared to $2.9 million of the same period in 1999. The decrease of $149,000 in commission revenue during 2000 was a result of Avatech's integration efforts of past business combinations, which limited the focus on sales to major accounts. COST OF REVENUE AND EXPENSES COST OF REVENUE Cost of product sales for the year ended June 30, 2000 decreased $3.6 million, or 17.4%, to $17.3 million, compared to $20.9 million for the same period in 1999. Cost of product sales as a percentage of related revenue decreased to 50.5% in 2000 from 54.7% in 1999. The decrease in cost of product sales as a percentage of revenues is attributed to Avatech's strategic decision to de-emphasize low margin hardware sales and focus on selling higher margin software products. Cost of service revenue for the year ended June 30, 2000 decreased $316,000, or 6.3%, to $4.7 million, compared to $5.0 million for the same period in 1999. Cost of service revenue as a percentage of related revenue increased to 13.6% in 2000 from 13.0% in 1999. The decrease in costs of service revenue is a result of a reduction in technical staff. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expense for the year ended June 30, 2000 decreased $21,000, or 0.2%, to $12.9 million compared to $12.9 million for the same period in 1999. Selling, general and administrative expense 93 as a percent of total revenues was 37.8% in 2000 compared 33.9% in 1999. The increase in the ratio of selling, general and administrative expense to revenue in 2000 is attributable to a significant decline in product sales. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for the year ended June 30, 2000 decreased $44,000, or 6.0%, to $692,000 compared to $736,000 for the same period in 1999. Depreciation and amortization expense remained relatively consistent between 2000 and 1999. OTHER INCOME (EXPENSE) Other expense for the year ended June 30, 2000 increased $200,000, or 39.6%, to $703,139 compared to $504,000 for the same period in 1999. The increase in other expense is primarily attributable to an increase in interest expense of 32.2% or $156,000 in 2001. The increase in interest expense is a result of the issuance of $1.6 million of subordinated notes payable in 1999 to fund on-going operations. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS ("Statement 141"). Statement 141 eliminates the pooling-of-interests method of accounting for business combinations and requires that intangible assets be recorded apart from goodwill if they meet certain criterion. Statement 141 also significantly increases the disclosures about business combinations. Statement 141 is not expected to have a significant impact on Avatech's financial position or results of operations. In June 2001, the FASB issued Statement of Accounting Standards No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Statement 142 requires that goodwill and intangible assets with indefinite lives arising from a business combination will no longer be amortized to earnings, but instead reviewed annually for impairment. Avatech will adopt Statement 142 effective July 1, 2002. For goodwill resulting from business combinations prior to July 1, 2001, amortization of goodwill will continue through June 30, 2002. For business combinations occurring on or after July 1, 2001, the associated goodwill will not be amortized. Upon adoption of Statement 142 on July 1, 2002, the Company is required to perform a transitional impairment test for all recorded goodwill within six months and, if necessary, determine the amount of an impairment loss by June 30, 2003. The effects of applying the transitional impairment test required by Statement 142 are currently being determined. The current annual amortization expense for goodwill is approximately $100,000. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("Statement 144"). Statement 144 supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement 121"), and provides a single accounting model for long-lived assets to be disposed of. Statement 144 retains the requirements of Statement 121 to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted future cash flows and to measure the impairment loss as the difference between the carrying amount and the fair value of the asset. Statement 144 does not apply to goodwill and other intangible assets that are not amortized. Avatech will apply the new rules on accounting for the impairment or disposal of long-lived assets on July 1, 2002. The effect of adoption is not expected to have a material effect on Avatech's consolidated financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES Historically, Avatech has financed its operations and met its capital expenditure requirements primarily through cash flows provided by operations and borrowings under short-term and long-term debt arrangements. Avatech had a deficiency of working capital of $4.5 million at March 31, 2002. Current liabilities include $0.9 million of borrowings under a line-of-credit and $3.0 million of borrowings from an Avatech lender. In October 2000, Avatech entered into a $4.0 million revolving line-of-credit agreement with a lender that expires in October 2003, but is payable within 60 days of demand. Borrowings under the line-of-credit bear interest at the 94 lender's prime rate plus 1.5%. The amount of outstanding borrowings is limited to 75% of eligible accounts receivable. In January 1999, Avatech borrowed $3.0 million from a lender under an agreement that expires in December 2002. The agreement currently requires quarterly principal and interest payments of approximately $621,311, and bears interest at 6.5% per annum. This note is subordinate to the line-of-credit. The loan with the lender is currently in default, but in connection with the proposed merger with PlanetCAD, Avatech has an agreement with the lender to extinguish the $3.0 million obligation in consideration for $1.0 million in cash. For the nine months ended March 31, 2002 Avatech generated $1.2 million of cash from operations. For the comparable nine-month period in 2001, Avatech used $0.1 million of cash in its operations. Net cash provided by (used in) operating activities was $(0.4) million in 2001, $0.2 million in 2000 and $(2.1) million in 1999. Cash flow from operations before working capital changes has improved from deficits of $1.0 million and $1.3 million in 1999 and 2000, to surpluses of $0.9 million in 2001 and $0.3 million for the nine months ended March 31, 2002. Avatech's operating assets and liabilities consist primarily of accounts receivable, accounts payable, and inventory. Changes in these balances are affected by the timing of sales and investments in inventory based on expected customer demand. Inventory levels are minimized through arrangements with suppliers to ship products with an average delivery period of two days and centralized inventory management. For the year ended June 30, 2001, cash provided by operations was adversely affected by increases in accounts receivable of $1.0 million. The increase is primarily attributable to robust sales in June 2001, triggered by sales incentives offered by Avatech's major supplier, causing accounts receivable to increase over the same period in 2000. During the nine months ended March 31, 2002, Avatech collected accounts receivable recorded in June 2001, and cash flow from operations was favorably impacted by a net decline in accounts receivable of $1.2 million. Avatech's investment activities consist principally of investments in computer and office equipment. Avatech acquired $0.2 million of fixed assets during the nine months ended March 31, 2002, and acquired fixed assets of $0.4 million in 2001, $0.5 million in 2000, and $0.7 million in 1999. Avatech has no outstanding purchase commitments at March 31, 2002, and expects total fixed asset purchases in 2002 to be less than $0.4 million. As described more fully above, Avatech's financing activities in all periods have consisted principally of borrowings and repayments under its lines of credit, and in 1999, $3.0 million of borrowings from one of its lenders under a subordinated note agreement. Net borrowings (repayments) under lines of credit were $(1.0) million for the nine months ended March 31, 2002, $0.7 million in 2001, $(0.7) million in 2000, and $0.2 million in 1999. At March 31, 2002, Avatech had additional borrowing availability under its line of credit of $1.0 million. Avatech also has outstanding $1.6 million of 10% subordinated notes. The notes mature on various dates between March 2003 and June 2003, and interest is payable quarterly until maturity or prepayment. Because of the demand provisions of the line-of-credit and the lending agreement, and uncertainties surrounding the ability of Avatech to obtain the needed cash if the loans were required to be repaid in the near term, there is substantial doubt about the ability of Avatech to continue as a going concern if the lenders exercise their demand rights under the agreements. Although management cannot control the actions of these lenders, it believes that they will not demand repayment of outstanding borrowings in the next 12 months. In connection with the proposed merger with PlanetCAD, the lender has agreed to accept $1.0 million of cash to extinguish the $3.0 of outstanding borrowings. Management believes that existing cash and cash equivalent balances, available borrowings under the revolving credit agreement and its anticipated cash flows from operations will satisfy its working capital and capital expenditure requirements for at least the next twelve months. FINANCING ARRANGEMENTS WITH CIT Under the CIT Revolving Line of Credit Agreement, Avatech and its subsidiaries obtained a 3-year revolving line of credit with the CIT Group/Business Credit, Inc. ("CIT") in an amount up to $4,000,000. In consideration for granting the line of credit, Avatech granted to CIT a warrant to purchase up to 16,213 shares of voting common stock of Avatech at an exercise price of $.01 per share. The warrant expires on October 25, 2003. Avatech also granted CIT certain registration rights (including but not limited to drag-along rights and tag-along rights) pursuant to that certain Warrantholders Rights Agreement of the same date. 95 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Avatech is exposed to market risk from changes in interest rates associated with its variable rate line-of-credit facility. At June 30, 2001, approximately 29.6% of the Company's outstanding debt bears interest at variable rates. Accordingly, the Company's earnings and cash flow are affected by changes in interest rates. Assuming the current level of borrowings at variable rates and assuming a 100 basis point change in the 2001 average interest rate under these borrowings, it is estimated that the Company's 2001 interest expense and net income would have changed by less than $20,000. In the event of an adverse change in interest rates, management would likely take actions to further mitigate its exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, the analysis assumes no such actions. Further the analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment. 96 DISAGREEMENTS WITH AVATECH'S ACCOUNTANTS None. DIRECTORS AND EXECUTIVE OFFICERS FOLLOWING THE MERGER Set forth below is information, as of May [___], 2002, with respect to the individuals who it is expected will serve as directors and executive officers of the combined company after the merger. For additional information concerning each of these directors and executive officers, see "Security Ownership of Certain Beneficial Owners, Directors and Management" and "Executive Compensation" beginning on pages [___] and [___], respectively, of this proxy statement/prospectus. The following persons are expected to serve as directors of PlanetCAD following the merger:
NAME AGE CURRENT POSITION WITH AVATECH ANTICIPATED POSITION - ---- --- ----------------------------- -------------------- Henry D. Felton............59 Chief Executive Officer and Chief Executive Officer Chairman of the Board of Directors W. James Hindman...........66 Director Chairman of the Board of Directors Eugene J. Fischer (1)......55 None Director James A. Fanella (1).......44 None Director Director 5 ................-- None Director Director 6 ................-- None Director Director 7 ................-- None Director
- --------------------- (1) The biographies of Messrs. Fischer and Fanella are set forth above under "The PlanetCAD Annual Meeting -- Election of Directors -- Nominees For Election as PlanetCAD Directors" beginning on page 29. There are no family relationships among any of the directors or executive officers of Avatech. HENRY D. FELTON. Mr. Felton has been with Avatech since its inception in 1997 and has served as Chairman of the Board and Chief Executive Officer since that time. He is the former Co-Founder, President and Chief Operating Officer of Youth Services International, Inc. Previously, Mr. Felton was Executive Vice President of Maryland National Bank and a Management Committee member. W. JAMES HINDMAN. Mr. Hindman has been a member of the Board of Directors of Avatech since its inception in 1997. Previously, Mr. Hindman founded Youth Services International, Inc. and served as its Chairman of the Board and Chief Executive Officer from 1991 to 1997. In addition, Mr. Hindman is the founder of Jiffy Lube International, Inc. and served as its Chairman of the Board and Chief Executive Officer from 1980 to 1989. In addition, from 1976 to 1980, Mr. Hindman was the Head Football Coach at Western Maryland College, his alma mater. From 1967 to 1979, Mr. Hindman was involved as the founder and President of W.J. Hindman & Associates, Inc., a real-estate development, health care and consulting company that owned and operated 18 nursing home facilities throughout Maryland, Iowa, Illinois and Nebraska. He has served as a member of the boards of directors of Morningside College and the Baltimore Symphony Orchestra. DIRECTOR 5. 97 DIRECTOR 6. DIRECTOR 7. The following persons are expected to serve as the executive officers of PlanetCAD following the merger:
NAME AGE CURRENT POSITION WITH AVATECH ANTICIPATED POSITION - ---- --- ----------------------------- -------------------- Henry D. Felton (1)......59 Chief Executive Officer Chief Executive Officer V. Joel Nicholson........59 Executive Vice President Executive Vice President Scott Fischer ..........44 Senior Vice President, Professional Services Sr. Vice President, Professional Services Debra Keith ............50 Senior Vice President, Sales and Marketing Sr. Vice President, Sales and Marketing Gary Rever ..............50 Chief Financial Officer Chief Financial Officer
- --------------------- (1) The biography of Mr. Felton is set forth above under "--Description and Executive Officers Following the Merger" on page 97. V. JOEL NICHOLSON. Mr. Nicholson has been with Avatech since its inception in 1997 and has served as a director and Executive Vice President since that time. Prior to joining Avatech, Mr. Nicholson served as President of Evergreen National Development, Inc., a start-up corporation that provided services to client companies considering mergers, acquisitions and other growth options. Formerly, Mr. Nicholson was the Senior Vice President of Youth Services International, Inc., responsible for mergers and acquisitions. During his military career, he held various high level positions SCOTT FISCHER. Mr. Fischer joined Avatech in April 2002 as Senior Vice President, Professional Services. Prior to going to Avatech, Mr. Fischer was a principal in TenX Capital Partners. Prior, he was a Senior Vice President of Appnet, then in Commerce One, which acquired it. Mr. Fischer began his career with Anderson Consulting (Accenture) where he spent 17 years. DEBRA KEITH. Ms. Keith joined Avatech in July of 1998 as a Sales Manager and became Senior Vice President of Sales and Marketing in April 2002. Prior to joining Avatech, Ms. Keith was the Major Accounts Program Manager for Autodesk. As a pioneer in the computer-aided-design and engineering market since 1979, Ms. Keith has held a variety of integrated solution sales and sales management positions. GARY REVER. Mr. Rever joined Avatech in August 2000 as Senior Vice President and Chief Financial Officer. He was formerly the President of Mason-Dixon Services, LLC, a bank holding company subsidiary that provided operational and IT services to affiliate companies. Prior, he has served as the Chief Financial Officer of Bank Maryland Corporation and Vice President of MNC Affiliates. Mr. Rever is a Certified Public Accountant and earned his BA in Economics at the University of Maryland. 98 AVATECH EXECUTIVE COMPENSATION The following table presents information concerning all compensation earned during the three most recent fiscal years ended June 30 by Avatech's Chief Executive Officer and four other most highly compensated executive officers whose combined salary and bonus exceeded $100,000 for services rendered during the fiscal years. These executive officers are referred to as the "Named Executive Officers." The compensation set forth in the table below does not include medical, group life or other benefits that are available to all of Avatech's salaried employees, and perquisites and other benefits, securities or property that do not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown in the table.
LONG-TERM COMPENSATION ------------ AWARDS ------------ SECURITIES NAME AND PRINCIPAL ANNUAL COMPENSATION UNDERLYING ALL OTHER POSITION YEAR SALARY ($) BONUS ($) OPTIONS(#) COMPENSATION ($) - ----------------------------------------------------------------------------------------------------------------------------- Henry Felton......................... 2001 $ 6,121 $ - 33,907 $ - Chairman, Chief Executive Officer 2000 5,766 - 65,987 - 1999 26,835 - - - Joel Nicholsonn...................... 2001 109,596 - - - Executive Vice President 2000 103,596 - - - 1999 94,963 - - - Debra Keithn......................... 2001 84,167 25,000 4,600 - Senior Vice President, 2000 80,000 25,000 11,800 - Sales and Marketing 1999 80,000 25,000 6,000 - Gary Revern.......................... 2001 77,000 7,000 - - Senior Vice President, 2000 - - 60,000 - Chief Financial Officer 1999 - - - - Frank Willsonn....................... 2001 102,818 - - - Vice President, 2000 102,817 - - - Technology and Business Strategies 1999 90,083 - - -
OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information with respect to stock options granted to each of the Named Executive Officers during 2001. Avatech granted options to purchase up to a total of 243,212 shares to employees during the year, the table percentage column shows how much of that total went to the Named Executive Officers.
NUMBER OF PERCENT OF SHARES TOTAL OPTIONS UNDERLYING GRANTED TO OPTIONS EMPLOYEES IN EXERCISE PRICE NAME GRANTED 2001 (%) ($/SHARE) EXPIRATION DATE ------------------- ---------- ------------- -------------- ---------------- Henry Felton....... 33,907 13.9% $ 4.25 December 2011 Joel Nicholson..... - - - - 99 Debra Keith........ 15,000 6.2% $ 4.25 November 2011 Gary Rever......... - - - - Frank Willson...... - - - -
OPTION EXERCISES IN LAST FISCAL YEAR The following table sets forth the number of shares the Named Executive Officers purchased in connection with option exercises during the 2001 fiscal year and the value they realized on those exercises.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS SHARES AT FISCAL YEAR-END ACQUIRED ON ------------------------------ NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE -------------- ----------- -------------- ----------- ------------- Henry Felton - - 110,297 - Joel Nicholson - - - - Debra Keith - - 4,600 28,200 Gary Rever - - - 60,000 Frank Willson - - - -
AVATECH EMPLOYMENT CONTRACTS, CHANGE-IN-CONTROL AND INDEMNIFICATION ARRANGEMENTS The executive officers serve at the discretion of our board of directors. However, three key executives of Avatech, Henry D. Felton (CEO), V. Joel Nicholson (EVP) and Gary Rever (CFO), each have signed a severance agreement that provides for specific cash compensatory arrangements to these employees in the event of a change in control or in the event of the employees' disability. The Severance Agreements for Messrs. Felton and Nicholson provide that if the executive's employment is terminated (a) by Avatech without cause, or (b) due to his death or disability, then the executive will receive a severance payment equal to 18 months' base salary then in effect and full accelerated vesting of all of his unvested stock options. Mr. Rever's severance agreement provides that if his employment is terminated within one year following a change of control, Mr. Rever will receive 18 months' base salary then in effect and full accelerated vesting of all of his unvested stock options. Messrs. Felton and Nicholson's severance agreements contain non-compete provisions. Upon termination of the executive's employment for any reason, he may not compete with Avatech within a 500 mile radius of any Avatech office, nor assist any other person or organization in competing with Avatech, until 18 months after the date of his employment termination. AVATECH - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS W. James Hindman currently owns approximately 3.2% of Avatech's outstanding common stock. Upon consummation of the PlanetCAD merger, Mr. Hindman will own approximately 2.4% of the outstanding stock of PlanetCAD and will be the Chairman of the Board of Directors of PlanetCAD. Mr. Hindman currently owns $225,000 of the Avatech 10% subordinated notes and has signed a binding agreement to exchange all $225,000 of such notes for shares of Avatech's convertible preferred stock to be issued upon consummation of the merger. 100 Avatech began in 1996 and grew by acquiring corporations through merger. Avatech stock was given to the owners of these founding companies in exchange for the stock of the founding companies. The owners of these founding companies became controlling stockholders of Avatech. Upon consummation of the PlanetCAD merger, these founding stockholders, as a group, will own approximately _% of the outstanding stock of PlanetCAD. Henry D. Felton is currently the Chairman and CEO of Avatech and, at the effective time of the PlanetCAD merger, will be the CEO of PlanetCAD. After the merger, Mr. Felton will also own approximately 6.6% of the outstanding stock of PlanetCAD and holds stock options and warrants to purchase up to 1.4% of PlanetCAD stock. Mr. Felton currently owns $300,000 of the Avatech 10% subordinated notes and has signed a binding agreement to exchange $300,000 of such notes for shares of Avatech's convertible preferred stock to be issued upon consummation of the merger. Pursuant to a written lease dated June 30, 1998, Frank Willson is a member of Saltwater, L.L.C., the landlord of an office building in Virginia Beach, Virginia in which Avatech is a tenant. Avatech pays $6,527.27 per month under the lease that runs until December 31, 2002. Prior to the merger, Mr. Willson owns 13.8% of Avatech's outstanding common stock. Upon consummation of the PlanetCAD merger, Mr. Willson will own approximately 10.3% of the outstanding stock of PlanetCAD. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF AVATECH The following table sets forth certain information regarding the ownership of Avatech common stock as of March 31, 2002 by (i) each Avatech director, (ii) each of the Avatech executive officers named in the summary compensation table, (iii) all of such named executive officers and directors as a group, and (iv) all those known by Avatech to be beneficial owners of more than five percent of Avatech common stock. Except as shown otherwise in the footnotes to the table, the address of each person listed is in care of Avatech Solutions, Inc., 11403 Cronhill Drive, Owings Mills, Maryland 21117.
BENEFICIAL OWNERSHIP(1) NAME AND ADDRESS OF NUMBER OF PERCENT OF BENEFICIAL OWNER SHARES TOTAL(2) ---------------- ------ -------- Frank C. Willson(3) 5656 Shell Road Virginia Beach, VA 23455 824,371 13.8% Jean Schaeffer(4) 669,575 11.2% Henry D. Felton(5) 649,429 10.6% Gregory A. Blackwell(6) 1470 N. Pearson Lane Roanoke, TX 76262 573,054 9.6% V. Joel Nicholson(7) 422,882 7.1% Keith Carter(8) 85 Gulfstream Road #85 Dania Beach, FL 33004 338,186 5.6% Ropnald C. Diegleman 9319 Meadow Hill Road Ellicott City, MD 120141 307,650 5.1% W. James Hindman(9) C/o Rich Meadow Farms 2322 Nicodemus Road Westminster, MD 21157 207,911 3.1% 101 Gary Rever(10) 20,000 * Debra Keith(11) 4322 North Beltline Road, Suite B-110 Irving, TX 75038 10,533 * Charles Heller(12) 1211 Hillcrest Road Arnold, MD 21012 7,000 * Donald Walsch(13) 4201 Lomo Alto # 300 Highland Park, Texas 75219 5,000 * All executive officers and directors as a group (12 persons) 4,035,591 58.6%
- ---------- * Less than one percent. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Avatech common stock subject to options and warrants currently exercisable within 60 days of March 31, 2002, are deemed outstanding for purposes of computing the percentage of the person or entity holding such securities but are not deemed outstanding for purposes of computing the percentage of any other person or entity. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. (2) Percentage of ownership is based on 5,995,402 shares of common stock outstanding as of March 31, 2002. (3) Mr. Willson is an Avatech founder, currently a member of the board of directors, and serves as Vice President of Technology and Business Strategies of Avatech. (4) Mrs. Schaeffer is an Avatech founder, currently a member the board of directors, and serves as Vice President of Marketing. Includes 334,775 shares beneficially owned by Mrs. Schaeffer's spouse, and 4,000 warrants to purchase common stock owned jointly. (5) Mr. Felton is an Avatech founder, currently a member and chairman of the board of directors, and is the Chief Executive Officer of Avatech. Includes 110,297 shares subject to stock options that are exercisable within 60 days of March 31, 2002 and 7,000 warrants to purchase common stock held by Mr. Felton's spouse, and 5,000 warrants to purchase common stock owned by Mr. Felton. (6) Mr. Blackwell is an Avatech founder, currently a member of the board of directors, and serves as an employee of Avatech. (7) Mr. Nicholson is an Avatech founder, currently a member of the board of directors, and serves as an Executive Vice President of Avatech. Includes 5,882 shares owned by Mr. Nicholson's spouse. (8) Mr. Carter is an Avatech founder and is currently a member of the board of directors (9) Mr. Hindman is an Avatech founder and currently a member of the board of directors. Includes 7,000 shares subject to stock options are exercisable within 60 days of March 31, 2002, 4,000 warrants to purchase common stock held by Mr. Hindman's spouse, 5,000 warrants to purchase common stock held by Mr. Hindman, and 29,411 shares held by Hindman and Associates. Mr. Hindman's adult children 102 beneficially own 414,750 shares of Avatech. Mr. Hindman disclaims beneficial ownership of the shares owned by his adult children. (10) Mr. Rever serves as a Senior Vice President and Chief Financial Officer of Avatech. Includes 20,000 shares subject to stock options are exercisable within 60 days of March 31, 2002. (11) Mrs. Keith serves as a Senior Vice President of Sales and Marketing of Avatech. Includes 10,533 shares subject to stock options are exercisable within 60 days of March 31, 2002. (12) Mr. Heller is currently a member of Avatech's board of directors. (13) Mr. Walsch is currently a member of Avatech's board of directors. COMPARISON OF PLANETCAD COMMON STOCK AND AVATECH COMMON STOCK The rights of Avatech stockholders are currently governed by the Delaware General Corporation Law, the Avatech certificate of incorporation and the Avatech bylaws. In accordance with the merger agreement, at the effective time of the merger each issued and outstanding share of Avatech common stock will be converted into the right to receive shares of PlanetCAD common stock based on the exchange ratio specified in the merger agreement. Accordingly, upon completion of the merger, the rights of Avatech stockholders who become stockholders of PlanetCAD will be governed by the Delaware General Corporation Law, the PlanetCAD certificate of incorporation and the PlanetCAD bylaws. The following are summaries of what Avatech and PlanetCAD believe are the material differences between the rights of Avatech stockholders and the rights of PlanetCAD stockholders. This summary is not an exhaustive list or detailed discussion of the provisions discussed and is qualified in its entirety by Avatech and PlanetCAD's certificates of incorporation and bylaws. For additional information, including copies of those documents, see "Where You Can Find More Information." AUTHORIZED CAPITAL AVATECH. Avatech has the authority to issue a single class of capital stock, consisting of 10,000,000 shares of common stock, par value $0.01 per share. As of May 24, 2002, there were (a) 5,995,402 shares of Avatech common stock outstanding, (b) no shares of Avatech common stock were held in the treasury of Avatech or any of its subsidiaries and (c) 702,985 shares of Avatech common stock were reserved for issuance upon the exercise of outstanding options to purchase shares of Avatech common stock. PLANETCAD. As of the date of this proxy statement/prospectus, PlanetCAD has the authority to issue an aggregate of 25,000,000 shares of capital stock, consisting of 22,500,000 shares of common stock and 2,500,000 shares of preferred stock issuable from time to time by the PlanetCAD board of directors in one or more classes or series, of which 100,000 shares have been designated as Series A Junior Participating Preferred Stock and 1,202,463 of which have been designated as Series B Convertible Preferred Stock. As of May 24, 2002, there were 12,443,545 shares of PlanetCAD common stock and 1,202,463 shares of Series B Convertible Preferred Stock outstanding. BOARD OF DIRECTORS AVATECH. Under the Avatech bylaws, the number of directors of Avatech must be at least five. Within that limitation, the exact number of directors is fixed by resolution of the majority of Avatech's entire board of directors. The current number of Avatech directors is nine. The Avatech bylaws provide that directors are elected by a plurality of the votes of the shares present in person or represented by proxy at the annual stockholders meeting. Directors are entitled to serve until a director's successor is elected and qualified. A quorum at a meeting of the Avatech board of directors consists of a majority of the total number of directors fixed from time to time by Avatech's board of directors, and a majority of the directors present at any meeting at which a quorum is present is required to approve Avatech board of directors action, unless a different vote is required by applicable law, the Avatech certificate of incorporation or bylaws. 103 PLANETCAD. Under the PlanetCAD bylaws, the number of directors of PlanetCAD is fixed by resolution of PlanetCAD's board of directors. The current number of PlanetCAD directors has been established to be seven. Notwithstanding the resolution, the board of directors has nominated only five persons to serve as directors and only five directors are to be elected at the annual meeting. If the merger is not completed, PlanetCAD may conduct a search to fill the two director vacancies that were created by director resignations during 2001. The PlanetCAD bylaws provide that directors are elected for one-year terms by a plurality of the votes of the shares present in person or represented by proxy at the annual stockholders meeting and entitled to vote in the election. If for any cause the directors are not elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting called for that purpose, by plurality vote at such meeting. Vacancies on the board of directors from time to time may be filled by a majority vote of the directors remaining in office. A series of preferred stock may be given rights to elect directors that are different or in addition to the election rights contained in the PlanetCAD bylaws. Generally, a quorum at a meeting of the PlanetCAD board of directors consists of a majority of the total number of directors fixed from time to time by PlanetCAD's board of directors, and a majority of the directors present at any meeting at which a quorum is present is required to approve PlanetCAD board of directors action, unless a different vote is required by applicable law, the PlanetCAD certificate of incorporation or bylaws. COMMITTEES OF THE BOARD OF DIRECTORS AVATECH. Under the Avatech bylaws, the Avatech board of directors may appoint one or more committees by a majority vote of the entire board of directors. The Avatech bylaws provide that, to the extent set forth in the authorizing resolutions, a committee shall have and may exercise all the powers and authority of the Avatech board of directors in the management of Avatech's business and affairs. However, a committee may not: - amend the Avatech certificate of incorporation; - adopt an agreement of merger or consolidation; - recommend to the Avatech stockholders the sale, lease or exchange of all or substantially all of Avatech's property and assets; - recommend to the Avatech stockholders a dissolution of Avatech or a revocation of a dissolution of Avatech; - amend the Avatech bylaws; or - unless the resolution authorizing the committee expressly so provides, declare a dividend, authorize the issuance of stock or adopt a certificate of ownership and merger. The Avatech board of directors currently has an executive committee that, subject to the limitations described above, may exercise all the powers and authority of the Avatech board in the management of the business and affairs of Avatech. PLANETCAD. Under the PlanetCAD bylaws, the PlanetCAD board of directors may designate an executive committee and one or more other committees, from among its members, by resolution of a majority of the entire board of directors. The PlanetCAD bylaws provide that, to the extent permitted by law and set forth in the authorizing resolutions, the executive committee shall have and may exercise all the powers and authority of the PlanetCAD board of directors in the management of PlanetCAD's business and affairs, including the authority and power to declare a dividend, to authorize the issuance of stock and to adopt certificates of ownership and merger. However, the executive committee may not: - amend the PlanetCAD certificate of incorporation (except it may, if authorized in the resolutions of the board of directors providing for the issuance of stock, fix the designations, preferences and rights of that stock); - adopt an agreement of merger or consolidation; 104 - recommend to the PlanetCAD stockholders the sale, lease or exchange of all or substantially all of PlanetCAD's property and assets; - recommend to the PlanetCAD stockholders a dissolution of PlanetCAD or a revocation of a dissolution of PlanetCAD; or - amend the PlanetCAD bylaws. Committees other than the executive committee shall have the powers and perform the duties as prescribed in their authorizing resolutions, but a committee may not have any of the powers denied to the executive committee. The PlanetCAD board of directors currently has an audit committee and a compensation committee. The audit committee reviews and recommends independent auditors, reviews the scope and procedures of the audit with the auditors and PlanetCAD's financial managers, reviews the effectiveness of and elicits recommendations for improvement of PlanetCAD's accounting and financial controls, reviews financial statements to be included in PlanetCAD's annual report, reviews PlanetCAD's accounting and financial human resources and succession planning and investigates any matter brought to the committee's attention within the scope of its duties and, when it deems appropriate, retains outside counsel to assist in any such investigation. The compensation committee reviews and recommends to the board of directors the compensation of management personnel and reviews and recommends to the board of directors PlanetCAD's executive incentive and benefit plans. NEWLY CREATED DIRECTORSHIPS AND VACANCIES AVATECH. Under the Avatech bylaws, vacancies and newly created directorships resulting from an increase in the number of directors may be filled by the affirmative vote of a majority of the Avatech board of directors then in office, even if less than a quorum. If there are no directors in office, then an election of directors may be held in the manner provided by applicable law. The Avatech bylaws authorize each director elected to fill a newly created directorship or vacancy to hold office until the next annual election and until such director's successor has been elected and qualified. PLANETCAD. Under the PlanetCAD certificate of incorporation and bylaws, newly created directorships resulting from an increase in the number of directors and any vacancies in the board of directors will be filled by the affirmative vote of a majority of the PlanetCAD board of directors then in office, even though less than a quorum, unless the PlanetCAD board of directors determines by resolution that any such vacancies or newly created directorships will be filled by PlanetCAD stockholders. A series of preferred stock may be given rights to fill vacancies that are different or in addition to the provisions in the PlanetCAD certificate of incorporation and bylaws. PlanetCAD's certificate of incorporation authorizes directors elected to fill a newly created directorship or other vacancy to hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor has been elected and qualified. No decrease in the number of directors will shorten the term of an incumbent director. REMOVAL OF DIRECTORS AVATECH. Under the Avatech bylaws, any director may be removed, with or without cause, by the holders of a majority of the outstanding shares then entitled to vote at an election of directors, or by written consent of the stockholders. PLANETCAD. Under the PlanetCAD certificate of incorporation and bylaws and subject to the rights of the holders of any series of preferred stock, a director may be removed from office, with cause, by the vote of the holders of a majority of the voting power of all then-outstanding shares of PlanetCAD common stock entitled to vote in the election of directors, or without cause by the vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all then-outstanding shares of PlanetCAD common stock entitled to vote in the election of directors. 105 SPECIAL MEETINGS OF STOCKHOLDERS AVATECH. Under the Avatech bylaws, a special meeting of the stockholders of Avatech may be called for any purpose by its president, secretary, a majority of the Avatech board of directors or by a majority of the stockholders. Notice of the special meeting must set forth, among other details, the purpose or purposes of the special meeting. Except as otherwise provided by law, Avatech's certificate of incorporation or bylaws or a larger vote is required by Avatech's board of directors, all actions of the stockholders, other than for the election of directors, are decided by the vote of the holders of a majority of the outstanding shares of stock entitled to vote on the issue. PLANETCAD. Under the PlanetCAD certificate of incorporation and bylaws, a special meeting of the stockholders of PlanetCAD may be called for any purpose by its chairman of the board of directors, chief executive officer, majority vote of the total number of authorized directors or the holders of shares entitled to cast not less than two-thirds (2/3) of the votes at the meeting. If a special meeting is called by any person or persons other than PlanetCAD's board of directors, a request for a meeting specifying the general nature of the business to be transacted at the meeting must be delivered to PlanetCAD. No business may be transacted at such a special meeting other than that specified in the request for a meeting. After receipt of the request for a special meeting, the board of directors will determine the time and the place of the meeting, which must be not less than 35 nor more than 120 days after PlanetCAD received the meeting request. Except as otherwise provided by law, PlanetCAD's certificate of incorporation or bylaws, all actions of the stockholders, other than for the election of directors, are decided by the vote of the holders of a majority of the outstanding shares of stock entitled to vote on the issue, excluding all abstentions. STOCKHOLDER ACTION BY WRITTEN CONSENT AVATECH. Under the Avatech bylaws, unless otherwise restricted by the Avatech certificate of incorporation, any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if written consents setting forth the action so taken are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to take such action at a meeting at which all shares entitled to vote were present and voted. Prompt notice of the taking of any action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing to the action. PLANETCAD. Under the PlanetCAD certificate of incorporation and bylaws, no action may be taken by the stockholders except at an annual or special meeting of the stockholders, and no action may be taken by written consent. NOMINATION OF DIRECTORS AVATECH. Neither the certificate of incorporation nor the bylaws of Avatech includes a provision addressing the nomination of directors. PLANETCAD. PlanetCAD's bylaws provide that nominations for directors at its annual meeting may be made by or at the direction of the PlanetCAD board of directors or by any stockholder entitled to vote at the meeting. A stockholder, however, must comply with certain notice requirements to nominate a director, including, generally, that notice of the nomination is given not less than sixty days nor more than ninety days prior to the anniversary of the previous year's annual meeting. In addition, the notice must contain specified information about the person or persons nominated. The chairman of the annual meeting may disregard a stockholder nomination that does not comply with the procedures set forth in the PlanetCAD bylaws. 106 ADVANCE NOTICE OF STOCKHOLDER-PROPOSED BUSINESS AT ANNUAL MEETINGS AVATECH. Neither the certificate of incorporation nor the bylaws of Avatech includes a provision addressing stockholder-proposed business. PLANETCAD. The PlanetCAD certificate of incorporation and bylaws provide that a stockholder must give notice to PlanetCAD before bringing business before an annual meeting. Generally, the stockholder must give such notice not less than sixty days nor more than ninety days prior to the anniversary of the previous year's annual meeting. In addition, the notice must contain specified information related to the stockholder who proposes to bring the business before an annual meeting and the nature of the business that is proposed to be conducted. Only matters that are brought before a meeting in compliance with the bylaws will be considered at the annual meeting. The chairman of the annual meeting may declare at the meeting whether any proposed business was properly brought before the meeting. AMENDMENT OF GOVERNING DOCUMENTS AVATECH. Under the Delaware General Corporation Law, an amendment to a corporation's certificate of incorporation generally requires the recommendation of a corporation's board of directors, the approval of at least a majority of all shares entitled to vote thereon, voting together as a single class, and the approval of at least a majority of the outstanding stock of each class entitled to vote separately. The certificate of incorporation of a Delaware company may provide for a stockholder vote greater than a majority to approve an amendment to the certificate of incorporation. Under the Avatech certificate of incorporation, an amendment to the certificate of incorporation requires a two-thirds (2/3) vote of the shares entitled to vote on the amendment. In addition, Avatech's certificate of incorporation provides that an amendment to the certificate of incorporation may alter the contract rights of any outstanding stock, and any objecting stockholder whose rights may be adversely affected by such amendment shall not be entitled to the same rights as an objecting stockholder in the case of a consolidation, merger, share exchange, or transfer of all, or substantially all, of the assets of Avatech. The Avatech bylaws may be amended or repealed by the stockholders or by the board of directors. PLANETCAD. PlanetCAD may amend, alter, change or repeal any provision of its certificate of incorporation as permitted by the Delaware General Corporation Law and the PlanetCAD certificate of incorporation, except as noted below. Under the PlanetCAD certificate of incorporation, subject to greater or different rights that might be granted to a class or series of stock by law, elsewhere in the certificate of incorporation or in the designation of a series of preferred stock, the affirmative vote of sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares entitled to vote at an election of directors, voting as a single class, is required to amend, alter or repeal Article V (election of directors), Article VI (limitation of liability), and Article VII (amendment of certificate of incorporation) of the PlanetCAD certificate of incorporation. The PlanetCAD bylaws may be amended or repealed by the stockholders or by the board of directors. Amendment or repeal of the bylaws by the stockholders, however, requires the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of the then-outstanding shares entitled to vote. SUPERMAJORITY VOTING REQUIREMENTS FOR CERTAIN BUSINESS COMBINATIONS AND ISSUANCE OF STOCK AVATECH. Under the Delaware General Corporation Law, a merger, consolidation, sale of all or substantially all of a corporation's assets or a dissolution must be adopted by the board of directors and approved by a majority of the outstanding stock of the corporation entitled to vote thereon, unless the certificate of incorporation requires a higher percentage. The Avatech certificate of incorporation provides that the affirmative vote of two-thirds (2/3) of the shares entitled to vote on the issue is required for any of the actions described in the previous sentence. In addition, a two-thirds (2/3) vote of the stockholders is required to issue any shares of stock, or any securities exchangeable for, or convertible into, such shares, or warrants or other instruments evidencing rights or options to subscribe for, or otherwise acquire such shares. 107 PLANETCAD. The PlanetCAD certificate of incorporation does not require a supermajority vote for business combinations such as those described above, and the board of directors may issue stock without stockholder approval. INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF LIABILITY AVATECH. Avatech's certificate of incorporation provides that no director will be personally liable to Avatech or Avatech's stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (1) for breach of the director's duty of loyalty to Avatech and its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law, or (4) for any transaction from which the director derived an improper personal benefit. Modification or repeal of the indemnification provision in the certificate of incorporation will not adversely affect any right or protection of an Avatech director for any act taking place prior to such modification or repeal. In addition, Avatech's certificate of incorporation provides that any person made, or threatened to be made, a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer, employee or agent of Avatech, or is or was acting at the request of Avatech as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including, without limitation, as a fiduciary of, or otherwise rendering service to, any employee benefit plan of or relating to Avatech, shall be indemnified by Avatech to the fullest extent provided by the Delaware General Corporation Law. The right to indemnification conferred by Avatech's certificate of incorporation includes the right to be paid by Avatech the expenses incurred in defending any proceeding for which such right to indemnification is applicable in advance of its final disposition. Avatech, however, may only advance expenses upon receipt of an undertaking from the director or officer, in form and substance satisfactory to the Corporation's independent legal counsel, to repay all amounts advanced if it is ultimately determined that the director or officer is not entitled to indemnification. Avatech is not required to indemnify any director in connection with any proceeding initiated by such director, unless the proceeding was authorized by Avatech's board of directors. Avatech's bylaws provide further that if an indemnification claim is not paid within 60 days, the claimant may file suit to recover the unpaid amount, and if the claimant is successful, in whole or in part, the claimant may also recover the expenses of prosecuting such a claim. In any such proceeding, Avatech shall have the burden of proving that the claimant was not entitled to indemnification. In addition, the indemnification rights contained in the bylaws are not exclusive of any other rights acquired under statute, agreement, vote of the stockholders or otherwise. Any repeal or modification of the indemnification provisions in the bylaws operates prospectively only, and shall not affect the rights of a covered person in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against the covered person. Avatech's bylaws also provide that Avatech may, upon approval of a majority vote of the board of directors, indemnify its employees and agents to the same extent as its directors and officers. PLANETCAD. PlanetCAD's certificate of incorporation provides that no director will be personally liable to PlanetCAD or PlanetCAD's stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (1) for breach of the director's duty of loyalty to PlanetCAD and its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law, or (4) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law. Modification or repeal of the indemnification provision in the certificate of incorporation will not increase the personal liability of any PlanetCAD director for any act taking place prior to such modification or repeal. PlanetCAD's bylaws provide that PlanetCAD shall indemnify its directors and executive officers to the fullest extent not prohibited by the Delaware General Corporation Law; however, PlanetCAD may modify the extent of such indemnification by individual contracts with its directors and executive officers. PlanetCAD, generally, is not required to indemnify any director in connection with any proceeding initiated by such director unless (1) such indemnification is expressly required to be made by law, (2) PlanetCAD's board of directors authorized the proceeding or (3) PlanetCAD provides such indemnification, in its sole discretion, under the powers vested in 108 PlanetCAD under the Delaware General Corporation Law. If a director or executive officer agrees to repay any amounts advanced if it is ultimately determined that he or she was not entitled to be indemnified, PlanetCAD will advance any director or executive officer all expenses incurred by him or her in defense of any threatened, pending or completed action, suit or proceeding against him or her due to his or her status as a director or executive officer of PlanetCAD, or due to the fact that he or she was serving at the request of PlanetCAD as a director or executive officer of another corporation, partnership, joint venture, trust or other enterprise. PlanetCAD will not advance an executive officer acting in his or her capacity as an executive officer any funds if a majority of the disinterested members of the PlanetCAD board of directors or independent legal counsel by written opinion determine that the facts known at the time demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of PlanetCAD. PlanetCAD's bylaws provide further that the indemnification rights contained in the bylaws are contractual rights, and are enforceable as such. In addition, the indemnification rights contained in the bylaws are not exclusive of any other rights acquired under statute, agreement, vote of the stockholders or otherwise. Any repeal or modification of the indemnification provisions in the bylaws shall operate prospectively only, and shall not affect the rights of a covered person in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against the covered person. PlanetCAD `s bylaws also provide that PlanetCAD may indemnify its other officers, employees or agents as provided in the Delaware General Corporation Law. COMPROMISES AND ARRANGEMENTS AVATECH. The Avatech certificate of incorporation includes a provision related to the adoption of compromises and arrangements by its stockholders and creditors. Avatech's certificate of incorporation provides that whenever a compromise or arrangement is proposed between Avatech and its creditors or any class of them and/or between Avatech and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on application of Avatech or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for Avatech under the provisions of Section 291 of the Delaware General Corporation Law or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provision of Section 279 of the Delaware General Corporation Law, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of Avatech, as the case may be, agree to any compromise or arrangement or to any reorganization of Avatech as consequence of such compromise or arrangement, the compromise or arrangement and the reorganization shall, if sanctioned by the court to which the application was made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, or Avatech, as the case may be, and also on Avatech. PLANETCAD. PlanetCAD's certificate of incorporation does not include a provision related to the adoption of compromises and arrangements by its stockholders and creditors. DESCRIPTION OF SECURITIES The following summary description of PlanetCAD's common stock does not purport to be complete and is qualified in its entirety by the provisions of PlanetCAD's certificate of incorporation and bylaws and by the applicable provisions of the Delaware General Corporation Law. For information on how to obtain copies of PlanetCAD's certificate of incorporation and bylaws, see "Where You Can Find More Information." AUTHORIZED AND OUTSTANDING COMMON STOCK OF PLANETCAD As of the date of this proxy statement/prospectus, PlanetCAD has the authority to issue an aggregate of 25,000,000 shares of capital stock, consisting of 22,500,000 shares of common stock, par value $0.01 per share, and 2,500,000 shares of preferred stock issuable from time to time by the PlanetCAD board of directors in one or more classes or series, of which 100,000 shares have been designated as Series A Junior Participating Preferred Stock and 1,202,463 of which have been designated as Series B Convertible Preferred Stock. As of May 24, 2002, there were 109 12,443,545 shares of PlanetCAD common stock outstanding, no shares of Series A Junior Participating Preferred Stock outstanding and 1,202,463 shares of Series B Convertible Preferred Stock outstanding. PLANETCAD COMMON STOCK DIVIDENDS. The holders of common stock are entitled to dividends when and as declared by the board of directors from funds legally available to pay such dividends, but only after payment of any dividends owed to the holders of Series B Convertible Preferred Stock and any future class or series of stock with a preference over the common stock with respect to the payment of dividends. VOTING RIGHTS. Each holder of PlanetCAD common stock is entitled to attend all special and annual meetings of the stockholders of PlanetCAD, and to vote upon any matter, including, without limitation, the election of directors, properly brought for consideration before the stockholders. The holders of common stock are entitled to one vote for each share held of record. NO PREEMPTIVE OR CONVERSION RIGHTS. Holders of PlanetCAD common stock have no preemptive rights and no rights to convert their common stock into any other securities. LIQUIDATION RIGHTS. In the event of a liquidation, dissolution or winding up of PlanetCAD, the holders of PlanetCAD common stock and the holders of any class or series of stock entitled to participate with such holders, will be entitled to participate in the distribution of any assets of PlanetCAD remaining after PlanetCAD has paid all of its debts and liabilities and after PlanetCAD has paid, or set aside for payment, the holders of the Series B Convertible Preferred Stock an amount equal to their purchase price for such stock plus any accrued and unpaid dividends and has paid, or set aside for payment, the holders of any future class or series of stock with a liquidation preference over the common stock the preferential amount to which they are entitled. PLANETCAD PREFERRED STOCK PlanetCAD's board of directors has designated two classes of preferred stock: the Series A Junior Participating Preferred Stock and the Series B Convertible Preferred Stock. In addition, the board of directors has the authority to designate additional classes or series of preferred stock in the future with rights that may adversely affect the rights of the holders of PlanetCAD common stock. The Series A Junior Participating Preferred Stock is discussed below under the heading "Certain Provisions Relating to a Change of Control." As discussed above, the Series B Convertible Preferred Stock confers on its holders preferences over the common stock holders with respect to dividends and liquidation rights. In addition, the holders of Series B Convertible Preferred Stock are entitled to anti-dilution protection and special class voting privileges. Each share of Series B Convertible Preferred Stock outstanding as of the date of this proxy statement/prospectus will automatically convert into two shares of common stock immediately before the completion of the merger. PlanetCAD has agreed to register for resale under the Securities Act the shares of common stock that are issued upon conversion of the Series B Convertible Preferred Stock. LIMITATION OF LIABILITY AND INDEMNIFICATION LIMITATIONS OF LIABILITY. Delaware law authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breach of the fiduciary duty of care. Although Delaware law does not change the duty of care, it enables corporations to limit available relief to equitable remedies such as injunction or rescission. PlanetCAD's certificate of incorporation limits the liability of directors to PlanetCAD or its stockholders to the fullest extent permitted under Delaware law. Specifically, directors of PlanetCAD are not personally liable for monetary damages to PlanetCAD or its stockholders for breaches of the their fiduciary duties, except for liability for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of the law, for any transaction from which the director or executive officer derived an improper personal benefit, or for authorizing the payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. INDEMNIFICATION. PlanetCAD has entered into indemnification agreements with each of its directors and executive officers that require PlanetCAD to indemnify each such person to the fullest extent authorized or 110 permitted by PlanetCAD's certificate of incorporation and Delaware law against expenses, judgments, fines, settlements and other amounts actually and responsibly incurred (including expenses of a derivative action) in connection with any proceeding, whether actual or threatened, to which they may be made a party by reason of the fact that they are or were acting as a director, officer, employee or other agent of PlanetCAD or any of its affiliated enterprises. Delaware law permits this indemnification, provided the person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of PlanetCAD and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder. In addition, PlanetCAD maintains director and officer liability insurance which, subject to certain exceptions and limitations, insures directors and officers for any alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act in their respective capacities as directors and officers of PlanetCAD. CERTAIN PROVISIONS RELATING TO A CHANGE OF CONTROL PROVISIONS RELATED TO THE ELECTION OF DIRECTORS AND STOCKHOLDER ACTION. PlanetCAD's certificate of incorporation requires the affirmative vote of two-thirds of the stockholders to remove a director from the board of directors without cause. The certificate of incorporation also provides that all board vacancies are to be filled by the remaining directors, unless the remaining directors approve a stockholder vote to fill a vacancy. PlanetCAD's bylaws prohibit less than two-thirds of PlanetCAD's stockholders from calling a special meeting, whether for the purpose of replacing directors or for any other purpose. As a result, once elected, PlanetCAD directors may not be removed from office without cause until the next annual meeting of the stockholders. Therefore, a third party interested in taking control of PlanetCAD quickly will not be able to do so unless the third party acquires two-thirds or more of PlanetCAD's voting securities at the time of the acquisition. In addition, PlanetCAD's certificate of incorporation and bylaws prohibit stockholders from taking action by written consent in lieu of a meeting. STOCKHOLDER RIGHTS PLAN. In March 2002, PlanetCAD's board of directors adopted a stockholders rights plan. The plan is designed to deter a takeover of PlanetCAD on terms other than those approved by the PlanetCAD's board of directors. The plan causes substantial dilution to a person or group that attempts to acquire PlanetCAD on terms that are not approved by the PlanetCAD board of directors. Under the plan, each PlanetCAD stockholder as of March 21, 2002 received a right that entitles that stockholder to purchase one one-thousandth of a share of PlanetCAD's Series A Junior Participating Preferred Stock for each share of common stock held. Generally, the rights become exercisable only if a person or group acquires, or obtains the rights to acquire, 15% or more of PlanetCAD's outstanding common stock, or if a tender or exchange offer is commenced, the completion of which would result in a person owning more than 15% of PlanetCAD's outstanding common stock. The rights, however, are not exercisable if a person who acquires more than 15% of PlanetCAD's outstanding common stock offers to purchase all of PlanetCAD's outstanding shares of common stock, and PlanetCAD's board of directors determines by a two-thirds vote that such offer is fair to and otherwise in the best interests of PlanetCAD and its stockholders. If the rights become exercisable, the rights of the person who acquire more than 15% of PlanetCAD's common stock become null and void. All other stockholders will be entitled to purchase stock of PlanetCAD, or the stock of any company that has acquired PlanetCAD, having a value twice that of the exercise price of the rights. For example, at a purchase price of $5.00 per right, each right would entitle its holder to purchase $10.00 worth of stock of PlanetCAD or the company that has acquired PlanetCAD for $5.00. The rights will expire March 8, 2012, and are redeemable for $0.0001 per right at the approval of PlanetCAD's board of directors. All of the shares of PlanetCAD common stock to be issued to Avatech stockholders will be issued with rights attached. CERTAIN STATUTORY PROVISIONS. PlanetCAD is subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, this provision prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless: - prior to such date, the corporation's board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; 111 - upon consummation of the transaction that resulted in such person becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding, shares owned by certain directors or certain employee stock plans; and - on or after the date the stockholder became an interested stockholder, the business combination is approved by the corporation's board of directors and authorized by the affirmative vote, and not by written consent, of at least two-thirds of the outstanding voting stock of the corporation excluding that owned by the interested stockholder. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person, other than the corporation and any direct or indirect wholly-owned subsidiary of the corporation, who together with the affiliates and associates, owns or, as an affiliate or associate, within three years prior, did own 15% or more of the corporation's outstanding voting stock. Section 203 expressly exempts from the requirements described above any business combination by a corporation with an interested stockholder who becomes an interested stockholder in a transaction approved by the corporation's board of directors. 112 LEGAL MATTERS The validity of the PlanetCAD common stock and certain tax matters will be passed upon for PlanetCAD by Hogan & Hartson L.L.P., Denver, Colorado. Certain legal and tax matters will be passed upon for Avatech by Shapiro Sher & Guinot, P.A., Baltimore, Maryland. EXPERTS The consolidated financial statements of PlanetCAD as of December 31, 2001, and for the years ended December 31, 2001 and 2000, have been incorporated by reference herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, incorporated by reference herein and upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements and schedule of Avatech Solutions, Inc. and subsidiaries as of June 30, 2001 and 2000, and for each of the two years in the period ended June 30, 2001, included in this proxy statement/prospectus have been audited by Walpert and Wolpoff, LLP, independent auditors, as stated in their report appearing herein, and upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements and schedule of Avatech Solutions, Inc. and Subsidiaries at June 30, 1999 (not presented herein), and for the year then ended, included in the Proxy Statement of PlanetCAD, Inc. which is referred to and made apart of this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. OTHER MATTERS As of the date of this proxy statement/prospectus, the PlanetCAD board of directors does not know of any matters that will be presented for consideration at the PlanetCAD annual meeting other than those described in this proxy statement/prospectus. If any other matters properly come before the special meeting or any adjournments or postponements of the special meeting, and are voted upon, the enclosed proxies will confer discretionary authority on the individuals named as proxies to vote the shares represented by those proxies as to any other matters. Those individuals named in the proxies intend to vote or not vote in accordance with the recommendation of PlanetCAD's management. PlanetCAD anticipates that its next annual meeting of stockholders will be held on or about [______], 2003. The deadline for submitting a stockholder proposal for inclusion in our proxy statement and form of proxy for the next PlanetCAD annual meeting of stockholders, as calculated pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as amended, is [________], 2003. The deadline for submitting a stockholder proposal or a nomination for director that is not to be included in such proxy statement and proxy is no earlier than [________], 2003 and no later than [_________], 2003. Stockholders are also advised to review the PlanetCAD bylaws, which contain additional requirements with respect to advance notice of stockholder proposals and director nominations. To be included in the proxy materials relating to the next PlanetCAD annual meeting, all proposals must be received at PlanetCAD's principal executive offices on or before the above mentioned dates. WHERE YOU CAN FIND MORE INFORMATION PlanetCAD files annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information PlanetCAD files at the SEC's public reference rooms at the following locations: 113 Public Reference Section Northeast Regional Office Midwest Regional Office 450 Fifth Street, N.W. 233 Broadway Northwestern Atrium Center Washington, D.C. 20549 New York, NY 10279 500 West Madison Street, Suite 1400 Chicago, IL 60661
Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. PlanetCAD's SEC filings are also available to the public from commercial document retrieval services and at the website maintained by the SEC at www.sec.gov. PlanetCAD filed a registration statement on Form S-4 to register with the SEC the PlanetCAD common stock to be issued to Avatech stockholders in the merger. This proxy statement/prospectus is a part of the PlanetCAD registration statement and constitutes a prospectus of PlanetCAD for the issuance of PlanetCAD common stock to Avatech stockholders, a proxy statement of PlanetCAD for its annual meeting and a proxy statement of Avatech for its special meeting. As allowed by SEC rules, this proxy statement/prospectus does not contain all the information you can find in the PlanetCAD registration statement or the exhibits to the PlanetCAD registration statement. You may obtain copies of the registration statement in the manner described above. The SEC allows PlanetCAD to "incorporate by reference" information into this proxy statement/prospectus, which means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be part of this proxy statement/prospectus, except for any information superseded by information contained directly in this proxy statement/ prospectus. This proxy statement/prospectus incorporates by reference the documents set forth below that PlanetCAD has previously filed with the SEC. These documents contain important information about PlanetCAD and its financial condition.
PlanetCAD SEC Filings (File No. 0-288-42) Period ---------------------------------------- --------- Annual Report on Form 10-K Year ended December 31, 2001 Quarterly Report on Form 10-Q Quarter Ended March 31, 2002 Current Report on Form 8-K Dated January 25, 2002 Current Report on Form 8-K Dated March 11, 2002 Current Report on Form 8-K Dated May 2, 2002 Current Report on Form 8-K Dated May 28, 2002
PlanetCAD has supplied all information contained or incorporated by reference in this proxy statement/ prospectus relating to PlanetCAD, and Avatech has supplied all such information relating to Avatech. If you are already a PlanetCAD stockholder, we may already have sent you some of the documents incorporated by reference, but you can obtain any of them through us, the SEC or the SEC's website as described above. Documents incorporated by reference are available from us without charge, excluding all exhibits unless we have specifically incorporated by reference an exhibit in this proxy statement/prospectus. Stockholders may obtain documents incorporated by reference in this proxy statement/prospectus by requesting them in writing or by telephone from PlanetCAD at the following address: PlanetCAD Inc. 2520 55th Street, Suite 200 Boulder, Colorado 80301 (303) 209-9100 IF YOU WOULD LIKE TO REQUEST DOCUMENTS, PLEASE DO SO AT LEAST FIVE BUSINESS DAYS BEFORE THE DATE OF THE MEETING IN ORDER TO RECEIVE TIMELY DELIVERY OF SUCH DOCUMENTS BEFORE THE MEETING. If you request any incorporated documents, we will mail them to you by first class mail, or another equally prompt means, within one business day after we receive your request. 114 You may also obtain information from PlanetCAD's website: www.planetcad.com. Avatech is a privately held corporation that is not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and therefore does not incorporate information in this proxy statement/prospectus by reference unless such information appears in an Appendix to this proxy statement/prospectus. WHAT INFORMATION YOU SHOULD RELY ON NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION THAT DIFFERS FROM, OR ADDS TO, THE INFORMATION DISCUSSED IN THIS PROXY STATEMENT/PROSPECTUS OR IN THE ANNEXES ATTACHED HERETO WHICH ARE SPECIFICALLY INCORPORATED BY REFERENCE. THEREFORE, IF ANYONE GIVES YOU DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT. THIS DOCUMENT IS DATED __________, 2002. THE INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS SPEAKS ONLY AS OF ITS DATE UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO EXCHANGE OR SELL, OR A SOLICITATION OF AN OFFER TO EXCHANGE OR PURCHASE, SHARES OF PlanetCAD COMMON STOCK OR TO ASK FOR PROXIES, TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO DIRECT THESE ACTIVITIES. 115 INDEX TO FINANCIAL STATEMENTS UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION Introduction................................................................................... F-2 Condensed Combined Pro Forma Balance Sheet as of March 31, 2002................................ F-4 Condensed Combined Pro Forma Statement of Operations for the Year Ended June 30, 2001.......... F-5 Condensed Combined Pro Forma Statement of Operations for the Nine Months Ended March 30, 2002.. F-6 Notes to Pro Forma Combined Condensed Financial Information.................................... F-7 AVATECH JUNE 30, 2001, 2000 AND 1999 AUDITED FINANCIAL STATEMENTS Independent Auditors' Reports.................................................................. F-10 Consolidated Balance Sheets.................................................................... F-12 Consolidated Statements of Operations.......................................................... F-14 Consolidated Statements of Stockholders' Deficiency............................................ F-15 Consolidated Statements of Cash Flows.......................................................... F-16 Notes to Consolidated Financial Statements..................................................... F-17 AVATECH MARCH 31, 2002 AND 2001 UNAUDITED FINANCIAL STATEMENTS Consolidated Balance Sheet..................................................................... F-28 Consolidated Statements of Operations.......................................................... F-30 Consolidated Statements of Stockholders' Deficiency............................................ F-31 Consolidated Statements of Cash Flows.......................................................... F-32 Notes to Consolidated Financial Statements..................................................... F-33
F-1 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION INTRODUCTION The merger agreement requires PlanetCAD to issue to the Avatech stockholders three shares of PlanetCAD common stock for each share of PlanetCAD common stock outstanding when the merger closes. The following tables set forth certain historical financial information of PlanetCAD and Avatech on an unaudited pro forma basis after giving effect to the merger as a "reverse acquisition" (i.e., with Avatech as the acquiror of PlanetCAD for accounting purposes). The accompanying unaudited pro forma combined condensed balance sheet assumes the merger took place on March 31, 2002. The unaudited pro forma combined condensed balance sheet combines the unaudited consolidated balance sheet of Avatech as of March 31, 2002 and the unaudited consolidated balance sheet of PlanetCAD as of March 31, 2002. PlanetCAD's fiscal year ends on December 31. For purposes of the pro forma information, Avatech's statement of operations for the year ended June 30, 2001 has been combined with PlanetCAD's unaudited consolidated statement of operations for the twelve months ended June 30, 2001 and Avatech's unaudited consolidated statement of operations for the nine months ended March 31, 2002 has been combined with PlanetCAD's unaudited consolidated statement of operations for the nine months ended March 31, 2002. The unaudited pro forma combined condensed statement of operations gives effect to the PlanetCAD merger as if it had occurred on July 1, 2000. The unaudited pro forma combined condensed financial information is presented for illustrative purposes only and is not necessarily indicative of the future financial position or future results of operations of Avatech after the merger or of the financial position or results of operations of Avatech that would have actually occurred had the merger been effected as of the dates described above. The allocation of the purchase price reflected in the unaudited pro forma combined condensed financial information is preliminary. Although Avatech expects to obtain a formal valuation of PlanetCAD and the allocation of the purchase price to the intangible assets, such valuation has not been completed as of the date of this proxy statement/prospectus. For purposes of recording the acquisition in the pro forma financial statements, Avatech established an estimated value of $4.5 million for PlanetCAD common stock based on quoted market prices of PlanetCAD common stock near the date of the merger agreement and estimates of the fair value of PlanetCAD (as obtained from a fairness opinion from experts engaged by PlanetCAD's board of directors). The actual purchase price and purchase price allocation to reflect the fair values of assets acquired and liabilities assumed will be based upon a formal valuation after the merger. Accordingly, the adjustments included here will change based upon the determination of the final purchase price and the allocation of the purchase price. That allocation may differ significantly from the preliminary allocation included in this statement. As a condition to completion of the proposed merger, a lender will extinguish Avatech's $3.0 million obligation for a cash payment of $1.0 million at the merger closing. This arrangement has been reflected in the pro forma consolidated statements as the extinguishment of approximately $3.0 million of subordinated debt for a $1.0 million cash payment. As a result, Avatech will record a one-time extraordinary pre-tax gain in an amount of approximately $2.0 million. PlanetCAD, as a condition precedent to the merger, is required to make appropriate arrangements for investors in the February 2000 private placement of PlanetCAD common stock (PIPE Investors) to accept PlanetCAD common stock or convertible preferred stock in exchange for their outstanding claims of $432,888 relating to the registration rights of PlanetCAD common stock they acquired in such placement. This arrangement has been reflected in the pro forma consolidated balance sheet as a reduction of accrued liabilities and an increase in common stock and additional paid-in capital. F-2 The pro forma statements of operations do not reflect any effect of the contemplated operating efficiencies, cost savings and other benefits, or merger related expenses anticipated by Avatech's management as a result of the merger. The unaudited pro forma combined condensed financial information should be read in conjunction with the audited consolidated financial statements and related notes of PlanetCAD and the audited consolidated financial statements of Avatech, Avatech's Management Discussion and Analysis of Financial Condition and Results of Operations and PlanetCAD's Management Discussion and Analysis of Financial Condition and Results of Operations included or incorporated by reference in this proxy statement/prospectus. F-3 AVATECH SOLUTIONS, INC. UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET AS OF MARCH 31, 2002
Historical Historical Pro Forma Combined Avatech PlanetCAD Adjustments Note Pro Forma --------------- -------------- --------------- --------------- ASSETS Current Assets: Cash and cash equivalents $ 175,264 $4,259,167 $(1,950,000) d,e $ 2,484,431 Accounts receivable, net 3,993,023 494,732 -- 4,487,755 Inventory 375,726 -- -- 375,726 Prepaid expenses and other current assets 247,873 146,244 -- 394,117 --------------- -------------- --------------- --------------- Total Current Assets 4,791,886 4,900,143 (1,950,000) 7,742,029 --------------- -------------- --------------- --------------- Property and Equipment, net 815,891 720,278 -- 1,536,169 Goodwill, and other intangible assets, net 752,920 631,169 1,063,208 a 2,447,297 Other assets 79,274 143,578 -- 222,852 --------------- -------------- --------------- --------------- 832,194 774,747 1,063,208 2,670,149 --------------- -------------- --------------- --------------- Total Assets $6,439,971 $6,395,168 $ (886,792) $11,948,347 =============== ============== =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current Liabilities Accounts payable and accrued expenses $ 3,888,668 $ 1,084,366 $ (432,888) c $ 4,540,146 Borrowings under lines-of-credit 903,870 -- -- 903,870 Current portion of long-term debt 3,676,879 -- (3,318,758) d,g 358,121 Deferred revenue 608,166 701,898 -- 1,310,064 Other current liabilities 237,641 -- -- 237,641 --------------- -------------- --------------- --------------- Total Current Liabilities 9,315,224 1,786,264 (3,751,646) 7,349,842 --------------- -------------- --------------- --------------- Long-Term Debt 41,813 -- -- 41,813 --------------- -------------- --------------- --------------- Subordinated Long-Term Debt 924,349 -- (441,888) g 482,461 --------------- -------------- --------------- --------------- Total Liabilities 10,281,386 1,786,264 (4,193,534) 7,874,116 --------------- -------------- --------------- --------------- Stockholders' Equity (Deficiency) Common stock 59,955 124,435 409,549 b 593,939 Preferred stock -- -- 8,000 g 8,000 Additional paid-in capital 1,661,228 36,067,346 (30,654,330) b,c 7,074,244 Accumulated deficit (5,562,598) (31,582,877) 33,543,523 b,d (3,601,952) --------------- -------------- --------------- --------------- Total Stockholders' Equity (Deficiency) (3,841,415) 4,608,904 3,306,742 4,074,231 --------------- -------------- --------------- --------------- Total Liabilities and Stockholders' Equity (Deficiency) $6,439,971 $6,395,168 $ (886,792) $11,948,347 =============== ============== =============== ===============
F-4 AVATECH SOLUTIONS, INC. UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2001
Historical Historical Pro Forma Combined Avatech PlanetCAD Adjustments Note Pro Forma --------------- -------------- --------------- --------------- Revenue Product sales $ 23,546,131 $ 1,544,021 $ - $ 25,090,152 Service revenue 6,049,275 981,404 - 7,030,679 Commission revenue 3,415,344 - - 3,415,344 --------------- -------------- --------------- --------------- Total Revenue 33,010,750 2,525,425 - 35,536,175 --------------- -------------- --------------- --------------- Cost of Revenue Cost of product sales 16,388,742 487,290 - 16,876,032 Cost of service revenue 3,813,635 1,200,549 - 5,014,184 --------------- -------------- --------------- --------------- Total Cost of Revenue 20,202,377 1,687,839 - 21,890,216 --------------- -------------- --------------- --------------- Gross Margin 12,808,373 837,586 - 13,645,959 --------------- -------------- --------------- --------------- Other Expenses Selling, general and administrative 11,519,199 7,859,686 - 19,378,885 Research and development - 7,409,023 - 7,409,023 Depreciation and amortization 694,503 - 354,403 a 1,048,906 --------------- -------------- --------------- --------------- Total Other Expenses 12,213,702 15,268,709 354,403 27,836,814 --------------- -------------- --------------- --------------- Income/(Loss) From Operations 594,671 (14,431,123) (354,403) (14,190,855) --------------- -------------- --------------- --------------- Other Income/(Expense) Interest and other income/(expense) 61,488 320,383 - f,g 381,871 Interest expense (553,823) - 272,442 (281,381) --------------- -------------- --------------- --------------- (492,335) 320,383 272,442 100,490 --------------- -------------- --------------- --------------- Net Income (Loss) From Continuing Operations Before Income Taxes 102,336 (14,110,740) (81,961) (14,090,365) Income tax expense 13,000 - - 13,000 --------------- -------------- --------------- --------------- Net Income (Loss) From Continuing Operations $ 89,336 $(14,110,740) $ (81,961) $ (14,103,365) =============== ============== =============== =============== Earnings (Loss) per Common Share - Basic and Diluted $ 0.01 $ (1.17) $ (0.24) =============== ============== =============== Weighted average number of common shares outstanding - Basic and Diluted 5,995,904 12,095,835 58,003,044 =============== ============== ===============
F-5 AVATECH SOLUTIONS, INC. UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 2002
Historical Historical Pro Forma Combined Note Avatech PlanetCAD Adjustments Pro Forma --------------- -------------- --------------- --------------- Revenue Product sales $ 17,682,069 $ 363,262 $ - $ 18,045,331 Service revenue 4,606,581 1,033,442 - 5,640,023 Commission revenue 2,946,221 - - 2,946,221 --------------- -------------- --------------- --------------- Total Revenue 25,234,871 1,396,704 - 26,631,575 --------------- -------------- --------------- --------------- Cost of Revenue Cost of product sales 11,754,730 244,129 - 11,998,859 Cost of service revenue 3,227,757 527,360 - 3,755,117 --------------- -------------- --------------- --------------- Total Cost of Revenue 14,982,487 771,489 - 15,753,976 --------------- -------------- --------------- --------------- Gross Margin 10,252,384 625,215 - 10,877,599 --------------- -------------- --------------- --------------- Other Expenses Selling, general and administrative 9,476,243 4,485,719 - 13,961,962 Research and development - 2,039,716 - 2,039,716 Depreciation and amortization a 503,472 - 265,802 769,274 Goodwill impairment 283,000 - - 283,000 -------------------------------------------------------------------- Total Other Expenses 10,262,715 6,525,435 265,802 17,053,952 --------------- -------------- --------------- --------------- Income/(Loss) From Operations (10,331) (5,900,220) (265,802) (6,176,353) --------------- -------------- --------------- --------------- Other Income/(Expense) Interest and other income/(expense) 47,699 - - 47,699 Interest expense f (348,416) (270,688) 204,463 (414,641) --------------- -------------- --------------- --------------- (300,717) (270,688) 204,463 (366,942) --------------- -------------- --------------- --------------- Net Income (Loss) From Continuing Operations Before Income Taxes (311,048) (6,170,908) (61,339) (6,543,295) Income tax expense 40,000 - - 40,000 --------------- -------------- --------------- --------------- Net Income (Loss) From Continuing Operations (351,048) (6,170,908) (61,339) (6,583,295) =============== ============== =============== =============== Earnings (Loss) per Common Share - Basic and Diluted $ (0.06) $ (0.50) $ (0.11) =============== ============== =============== Weighted average number of common shares outstanding - Basic and Diluted 6,005,021 12,427,356 59,329,128 =============== ============== ===============
F-6 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION 1. The Merger The merger will be treated as a reverse acquisition purchase in which Avatech is treated as the acquiror of PlanetCAD for financial accounting purposes. Under that method, the purchase price for accounting purposes is established using the fair market value of the outstanding PlanetCAD common stock, determined by an independent appraiser, plus the value of PlanetCAD's stock options and estimated acquisition related costs, as follows: Estimated fair value of PlanetCAD's common stock $4,500,000 Estimated fair value of PlanetCAD's stock option 655,000 Estimated acquisition related costs 950,000 --------- $6,105,000 =========
The unaudited pro forma combined condensed balance sheet and statements of operations are not necessarily indicative of the financial position and operating results that would have been achieved had the merger been completed as of the beginning of the earliest periods presented. They should not be construed as being a representation of financial position or future operating results of the combined companies. Management does not expect significant changes to the preliminary valuation of the transaction. However, the final purchase price allocation could be significantly different from the amounts reflected in the unaudited pro forma combined condensed information. In addition, the unaudited pro forma combined condensed financial information gives effect only to the adjustments set forth in the accompanying notes and does not reflect any restructuring or merger related costs, or any potential cost savings or other synergies that management expects to realize as a result of the merger. 2. Adjustments to Unaudited Pro Forma Combined Condensed Financial Statements The adjustments to the unaudited pro forma combined condensed balance sheet as of March 31, 2002 and the pro forma combined condensed statements of operations for the year ended June 30, 2001 and for the nine months ended March 31, 2002 in connection with the proposed merger are presented below: (a) The fair values of PlanetCAD's net assets have been estimated for the purpose of allocating the purchase price of the deemed acquisition of PlanetCAD and determining the pro forma effect of the acquisition on the combined financial statements. The estimated purchase price of $6,105,000 has been assigned to the tangible and intangible assets acquired and liabilities assumed as follows: Current and other assets at March 31, 2002 $ 5,763,999 Fair value adjustments: Acquired technology--3-year life 1,694,377 --------- 7,458,376 Less liabilities assumed at March 31, 2002 (1,353,376) --------- $ 6,105,000 =========
(see Note 1 for the fair value of PlanetCAD common stock and options.) (b) This adjustment is to eliminate the common stock, additional paid in capital, accumulated other comprehensive loss and accumulated deficit of PlanetCAD. (c) This adjustment is to convert PlanetCAD's PIPE Investors claims to common stock. (see Note 4). F-7 (d) This adjustment is to extinguish a portion of Avatech's subordinated debt. (e) This adjustment is an estimate of the acquisition costs to complete the merger. (f) This adjustment is to reduce interest from the extinguishment of debt. (g) This adjustment is for the exchange of a total of $800,000 of subordinated debt for preferred stock and the associated reduction in interest expense. 3. Items Not Adjusted The pro forma statements do not reflect any effect of operating efficiencies, cost savings and other benefits, or merger related expenses anticipated by Avatech's management as a result of the merger. 4. Pro Forma Net Loss Per Share The pro forma basic and diluted net loss per share is computed by dividing the pro forma net loss by the pro forma basic and diluted weighted average number of shares outstanding, assuming PlanetCAD and Avatech had merged at the beginning of the earliest period presented. The pro forma basic and diluted weighted average number of shares outstanding includes the assumed conversion of PlanetCAD's convertible preferred stock to common stock upon the completion of the merger. The pro forma weighted average basic and diluted number of shares outstanding, and pro forma adjustment to the weighted shares outstanding, are calculated as follows for the year ended June 30, 2001 and the nine months ended March 31, 2002:
Basic and Diluted ----------- For the year ended June 30, 2001: PlanetCAD's weighted average common shares 12,095,835 Estimated common shares issued to PIPE Investors 2,404,926 ----------- PlanetCAD adjusted shares 14,500,761 Multiplied by 3.00 Equivalent PlanetCAD shares issued to Avatech stockholders 43,502,283 Add PlanetCAD weighted average shares 14,500,761 ---------- Pro forma combined weighted average shares outstanding 58,003,044
F-8
Basic and Diluted ----------- For the nine months ended March 31, 2002: PlanetCAD's weighted average common shares 12,427,356 Estimated common shares issued to PIPE Investors 2,404,926 ----------- PlanetCAD adjusted shares 14,832,282 Multiplied by 3.00 Equivalent PlanetCAD shares issued to Avatech stockholders 44,496,846 Add PlanetCAD weighted average shares 14,832,282 ---------- Pro forma combined weighted average shares outstanding 59,329,128 ---------- ----------
The adjustment to common shares outstanding at March 31, 2002, is calculated as follows: As of March 31, 2002: PlanetCAD's common shares outstanding 12,443,545 Estimated common shares issued to PIPE Investors 2,404,926 ----------- PlanetCAD adjusted shares 14,848,471 Multiplied by 3.00 Equivalent PlanetCAD shares outstanding 44,545,413 Add PlanetCAD shares outstanding 14,848,471 ----------- Pro forma combined average shares outstanding 59,393,884 Less combined shares outstanding before common stock issued to PIPE Investors and exchange ratio effect 18,438,947 ----------- Pro forma adjustment to shares outstanding 40,954,937 ----------- -----------
F-9 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Avatech Solutions, Inc. We have audited the accompanying consolidated balance sheet (not presented herein) of Avatech Solutions, Inc. and Subsidiaries as of June 30, 1999, and the related consolidated statements of operations, stockholders' deficiency and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avatech Solutions, Inc. and Subsidiaries at June 30, 1999 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Baltimore, Maryland December 23, 1999 F-10 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Avatech Solutions, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Avatech Solutions, Inc. and Subsidiaries as of June 30, 2001and 2000, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avatech Solutions, Inc. and Subsidiaries as of June 30, 2001 and 2000, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. WALPERT & WOLPOFF, LLP Baltimore, Maryland October 3, 2001 (except for Note 4 for which the date is February 1, 2002) F-11 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2001 and 2000
2001 2000 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 309,621 $ 423,307 Accounts receivable, less allowance of approximately $212,000 in 2001 and $282,000 in 2000 5,123,773 4,170,134 Inventory 462,660 455,594 Prepaid expenses and other current assets 382,411 479,398 ------------ ------------ Total Current Assets 6,278,465 5,528,433 ------------ ------------ Property and Equipment Computer software and equipment 2,381,422 2,773,484 Office furniture and equipment 799,526 923,879 Leasehold improvements 191,908 213,370 ------------ ------------ 3,372,856 3,910,733 Less Accumulated depreciation and amortization 2,461,630 2,792,404 ------------ ------------ 911,226 1,118,329 ------------ ------------ Goodwill, Net of accumulated amortization of $344,000 in 2001 and $244,000 in 2000 1,108,920 1,208,875 Other assets 78,404 64,610 ------------ ------------ 1,187,324 1,273,485 ------------ ------------ Total Assets $ 8,377,015 $ 7,920,247 ============ ============
See Independent Auditors' Report and notes to consolidated financial statements. F-12 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2001 and 2000
2001 2000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities Accounts payable and accrued expenses $ 4,314,842 $ 4,633,828 Borrowings under lines-of-credit 1,916,912 1,182,998 Current portion of long-term debt 1,755,292 6,810 Deferred revenue 794,916 780,771 Other current liabilities 211,215 181,806 ------------ ------------ Total Current Liabilities 8,993,177 6,786,213 ------------ ------------ Long-Term Debt 1,216,066 2,972,303 ------------ ------------ Subordinated Long-Term Debt (including $775,000 payable to related parties) 1,592,610 1,588,772 ------------ ------------ Commitments and Contingencies - - Total Liabilities 11,801,853 11,347,288 ------------ ------------ Stockholders' Deficiency Common stock, $0.01 par value; 10,000,000 shares authorized; issued and outstanding shares 6,013,549 at June 30, 2001 and 6,038,937 at June 30, 2000 60,136 60,390 Additional paid-in capital 1,726,576 1,813,455 Accumulated deficit (5,211,550) (5,300,886) ------------ ------------ Total Stockholders' Deficiency (3,424,838) (3,427,041) ------------ ------------ Total Liabilities and Stockholders' Deficiency $ 8,377,015 $ 7,920,247 ============ ============
See Independent Auditors' Report and notes to consolidated financial statements. F-13 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Years Ended June 30, 2001, 2000 and 1999
2001 2000 1999 --------------- --------------- --------------- Revenue Product sales $ 23,546,131 $ 23,920,585 $ 28,432,471 Service revenue 6,049,275 7,519,169 6,871,010 Commission revenue 3,415,344 2,754,289 2,903,295 --------------- --------------- --------------- Total Revenue 33,010,750 34,194,043 38,206,776 --------------- --------------- --------------- Cost of Revenue Cost of product sales 16,388,742 17,267,541 20,899,471 Cost of service revenue 3,813,635 4,664,518 4,980,225 --------------- --------------- --------------- Total Cost of Revenue 20,202,377 21,932,059 25,879,696 --------------- --------------- --------------- Gross Margin 12,808,373 12,261,984 12,327,080 --------------- --------------- --------------- Other Expenses Selling, general and administrative 11,519,199 12,919,902 12,940,965 Depreciation and amortization 694,503 692,180 736,196 --------------- --------------- --------------- Total Other Expenses 12,213,702 13,612,082 13,677,161 --------------- --------------- --------------- Income/(Loss) From Operations 594,671 (1,350,098) (1,350,081) --------------- --------------- --------------- Other Income/(Expense) Interest and other income/(expense) 61,488 (61,819) (18,703) Interest expense (553,823) (641,320) (484,932) --------------- --------------- --------------- (492,335) (703,139) (503,635) --------------- --------------- --------------- Income (Loss) Before Income Taxes 102,336 (2,053,237) (1,853,716) Income tax expense 13,000 - - --------------- --------------- --------------- Net Income (Loss) $ 89,336 $ (2,053,237) $ (1,853,716) =============== =============== =============== Earnings (loss) per Common Share - Basic and Diluted $ 0.01 $ (0.34) $ (0.31) =============== =============== =============== Weighted average number of common shares outstanding - Basic and Diluted 5,995,904 6,078,374 6,038,710 =============== =============== ===============
See Independent Auditors' Reports and notes to consolidated financial statements. F-14 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Deficiency Years Ended June 30, 2001, 2000 and 1999
Common Stock ----------------------------------------------- No. of Additional Shares Par Value Paid-In Capital ------------- ------------- --------------- Balance at June 30, 1998 5,891,274 $ 58,913 $ 1,200,901 Issuance of common stock for cash 76,270 763 323,385 Issuance of common stock in connection with the 1998 Employee Stock Purchase Plan 36,789 368 132,439 Return of common stock held in escrow in connection with the acquisition of APPA Business Computers, Inc. (18,824) (188) (79,812) Issuance of warrants to purchase of 4,000 shares of common stock - - 1,240 Comprehensive loss: Net loss for 1999 - - - Other comprehensive loss - unrealized loss on available-for-sale securities - - - ------------- ------------- ------------- Total comprehensive loss - - - ------------- ------------- ------------- Balance at June 30, 1999 5,985,509 59,856 1,578,153 Issuance of common stock for cash 102,500 1,025 409,600 Issuance of common stock in connection with the 1998 Employee Stock Purchase Plan 18,810 188 67,721 Purchase of common stock from former employees (67,882) (679) (242,019) Net loss for fiscal year 2000 - - - ------------- ------------- ------------- Balance at June 30, 2000 6,038,937 60,390 1,813,455 Issuance of common stock for cash 6,176 62 26,186 Purchase of common stock from former employees (31,564) (316) (113,065) Net Income for fiscal year 2001 - - - ------------- ------------- ------------- Balance at June 30, 2001 6,013,549 $ 60,136 $ 1,726,576 ============= ============= ============= Other Comprehensive Accumulated Income Deficit Total ------------- ------------- ------------- Balance at June 30, 1998 $ 1,688 $ (1,393,933) $ (132,431) Issuance of common stock for cash - - 324,148 Issuance of common stock in connection with the 1998 Employee Stock Purchase Plan - - 132,807 Return of common stock held in escrow in connection with the acquisition of APPA Business Computers, Inc. - - (80,000) Issuance of warrants to purchase of 4,000 shares of common stock - - 1,240 Comprehensive loss: Net loss for 1999 - (1,853,716) (1,853,716) Other comprehensive loss - unrealized loss on available-for-sale securities (1,688) - (1,688) ------------- ------------- ------------- Total comprehensive loss - - (1,855,404) ------------- ------------- ------------- Balance at June 30, 1999 - (3,247,649) (1,609,640) Issuance of common stock for cash - - 410,625 Issuance of common stock in connection with the 1998 Employee Stock Purchase Plan - - 67,909 Purchase of common stock from former employees - - (242,698) Net loss for fiscal year 2000 - (2,053,237) (2,053,237) ------------- ------------- ------------- Balance at June 30, 2000 - (5,300,886) (3,427,041) Issuance of common stock for cash - - 26,248 Purchase of common stock from former employees - - (113,381) Net Income for fiscal year 2001 - 89,336 89,336 ------------- ------------- ------------- Balance at June 30, 2001 $ - $ (5,211,550) $ (3,424,838) ============= ============= =============
See Independent Auditors' Reports and notes to consolidated financial statements. F-15 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years Ended June 30, 2001, 2000 and 1999
2001 2000 1999 --------------- --------------- --------------- Cash Flows From Operating Activities Net income (loss) $ 89,336 $ (2,053,237) $ (1,853,716) Adjustments to reconcile net income (loss) to net cash (used in)/provided by operating activities: Provision for bad debts 73,893 55,367 - Depreciation and amortization 694,503 692,180 736,196 Deferred income taxes - 23,802 - Loss / (Gain) on available-for-sale securities - (2,205) 5,735 Loss on disposal of property and equipment 1,420 17,420 78,742 Amortization of debt discount charged to interest expense 2,694 3,838 4,774 Changes in operating Assets and Liabilities: Accounts receivable (1,027,531) (1,869) (491,688) Inventory (7,065) 385,182 224,543 Prepaid expenses and other current assets 96,987 437,728 (189,467) Accounts payable and accrued expenses (318,986) 295,698 (238,924) Deferred revenue 14,144 213,915 (84,168) Other current liabilities 29,410 141,401 (265,766) --------------- --------------- --------------- Net Cash (Used In)/Provided By Operating Activities (351,195) 209,220 (2,073,739) --------------- --------------- --------------- Cash Flows From Investing Activities Purchase of property and equipment (394,060) (535,161) (731,116) Proceeds from sale of property and equipment 6,343 4,436 - Proceeds from sale of available-for-sale securities - 16,807 - Purchase of Configured Systems, Inc. - net of cash acquired of $32,754 - - (367,246) --------------- --------------- --------------- Net Cash Used In Investing Activities (387,717) (513,918) (1,098,362) --------------- --------------- --------------- Cash Flows From Financing Activities Proceeds from borrowings under lines-of-credit 30,977,721 31,870,180 16,066,299 Repayments of borrowings under lines-of-credit (30,244,758) (32,571,042) (15,882,868) Proceeds from issuance of long-term debt - 137,269 3,000,000 Repayments of long-term debt (6,810) (188,894) - Proceeds from issuance of common stock 26,248 478,534 324,148 Repurchase of common stock (113,381) (242,698) - (Increase) decrease in other assets related to financing costs (13,794) 45,891 - Change in other long-term liabilities - - (37,264) --------------- --------------- --------------- Net Cash Provided By /(Used In) Financing Activities 625,226 (470,760) 3,470,315 --------------- --------------- --------------- Net (Decrease) Increase in Cash and Cash Equivalents (113,686) (775,458) 298,214 Cash and Cash Equivalents - Beginning of Year 423,307 1,198,765 900,461 --------------- --------------- --------------- Cash and Cash Equivalents - End of Year $ 309,621 $ 423,307 $ 1,198,765 =============== =============== ===============
See Independent Auditors' Reports and notes to consolidated financial statements. F-16 (1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS AND BASIS OF PRESENTATION Avatech Solutions, Inc. provides design automation software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United States. The consolidated financial statements include the accounts of Avatech Solutions, Inc. and its wholly-owed subsidiaries (collectively, the "Company"). All intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of 3 months or less when purchased to be cash equivalents. MARKETABLE SECURITIES Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value, with the change in fair value during the period included in earnings. Marketable debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. Securities not classified as either held-to-maturity or trading securities are classified as available-for-sale securities. Available-for-sale securities are recorded at fair value, with the change in fair value during the period excluded from earnings and recorded net of income taxes as a separate component of equity. Realized gains and losses and declines in market value judged to be other than temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. INVENTORY Inventory, consisting primarily of computer software and hardware purchased from the Company's major supplier, is stated at the lower of the first-in, first-out cost, or market. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation for computer equipment and office furniture and equipment is provided for by the straight-line method over estimated useful lives ranging from 3 to 7 years. Leasehold improvements are depreciated over the lesser of the lease term or the useful life of the asset using the straight-line method. F-17 (1) CONTINUED LONG-LIVED ASSETS The Company identifies and records impairment on long-lived assets, including goodwill, when events and circumstances indicate that such assets have been impaired. The Company periodically evaluates the recoverability of its long-lived assets based on expected undiscounted cash flows, and recognizes impairments, if any, based on expected discounted cash flows. At June 30, 2001, 2000 and 1999, no such impairment existed. GOODWILL AND INTANGIBLES Goodwill is the excess of the purchase price paid over the value of the identifiable net assets acquired in purchase business combinations. Amortization expense is calculated on a straight-line basis over 15 years. At each balance sheet date, the Company evaluates the period of amortization of intangible assets. The factors used in evaluating the period of amortization include: (i) current operating results, (ii) projected future operating results, and (iii) any other material factors that effect the continuity of the business. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 141, BUSINESS COMBINATIONS, and SFAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead be tested for impairment at least annually. SFAS 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. Goodwill amortization was approximately $100,000, $89,000 and $95,000 for the years ended June 30, 2001, 2000 and 1999, respectively. STOCK OPTIONS GRANTED TO EMPLOYEES SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS No.123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to account for its stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and to present pro forma earnings (loss) and per share information as though it had adopted SFAS No. 123. Under the provisions of APB Opinion No. 25, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company's common stock at the date of the grant over the amount an employee must pay to acquire the stock. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE The Company recognizes revenue in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which requires that revenue for licensing, selling, leasing, or otherwise marketing computer software be recognized when evidence of an arrangement exists, delivery of the product has occurred, collectibility of the related receivable is assured and the vendor's fee is fixed or determinable. In December 1998, the American Institute of Certified Public Accountants ("AICPA") issued SOP No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP No. 98-9 clarifies certain provisions of SOP No. 97-2. F-18 (1) CONTINUED Effective January 1, 1999, the Company adopted the provision of SOP No. 98-9. Accordingly, revenue is recognized for the multiple elements of software arrangements based upon vendor specific objective evidence of fair value for each element. Revenue from products sales, consisting primarily of computer software and hardware, is recognized upon completion of a signed contract and shipment of the products, assuming all other criteria for revenue recognition are met. Revenue from services is recognized upon performance of services. Advance payments for these services are deferred and recognized in the periods in which the services are performed. Revenue from maintenance contracts is deferred and recognized ratably over the period of the agreement. Training and consulting revenue is recognized upon completion of the training or performance of services, respectively. Commission revenue is recorded on transactions in which the Company does not take title to the product, has no risk of loss for collection, delivery, or return and has acted as an agent or broker. Receivables generally are due within 30 days. The Company does not generally require collateral from its customers. COST OF PRODUCT SALES Cost of product sales includes the costs of purchasing software and hardware from suppliers and the associated shipping and handling costs. COST OF SERVICE REVENUE Cost of service revenue consists primarily of direct employee compensation and related benefits, the cost of subcontracted services and direct expenses billable to customers. Cost of service revenue does not include an allocation of overhead costs. WARRANTY COSTS The Company does not provide for warranty costs for its products as such costs are provided for by the manufacturer of the products. ADVERTISING COSTS Costs incurred for producing and communicating advertisements are expensed as incurred and included in selling, general and administrative expenses in the accompanying statements of operations. Advertising expenses approximated $412,000, $399,000 and $208,000 for years ended June 30, 2001, 2000 and 1999, respectively. BUSINESS SEGMENT REPORTING The Company provides design automation software, hardware, training, technical support and professional services through locations throughout the United States. The Company does not operate more than one business segment. INCOME TAXES Income tax expense includes income taxes currently payable and deferred taxes arising from temporary differences between financial reporting and income tax bases of assets and liabilities. They are measured using the enacted tax rates and laws that will be effect when the differences are expected to reverse. CONCENTRATION OF CREDIT RISK The Company maintains cash in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses on these accounts. F-19 (1) CONTINUED EARNINGS (LOSS) PER SHARE OF COMMON STOCK Basic earnings (loss) per common share ("EPS") is computed as net earnings (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that would occur from common shares issuable through stock-based compensation, including stock options, restricted stock awards, warrants and convertible securities. Potential common shares have not been included for the years ended June 30, 2001, 2000 and 1999, since the effect would be antidilutive. OTHER RECENTLY ISSUED STANDARDS In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("Statement 144"). Statement 144 supercedes Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND for LONG-LIVED ASSETS TO BE DISPOSED OF ("Statement 121"), and provides a single accounting model for long-lived assets to be disposed of. Statement 144 retains the requirements of Statement 121 to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted future cash flows and to measure the impairment loss as the difference between the carrying amount and the fair value of the asset. Statement 144 does not apply to goodwill and other intangible assets that are not amortized. The Company will apply these new rules on accounting for the impairment or disposal of long-lived assets in the current fiscal year. The effect of adoption is not expected to have a material effect on the Company's consolidated financial position or results of operations. (2) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The Company paid interest of approximately $553,000, $629,000 and $340,000 in 2001, 2000 and 1999, respectively. (3) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following:
----------------------------------- June 30, ----------------------------------- 2001 2000 ---------------- --------------- Prepaid Insurance $ 108,139 $ 94,196 Other Current Assets (none in excess of 5% of total current assets) 274,272 385,202 ---------------- --------------- $ 382,411 $ 479,398 ================ ===============
(4) ACQUISITIONS POOLING-OF-INTERESTS On September 17, 1998, the Company acquired by merger all of the outstanding stock of OrthoCADD Services, Inc. in exchange for 231,294 shares of voting common stock. The acquisition was accounting for as a pooling-of-interests and accordingly, the Company's consolidated financial statements for periods prior to the merger were restated to include the combined results of operations, financial position and cash flows of OrthoCADD Services, Inc. F-20 (4) CONTINUED The revenues and net loss of OrthoCADD Services, Inc. from July 1, 1998, through September 17,1998, were approximately $175,000 and $(36,000), respectively. Effective with the combination, OrthoCADD Services, Inc. changed its name to Avatech of Connecticut, Inc. and provides design automation software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions in Connecticut. PURCHASE Effective August 6, 1998, the Company acquired all of the outstanding stock of New Jersey-based Configured Systems, Inc. in a business combination accounted for as a purchase. Configured Systems, Inc. provides design automation software, hardware, training, technical support and professional services to corporations and government agencies in New Jersey. The total purchase price of Configured Systems, Inc. consisted of $400,000 cash. Goodwill of approximately $366,000 was being amortized over its estimated useful life of 15 years. Effective with the acquisition, Configured Systems, Inc. changed its name to Avatech of New Jersey, Inc. The results of operations of Avatech of New Jersey, Inc. for the period August 6, 1998, through June 30, 1999, are included in the accompanying 1999 consolidated statement of operations. (5) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accrued expenses consist of the following:
----------------------------------- June 30, ----------------------------------- 2001 2000 ---------------- --------------- Accounts payable $ 3,413,180 $ 3,794,386 Accrued payroll 262,457 318,923 State taxes payable 152,869 106,772 Other (none in excess of 5% of total current liabilities) 486,336 413,747 ---------------- --------------- $ 4,314,842 $ 4,633,828 ================ ===============
(6) BORROWINGS UNDER LINE-OF-CREDIT On March 3, 1999, the Company entered into a revolving line-of-credit agreement with a bank providing for a borrowing limit of $3,000,000, subject to certain limitations based on collateral. Borrowings under this line-of-credit, bearing interest at either the London InterBank Offering Rate (LIBOR) Market Index Rate plus 3.0% or the bank's prime rate plus 0.5%, as determined under the agreement, were due on March 2, 2000. Borrowings under this line of credit were secured by the assets of the Company and by the joint and several personal guaranties of certain officers and stockholders of the Company, which were limited to the aggregate amount of $250,000. In connection with this line of credit, the Company was required to comply with certain financial and non-financial covenants. In addition, the bank had the right to restrict any prepayment of other indebtedness by the Company. As of June 30, 2000 and 1999, the Company was in technical default of this agreement, as it was not in compliance with the financial covenants. Subsequent to June 30, 1999, the Company received a waiver from the bank on the violation of the financial covenants for the periods ending June 30, 1999 and September 30, 1999. In connection with this waiver, the lender and the Company modified the financial covenants to provide for likely future compliance based on expected future financial results. Effective June 30, 2000, the Company entered into a Forbearance and Modification Agreement reducing the line-of-credit to a maximum of $2,500,000. This line-of-credit was subsequently paid off in conjunction with debt restructuring in October 2000. The balance outstanding under this line-of-credit was $1,182,998 at June 30, 2000. F-21 (6) CONTINUED On October 25, 2000, the Company entered into a revolving line-of-credit agreement which expires October 30, 2003, but is payable within 60 days of demand by the lender with a financial institution under which the Company may borrow up to $4,000,000, subject to certain limitations based on collateral. Borrowings under this line-of-credit bear interest at prime rate plus 1.5%, as determined under the agreement. The credit extended under this financing agreement is limited to the lesser of $4 million or 75% of the Company's aggregate outstanding eligible accounts receivable. Borrowings under this line-of-credit are secured by the assets of the Company. In addition, the bank has the right to restrict any prepayment of other indebtedness by the Company. The balance outstanding under this line-of-credit was $1,916,912 at June 30, 2001. Because the interest rate adjusts with changes in the prime rate, the fair value of the borrowings under the line of credit was equal to the carrying amount. (7) LONG-TERM DEBT AND WARRANTS On January 25, 1999, the Company entered into a loan agreement with a significant supplier under which it borrowed approximately $3,000,000. Effective December 17, 1999, the loan terms were modified to provide for quarterly payments of interest only through September 30, 2000, followed by quarterly payments of principal and interest of $511,509 beginning December 31, 2000. The terms were subsequently modified on July 27, 2000, to provide for quarterly interest only payments through September 30, 2001, followed by quarterly payments of principal and interest of $621,311 beginning December 31, 2001. The amended loan matures December 31, 2002, and bears interest at 6.5% per annum. This note is secured by all assets of the Company, as defined in the security agreement, and is subordinate to the obligations of the Company under its line-of-credit agreement with the financial institution (see Note 6). The loan agreement requires the Company to comply with certain financial and non-financial covenants. The Company was in default, as it was not in compliance with these covenants at June 30, 2001 and 2000. Additionally, as of the report date, the Company was in default on a principal payment due December 31, 2001. However, as this debt is subordinated to the revolving line-of-credit agreement outlined in Note 6, the holder of this note cannot call this note or force the Company to make payments on the debt. The Company continues to negotiate with this supplier to restructure this debt to include more favorable payment terms. At June 30, 2001 and 2000, the balance outstanding under this loan agreement was $2,960,646, of which $1,747,908 and $-0-, respectively is classified as current. Additionally, the Company issued $1,600,000 of 10% subordinated notes with attached nontransferable stock purchase warrants during 1998 and 1999. The notes bear simple interest at the rate of 10% per annum until all principal and accrued and unpaid interest has been paid. Interest only is payable quarterly until maturity or prepayment. The notes mature on various dates between March 2003 and June 2003. The notes may not be prepaid by the Company without the holder's consent prior to the second anniversary of their date of issuance. The notes are fully subordinated to the payment of senior indebtedness (line-of-credit) of the Company. Of the total subordinated notes, $775,000 were issued to related parties. The fair value of the long-term debt approximates its carrying value based on interest rates available to the Company for similar loans. The stock purchase warrants issued in connection with the 10% subordinated notes expire 5 years after their date of issuance. They are detachable from the notes, but are not transferable by the holder for any reason. Each $25,000 principal amount of notes is accompanied by one stock purchase warrant entitling the holder to purchase, prior to the expiration date of the warrants, up to 1,000 shares of the Company's common stock at a price of $5.75 per share. The number of shares or exercise price will be adjusted in the event of any stock dividend, stock splits, or recapitalization of the Company. F-22 (7) CONTINUED The warrants issued in conjunction with the 10% subordinated notes were valued at $19,840, an estimate based on a valuation using a generally accepted warrant valuation methodology. The estimated value of the warrants was recorded as additional paid-in capital and the notes have been recorded net of a discount of $19,840. At June 30, 2001 and 2000, the balance outstanding under the 10% subordinates notes was $1,592,610 and $1,588,772, respectively. During 1999, the Company converted $100,000 of other outstanding indebtedness to 10% Subordinated Notes and issued stock purchase warrants to purchase 4,000 shares of common stock. The aggregate maturities of long-term debt are as follows: Year Ending June 30, 2002 $ 1,755,292 2003 2,808,676 ---------------- $ 4,563,968 ================
(8) EMPLOYEE STOCK PLANS Effective April 2, 1998, the Company adopted the Avatech Solutions, Inc. 1998 Stock Option Plan (revised in 2000) which is administered by the Board of Directors. The Plan provides for the granting of either qualified or non-qualified stock options to purchase an aggregate of up to 500,000 shares of common stock to eligible employees, officers, and directors of the Company. Transactions relating to stock options are as follows:
Number of Shares and Options Exercisable -------------------- Balance at July 1, 1998 30,000 Granted 168,525 Canceled (26,805) -------------------- Balance at June 30, 1999 171,720 Granted 174,440 Canceled (71,860) -------------------- Balance at June 30, 2000 274,300 Granted 176,355 Canceled (51,470) -------------------- Balance at June 30, 2001 399,185 ====================
The options granted under this plan vest in three equal installments on the anniversary date of grant over a three-year period. The 399,185 options outstanding at June 30, 2001 were issued at an exercise price of $4.25 and have a weighted-average remaining contractual life of 8.8 years. Of the total options outstanding, 186,489 are exercisable at June 30, 2001. F-23 (8) CONTINUED The Company has elected, in accordance with the provisions of SFAS No. 123, to apply the current accounting rules under APB Opinion No. 25 and related interpretations in accounting for stock options and accordingly, has presented the disclosure-only information as required by SFAS No. 123. Had the Company elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS No. 123, the net income and per share information would approximate the pro forma amounts shown in the table below:
Year Ended June 30, 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------- Net income (loss) - as reported $ 89,336 $(2,053,237) $(1,853,716) ----------------------------------------------------------------------------------------------------------------- Net (loss) income - pro forma $ (99,456) $(2,163,510) $(1,894,701) ----------------------------------------------------------------------------------------------------------------- Basic and diluted net income (loss) per common share - as reported $ 0.01 $ (0.34) $ (0.31) ----------------------------------------------------------------------------------------------------------------- Basic and diluted net (loss) per common share - pro forma $ (0.02) $ (0.36) $ (0.31) -----------------------------------------------------------------------------------------------------------------
The fair value of options granted (which is amortized to expense over the option vesting period in determining the pro forma impact) is estimated on the date of grant using the minimum value method of Black-Scholes option-pricing model, which assumes no volatility, with the following weighted-average assumptions:
Year Ended June 30, 2001 2000 1999 ---------------------------------------------------------------- Expected life of options 5 Years 5 Years 5 Years ---------------------------------------------------------------- Risk-free interest rate 5.21% 5.5% 5.5% ---------------------------------------------------------------- Expected dividend yield 0% 0% 0% ----------------------------------------------------------------
The weighted-average fair value of options granted during the years is as follows:
Year Ended June 30, 2001 2000 1999 -------------------------------------------------------------------------- Fair value of each option granted $ 0.95 $ 1.18 $ 1.02 Total number of options granted 176,355 174,440 168,525 -------------------------------------------------------------------------- TOTAL FAIR VALUE OF ALL OPTIONS GRANTED $ 167,537 $ 205,839 $ 171,896 ==========================================================================
In accordance with SFAS No. 123, the weighted-average fair value of stock options granted is based on the theoretical statistical model using the preceding Black-Scholes assumptions. In actuality, because the Company's stock options do not trade on a secondary exchange, employees can receive no value or derive any benefit from holding stock options under these arrangements without an increase in the market price of the Company's common stock. Such an increase in stock price would benefit all stockholders commensurately. Effective May 1, 1998, the Company adopted the 1998 Employee Stock Purchase Plan for all employees meeting certain eligibility requirements. Under the Plan, employees may purchase shares of the Company's common stock, subject to certain limitations, at 85% of its market value as determined by the Board of Directors. Purchases are limited to 10% of an employee's eligible compensation. A total of 150,000 shares are available for sale to employees under this Plan. The Board of Directors authorized the suspension of this Plan in March 2000. During 2000, the Company sold approximately 16,400 shares to employees under this Plan. F-24 (8) CONTINUED At June 30, 2001, the Company has reserved 463,185 shares of common stock for future issuances upon the exercise of stock options granted of 399,185 under the 1998 Stock Option Plan and 64,000 shares of common stock issuable upon the exercise of outstanding warrants. (9) INCOME TAXES Significant components of the Company's deferred tax assets and liabilities at June 30 are as follows:
2001 2000 ---------------- ----------------- Deferred Tax Assets Net operating loss carryforward $ 1,688,082 $ 1,777,124 Allowance for doubtful accounts 81,974 52,852 Accrued vacation pay 1,822 13,834 Book over tax depreciation 76,571 59,080 ---------------- ----------------- Total Deferred Tax Assets 1,848,449 1,902,890 Valuation Allowance for Net Deferred Tax Assets (1,848,449) (1,902,890) ---------------- ----------------- Net Deferred Tax Assets $ - $ - ================ =================
A valuation allowance of 100% of the deferred income tax asset had been provided at June 30, 2001 and 2000, due to the uncertainty of future realization of net operating loss carry forwards. The Company's provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate as follows for the years ended June 30:
2001 2000 1999 ---------- ---------- ---------- Expected federal income tax (benefit) at 34% $ 30,374 $ (698,100) $ (630,263) Expenses not deductible for tax purposes 26,879 47,419 100,326 State income taxes, net of federal benefit 8,580 (94,860) (85,642) Change in valuation allowance for deferred taxes (54,441) 735,900 587,093 Effect of pre-merger Subchapter S Corporation Earnings taxed directly to shareholders - - 28,486 Other 1,608 9,641 - ---------- ---------- ---------- $ 13,000 $ - $ - ========== ========== ==========
At June 30, 2001, the Company had net operating loss carryforwards totaling approximately $4,400,000 which will begin to expire in 2011. Certain net operating loss carryforwards at June 30, 2001, are related to subsidiaries of the Company, and are available only to offset future taxable income of those subsidiaries. There was no income tax expense/(benefit) for the years ended June 30, 2000 and 1999. In fiscal 2001, $89,042 of the net operating loss carryforward was used to offset taxable income. F-25 (10) COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases certain office space and equipment under noncancellable operating leases that expire in various years through 2004. The Company also leases one office location from an entity controlled by a stockholder under a noncancellable operating lease, which expires in 2003. Future minimum payments under all noncancellable operating leases with initial terms of 1 year or more consisted of the following at June 30, 2001:
Related Party Other Total ----------------- ---------------- ----------------- Year Ended June 30, 2002 $ 78,328 $ 945,242 $ 1,023,570 2003 39,164 759,025 798,189 2004 - 437,302 437,302 2005 - 104,673 104,673 2006 - 25,515 25,515 ----------------- ---------------- ----------------- Total Minimum Lease Payments $ 117,492 $ 2,271,757 $ 2,389,249 ================= ================ =================
Rent expense consisted of the following for the years ended June 30:
2001 2000 1999 -------------- -------------- -------------- Office Space $ 1,066,818 $ 1,009,056 $ 1,000,487 Equipment 69,132 99,915 80,930 -------------- -------------- -------------- $ 1,135,950 $ 1,108,971 $ 1,081,417 ============== ============== ==============
Rent expense for the years ended June 30, 2001, 2000 and 1999 included amounts paid to related parties of approximately $83,000, $82,000 and $78,000, respectively. AGREEMENTS WITH EXECUTIVES The Company has entered into agreements with three executives that provide for payments of eighteen months of salary and immediate vesting of all stock options not previously vested upon termination of the executive. At June 30, 2001, the total commitment was approximately $500,000. (11) EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS Effective January 1, 1998, the Company adopted the Avatech Solutions, Inc. 401(k) Retirement Savings Plan and Trust (the "Plan"). The Plan is a defined contribution plan which covers substantially all employees of the Company, or its wholly-owned subsidiaries, who have attained age 21 and have completed 6 months of service. Participants may elect to contribute from 1% to 15% of eligible annual compensation to the Plan. Maximum salary deferrals are currently $10,000 per year. The Company will match 25% of the participant salary deferrals up to 6% of a participant's compensation for all participants employed on the last day of the Plan year. The Company may also make discretionary profit-sharing contributions to the Plan for all participants who are employed on the last day of the Plan year. The total amount recorded by the Company as expense during the years ended June 30, 2001, 2000 and 1999, was approximately $79,000, $86,000 and $68,000, respectively. F-26 (11) CONTINUED Effective February 1, 1998, the Company adopted the 1998 Incentive and Deferred Income Program, which provides awards to substantially all employees of the Company. Amounts credited to the incentive compensation fund are $50,000 per quarter if quarterly contribution targets, as defined by the plan, are met. No amounts were charged to expense under this plan in 2001, 2000 and 1999. In February 2000, the Board of Directors approved the termination of this Plan effective January 15, 2001. Under this plan of termination, balances due to participants were paid in cash during the fiscal years ended June 30, 2001 and 2000. (12) SIGNIFICANT SUPPLIER Approximately 87%, 80% and 70% of the Company purchases for the years ended June 30, 2001, 2000 and 1999, respectively, were from one vendor and approximately 85% and 79% of accounts payable at June 30, 2001 and 2000, respectively, were due to this vendor. (13) LIQUIDITY AND CAPITAL RESOURCES For the year ended June 30, 2001, the Company recorded net income of approximately $89,000 compared to a net loss of approximately $2.1 million for the year ended June 30, 2000. Management has implemented various cost containment efforts, which contributed significantly to the improvement in earnings. At June 30, 2001, the Company had negative working capital and a stockholders' deficit of $3.4 million. Management believes that it continues to control expenses, which it believes, in conjunction with potential revenue growth, will result in improved profitability and an increase in working capital. The Company's management continues to seek new investors for the infusion of additional capital to support existing operations. Management believes that existing financing arrangements and improving operating results will allow it to meet its obligations in the ordinary course of business for the foreseeable future and continue as a going concern. F-27 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheet March 31, 2002 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 175,264 Accounts receivable, less allowance of approximately $95,000 in 2002 3,993,023 Inventory 375,726 Prepaid expenses and other current assets 247,873 ------------- Total Current Assets 4,791,886 ------------- Property and Equipment Computer software and equipment 2,555,512 Office furniture and equipment 894,173 Leasehold improvements 195,912 ------------- 3,645,597 Less: Accumulated depreciation and amortization 2,829,706 ------------- 815,891 ------------- Goodwill, Net of accumulated amortization 752,920 Other assets 79,274 ------------- 832,194 ------------- Total Assets $ 6,439,971 =============
F-28 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Balance Sheet March 31, 2002 (Unaudited) LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities Accounts payable and accrued expenses $ 3,888,668 Borrowings under lines-of-credit 903,870 Current portion of long-term debt 3,676,879 Deferred revenue 608,166 Other current liabilities 237,641 ------------- Total Current Liabilities 9,315,224 ------------- Long-Term Debt 41,813 ------------- Subordinated Long-Term Debt 924,349 ------------- Total Liabilities 10,281,386 ------------- Commitments and Contingencies Stockholders' Deficiency Common stock, $0.01 par value; 10,000,000 shares authorized; issued and outstanding shares 5,995,402 59,955 Additional paid-in capital 1,661,228 Accumulated deficit (5,562,598) ------------- Total Stockholders' Deficiency (3,841,415) ------------- Total Liabilities and Stockholders' Deficiency $ 6,439,971 =============
F-29 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Operations Nine-Month Periods Ended March 31, 2002 and 2001 (Unaudited)
2002 2001 ------------- ------------- Revenue Product sales $ 17,682,069 $ 17,418,388 Service revenues 4,606,581 4,454,214 Commission revenue 2,946,221 2,542,985 ------------- ------------- Total Revenue 25,234,871 24,415,587 ------------- ------------- Cost of Revenue Cost of product sales 11,754,730 11,896,084 Cost of service revenues 3,227,757 3,487,621 ------------- ------------- Total Cost of Revenue 14,982,487 15,383,705 ------------- ------------- Gross Margin 10,252,384 9,031,882 ------------- ------------- Other Expenses Selling, general and administrative 9,476,243 8,146,427 Depreciation and amortization 503,472 537,796 Goodwill impairment 283,000 -- ------------- ------------- Total Other Expenses 10,262,715 8,684,223 ------------- ------------- Loss/Income From Operations (10,331) 347,659 ------------- ------------- Other Income/(Expense) Interest and other income/(expense) 47,699 54,884 Interest expense (348,416) (428,255) ------------- ------------- (300,717) (373,371) ------------- ------------- Loss Before Income Taxes (311,048) (25,712) Income Tax Expense 40,000 11,000 ------------- ------------- Net Loss $ (351,048) $ (36,712) ============= ============= Loss per Common Share - Basic and diluted $ (0.06) $ (0.01) ============= ============= Weighted average number of common shares outstanding - Basic and diluted 6,005,021 5,989,890 ============= =============
F-30 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Deficiency Nine-Month Period Ended March 31, 2002
Common Stock -------------------------------- Additional Number Paid- Accumulated of Shares Par Value In Capital Deficit Total ------------- ------------ ------------- -------------- ------------- (Unaudited) Balance at June 30, 2001 6,013,549 $ 60,136 $ 1,726,576 $ (5,211,550) $ (3,424,838) Purchase of common stock from former employees (18,147) (181) (65,348) - (65,529) Net loss for nine-month period ended March 31, 2002 - - - (351,048) (351,048) ------------- ------------ ------------- -------------- ------------- Balance at March 31, 2002 5,995,402 $ 59,955 $ 1,661,228 $ (5,562,598) $ (3,841,415) ============= ============ ============= ============== =============
F-31 AVATECH SOLUTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine-Month Period Ended March 31, 2002 and 2001 (Unaudited)
2002 2001 ----------------- ----------------- Cash Flows From Operating Activities Net loss $ (351,048) $ (36,712) Adjustments to reconcile net loss to net cash provided by / (used in) operating activities: Provision for bad debts (117,259) 144,350 Goodwill impairment 283,000 - Depreciation and amortization 503,472 537,796 Loss on disposal of property and equipment 7,266 1,079 Amortization of debt discount charged to interest expense 2,883 2,883 Changes in operating Assets and Liabilities: Accounts receivable 1,248,009 (207,439) Inventory 86,934 23,112 Prepaid expenses and other current assets 134,538 37,032 Accounts payable and accrued expenses (426,174) (420,420) Deferred revenue (186,750) (158,606) Other current liabilities 26,426 4,920 ----------------- ----------------- Net Cash Provided By / (Used In) Operating Activities 1,211,297 (72,005) ----------------- ----------------- Cash Flows From Investing Activities Purchase of property and equipment (210,155) (221,640) Proceeds from sale of property and equipment 10,890 6,343 ----------------- ----------------- Net Cash Used In Investing Activities (199,265) (215,297) ----------------- ----------------- Cash Flows From Financing Activities Proceeds from borrowings under lines-of-credit 23,803,690 22,946,149 Repayments of borrowings under lines-of-credit (24,816,732) (22,231,556) Repayments of long-term debt (41,884) (5,058) Proceeds from issuance of voting common stock - 22,296 Repurchase of voting common stock (65,529) (109,809) (Increase) in other assets related to financing costs (25,934) (13,794) ----------------- ----------------- Net Cash (Used In)/Provided By Financing Activities (1,146,389) 608,228 ----------------- ----------------- Net (Decrease)/Increase in Cash and Cash Equivalents (134,357) 320,926 Cash and Cash Equivalents - Beginning of Period 309,621 423,306 ----------------- ----------------- Cash and Cash Equivalents - End of Period $ 175,264 $ 744,232 ================= ================= Supplemental Disclosures of Cash Flow Information Cash paid during the period for: Interest $ 352,041 $ 428,101 ================= ================= Income Taxes $ 39,959 $ 10,291 ================= ================= Noncash Investing and Financing Activities Purchase of equipment under capital lease $ 118,074 $ - ================= =================
F-32 (1) BASIS OF PRESENTATION The unaudited interim financial information as of March 31, 2002 and for the nine months ended March 31, 2002 and 2001 has been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to article 10 of Regulation S-X. In the opinion of management such information contain all adjustments (consisting only of those of a normal recurring nature) necessary for fair presentation of Avatech Solutions, Inc. and its wholly-owned subsidiaries (collectively, the "Company") for such periods. Results of operations for the nine-month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended June 30, 2002. See the Company's year-end audited financial statements as of June 30, 2001 and 2000 and for the years ended June 30, 2001, 2000 and 1999 for additional disclosures relating to the Company's consolidated financial statements. (2) LIQUIDITY AND RISKS AND UNCERTAINTIES At March 31, 2002, the Company has a deficiency of working capital of $4,523,338 and a stockholders' deficiency of $3,841,415. The Company reported net losses of $351,048, $2,053,237 and $1,853,716 for the nine-month period ended March 31, 2002 and the years ended June 30, 2000 and 1999, respectively. As described more fully in Note 6 to the Company's June 30, 2001 financial statements, the Company's current liabilities include borrowings from a lender under a revolving line of credit that expires in October 2003, but is payable within 60 days of demand by the lender. The balance under this line of credit at March 31, 2002 was $903,870. The Company also has outstanding borrowings from a supplier/lender in the amount of $2,960,646 at March 31, 2002. As described more fully in Note 7 to the Company's 2001 financial statements, the Company is in default of certain financial covenants and payment provisions of the supplier lending arrangement. As a condition to completion of the proposed merger with PlanetCAD, the supplier/lender will extinguish Avatech's $3.0 million obligation for a cash payment of $1.0 million at the merger closing. Because of the demand provisions of these financing arrangements, and uncertainties surrounding the ability of the Company to obtain the needed cash if the loans were required to be repaid in the near term, there is substantial doubt about the Company's ability to continue as a going concern if the lenders exercise their demand repayment rights under the agreements. Although management cannot control the actions of these lenders, it believes that they will not demand repayment of outstanding borrowings in the next 12 months. In addition, upon consummation of the merger contemplated in this proxy statement/prospectus, the Company expects to have a more favorable working capital position. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. (3) INVENTORY Inventory, consisting primarily of computer software and hardware purchased from suppliers, is stated at the lower of first-in, first-out, cost, or tmarket. (4) INCOME TAXES The income tax provision recorded on the accompanying consolidated statement of operations represents state income taxes related to certain of the Company's subsidiaries. F-33 (5) RECENTLY ISSUED STANDARDS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 141, BUSINESS COMBINATIONS, and SFAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill SFAS 142 requires that goodwill and certain intangibles no longer be amortized, but instead be tested for impairment at least annually. SFAS 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. The Company will be required to adopt SFAS 142 effective for fiscal year ending June 30, 2003. A determination of any goodwill impairment resulting from this adoption cannot be determined at this time. (6) GOODWILL The Company performed an evaluation of goodwill consistent with the guidelines of SFAS 121 and has recorded an impairment of goodwill of $283,000 for the nine-month period ended March 31, 2002. (7) PER SHARE CALCULATIONS Basic loss per share is computed as net loss divided by the weighted-average number of common shares outstanding for the period. Potential common shares have not been included in diluted loss per share since the effect would be antidilutive. (8) EMPLOYEE STOCK PLAN During the nine-month period ended March 31, 2002, the Company issued options to eligible employees under its 1998 Stock Option Plan (revised in 2000) to purchase 209,080 shares of common stock at an exercise price of $4.25 per share. (9) LITIGATION On May 21, 2002, a former employee filed a lawsuit against Avatech alleging breach of employment contract in connection with the former employee's dismissal. The lawsuit alleges damages in the amount of $187,500. Management believes that the lawsuit is without merit. (10) SUBSEQUENT EVENTS On May 1, 2002, an agreement was executed whereby PlanetCad Inc. ("PlanetCad") intends to acquire all the outstanding shares of the Company in exchange for newly issued shares of PlanetCad. After the anticipated transaction, shareholders of the Company will own approximately 75% of PlanetCad. For accounting purposes, the acquisition will be treated as a reverse acquisition with the Company as the acquiror. An aggregate of up to $1,600,000 of the 10% subordinated notes will be exchanged for shares of convertible preferred stock equal to the amount of the note exchanged divided by the closing per share price of PlanetCAD's common stock on the effective date of the merger (but not less than $0.25 or more than $0.75). The convertible preferred common stock is convertible into shares of common stock at the rate of 1.1 shares of common stock for each share of preferred stock. As of May 28, 2002, the Company has received commitments to exchange $800,000 of 10% subordinated notes for convertible preferred stock. F-34 ANNEX A AGREEMENT AND PLAN OF MERGER AMONG PLANETCAD INC., A DELAWARE CORPORATION ("PARENT"), RAVEN ACQUISITION CORPORATION, A DELAWARE CORPORATION ("SUB") AND AVATECH SOLUTIONS, INC., A DELAWARE CORPORATION ("COMPANY") DATED AS OF MAY 1, 2002 TABLE OF CONTENTS
PAGE -------- ARTICLE 1 THE MERGER........................................................... 2 Section 1.1 The Merger.................................................. 2 Section 1.2 Effective Time.............................................. 2 Section 1.3 Effects of the Merger....................................... 2 Section 1.4 Charter and Bylaws; Directors and Officers.................. 2 Section 1.5 Conversion of Securities.................................... 2 Section 1.6 Parent to Make Certificates Available....................... 3 Section 1.7 Dividends; Transfer Taxes; Withholding...................... 4 Section 1.8 No Fractional Securities.................................... 4 Section 1.9 Return of Exchange Fund..................................... 5 Section 1.10 No Further Ownership Rights in Company Common Stock......... 5 Section 1.11 Closing of Company Transfer Books........................... 5 Section 1.12 Lost Certificates........................................... 5 Section 1.13 Dissenters' Rights.......................................... 5 Section 1.14 Further Assurances.......................................... 6 Section 1.15 Closing..................................................... 6 ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB..................... 7 Section 2.1 Organization, Standing and Power............................ 7 Section 2.2 Capital Structure........................................... 7 Section 2.3 Authority................................................... 8 Section 2.4 Consents and Approvals; No Violation........................ 8 Section 2.5 Parent Common Stock to be Issued in the Merger.............. 9 Section 2.6 SEC Documents and Financial Statements...................... 9 Section 2.7 Absence of Certain Changes or Events........................ 10 Section 2.8 Reorganization.............................................. 10 Section 2.9 Permits and Compliance...................................... 10 Section 2.10 Tax Matters................................................. 10 Section 2.11 Actions and Proceedings..................................... 12 Section 2.12 Intellectual Property....................................... 12 Section 2.13 Environmental Matters....................................... 12 Section 2.14 Suppliers and Distributors.................................. 13 Section 2.15 Insurance................................................... 14 Section 2.16 Transactions with Affiliates................................ 14 Section 2.17 Brokers..................................................... 14 Section 2.18 Required Vote of Parent Stockholders........................ 14 Section 2.19 Labor Matters............................................... 14 Section 2.20 Title to and Sufficiency of Assets.......................... 14 Section 2.21 Litigation.................................................. 15 Section 2.22 Certain Agreements.......................................... 15 Section 2.23 ERISA....................................................... 16
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PAGE -------- ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ 17 Section 3.1 Organization, Standing and Power............................ 17 Section 3.2 Capital Structure........................................... 17 Section 3.3 Authority................................................... 18 Section 3.4 Consents and Approvals; No Violation........................ 18 Section 3.5 Financial Statements........................................ 19 Section 3.6 Absence of Certain Changes or Events........................ 20 Section 3.7 Permits and Compliance...................................... 20 Section 3.8 Tax Matters................................................. 20 Section 3.9 Actions and Proceedings..................................... 21 Section 3.10 Certain Agreements.......................................... 21 Section 3.11 ERISA....................................................... 22 Section 3.12 Labor Matters............................................... 23 Section 3.13 Intellectual Property....................................... 23 Section 3.14 Required Vote of Company Stockholders....................... 23 Section 3.15 Reorganization.............................................. 23 Section 3.16 Environmental Matters....................................... 24 Section 3.17 Insurance................................................... 24 Section 3.18 Transactions with Affiliates................................ 25 Section 3.19 Title to and Sufficiency of Assets.......................... 25 Section 3.20 Brokers..................................................... 25 Section 3.21 Litigation.................................................. 25 Section 3.22 Suppliers and Distributors.................................. 25 ARTICLE 4 COVENANTS RELATING TO CONDUCT OF BUSINESS............................ 27 Section 4.1 Conduct of Business Pending the Merger...................... 27 Section 4.2 Cooperation................................................. 27 Section 4.3 No Solicitation............................................. 28 Section 4.4 Reorganization.............................................. 28 ARTICLE 5 ADDITIONAL AGREEMENTS................................................ 29 Section 5.1 Stockholder Meetings........................................ 29 Section 5.2 Preparation of the Registration Statement and the Proxy 29 Statement................................................... Section 5.3 Access to Information; Due Diligence........................ 31 Section 5.4 Rule 145 Letters............................................ 31 Section 5.5 Stock Exchange Listing...................................... 31 Section 5.6 Fees and Expenses........................................... 31 Section 5.7 Company Stock Options....................................... 32 Section 5.8 Reverse Stock Split......................................... 32 Section 5.9 Efforts Required............................................ 32 Section 5.10 Public Announcements........................................ 32 Section 5.11 Indemnification; Directors and Officers Insurance........... 32 Section 5.12 Board of Directors, Officers and Employees of Parent........ 33 Section 5.13 Notification of Certain Matters............................. 33 Section 5.14 Lock-Up Agreements.......................................... 33 Section 5.15 Standstill Agreement........................................ 34
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PAGE -------- ARTICLE 6 CONDITIONS PRECEDENT TO THE MERGER................................... 35 Section 6.1 Conditions to Each Party's Obligation to Effect the 35 Merger...................................................... Section 6.2 Conditions to Obligation of the Company to Effect the 36 Merger...................................................... Section 6.3 Conditions to Obligations of Parent and Sub to Effect the 36 Merger...................................................... ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER.................................... 38 Section 7.1 Termination................................................. 38 Section 7.2 Effect of Termination....................................... 39 Section 7.3 Amendment................................................... 39 Section 7.4 Waiver...................................................... 39 ARTICLE 8 GENERAL PROVISIONS................................................... 41 Section 8.1 Notices..................................................... 41 Section 8.2 Interpretation.............................................. 41 Section 8.3 Counterparts................................................ 41 Section 8.4 Entire Agreement; No Third-Party Beneficiaries.............. 42 Section 8.5 Governing Law............................................... 42 Section 8.6 Assignment.................................................. 42 Section 8.7 Severability................................................ 42 Section 8.8 Enforcement of this Agreement............................... 42 Section 8.9 Defined Terms............................................... 43
iii AGREEMENT AND PLAN OF MERGER This AGREEMENT AND PLAN OF MERGER, dated as of May 1, 2002 (this "AGREEMENT"), is among PlanetCAD Inc., a Delaware corporation ("PARENT"), Raven Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent ("SUB"), and Avatech Solutions, Inc., a Delaware corporation (the "COMPANY") (Sub and the Company being hereinafter collectively referred to as the "CONSTITUENT CORPORATIONS"). All capitalized terms used herein shall have the definitions set forth herein. RECITALS: A. The respective Boards of Directors of Parent, Sub and the Company have approved and declared advisable the merger of Sub with and into the Company upon the terms and subject to the conditions of this Agreement (the "MERGER"); B. The respective Boards of Directors of Parent and the Company have determined that the Merger is in the best interests of their respective corporations and stockholders; and C. For federal income tax purposes, it is intended by the parties hereto that the Merger qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "CODE"), and that by executing this Agreement, the parties intend to adopt a plan of reorganization within the meaning of Section 368(a) of the Code and the regulations thereunder. AGREEMENT: NOW, THEREFORE, in consideration of the premises, representations, warranties and agreements herein contained, the parties agree as follows: 1 ARTICLE 1 THE MERGER Section 1.1 THE MERGER. Upon the terms and subject to the conditions hereof, and in accordance with the General Corporation Law of the State of Delaware (the "DGCL"), Sub shall be merged with and into the Company at the Effective Time (as defined in Section 1.2). Following the Merger, the separate corporate existence of Sub shall cease and the Company shall continue as the surviving corporation (the Company shall sometimes hereinafter be referred to as the "SURVIVING CORPORATION") and as a wholly-owned subsidiary of Parent. Section 1.2 EFFECTIVE TIME. The Merger shall become effective when the Certificate of Merger (the "CERTIFICATE OF MERGER"), executed in accordance with the relevant provisions of the DGCL, is filed with the Secretary of State of the State of Delaware; PROVIDED, HOWEVER, that, upon mutual consent of the Constituent Corporations, the Certificate of Merger may provide for a later date of effectiveness of the Merger not more than thirty (30) days after the date the Certificate of Merger is filed. When used in this Agreement, the term "EFFECTIVE TIME" shall mean the date and time at which the Certificate of Merger is accepted for filing or such later time established by the Certificate of Merger. The Certificate of Merger shall be filed on the Closing Date (as defined in Section 1.15). Section 1.3 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in Section 259 of the DGCL. Section 1.4 CHARTER AND BYLAWS; DIRECTORS AND OFFICERS. The certificate of incorporation and bylaws of the Company in effect at the Effective Time shall be the certificate of incorporation and bylaws of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law. The officers and directors of the Company at the Effective Time shall continue to be, without further action, the officers and directors of the Surviving Corporation, until the earlier of their resignation or removal or until their respective successors are duly elected and qualified, as the case may be. Section 1.5 CONVERSION OF SECURITIES. As of the Effective Time, by virtue of the Merger and without any action on the part of Sub, the Company or the holders of any securities of the Constituent Corporations: (a) STOCK OF SUB. Each issued and outstanding share of common stock, $0.01 par value per share, of Sub shall be converted into one (1) share of common stock, $0.01 par value per share, of the Surviving Corporation. (b) CERTAIN COMPANY COMMON STOCK CANCELLED. All shares of Company Common Stock held in the treasury of the Company or owned by Parent or Sub shall automatically be canceled and retired and shall cease to exist, and no capital stock of Parent or other consideration shall be delivered in exchange therefor. (c) DETERMINATION OF EXCHANGE RATIO. At the Closing, each of Parent and the Company shall deliver to the other a certificate of an officer stating the number of shares of Parent Common Stock or Company Common Stock, as the case may be, that are outstanding on such date. The aggregate number of shares of Parent Common Stock to be issued in the Merger shall be the result of multiplying (i) the number of shares of Parent Common Stock outstanding on the Closing Date, by (ii) three (3) (the "MERGER SHARES"). The number of Merger Shares to be issued in the Merger in exchange for each share of Company Common Stock shall be the result of dividing (i) the number of Merger Shares, by (ii) the number of shares of Company Common Stock outstanding on the Closing Date (such result expressed as a ratio of the number of shares of Parent Common Stock to be issued in the Merger for each then 2 outstanding share of Company Common Stock is hereinafter referred to as the "EXCHANGE RATIO"). (d) CONVERSION. Subject to the provisions of Section 1.8 and Section 1.13, each share of common stock, $0.01 par value per share, of the Company ("COMPANY COMMON STOCK") issued and outstanding immediately prior to the Effective Time (other than shares to be canceled in accordance with Section 1.5(b)) shall be converted into the right to receive a number of fully paid shares of Parent's common stock, $0.01 par value per share ("PARENT COMMON STOCK"), equal to the Exchange Ratio. All such shares of Company Common Stock, when so converted, shall no longer be outstanding and shall automatically be canceled and retired and each holder of a certificate representing any such shares shall cease to have any rights with respect thereto, except the right to receive the shares of Parent Common Stock pursuant to this Section, any dividends and other distributions in accordance with Section 1.7 and any cash, without interest, in lieu of fractional shares in accordance with Section 1.8 (collectively, the "MERGER CONSIDERATION"). Section 1.6 PARENT TO MAKE CERTIFICATES AVAILABLE. (a) EXCHANGE OF CERTIFICATES. Parent shall, at its sole cost and expense, authorize a bank, trust company, or such other person or persons as shall be reasonably acceptable to Parent and the Company, to act as Exchange Agent hereunder (the "EXCHANGE AGENT"). As soon as practicable after the Effective Time, Parent shall deposit with the Exchange Agent, in trust for the holders of shares of Company Common Stock converted in the Merger, (i) certificates representing the shares of Parent Common Stock issuable pursuant to Section 1.5(d) in exchange for outstanding shares of Company Common Stock, and (ii) cash, as required to make payments in lieu of any fractional shares pursuant to Section 1.8 (such certificates representing shares of Parent Common Stock and cash, together with any dividends or distributions with respect thereto, being hereinafter collectively referred to as the "EXCHANGE FUND"). Except as contemplated by Section 1.9, the Exchange Fund shall not be used for any other purpose. (b) EXCHANGE PROCEDURES. As soon as practicable, but in no event later than ten (10) trading days after the Effective Time, the Exchange Agent shall mail to each record holder of a certificate or certificates that immediately prior to the Effective Time represented outstanding shares of Company Common Stock converted in the Merger (the "CERTIFICATES") a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon actual delivery of the Certificates to the Exchange Agent, and shall contain instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock and cash in lieu of fractional shares); PROVIDED, HOWEVER, that no such letter shall be delivered to any record holder that prior to Closing perfected dissenter's rights under the DGCL. Upon surrender for cancellation to the Exchange Agent of a Certificate held by any record holder of a Certificate, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor (i) a certificate representing that number of whole shares of Parent Common Stock into which the shares represented by the surrendered Certificate shall have been converted at the Effective Time pursuant to this Article 1, (ii) cash in lieu of any fractional share in accordance with Section 1.8, and (iii) certain dividends and other distributions in accordance with Section 1.7, and any Certificate so surrendered shall forthwith be canceled. (c) STOCK OPTIONS AND WARRANTS. All of the Company Stock Options (as defined in Section 3.2(b)) shall terminate immediately prior to the Effective Time. Parent and the Company will make appropriate arrangements to cause each outstanding warrant to purchase Avatech Common 3 Stock to be converted into a right to purchase that number of shares of PlanetCAD Common Stock determined by multiplying the number of shares of Avatech Common Stock subject thereto by the Exchange Ratio, at an exercise price equal to the exercise price thereof divided by the Exchange Ratio. Section 1.7 DIVIDENDS; TRANSFER TAXES; WITHHOLDING. No dividends or other distributions that are declared on or after the Effective Time on Parent Common Stock, or are payable to the holders of record thereof on or after the Effective Time, will be paid to any person entitled by reason of the Merger to receive a certificate representing Parent Common Stock until such person surrenders the related Certificate or Certificates, as provided in Section 1.6, and no cash payment in lieu of fractional shares will be paid to any such person pursuant to Section 1.8 until such person shall so surrender the related Certificate or Certificates. Subject to the effect of applicable law, there shall be paid to each record holder of a new certificate representing such Parent Common Stock: (i) at the time of such surrender or as promptly as practicable thereafter, the amount of any dividends or other distributions theretofore paid with respect to the shares of Parent Common Stock represented by such new certificate and having a record date on or after the Effective Time and a payment date prior to such surrender; (ii) at the appropriate payment date or as promptly as practicable thereafter, the amount of any dividends or other distributions payable with respect to such shares of Parent Common Stock and having a record date on or after the Effective Time but prior to such surrender and a payment date on or subsequent to such surrender; and (iii) at the time of such surrender or as promptly as practicable thereafter, the amount of any cash payable with respect to a fractional share of Parent Common Stock to which such holder is entitled pursuant to Section 1.8. In no event shall the person entitled to receive such dividends or other distributions be entitled to receive interest on such dividends or other distributions. If any cash or certificate representing shares of Parent Common Stock is to be paid to or issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of such exchange that the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange shall pay to the Exchange Agent any transfer or other taxes required by reason of the issuance of certificates for such shares of Parent Common Stock in a name other than that of the registered holder of the Certificate surrendered, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. Parent or the Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as Parent or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code or under any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Parent or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Parent or the Exchange Agent. Section 1.8 NO FRACTIONAL SECURITIES. No certificates or scrip representing fractional shares of Parent Common Stock shall be issued upon the surrender for exchange of Certificates pursuant to this Article 1, and no Parent dividend or other distribution or stock split shall relate to any fractional share, and no fractional share shall entitle the owner thereof to vote or to any other rights of a security holder of Parent. In lieu of any such fractional share, each holder of Company Common Stock who would otherwise have been entitled to a fraction of a share of Parent Common Stock upon surrender of Certificates for exchange pursuant to this Article 1 will be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying (i) the closing price per share of the Parent Common Stock as quoted on the American Stock Exchange ("AMEX") on the Closing Date by (ii) the fractional interest to which such holder would otherwise be entitled. As promptly as practicable after the determination of the amount of cash, if any, to be paid to holders of fractional share interests, the Exchange Agent shall so notify Parent, and Parent shall deposit such amount with the Exchange Agent 4 and shall cause the Exchange Agent to forward payments to such holders of fractional share interests subject to and in accordance with the terms of Section 1.6 and this Section 1.8. Section 1.9 RETURN OF EXCHANGE FUND. Any portion of the Exchange Fund (including any interest earned thereon) which remains undistributed to the former stockholders of the Company for six (6) months after the Effective Time shall be delivered to Parent, upon demand of Parent, and any such former stockholders who have not theretofore complied with this Article 1 shall thereafter look only to Parent for payment of their claim for shares of Parent Common Stock, any cash in lieu of fractional shares of Parent Common Stock and any dividends or distributions with respect to Parent Common Stock. Neither Parent nor the Surviving Corporation shall be liable to any former holder of Company Common Stock for any such shares of Parent Common Stock, cash and dividends and distributions held in the Exchange Fund which are delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Section 1.10 NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. The Merger Consideration issued upon the surrender for exchange of Certificates in accordance with the terms hereof (including any cash paid pursuant to Section 1.6, Section 1.7 and Section 1.8) shall be deemed to have been issued in full satisfaction of all rights pertaining to the shares of Company Common Stock represented by such Certificates. Section 1.11 CLOSING OF COMPANY TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of shares of Company Common Stock shall thereafter be made on the records of the Company. If, after the Effective Time, Certificates are presented to the Surviving Corporation, the Exchange Agent or Parent, such Certificates shall be canceled and exchanged as provided in this Article 1. Section 1.12 LOST CERTIFICATES. If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed and, if required by Parent or the Exchange Agent, the posting by such person of a bond, in such reasonable amount as Parent or the Exchange Agent may direct as indemnity against any claim that may be made against them with respect to such Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of Parent Common Stock, any cash in lieu of fractional shares of Parent Common Stock to which the holders thereof are entitled pursuant to Section 1.8 and any dividends or other distributions to which the holders thereof are entitled pursuant to Section 1.6 and Section 1.7. Section 1.13 DISSENTERS' RIGHTS. (a) NO MERGER CONSIDERATION. Notwithstanding anything to the contrary contained in this Agreement, any holder of shares of capital stock of the Company with respect to which dissenters' rights, if any, are granted by reason of the Merger under the DGCL and who does not vote in favor of the Merger and who otherwise complies with the provisions of the DGCL relating to the exercise of dissenters' rights ("COMPANY DISSENTING SHARES") shall not be entitled to receive any Merger Consideration pursuant to Section 1.5(d); rather, such Company Dissenting Shares shall be converted into the right to receive payment from the Surviving Corporation with respect thereto in accordance with the relevant provisions of the DGCL, unless such holder fails to perfect, effectively withdraws or loses his or her right to dissent from the Merger under the DGCL. If any such holder so fails to perfect, effectively withdraws or loses his or her dissenters' rights under the DGCL, each Company Dissenting Share of such holder shall thereupon be deemed to have been converted, as of the Effective Time, into the right to receive the Merger Consideration pursuant to Section 1.5(d). (b) NOTICE. The Company shall give Parent prompt notice of any demands received by the Company for the payment of fair value for shares, and Parent shall have the right to 5 participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent, make any payment with respect to, or settle or offer to settle, such demands. Section 1.14 FURTHER ASSURANCES. If at any time after the Effective Time the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments or assurances or any other acts or things are necessary, desirable or proper (a) to vest, perfect or confirm, of record or otherwise, in the Surviving Corporation its right, title or interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of either of the Constituent Corporations, or (b) otherwise to carry out the purposes of this Agreement, the Surviving Corporation and its proper officers and directors or their designees shall be authorized to execute and deliver, in the name and on behalf of either of the Constituent Corporations, all such deeds, bills of sale, assignments and assurances and to do, in the name and on behalf of either Constituent Corporation, all such other acts and things as may be necessary, desirable or proper to vest, perfect or confirm the Surviving Corporation's right, title or interest in, to or under any of the rights, privileges, powers, franchises, properties or assets of such Constituent Corporation and otherwise to carry out the purposes of this Agreement. Section 1.15 CLOSING. Unless earlier terminated as expressly permitted hereunder, the closing of the transactions contemplated by this Agreement (the "CLOSING") and all actions specified in this Agreement to occur at the Closing shall take place at the offices of Hogan & Hartson L.L.P., 1200 Seventeenth Street, Suite 1500, Denver, Colorado, at 10:00 a.m., local time, no later than the second business day following the day on which the last of the conditions set forth in Article 6 shall have been fulfilled or waived (if permissible) (the "Closing Date"), or at such other time and place as Parent and the Company shall agree. 6 ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB Parent and Sub represent and warrant to the Company as follows: Section 2.1 ORGANIZATION, STANDING AND POWER. Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Each other Subsidiary of Parent is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has the requisite corporate power and authority to carry on its business as now being conducted. Each of Parent and Sub is duly qualified to do business, and is in good standing, in each jurisdiction where the character of its respective properties owned or held under lease or the nature of its respective activities makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on Parent. For purposes of this Agreement, "MATERIAL ADVERSE CHANGE" or "MATERIAL ADVERSE EFFECT" means, when used with respect to either party, any change or effect that is or could reasonably be expected (as far as can be reasonably foreseen at the time) to be materially adverse to the business, assets, liabilities, results of operations, or the financial condition of such party and its Subsidiaries, taken as a whole. Section 2.2 CAPITAL STRUCTURE. (a) STOCK. As of the date hereof, the authorized capital stock of Parent consists of: (i) 22,500,000 shares of Parent Common Stock, and (ii) 2,500,000 shares of preferred stock, $0.01 par value per share ("PARENT PREFERRED STOCK"), of which 100,000 shares have been designated as Series A Junior Participating Preferred Stock all of which are reserved for issuance upon exercise of preferred stock purchase rights (the "RIGHTS") issued pursuant to Parent's Stockholder Rights Agreement dated March 11, 2002 (the "RIGHTS AGREEMENT"). At the close of business on the date of execution hereof, (i) 12,493,545 shares (including 50,000 shares held in escrow and to be retired prior to the Closing Date) of Parent Common Stock (and attached Rights) were issued and outstanding, all of which were validly issued, fully paid and nonassessable and free of preemptive rights, (ii) no shares of Parent Common Stock were held in the treasury; (iii) 4,121,601 shares of Parent Common Stock were reserved for future issuance pursuant to the stock option plans of Parent (collectively, the "PARENT STOCK OPTION PLANS"), and (iv) 1,807,500 shares of Parent Common Stock were reserved for future issuance pursuant to outstanding warrant rights, prior acquisitions and other matters. No shares of Parent Preferred Stock are outstanding. No shares of Parent Common Stock are held by any Subsidiary of Parent. (b) OPTIONS, ETC. The Parent SEC Documents (as defined in Section 2.6(a)), together with Section 2.2(b) of the letter dated the date hereof and delivered on the date hereof by Parent to the Company, which relates to this Agreement and is designated therein as the Parent Letter, as such letter may be updated from time to time between the date hereof and May 14, 2002 (the "PARENT LETTER"), contain a materially correct description of the outstanding options, warrants or other rights to purchase shares of Parent Common Stock, whether issued under the Parent Stock Option Plans (collectively, the "PARENT STOCK OPTIONS") or otherwise. Except (i) as disclosed in the Parent SEC Documents, and (ii) as set forth on Section 2.2(b) of the Parent Letter, there are no options, warrants, calls, rights or agreements to which Parent or any of its Subsidiaries is a party or by which any of them is bound obligating Parent or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of Parent or any of its Subsidiaries or obligating Parent or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, right or agreement. 7 (c) CONTRACTUAL OBLIGATIONS. Except as set forth in Section 2.2(c) of the Parent Letter, there are no outstanding contractual obligations of Parent or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of Parent Common Stock or any capital stock of or any equity interests in Parent or any Subsidiary. Each outstanding share of capital stock of each Subsidiary of Parent is duly authorized, validly issued, fully paid and nonassessable and, except as disclosed in the Parent SEC Documents, each such share is owned by Parent or another Subsidiary of Parent, free and clear of all Liens. Parent does not have any outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote (or are convertible into or exercisable for securities having the right to vote) with the stockholders of Parent on any matter. Section 2.2(c) of the Parent Letter contains a correct and complete list as of the date of this Agreement of each of Parent's Subsidiaries. Except as set forth on Section 2.2(c) of the Parent Letter, as of the date hereof, neither Parent nor any of its Subsidiaries is party to or bound by (x) any agreement or commitment pursuant to which Parent or any Subsidiary of Parent is or could be required to register any securities under the Securities Act or (y) any debt agreements or instruments which grant any rights to vote (contingent or otherwise) on matters on which stockholders of Parent may vote. (d) ENTITIES. Section 2.2(d) of the Parent Letter contains a correct and complete list as of the date of this Agreement of each entity in which Parent owns an equity interest (other than a Subsidiary), including the number of outstanding shares of the stock of each such entity and the percentage interest represented by Parent's ownership in the entity. Section 2.3 AUTHORITY. On or prior to the date of this Agreement, the respective Boards of Directors of Parent and Sub have declared the Merger advisable and in the best interest of Parent and its stockholders, approved and adopted this Agreement in accordance with the DGCL, resolved to recommend the adoption of this Agreement by Parent's stockholders and directed that this Agreement be submitted to Parent's stockholders for adoption. Each of Parent and Sub has all requisite corporate power and authority to enter into this Agreement, and, subject to approval and adoption by the stockholders of Parent of this Agreement, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Parent and Sub and the consummation by Parent and Sub of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Sub, subject in the case of this Agreement, to (x) approval and adoption of this Agreement and the related amendments of the certificate of incorporation of Parent by the stockholders of Parent and (y) the filing the Certificate of Merger as required by the DGCL. This Agreement has been duly executed and delivered by Parent and Sub, and (assuming the valid authorization, execution and delivery of this Agreement by the Company and the validity and binding effect of this Agreement on the Company) this Agreement constitutes the valid and binding obligation of Parent and Sub enforceable against each of them in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws relating to or affecting creditors generally and by general equity principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). The filing of a registration statement on Form S-4 with the Securities and Exchange Commission (the "SEC") by Parent under the Securities Act of 1933, as amended (together with the rules and regulations thereunder, the "SECURITIES ACT"), for the purpose of registering the shares of Parent Common Stock to be issued in connection with the Merger (together with any amendments or supplements thereto, whether prior to or after the effective date thereof, the "REGISTRATION STATEMENT") has been duly authorized by Parent's Board of Directors. Section 2.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming that all consents, approvals, authorizations and other actions described in this Section 2.4 have been obtained and all filings and obligations described in this Section 2.4 have been made, except as set forth in Section 2.4 of the Parent Letter, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, result in any violation of, or material default (with or without notice or lapse of time, or both) under, or give to 8 others a right of termination, cancellation or acceleration of any obligation or result in the loss of a material benefit under, or result in the creation of any material lien, security interest, charge or encumbrance upon any of the properties or assets of Parent or any of its Subsidiaries under, any provision of (i) the certificate of incorporation or bylaws of Parent, (ii) any provision of the comparable charter or organization documents of any of Parent's Subsidiaries, (iii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to Parent or any of its Subsidiaries or (iv) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or any of its Subsidiaries or any of their respective properties or assets, other than any such violations, defaults, rights, losses, liens, security interests, charges or encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on Parent, materially impair the ability of Parent to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. No filing or registration with, or authorization, consent or approval of, any domestic (federal and state), foreign or supranational court, commission, governmental body, regulatory agency, authority or tribunal (a "GOVERNMENTAL ENTITY") is required by or with respect to Parent or any of its Subsidiaries in connection with the execution and delivery of this Agreement by Parent or Sub or is necessary for the consummation of the Merger and the other transactions contemplated by this Agreement, except for (i) in connection, or in compliance, with the provisions of the Securities Act and the Securities Exchange Act of 1934, as amended (together with the rules and regulations thereunder, the "EXCHANGE ACT"), (ii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (iii) applicable requirements, if any, of state securities or "blue sky" laws ("BLUE SKY LAWS") and AMEX, (iv) as may be required under foreign laws and (v) such other consents, orders, authorizations, registrations, declarations, approvals and filings the failure of which to be obtained or made would not, individually or in the aggregate, have a Material Adverse Effect on Parent, materially impair the ability of Parent or Sub to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. Section 2.5 PARENT COMMON STOCK TO BE ISSUED IN THE MERGER. Subject to the approval by the stockholders of Parent of an increase in the authorized Parent Common Stock, all of the shares of Parent Common Stock issuable in exchange for Company Common Stock at the Effective Time in accordance with this Agreement, when so issued, will be duly authorized, validly issued, fully paid and nonassessable and free and clear of any Liens. Section 2.6 SEC DOCUMENTS AND FINANCIAL STATEMENTS. (a) Parent has filed as of the date hereof all documents required to be filed with the SEC since January 1, 2001 (the "PARENT SEC DOCUMENTS"). Except as otherwise described in Section 2.6(a) of the Parent Letter, as of their respective dates, the Parent SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and, at the respective times they were filed, none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) The consolidated financial statements (including, in each case, any related notes) of Parent included in the Parent SEC Documents complied as of their respective dates in all material respects with all applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with United States generally accepted accounting principles ("GAAP") (except, in the case of the unaudited statements, as permitted by Form 10-QSB of the SEC) applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly presented in all material respects the consolidated financial position of Parent and its consolidated Subsidiaries as at the respective dates thereof and the consolidated results of their operations 9 and their consolidated cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments and to any other adjustments described therein). Except as disclosed in the Parent SEC Documents or as required by GAAP, Parent has not, since December 31, 2001, made any material change in the accounting practices or policies applied in the preparation of financial statements. (c) Parent and its Subsidiaries do not have any liabilities or obligations (whether accrued, contingent, due or to become due or whether or not required to be reflected in financial statements in accordance with GAAP) other than (i) liabilities reflected in the December 31, 2001 balance sheet included in the Parent SEC Documents (the "PARENT BALANCE SHEET"), (ii) normal or recurring liabilities incurred since the date of the Parent Balance Sheet in the ordinary course of business consistent with past practices, and (iii) liabilities incurred in the performance of or as contemplated by this Agreement. (d) All accounts receivable of Parent whether reflected in the Parent Balance Sheet or otherwise, represent sales actually made in the ordinary course of business, and are current and collectible net of any reserves shown on the Parent Balance Sheet (which reserves were calculated consistent with past practices). (e) Parent does not maintain any inventory. Section 2.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the Parent SEC Documents, prior to the date hereof there has been no event causing a Material Adverse Effect on Parent, nor any development that would, individually or in the aggregate, result in a Material Adverse Effect on Parent. Section 2.8 REORGANIZATION. To the Knowledge of Parent, (i) neither Parent nor any of its Subsidiaries has taken any action or failed to take any action which action or failure would jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code, and (ii) there are no facts that would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. Section 2.9 PERMITS AND COMPLIANCE. Each of Parent and its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, tariffs, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for Parent or any of its Subsidiaries to own, lease and operate its properties or to carry on its business as it is now being conducted (the "PARENT PERMITS"), except where the failure to have any of the Parent Permits would not, individually or in the aggregate, have a Material Adverse Effect on Parent, and no suspension or cancellation of any of the Parent Permits is pending or, to the Knowledge of Parent, threatened, except where the suspension or cancellation of any of the Parent Permits would not, individually or in the aggregate, have a Material Adverse Effect on Parent. Except as set forth in Section 2.9 of the Parent Letter, neither Parent nor any of its Subsidiaries is in violation of, or has taken any action or omitted to take any action which, with the passage of time, would result in a violation of (A) its charter, bylaws or other organizational documents, (B) any applicable law, ordinance, administrative, or governmental rule or regulation, (C) any order, decree or judgment of any Governmental Entity having jurisdiction over Parent or any of its Subsidiaries or (D) any Parent Permits. There are no contracts or agreements of Parent or its Subsidiaries having covenants not to compete that materially impair the ability of Parent to conduct its business as currently conducted or would reasonably be expected to materially impair Parent's ability to conduct its businesses. "KNOWLEDGE" means, with respect to either party, the actual knowledge of the directors and officers of such party. Section 2.10 TAX MATTERS. Except as set forth in Section 2.10 of the Parent Letter, (i) the Parent and each of its Subsidiaries have timely filed (taking account of extensions to file that have been properly obtained) all Tax Returns required to have been filed by it, and such Tax Returns are correct and complete in all material respects and do not contain a disclosure statement under Section 6662 of 10 the Code (or any predecessor provision or comparable provision of state, local or foreign laws); (ii) the Parent and each of its Subsidiaries have timely paid (taking account of extensions to pay that have been properly obtained) all Taxes required to be paid by it and that have been due and will timely pay (taking account of such extensions) all Taxes required to be paid by it and that will be due on or prior to the Effective Time (other than Taxes that are being timely and properly contested in good faith), or where payment is not yet due or is being contested in good faith, has established in accordance with GAAP an adequate reserve for the payment of such Taxes; (iii) the Parent and each of its Subsidiaries have complied in all material respects with all rules and regulations relating to the withholding of Taxes and the remittance of withheld Taxes; (iv) neither the Parent nor any of its Subsidiaries has waived any statute of limitations in respect of its Taxes, which remains open; (v) no federal, state, local, or foreign audits or administrative proceedings, of which the Parent or its Subsidiaries has written notice, are pending with regard to any Taxes or Tax Returns of the Parent or its Subsidiaries and none of them has received a written notice of any proposed audit or proceeding from the Internal Revenue Service (the "IRS") or any other taxing authority; (vi) no issues that have been raised by the relevant taxing authority in connection with the examination of Tax Returns required to have been filed by or with respect to the Parent and each of its Subsidiaries are currently pending; (vii) all deficiencies asserted or assessments made as a result of any examination of such Tax Returns by any taxing authority have been paid in full; (viii) neither the Parent nor any of its Subsidiaries has been a member of an affiliated group of corporations (within the meaning of Section 1504(a) of the Code) filing a consolidated federal income tax return (or a group of corporations filing a consolidated, combined, or unitary income tax return under comparable provisions of state, local, or foreign tax law) for any taxable period, other than a group the common parent of which is the Parent; (ix) neither the Parent nor any of its Subsidiaries has any obligation under any agreement or arrangement with any other person with respect to Taxes of such other person (including pursuant to Treasury Regulations Section 1.1502-6 or comparable provision of state, local or foreign tax law) including any liability for Taxes of any predecessor entity; (x) neither the Parent nor any of its Subsidiaries has filed any consent agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Parent; (xi) neither the Parent nor any of its Subsidiaries is party to or has any obligation under any tax-sharing, tax indemnity or tax allocation agreement or arrangement; (xii) except as may be required as a result of the Merger, the Parent and its Subsidiaries have not been and will not be required to include any adjustment in taxable income for any tax period (or portion thereof) pursuant to Section 481 or Section 263A of the Code or any comparable provision under state or foreign tax laws as a result of transactions, events or accounting methods employed prior to the Closing; (xiii) none of the Parent's or its Subsidiaries' assets are tax exempt use property within the meaning of Section 168(h) of the Code; (xiv) the Parent is not subject to (A) any foreign tax holidays, (B) any intercompany transfer pricing agreements, or other arrangements that have been established by the Parent or any of its Subsidiaries with any tax authority and (C) any expatriate programs or policies affecting the Parent or any of its Subsidiaries; (xv) the Parent is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code; (xvi) neither the Parent nor any of its Subsidiaries has ever made, or been required to make, an election under Section 338 of the Code. For purposes of this Agreement: (i) "TAXES" means any federal, state, local, foreign or provincial income, gross receipts, property, sales, use, license, franchise, employment, payroll, withholding, recapture, alternative or added minimum, ad valorem, value-added, transfer, excise, capital, or net worth tax, or other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any statutory additions including interest thereon or penalty imposed with respect thereto by any Governmental Entity, whether computed on a separate, consolidated, unitary, combined, or any other basis, and shall include any transferee or secondary liability in respect of any tax (whether imposed by law, contractual agreement, or otherwise), and (ii) "TAX RETURN" means any return, report or similar statement (including the attached schedules) 11 required to be filed with respect to any Tax, including any information return, claim for refund, amended return or declaration of estimated Tax. Section 2.11 ACTIONS AND PROCEEDINGS. Except as set forth in the Parent SEC Documents, there are no outstanding material orders, judgments, injunctions, awards or decrees of any Governmental Entity against or involving Parent or any of its Subsidiaries, or against or involving any of the present or former directors, officers, employees, consultants or agents of Parent or any of its Subsidiaries, as such, any of its or their properties, assets or business or any Parent Plan. Except as set forth in Section 2.11 of the Parent Letter, there are no material actions, suits or claims or legal, administrative or arbitrative proceedings or investigations (including claims for workers' compensation) pending or, to the Knowledge of Parent, threatened against or involving Parent or any of its Subsidiaries or any of its or their present or former directors, officers, employees, consultants or agents, as such, or any properties, assets or business of Parent or its Subsidiaries or any Parent Plan. Section 2.12 INTELLECTUAL PROPERTY. "INTELLECTUAL PROPERTY," with respect to either party, means all United States and foreign trademarks, trademark registrations, trademark rights and renewals thereof, trade names, trade name rights, trade dress, patents, patent rights, patent applications, industrial models, inventions, invention disclosures, author's rights, designs, utility models, inventor rights, software, copyrights, copyright registrations and renewals thereof, servicemarks, servicemark registrations and renewals thereof, servicemark rights, trade secrets, applications for trademark and servicemark registrations, know-how, data, market information, confidential information and other proprietary rights, and any data and information of any nature or form used or held for use in connection with the businesses of such party and/or its Subsidiaries as currently conducted or as currently contemplated by such party, together with all applications currently pending or in process for any of the foregoing. Except as disclosed in the Parent SEC Documents, Parent and its Subsidiaries own, or possess adequate licenses or other valid rights to use (including the right to sublicense to customers, suppliers or others as needed), all of the material Intellectual Property that is necessary for the conduct or contemplated conduct of Parent's or Subsidiaries' businesses (the "PARENT LICENSES"). There are no pending, or to the Knowledge of Parent, threatened interferences, re-examinations, oppositions or cancellation proceedings involving any patents or patent rights, trademarks or trademark rights, or applications therefor, of Parent or any Subsidiary. There is no breach or violation by Parent or any of its Subsidiaries under, and, to the Knowledge of Parent, there is no breach or violation by any other party to, any Parent License that is reasonably likely to give rise to any termination or any loss of rights thereunder. To the Knowledge of Parent, there has been no unauthorized disclosure or use of confidential information, trade secret rights, processes and formulas, research and development results and other know-how of Parent or any Subsidiary, the value of which to Parent and its Subsidiaries is dependent upon the maintenance of the confidentiality thereof. Section 2.13 ENVIRONMENTAL MATTERS. (a) DEFINED TERMS. For purposes of this Agreement, the following terms shall have the following meanings: (i) "HAZARDOUS SUBSTANCES" means (A) petroleum and petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials and polychlorinated biphenyls, and (B) any other chemicals, materials or substances regulated as toxic or hazardous or as a pollutant, contaminant or waste under any applicable Environmental Law; (ii) "ENVIRONMENTAL LAW" means any law, past, present or future (up until the Effective Time) and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, or common law, relating to pollution or protection of the environment, health or safety or natural resources, including those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Substances; and (iii) "ENVIRONMENTAL PERMIT" means any permit, approval, identification number, license or other authorization required under any applicable Environmental Law. 12 (b) IN COMPLIANCE. To the Knowledge of Parent, Parent and its Subsidiaries are and have been in compliance with all applicable Environmental Laws, have obtained all Environmental Permits and are in compliance with their requirements, and have resolved all past non-compliance with Environmental Laws and Environmental Permits without any pending, on-going or future obligation, cost or liability, except in each case for the notices set forth in Section 2.13 of the Parent Letter. (c) NO RELEASE. To the Knowledge of Parent, neither Parent nor any of its Subsidiaries has (i) placed, held, located, released, transported or disposed of any Hazardous Substances on, under, from or at any of Parent's or any of its Subsidiaries' properties or any other properties, (ii) any Knowledge or reason to know of the presence of any Hazardous Substances on, under, emanating from, or at any of Parent's or any of its Subsidiaries' properties or any other property but arising from Parent's or any of its Subsidiaries' current or former properties or operations, or (iii) any Knowledge or reason to know, nor has it received any written notice (A) of any violation of or liability under any Environmental Laws, (B) of the institution or pendency of any suit, action, claim, proceeding or investigation by any Governmental Entity or any third party in connection with any such violation or liability, (C) requiring the investigation of, response to or remediation of Hazardous Substances at or arising from any of Parent's or any of its Subsidiaries' current or former properties or operations or any other properties, (D) alleging noncompliance by Parent or any of its Subsidiaries with the terms of any Environmental Permit in any manner reasonably likely to require material expenditures or to result in material liability or (E) demanding payment for response to or remediation of Hazardous Substances at or arising from any of Parent's or any of its Subsidiaries' current or former properties or operations or any other properties, except in each case for the notices set forth in Section 2.13 of the Parent Letter. (d) NO OBLIGATION. To the Knowledge of Parent, no Environmental Law imposes any obligation upon Parent or any of its Subsidiaries arising out of or as a condition to any transaction contemplated by this Agreement, including any requirement to modify or to transfer any permit or license, any requirement to file any notice or other submission with any Governmental Entity, the placement of any notice, acknowledgment or covenant in any land records, or the modification of or provision of notice under any agreement, consent order or consent decree. (e) NO ASSESSMENTS. There are no environmental assessments or audit reports or other similar studies or analyses in the possession or control of Parent or any of its Subsidiaries relating to any real property currently or formerly owned, leased or occupied by Parent or any of its Subsidiaries. Section 2.14 SUPPLIERS AND DISTRIBUTORS. (a) NO NOTICE--SUPPLIERS. Neither Parent nor any of its Subsidiaries has received any notice, oral or written, or has any reason to believe that any significant supplier (including suppliers of data or information, which may include customers), including without limitation any sole source supplier, will not supply to Parent or any Subsidiary at any time after the Effective Time on terms and conditions substantially similar to those currently in place, subject only to general and customary price increases, unless comparable supplies, data, information or other items are readily available from other sources on comparable terms and conditions. (b) NO NOTICE--DISTRIBUTORS. Neither Parent nor any of its Subsidiaries has received, since January 1, 2001, any notice, oral or written, or has any reason to believe that any distributors, sales representatives, sales agents, or other third party sellers, will not sell or market the products or services of Parent or any of its Subsidiaries at any time after the Effective Time 13 on terms and conditions substantially similar to those used in the current sales and distribution contracts of Parent and its Subsidiaries. Section 2.15 INSURANCE. All material fire and casualty, general liability, business interruption, product liability, and sprinkler and water damage insurance policies maintained by Parent or any of its Subsidiaries are with reputable insurance carriers, provide full and adequate coverage for all normal risks incident to the business of Parent and its Subsidiaries and their respective properties and assets, and are in character and amount similar to that carried by persons engaged in similar businesses and subject to the same or similar perils or hazards. All such policies are listed in Section 2.15 of the Parent Letter. Parent and each of its Subsidiaries have made any and all payments required to maintain such policies in full force and effect. Neither Parent nor any of its Subsidiaries has received notice of default under any such policy, and has not received written notice or, to the Knowledge of Parent, oral notice of any pending or threatened termination or cancellation, coverage limitation or reduction or material premium increase with respect to such policy. Section 2.16 TRANSACTIONS WITH AFFILIATES. Except as set forth in the Parent SEC Documents, Section 2.16 of the Parent Letter or as otherwise contemplated by this Agreement, (a) no beneficial owner of 5% or more of Parent's outstanding capital stock, (b) no officer or director of Parent and (c) no Person (other than Parent) in which any such beneficial owner, officer or director owns any beneficial interest (other than a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market and less than 1% of the stock of which is beneficially owned by all such Persons) has any interest in: (i) any contract, arrangement or understanding with, or relating to, the business or operations of, Parent or any of its Subsidiaries; (ii) any loan, arrangement, understanding, agreement or contract for or relating to indebtedness of Parent or any of its Subsidiaries; or (iii) any property (real, personal or mixed), tangible or intangible, used in the business or operations of Parent or any of its Subsidiaries, excluding any such contract, arrangement, understanding or agreement constituting a Parent Plan or relating to terms of employment. Section 2.17 BROKERS. No broker, investment banker or other person (other than Alliant Partners, whose fees will be paid by Parent) is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent. Section 2.18 REQUIRED VOTE OF PARENT STOCKHOLDERS. The affirmative vote of the holders of a majority of the outstanding shares of Parent Common Stock is required to adopt this Agreement. Except as may be provided in the certificate of designation for any Parent Preferred Stock to be issued pursuant to Section 6.1(d), no other vote of the security holders of Parent is or will be required by law, the certificate of incorporation or bylaws of Parent or otherwise in order for Parent to consummate the Merger and the transactions contemplated hereby. Section 2.19 LABOR MATTERS. Neither Parent nor any of its Subsidiaries is a party to any collective bargaining agreement or labor contract. Neither Parent nor any of its Subsidiaries has engaged in any unfair labor practice with respect to its respective employees, and, to the Knowledge of Parent, there is no unfair labor practice complaint or grievance against Parent or any of its Subsidiaries by any person pursuant to the National Labor Relations Act or any comparable state agency or foreign law pending or threatened in writing. There is no labor strike, dispute, slowdown or stoppage pending or, to the Knowledge of Parent, threatened against or affecting Parent or any of its Subsidiaries which may interfere with the respective business activities of Parent or any of its Subsidiaries. Section 2.20 TITLE TO AND SUFFICIENCY OF ASSETS. (a) GOOD AND MARKETABLE TITLE. As of the date hereof, Parent and its Subsidiaries own, and as of the Effective Time Parent and its Subsidiaries will own, good and marketable title to all of their assets constituting personal property which is material to their business (excluding, for purposes of this sentence, assets held under leases), free and clear of any and all Liens, except 14 as set forth in Section 2.20 of the Parent Letter. Such assets, together with all assets held by Parent and its Subsidiaries under leases, include all tangible and intangible personal property, contracts and rights necessary or required for the operation of the businesses of Parent and its Subsidiaries as presently conducted. (b) NO REAL ESTATE. As of the date hereof, Parent and its Subsidiaries do not own, and as of the Effective Time Parent and its Subsidiaries will not own any real estate (excluding, for purposes of this sentence, real estate leases). All real estate leases held by Parent and its Subsidiaries, are adequate for the operation of the businesses of Parent and its Subsidiaries as presently conducted. Section 2.21 LITIGATION. Except as disclosed in the Parent SEC Documents or in Section 2.21 of the Parent Letter, there are no actions, suits, investigations or proceedings pending or, to the Knowledge of Parent, threatened against Parent or any Subsidiary before any federal, state, municipal, foreign or other governmental department, commission, board, bureau, agency or instrumentality, and neither the Company nor any Subsidiary has received any written notice of, or any written threats concerning the possible commencement of, any such actions, suits or proceedings with respect to the business of Parent or any Subsidiary, as the case may be, any of which actions, suits, investigations or proceedings, if decided adversely to Parent, would be reasonably likely to have a Material Adverse Effect on the Parent or any of its Subsidiaries. Section 2.22 CERTAIN AGREEMENTS. (a) COMPENSATION AGREEMENTS. Except as set forth in the Parent SEC Documents or Section 2.22(a) of the Parent Letter, neither Parent nor any of its Subsidiaries is a party to any oral or written agreement or plan relating to the compensation of employees of Parent or its Subsidiaries, including any employment agreement, severance agreement, stock option plan, stock appreciation rights plan, restricted stock plan or stock purchase plan, pension plan (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) or welfare plan (as defined in Section 3(1) of ERISA) (collectively, with respect to either Parent or the Company, the "COMPENSATION AGREEMENTS"). No holder of any option to purchase shares of Parent Common Stock, or shares of Parent Common Stock granted in connection with the performance of services for Parent or its Subsidiaries, is or will be entitled to receive cash from Parent or any Subsidiary in lieu of or in exchange for such option or shares as a result of the transactions contemplated by this Agreement. There is no indebtedness owed to Parent or its Subsidiaries by any officer, director or employee of Parent and its Subsidiaries. (b) CONTRACTS. All material contracts (as defined in Item 601(b)(10) of Regulation S-K of the SEC) of Parent ("PARENT SIGNIFICANT CONTRACTS") are set forth in the Parent SEC Documents. (c) BINDING CONTRACT. Except as set forth in Section 2.22(c) of the Parent Letter, each Parent Significant Contract is a legal, valid and binding agreement of Parent or its Subsidiaries, neither Parent nor any of its Subsidiaries (or to the Knowledge of Parent, any other party thereto) is in default under any Parent Significant Contract, and none of such Parent Significant Contracts has been canceled by the other party thereto; each Parent Significant Contract is in full force and effect and no event has occurred which, with the passage of time or the giving of notice or both, would constitute a default, event of default or other breach by Parent or any Subsidiary party thereto which would entitle the other party to such Parent Significant Contract to terminate the same or declare a default or event of default thereunder; Parent and its Subsidiaries are not in receipt of any claim of default under any such agreement; in each instance. 15 Section 2.23 ERISA. (a) PARENT PLAN. Each Parent Plan is described in the Parent SEC Documents. With respect to each Parent Plan, Parent has made available to the Company a true and correct copy of (i) the three (3) most recent annual reports (Form 5500) filed with the IRS, (ii) each such Parent Plan that has been reduced to writing and all amendments thereto, (iii) each trust agreement, insurance contract, administration agreement or funding arrangement relating to each such Parent Plan, (iv) a written summary of each unwritten Parent Plan, (v) the most recent summary plan description or other written explanation of each Parent Plan provided to participants, (vi) the most recent determination letter issued by the IRS with respect to any Parent Plan intended to be qualified under section 401(a) of the Code, (vii) any request for a determination currently pending before the IRS, and (viii) all correspondence with the IRS, the Department of Labor, the SEC or Pension Benefit Guaranty Corporation relating to any outstanding controversy. Each Parent Plan complies in all material respects with ERISA, the Code and all other applicable statutes and governmental rules and regulations. No Company Plan is subject to Title IV of ERISA. Neither Parent nor any of its Subsidiaries or ERISA Affiliates is a party to, has made any contribution to or otherwise incurred any obligation under any "multiemployer plan" as defined in Sections (37) and 4001(a)(3) of ERISA. (b) QUALIFICATION. All Parent Plans that are intended to be qualified under Section 401(a) of the Code have been determined by the IRS to be so qualified, or a timely application for such determination is now pending, or the remedial amendment period under applicable Treasury Regulations or IRS pronouncements has not expired, and to the Knowledge of Parent, nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Parent Plan subject to Section 401(a) of the Code. With respect to any Group Health Plan (as defined in Section 5000(b)(1) of the Code) maintained by Parent, any of its Subsidiaries, or ERISA Affiliates, each such plan has been operated in material compliance with the provisions of Part 6 of Title I of ERISA and Sections 4980B, 9801 and 9802 of the Code. Except as disclosed in Section 2.23(b) of the Parent Letter, neither Parent nor any of its Subsidiaries or ERISA Affiliates has any liability or obligation under any welfare plan to provide benefits after termination of employment to any employee or dependent other than as required by Section 4980B of the Code. (c) DEFINED TERMS. As used herein, "Parent Plan" or "Company Plan," as the case may be, means a "pension plan" (as defined in Section 3(2) of ERISA, a "welfare plan" (as defined in Section 3(1) of ERISA), or any other written or oral bonus, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, restricted stock, stock appreciation right, holiday pay, vacation, severance, medical, dental, vision, disability, death benefit, sick leave, fringe benefit, personnel policy, insurance or other plan, arrangement or understanding, in each case established or maintained by such party or any of its Subsidiaries or ERISA Affiliates or as to which it or any of its Subsidiaries or ERISA Affiliates has contributed or otherwise may have any liability. (d) SEVERANCE AND EMPLOYMENT AGREEMENTS. Except as set forth in Section 2.23(d) of the Parent Letter, the Parent SEC Documents contain a list or description of all (i) severance and employment agreements with employees of Parent and each Subsidiary and ERISA Affiliate, (ii) severance programs and policies of Parent and each Subsidiary and ERISA Affiliate with or relating to its employees and (iii) plans, programs, agreements and other arrangements of Parent and each Subsidiary and ERISA Affiliate with or relating to its employees containing change of control or similar provisions. 16 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Sub as follows: Section 3.1 ORGANIZATION, STANDING AND POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Each Subsidiary of the Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized and has the requisite corporate power and authority to carry on its business as now being conducted. The Company and each of its Subsidiaries are duly qualified to do business, and are in good standing, in each jurisdiction where the character of their properties owned or held under lease or the nature of their activities makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Section 3.2 CAPITAL STRUCTURE. (a) STOCK. As of the date hereof, the authorized capital stock of the Company consists of 10,000,000 shares of Company Common Stock. At the close of business on the date of execution hereof, (i) 5,990,158 shares of Company Common Stock were issued and outstanding, all of which were validly issued, fully paid and nonassessable and free of preemptive rights, (ii) no shares of Company Common Stock were held in the treasury; (iii) 750,000 shares of Company Common Stock were reserved for future issuance pursuant to the stock option plans of the Company (collectively, the "COMPANY STOCK OPTION PLANS"), (iv) 80,213 shares of Company Common Stock were reserved for future issuance pursuant to outstanding warrant rights, prior acquisitions and other matters. No shares of Company Common Stock are held by any Subsidiary of the Company. (b) OPTIONS, ETC. Section 3.2(b) of the letter dated the date hereof and delivered on the date hereof by the Company to Parent, which relates to this Agreement and is designated therein as the Company Letter, as such letter may be updated from time to time between the date hereof and May 14, 2002 (the "COMPANY LETTER"), contains a materially correct and complete list as of the date of this Agreement of each outstanding option, warrant or other right to purchase shares of Company Common Stock, whether issued under the Company Stock Option Plans (collectively, the "COMPANY STOCK OPTIONS") or otherwise, including the holder, date of grant, term, acceleration of vesting or exercisability, if any, exercise price and number of shares of Company Common Stock subject thereto. Except as set forth in Section 3.2(b) of the Company Letter, there are no options, warrants, calls, rights or agreements to which the Company or any of its Subsidiaries is a party or by which any of them is bound obligating the Company or any of its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of the Company or any of its Subsidiaries or obligating the Company or any of its Subsidiaries to grant, extend or enter into any such option, warrant, call, right or agreement. (c) CONTRACTUAL OBLIGATIONS. Except as set forth in Section 3.2(c) of the Company Letter, there are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares of Company Common Stock or any capital stock of or any equity interests in the Company or any Subsidiary. Each outstanding share of capital stock of each Subsidiary of the Company is duly authorized, validly issued, fully paid and nonassessable and each such share is owned by the Company or another Subsidiary of the Company, free and clear of all Liens. Except as set forth in Section 3.2 of the Company Letter, the Company does not have any outstanding bonds, debentures, notes or 17 other obligations the holders of which have the right to vote (or are convertible into or exercisable for securities having the right to vote) with the stockholders of the Company on any matter. Section 3.2(c) of the Company Letter contains a correct and complete list as of the date of this Agreement of each of the Company's Subsidiaries. Except as set forth on Section 3.2(c) of the Company Letter, as of the date hereof, neither the Company nor any of its Subsidiaries is party to or bound by (x) any agreement or commitment pursuant to which the Company or any Subsidiary of the Company is or could be required to register any securities under the Securities Act or (y) any debt agreements or instruments which grant any rights to vote (contingent or otherwise) on matters on which stockholders of the Company may vote. (d) ENTITIES. Section 3.2(d) of the Company Letter contains a correct and complete list as of the date of this Agreement of each entity in which the Company owns an equity interest (other than a Subsidiary), including the number of outstanding shares of the stock of each such entity and the percentage interest represented by the Company's ownership in the entity. Section 3.3 AUTHORITY. On or prior to the date of this Agreement, the Board of Directors of the Company has declared the Merger advisable and in the best interest of the Company and its stockholders, approved and adopted this Agreement in accordance with the DGCL, resolved to recommend the adoption of this Agreement by the Company's stockholders and directed that this Agreement be submitted to the Company's stockholders for adoption. The Company has all requisite corporate power and authority to enter into this Agreement, subject to approval and adoption by the stockholders of the Company of this Agreement, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, subject, in the case of this Agreement, to (x) approval and adoption of this Agreement by the stockholders of the Company and (y) the filing of the Certificate of Merger as required by the DGCL. This Agreement has been duly executed and delivered by the Company and (assuming the valid authorization, execution and delivery of this Agreement by Parent and Sub and the validity and binding effect of this Agreement on Parent and Sub) constitutes the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and similar laws relating to or affecting creditors generally and by general equity principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). The providing of information about the Company for inclusion in the Proxy Statement has been duly authorized by the Company's Board of Directors. Section 3.4 CONSENTS AND APPROVALS; NO VIOLATION. Assuming that all consents, approvals, authorizations and other actions described in this Section 3.4 have been obtained and all filings and obligations described in this Section 3.4 have been made, except as set forth in Section 3.4 of the Company Letter, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, result in any violation of, or material default (with or without notice or lapse of time, or both) under, or give to others a right of termination, cancellation or acceleration of any obligation or result in the loss of a material benefit under, or result in the creation of any material lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any of its Subsidiaries under, any provision of (i) the certificate of incorporation or bylaws of the Company, (ii) any provision of the comparable charter or organization documents of any of the Company's Subsidiaries, (iii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Company or any of its Subsidiaries or (iv) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or any of its Subsidiaries or any of their respective properties or assets, other than any such violations, defaults, 18 rights, losses, liens, security interests, charges or encumbrances that, individually or in the aggregate, would not have a Material Adverse Effect on the Company, materially impair the ability of the Company to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. No filing or registration with, or authorization, consent or approval of, any Governmental Entity is required by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement by the Company or is necessary for the consummation of the Merger and the other transactions contemplated by this Agreement, except for (i) in connection, or in compliance, with the provisions of the Securities Act and the Exchange Act, (ii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (iii) applicable requirements, if any, of Blue Sky Laws or AMEX, (iv) as may be required under foreign laws and (v) such other consents, orders, authorizations, registrations, declarations, approvals and filings the failure of which to be obtained or made would not, individually or in the aggregate, have a Material Adverse Effect on the Company, materially impair the ability of the Company to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby. Section 3.5 FINANCIAL STATEMENTS (a) The Company has heretofore delivered to Parent (i) consolidated balance sheets of the Company as at June 30, 1999, June 30, 2000 and June 30, 2001 and consolidated statements of operations, cash flows and changes in common stock and other stockholders' equity for each of the years then ended, audited by American Express, independent certified public accountants, whose audit reports thereon are included therein; and (ii) an unaudited consolidated balance sheet as at March 31, 2002 (the "COMPANY BALANCE SHEET") and an unaudited statement of operations for the nine month period then ended (collectively, the "COMPANY FINANCIAL STATEMENTS"). (b) Each of the Company Financial Statements (including, in each case, any related notes), complied, as of their respective dates, in all material respects with all applicable accounting requirements with respect thereto, was prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto) and fairly presented in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as at the respective dates thereof and the consolidated results of its operations and its consolidated cash flows for the periods then ended, (subject, in the case of the Company Balance Sheet and interim financial statements, to normal and recurring year-end audit adjustments which were not or are not expected to be material in amount. Except as required by GAAP, the Company has not, since June 30, 2001, made any material change in the accounting practices or policies applied in the preparation of financial statements. (c) The Company and its Subsidiaries do not have any liabilities or obligations (whether accrued, contingent, due or to become due or whether or not required to be reflected in financial statements in accordance with GAAP) other than (i) liabilities reflected in the Company Balance Sheet, (ii) normal or recurring liabilities incurred since the date of the Company Balance Sheet in the ordinary course of business consistent with past practices, and (iii) liabilities incurred in the performance of or as contemplated by this Agreement. (d) All accounts receivable of the Company whether reflected in the Company Balance Sheet or otherwise, represent sales actually made in the ordinary course of business, and are current and collectible net of any reserves shown on the Company Balance Sheet (which reserves were calculated consistent with past practices). (e) All of the inventories of the Company are of a quality usable and salable in the ordinary course of business and have been valued in accordance with GAAP consistent with past practice, except for items of obsolete materials and materials of below-standard quality, all of 19 which have been written off or written down to fair market value consistent with past practices. All inventories not written off have been priced at the lower of cost or market using average cost and the specific identification method determined in the ordinary course of business consistent with past practices. All work in process and finished goods inventory is free of any material defect or other deficiency. Section 3.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Section 3.6 of the Company Letter or as disclosed in the Company Financial Statements, prior to the date hereof there has been no event causing a Material Adverse Effect on the Company, nor any development that would, individually or in the aggregate, result in a Material Adverse Effect on the Company. Section 3.7 PERMITS AND COMPLIANCE. Each of the Company and its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, tariffs, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for the Company or any of its Subsidiaries to own, lease and operate its properties or to carry on its business as it is now being conducted (the "COMPANY PERMITS"), except where the failure to have any of the Company Permits would not, individually or in the aggregate, have a Material Adverse Effect on the Company, and no suspension or cancellation of any of the Company Permits is pending or, to the Knowledge of the Company, threatened, except where the suspension or cancellation of any of the Company Permits would not, individually or in the aggregate, reasonably be likely to have a Material Adverse Effect on the Company. Except as set forth in Section 3.7 of the Company Letter, neither the Company nor any of its Subsidiaries is in violation of, or has taken any action or omitted to take any action which, with the passage of time, would result in a violation of (A) its charter, bylaws or other organizational documents, (B) any applicable law, ordinance, administrative, or governmental rule or regulation, (C) any order, decree or judgment of any Governmental Entity having jurisdiction over the Company or any of its Subsidiaries or (D) any Company Permits. There are no contracts or agreements of the Company or its Subsidiaries containing covenants not to compete that materially impair the ability of the Company to conduct its business as currently conducted or would reasonably be expected to materially impair the Company's ability to conduct its businesses. Section 3.8 TAX MATTERS. Except as set forth in Section 3.8 of the Company Letter, (i) the Company and each of its Subsidiaries have timely filed (taking account of extensions to file that have been properly obtained) all Tax Returns required to have been filed by it, and such Tax Returns are correct and complete in all material respects and do not contain a disclosure statement under Section 6662 of the Code (or any predecessor provision or comparable provision of state, local or foreign laws); (ii) the Company and each of its Subsidiaries have timely paid (taking account of extensions to pay that have been properly obtained) all Taxes required to be paid by it and that have been due and will timely pay (taking account of such extensions) all Taxes required to be paid by it and that will be due on or prior to the Effective Time (other than Taxes that are being timely and properly contested in good faith), or where payment is not yet due or is being contested in good faith, has established in accordance with GAAP an adequate reserve for the payment of such Taxes; (iii) the Company and each of its Subsidiaries have complied in all material respects with all rules and regulations relating to the withholding of Taxes and the remittance of withheld Taxes; (iv) neither the Company nor any of its Subsidiaries has waived any statute of limitations in respect of its Taxes, which remains open; (v) no federal, state, local, or foreign audits or administrative proceedings, of which the Company or its Subsidiaries has written notice, are pending with regard to any Taxes or Tax Returns of the Company or its Subsidiaries and none of them has received a written notice of any proposed audit or proceeding from the IRS or any other taxing authority; (vi) no issues that have been raised by the relevant taxing authority in connection with the examination of Tax Returns required to have been filed by or with respect to the Company and each of its Subsidiaries are currently pending; (vii) all deficiencies asserted or assessments made as a result of any examination of such Tax Returns by any taxing authority have been paid in full; (viii) neither the Company nor any of its Subsidiaries has been 20 a member of an affiliated group of corporations (within the meaning of Section 1504(a) of the Code) filing a consolidated federal income tax return (or a group of corporations filing a consolidated, combined, or unitary income tax return under comparable provisions of state, local, or foreign tax law) for any taxable period, other than a group the common parent of which is the Company; (ix) neither the Company nor any of its Subsidiaries has any obligation under any agreement or arrangement with any other person with respect to Taxes of such other person (including pursuant to Treasury Regulations Section 1.1502-6 or comparable provision of state, local or foreign tax law) including any liability for Taxes of any predecessor entity; (x) neither the Company nor any of its Subsidiaries has filed any consent agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company; (xi) neither the Company nor any of its Subsidiaries is party to or has any obligation under any tax-sharing, tax indemnity or tax allocation agreement or arrangement; (xii) except as may be required as a result of the Merger, the Company and its Subsidiaries have not been and will not be required to include any adjustment in taxable income for any tax period (or portion thereof) pursuant to Section 481 or Section 263A of the Code or any comparable provision under state or foreign tax laws as a result of transactions, events or accounting methods employed prior to the Closing; (xiii) none of the Company's or its Subsidiaries' assets are tax exempt use property within the meaning of Section 168(h) of the Code; (xiv) the Company is not subject to (A) any foreign tax holidays, (B) any intercompany transfer pricing agreements, or other arrangements that have been established by the Company or any of its Subsidiaries with any tax authority and (C) any expatriate programs or policies affecting the Company or any of its Subsidiaries; (xv) the Company is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code; (xvi) neither the Company nor any of its Subsidiaries has ever made, or been required to make, an election under Section 338 of the Code. Section 3.9 ACTIONS AND PROCEEDINGS. Except as set forth in Section 3.9 of the Company Letter, there are no outstanding material orders, judgments, injunctions, awards or decrees of any Governmental Entity against or involving the Company or any of its Subsidiaries, or against or involving any of the present or former directors, officers, employees, consultants or agents of the Company or any of its Subsidiaries, as such, any of its or their properties, assets or business or any Company Plan. Except as set forth in Section 3.9 of the Company Letter, there are no material actions, suits or claims or legal, administrative or arbitrative proceedings or investigations (including claims for workers' compensation) pending or, to the Knowledge of the Company, threatened against or involving the Company or any of its Subsidiaries or any of its or their present or former directors, officers, employees, consultants or agents, as such, or any of the Company or its Subsidiaries properties, assets or business or any Company Plan. Section 3.10 CERTAIN AGREEMENTS. (a) COMPENSATION AGREEMENTS. Except as set forth in Section 3.10(a) of the Company Letter, neither the Company nor any of its Subsidiaries is a party to any Compensation Agreement. No holder of any option to purchase shares of Company Common Stock, or shares of Company Common Stock granted in connection with the performance of services for the Company or its Subsidiaries, is or will be entitled to receive cash from the Company or any Subsidiary in lieu of or in exchange for such option or shares as a result of the transactions contemplated by this Agreement. Section 3.10(a) of the Company Letter sets forth the total amount of indebtedness owed to the Company or its Subsidiaries from each officer, director or employee of the Company and its Subsidiaries. (b) CONTRACTS. Set forth in Section 3.10(b) of the Company Letter is a list of all contracts (whether oral or written) of the following categories to which the Company or any of its Subsidiaries is a party or by which any of them is bound: (i) contracts requiring annual expenditures by or liabilities of the Company and its Subsidiaries in excess of Seventy-Five 21 Thousand Dollars ($75,000) which have a remaining term in excess of one hundred eighty (180) days or are not cancelable (without material penalty, cost or other liability) within one hundred eighty (180) days; (ii) promissory notes, loans, agreements, indentures, evidences of indebtedness or other instruments relating to the lending of money, whether as borrower, lender or guarantor, in excess of Seventy-Five Thousand Dollars ($75,000); (iii) contracts containing covenants limiting the freedom of the Company or any of its Subsidiaries to engage in any line of business (other than prohibitions against engaging in business relating to specific product lines) or compete with any person, in any product line or line of business, or operate at any location; (iv) other contracts in which the Company or any of its Subsidiaries has granted exclusive marketing rights relating to any product or service, any group of products or services or any territory; and (v) to the Knowledge of the Company, as of the date hereof any other contract the performance of which could be reasonably expected to require expenditures by the Company or any of its Subsidiaries in excess of Seventy-Five Thousand Dollars ($75,000) (collectively, "COMPANY SIGNIFICANT CONTRACTS"). (c) BINDING CONTRACT. Except as set forth on Section 3.10(c) of the Company Letter, each Company Significant Contract is a legal, valid and binding agreement of the Company or its Subsidiaries, neither the Company nor any of its Subsidiaries (or to the Knowledge of the Company, any other party thereto) is in default under any Company Significant Contract, and none of such Company Significant Contracts has been canceled by the other party thereto; each Company Significant Contract is in full force and effect and no event has occurred which, with the passage of time or the giving of notice or both, would constitute a default, event of default or other breach by the Company or any Subsidiary party thereto which would entitle the other party to such Company Significant Contract to terminate the same or declare a default or event of default thereunder; the Company and its Subsidiaries are not in receipt of any claim of default under any such agreement; in each instance. Section 3.11 ERISA. (a) COMPANY PLAN. Each Company Plan is listed in Section 3.11(a) of the Company Letter. With respect to each Company Plan, the Company has made available to Parent a true and correct copy of (i) the three (3) most recent annual reports (Form 5500) filed with the IRS, (ii) each such Company Plan that has been reduced to writing and all amendments thereto, (iii) each trust agreement, insurance contract, administration agreement or funding arrangement relating to each such Company Plan, (iv) a written summary of each unwritten Company Plan, (v) the most recent summary plan description or other written explanation of each Company Plan provided to participants, (vi) the most recent determination letter issued by the IRS with respect to any Company Plan intended to be qualified under section 401(a) of the Code, (vii) any request for a determination currently pending before the IRS, and (viii) all correspondence with the IRS, the Department of Labor, the SEC or Pension Benefit Guaranty Corporation relating to any outstanding controversy. Each Company Plan complies in all material respects with ERISA, the Code and all other applicable statutes and governmental rules and regulations. No Company Plan is subject to Title IV of ERISA. Neither the Company nor any of its Subsidiaries or ERISA Affiliates is a party to, has made any contribution to or otherwise incurred any obligation under any "multiemployer plan" as defined in Sections (37) and 4001(a)(3) of ERISA. (b) QUALIFICATION. All Company Plans that are intended to be qualified under Section 401(a) of the Code have been determined by the IRS to be so qualified, or a timely application for such determination is now pending, or the remedial amendment period under applicable Treasury Regulations or IRS pronouncements has not expired, and to the Knowledge of the Company, nothing has occurred since the issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Company Plan subject to 22 Section 401(a) of the Code. With respect to any Group Health Plan (as defined in Section 5000(b)(1) of the Code) maintained by the Company, any of its Subsidiaries, or ERISA Affiliates, each such plan has been operated in material compliance with the provisions of Part 6 of Title I of ERISA and Sections 4980B, 9801 and 9802 of the Code. Except as disclosed in Section 3.11(b) of the Company Letter, neither the Company nor any of its Subsidiaries or ERISA Affiliates has any liability or obligation under any welfare plan to provide benefits after termination of employment to any employee or dependent other than as required by Section 4980B of the Code. (c) SEVERANCE AND EMPLOYMENT AGREEMENTS. Section 3.11(a) and Section 3.11(b) of the Company Letter collectively contain a list of all (i) severance and employment agreements with employees of the Company and each Subsidiary and ERISA Affiliate, (ii) severance programs and policies of the Company and each Subsidiary and ERISA Affiliate with or relating to its employees and (iii) plans, programs, agreements and other arrangements of the Company and each Subsidiary and ERISA Affiliate with or relating to its employees containing change of control or similar provisions. Section 3.12 LABOR MATTERS. Neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or labor contract. Neither the Company nor any of its Subsidiaries has engaged in any unfair labor practice with respect to its respective employees, and, to the Knowledge of the Company, there is no unfair labor practice complaint or grievance against the Company or any of its Subsidiaries by any person pursuant to the National Labor Relations Act or any comparable state agency or foreign law pending or threatened in writing. There is no labor strike, dispute, slowdown or stoppage pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries which may interfere with the respective business activities of the Company or any of its Subsidiaries. Section 3.13 INTELLECTUAL PROPERTY. The Company and its Subsidiaries own, or possess adequate licenses or other valid rights to use (including the right to sublicense to customers, suppliers or others as needed), all of the material Intellectual Property that is necessary for the conduct or contemplated conduct of the Company's or Subsidiaries' businesses. Section 3.13 of the Company Letter lists each material license or other agreement pursuant to which the Company or any Subsidiary has the right to use Intellectual Property utilized in connection with any product of, or service provided by, the Company and its Subsidiaries (the "COMPANY LICENSES"). There are no pending or to the Knowledge of the Company, threatened interferences, re-examinations, oppositions or cancellation proceedings involving any patents or patent rights, trademarks or trademark rights, or applications therefor, of the Company or any Subsidiary. There is no breach or violation by the Company or by any Subsidiary under, and, to the Knowledge of the Company, there is no breach or violation by any other party to, any Company License that is reasonably likely to give rise to any termination or any loss of rights thereunder. To the Knowledge of the Company, there has been no unauthorized disclosure or use of confidential information, trade secret rights, processes and formulas, research and development results and other know-how of the Company or any Subsidiary, the value of which to the Company and its Subsidiaries is dependent upon the maintenance of the confidentiality thereof. Section 3.14 REQUIRED VOTE OF COMPANY STOCKHOLDERS. The affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock is required to adopt this Agreement. No other vote of the security holders of the Company is required by law, the certificate of incorporation or bylaws of the Company or otherwise in order for the Company to consummate the Merger and the transactions contemplated hereby. Section 3.15 REORGANIZATION. To the Knowledge of the Company, (i) neither it nor any of its Subsidiaries has taken any action or failed to take any action which action or failure would jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code, 23 and (ii) there are no facts that would prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a) of the Code. Section 3.16 ENVIRONMENTAL MATTERS. (a) IN COMPLIANCE. To the Knowledge of the Company, the Company and its Subsidiaries are and have been in compliance with all applicable Environmental Laws, have obtained all Environmental Permits and are in compliance with their requirements, and have resolved all past non-compliance with Environmental Laws and Environmental Permits without any pending, on-going or future obligation, cost or liability, except in each case for the notices set forth in Section 3.16 of the Company Letter. (b) NO RELEASE. To the Knowledge of the Company, neither the Company nor any of its Subsidiaries has (i) placed, held, located, released, transported or disposed of any Hazardous Substances on, under, from or at any of the Company's or any of its Subsidiaries' properties or any other properties, (ii) any Knowledge or reason to know of the presence of any Hazardous Substances on, under, emanating from, or at any of the Company's or any of its Subsidiaries' properties or any other property but arising from the Company's or any of its Subsidiaries' current or former properties or operations, or (iii) any Knowledge or reason to know, nor has it received any written notice (A) of any violation of or liability under any Environmental Laws, (B) of the institution or pendency of any suit, action, claim, proceeding or investigation by any Governmental Entity or any third party in connection with any such violation or liability, (C) requiring the investigation of, response to or remediation of Hazardous Substances at or arising from any of the Company's or any of its Subsidiaries' current or former properties or operations or any other properties, (D) alleging noncompliance by the Company or any of its Subsidiaries with the terms of any Environmental Permit in any manner reasonably likely to require material expenditures or to result in material liability or (E) demanding payment for response to or remediation of Hazardous Substances at or arising from any of the Company's or any of its Subsidiaries' current or former properties or operations or any other properties, except in each case for the notices set forth in Section 3.16 of the Company Letter. (c) NO OBLIGATION. To the Knowledge of the Company, no Environmental Law imposes any obligation upon the Company or any of its Subsidiaries arising out of or as a condition to any transaction contemplated by this Agreement, including any requirement to modify or to transfer any permit or license, any requirement to file any notice or other submission with any Governmental Entity, the placement of any notice, acknowledgment or covenant in any land records, or the modification of or provision of notice under any agreement, consent order or consent decree. (d) NO ASSESSMENTS. There are no environmental assessments or audit reports or other similar studies or analyses in the possession or control of the Company or any of its Subsidiaries relating to any real property currently or formerly owned, leased or occupied by the Company or any of its Subsidiaries. Section 3.17 INSURANCE. The Company maintains fire and casualty, general liability, business interruption, product liability, and sprinkler and water damage insurance policies, all of which policies are with reputable insurance carriers, provide full and adequate coverage for all normal risks incident to the business of the Company and its Subsidiaries and their respective properties and assets, and are in character and amount similar to that carried by persons engaged in similar businesses and subject to the same or similar perils or hazards. All such policies are listed in Section 3.17 of the Company Letter. The Company and any of its Subsidiaries have made any and all payments required to maintain such policies in full force and effect. Neither the Company nor any of its Subsidiaries has received notice of default under any such policy, and has not received written notice or, to the Knowledge of 24 the Company, oral notice of any pending or threatened termination or cancellation, coverage limitation or reduction or material premium increase with respect to such policy. Section 3.18 TRANSACTIONS WITH AFFILIATES. Except as set forth in Section 3.18 of the Company Letter or as otherwise contemplated by this Agreement, (a) no beneficial owner of 5% or more of the Company's outstanding capital stock, or (b) officer or director of the Company or (c) any Person (other than the Company) in which any such beneficial owner, officer or director owns any beneficial interest (other than a publicly held corporation whose stock is traded on a national securities exchange or in the over-the-counter market and less than 1% of the stock of which is beneficially owned by all such Persons) has any interest in: (i) any contract, arrangement or understanding with, or relating to, the business or operations of, the Company or any of its Subsidiaries; (ii) any loan, arrangement, understanding, agreement or contract for or relating to indebtedness of the Company or any of its Subsidiaries; or (iii) any property (real, personal or mixed), tangible or intangible, used in the business or operations of the Company or any of its Subsidiaries, excluding any such contract, arrangement, understanding or agreement constituting a Company Plan or relating to terms of employment. Section 3.19 TITLE TO AND SUFFICIENCY OF ASSETS. (a) GOOD AND MARKETABLE TITLE. As of the date hereof, the Company and its Subsidiaries own, and as of the Effective Time the Company and its Subsidiaries will own, good and marketable title to all of their assets constituting personal property which is material to their business (excluding, for purposes of this sentence, assets held under leases), free and clear of any and all Liens, except as set forth in Section 3.19 of the Company Letter. Such assets, together with all assets held by the Company and its Subsidiaries under leases, include all tangible and intangible personal property, contracts and rights necessary or required for the operation of the businesses of the Company and its Subsidiaries as presently conducted. (b) NO REAL ESTATE. As of the date hereof, the Company and its Subsidiaries do not own, and as of the Effective Time the Company and its Subsidiaries will not own any real estate (excluding, for purposes of this sentence, real estate leases). All real estate leases held by the Company and its Subsidiaries, are adequate for the operation of the businesses of the Company and its Subsidiaries as presently conducted. Section 3.20 BROKERS. No broker, investment banker or other person (other than Bentley Securities Corporation, whose fees will be paid by the Company) is entitled to any broker's, finder's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. Section 3.21 LITIGATION. Except as set forth in Section 3.21 of the Company Letter, there are no actions, suits, investigations or proceedings pending or, to the Knowledge of the Company, threatened against the Company or any Subsidiary before any federal, state, municipal, foreign or other governmental department, commission, board, bureau, agency or instrumentality, and neither the Company nor any Subsidiary has received any written notice of, or any written threats concerning the possible commencement of, any such actions, suits or proceedings with respect to the business of the Company or any Subsidiary, as the case may be, any of which actions, suits, investigations or proceedings, if decided adversely to the Company, would be reasonably likely to have a Material Adverse Effect on the Company or any of its Subsidiaries. Section 3.22 SUPPLIERS AND DISTRIBUTORS. (a) NO NOTICE--SUPPLIERS. Neither the Company nor any of its Subsidiaries has received any notice, oral or written, or has any reason to believe that any significant supplier (including suppliers of data or information, which may include customers), including without limitation any sole source supplier, will not supply to the Company or any Subsidiary at any time after the Effective Time on terms and conditions substantially similar to those currently in place, 25 subject only to general and customary price increases, unless comparable supplies, data, information or other items are readily available from other sources on comparable terms and conditions. (b) NO NOTICE--DISTRIBUTORS. Neither the Company nor any of its Subsidiaries has received, since January 1, 2001, any notice, oral or written, or has any reason to believe that any distributors, sales representatives, sales agents, or other third party sellers, will not sell or market the products or services of the Company or any of its Subsidiaries at any time after the Effective Time on terms and conditions substantially similar to those used in the current sales and distribution contracts of the Company and its Subsidiaries. 26 ARTICLE 4 COVENANTS RELATING TO CONDUCT OF BUSINESS Section 4.1 CONDUCT OF BUSINESS PENDING THE MERGER. Except as expressly contemplated by this Agreement, and subject to the fiduciary obligations of its directors and officers, during the period from the date of this Agreement through the Effective Time, each of Parent and the Company shall, and shall cause each of its Subsidiaries to, in all material respects, carry on its business in the ordinary course as currently conducted and, to the extent consistent therewith, use commercially reasonable efforts to preserve intact its current business organizations, keep available the services of its current officers and key employees and preserve its relationships with customers, suppliers and others having business dealings with it. Without limiting the generality of the foregoing, and except as otherwise expressly contemplated by this Agreement, each of Parent and the Company shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of the other party: (a) (i) declare, set aside or pay any dividends on, or make any other actual, constructive or deemed distributions in respect of, any of its capital stock, or otherwise make any payments to its stockholders in their capacity as such, (ii) other than in the case of a reverse split of the Parent Common Stock, split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) purchase, redeem or otherwise acquire any shares of its capital stock any other securities thereof or any rights, warrants or options to acquire any such shares or other securities; (b) authorize for issuance, issue, deliver, sell, pledge, dispose of or otherwise encumber any shares of its capital stock, any other voting securities or equity equivalent or any securities convertible into, or any rights, warrants or options to acquire any such shares, voting securities, equity equivalent or convertible securities, other than the issuance of shares of capital stock upon the exercise of stock options outstanding on the date of this Agreement; (c) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, limited liability company, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets for an amount exceeding $50,000 in the aggregate, in the case the Company, or $25,000 in the aggregate, in the case of Parent; (d) except, in the case of the Company, for any advances under its secured line of credit, incur any indebtedness for borrowed money, guarantee any such indebtedness, incur, assume, guarantee, endorse, or prepay any material indebtedness (whether directly, indirectly, contingently or otherwise), or make any loans, advances or capital contributions to, or other investments in, any other person, other than (A) in amounts not to exceed $50,000 in the aggregate, in the case of the Company, or $25,000 in the aggregate, in the case of Parent; and (B) indebtedness, loans, advances, capital contributions and investments between it and any of its wholly-owned Subsidiaries or between any of such wholly-owned Subsidiaries, in each case in the ordinary course of business consistent with past practices and not in any event to exceed $50,000 in the aggregate, in the case of the Company, or $25,000 in the aggregate, in the case of Parent; or (e) authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing. Section 4.2 COOPERATION. Subject to compliance with applicable law, from the date hereof until the Effective Time, each of Parent and the Company shall confer on a regular and frequent basis with one or more representatives of the other party to report on the status of ongoing operations and discuss preparations for the operation of Parent following the Merger. 27 Section 4.3 NO SOLICITATION. (a) TAKEOVER PROPOSAL. Except as otherwise provided in this Section 4.3, each of Parent and the Company agrees that neither it nor any of its Subsidiaries nor any of the officers or directors of it or its Subsidiaries shall, and that it shall use all reasonable efforts to cause its and its Subsidiaries employees, agents and representatives not to, directly or indirectly: (i) solicit or initiate, or furnish or disclose non-public information in furtherance of, any inquiries or the making of any proposal with respect to any recapitalization, merger, consolidation or other business combination involving it, or the acquisition of its outstanding capital stock (other than upon exercise of options or warrants which are outstanding as of the date hereof) or any of its Subsidiaries or the acquisition of any substantial portion of the assets of it and its Subsidiaries, taken as a whole, in a single transaction or a series of related transactions, or any combination of the foregoing (a "TAKEOVER PROPOSAL"); (ii) negotiate or otherwise engage in discussions with any person with respect to any Takeover Proposal; or (iii) enter into any agreement, arrangement or understanding requiring it to abandon, terminate or fail to consummate the Merger or any other transactions contemplated by this Agreement. (b) PERMITTED SOLICITATION PERIOD. During the period commencing on the date hereof and ending on May 15, 2002, each of Parent and the Company may solicit Takeover Proposals and may accept any such Takeover Proposal that its Board of Directors reasonably determines, in the exercise of its fiduciary duty, is more favorable to it and its stockholders than the Merger (a "SUPERIOR TRANSACTION"). (c) UNSOLICITED PROPOSALS. To the extent required by the fiduciary duties of its directors under applicable law, each of Parent and the Company may furnish information to, and negotiate or otherwise engage in discussions with, any party (a "THIRD PARTY") who (i) delivers a bona fide written Takeover Proposal which was not solicited or initiated by it, directly or indirectly, after the date of this Agreement and (ii) enters into an appropriate confidentiality agreement with it, if, but only if, its Board of Directors determines in good faith by a majority vote that such proposal could reasonably be expected to lead to a Superior Transaction; provided further, that nothing in this Agreement shall prevent Parent from complying with the provisions of Rule 14e-2 under the Exchange Act with respect to a Takeover Proposal. (d) NOTICE AND TERMINATION. If the Board of Directors of Parent or the Company determines in good faith by a majority vote, with respect to any Takeover Proposal under Section 4.3(b) or 4.3(c), that such Takeover Proposal is a Superior Transaction and is in the best interests of it and its stockholders, then it may terminate this Agreement pursuant to Section 7.1(b)(iv) or 7.1(c)(iv), as the case may be, and enter into an acquisition agreement for the Superior Transaction; provided that, prior to any such termination, and in order for such termination to be effective, (i) it shall provide the other party two (2) business days' written notice that it intends to terminate this Agreement, identifying the Superior Transaction and delivering an accurate description of all material terms of the Superior Transaction to be entered into and (ii) on the date of termination, it shall deliver to the other party a written notice of termination of this Agreement. Section 4.4 REORGANIZATION. During the period from the date of this Agreement through the Effective Time, unless the other party shall otherwise agree in writing, none of Parent, the Company or any of their respective Subsidiaries shall take or fail to take any action with the actual knowledge of those taking or failing to take such action (or those directing such action or failure to take action) that such action or failure would jeopardize the qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. 28 ARTICLE 5 ADDITIONAL AGREEMENTS Section 5.1 STOCKHOLDER MEETINGS. (a) THE COMPANY. The Company will, as soon as practicable following the date of this Agreement, duly call, give notice of, convene and hold a meeting of its stockholders (the "COMPANY STOCKHOLDER MEETING") for the purpose of considering the approval and adoption of this Agreement and at such meeting call for a vote and cause proxies to be voted in respect of the approval and adoption of this Agreement. The Company will, through its Board of Directors, recommend to its stockholders the adoption and approval of this Agreement and subject to the fiduciary obligations of the Company's officers and directors, shall not withdraw, modify or change such recommendation. (b) PARENT. Parent will, as soon as practicable following the date of this Agreement, duly call, give notice of, convene and hold a meeting of its stockholders (the "PARENT STOCKHOLDER MEETING") for the purpose of considering: (i) the approval and adoption of this Agreement; (ii) the approval and adoption of a new stock option plan; and (ii) the approval and adoption of the amendment of Parent's certificate of incorporation to (A) change Parent's name to "Avatech Solutions, Inc.," (B) increase the authorized Parent Common Stock, and (c) if appropriate, effectuate a reverse split of Parent Common Stock. At such meeting Parent shall call for a vote and cause proxies to be voted in respect of the approval and adoption of this Agreement, such plan and such amendment. Parent will, through its Board of Directors, recommend to its stockholders the adoption and approval of this Agreement, such plan and such amendment, and, subject to the fiduciary obligations of Parent's officers and directors, shall not withdraw, modify or change such recommendation. Section 5.2 PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY STATEMENT. (a) PREPARATION AND FILING. The Company and Parent shall promptly prepare a Proxy Statement and Parent shall prepare and file with the SEC a Registration Statement, in which the Proxy Statement will be included as a prospectus, covering the issuance and sale of the Parent Common Stock in the Merger. Each of Parent and the Company shall use its commercially reasonable efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable after such filing. As promptly as practicable after the Registration Statement shall have become effective, the Company shall mail the Proxy Statement to its stockholders and Parent shall mail the Proxy Statement to its stockholders. Parent shall also take any action (other than qualifying to do business in any jurisdiction in which it is now not so qualified) required to be taken under any applicable state securities laws in connection with the issuance of Parent Common Stock in the Merger and the Company shall furnish all information concerning the Company and the holders of Company Common Stock as may be reasonably requested in connection with any such action. (b) COMMENTS. Parent will promptly notify the Company of the receipt of comments from the SEC and of any request by the SEC for amendments or supplements to the Registration Statement or the Proxy Statement or for additional information, and promptly will supply the Company with copies of all correspondence between Parent and the SEC with respect thereto. If, at any time prior to the Company Stockholder Meeting or Parent Stockholder Meeting, any event should occur relating to or affecting the Company, Parent or Sub, or to their respective Subsidiaries, officers or directors, which event should be described in an amendment or supplement to the Registration Statement or the Proxy Statement, the parties promptly will inform each other and cooperate in preparing, filing and having declared effective or clearing 29 with the SEC and, if required by applicable state securities laws, distributing to the Company's and Parent's stockholders such amendment or supplement. (c) INFORMATION--PARENT AND SUB. Parent and Sub represent and warrant that none of the information to be supplied in writing by Parent or Sub for inclusion or incorporation by reference in the Registration Statement or the joint proxy statement/prospectus included therein (together with any amendments or supplements thereto, the "PROXY STATEMENT") relating to the Company Stockholder Meeting and Parent Stockholder Meeting will (i) in the case of the Registration Statement, at the time it becomes effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) in the case of the Proxy Statement, at the time of the mailing of the Proxy Statement, at the time of each of the Company Stockholder Meeting and Parent Company Meeting and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event with respect to Parent, its officers and directors or any of its Subsidiaries shall occur which is required to be described in the Proxy Statement or the Registration Statement, such event shall be so described, and an appropriate amendment or supplement shall be promptly filed with the SEC and, as required by law, disseminated to the stockholders of Parent and the Company. The Registration Statement will comply (with respect to Parent) as to form in all material respects with the provisions of the Securities Act, and the Proxy Statement will comply (with respect to Parent) as to form in all material respects with the provisions of the Exchange Act. Notwithstanding the foregoing provisions of this Section 5.2(c), no representation or warranty is made by Parent or Sub with respect to statements made or incorporated by reference in the Proxy Statement or the Registration Statement based on information supplied in writing by the Company for inclusion or incorporation by reference therein. (d) INFORMATION--COMPANY. The Company represents and warrants that none of the information to be supplied in writing by the Company for inclusion or incorporation by reference in the Registration Statement or the Proxy Statement will (i) in the case of the Registration Statement, at the time it becomes effective, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or (ii) in the case of the Proxy Statement, at the time of the mailing of the Proxy Statement, at the time of each of the Company Stockholder Meeting and Parent Company Meeting and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If at any time prior to the Effective Time any event with respect to the Company, its officers and directors or any of its Subsidiaries shall occur which is required to be described in the Proxy Statement or the Registration Statement, such event shall be so described, and an appropriate amendment or supplement shall be promptly filed with the SEC and, as required by law, disseminated to the stockholders of the Company and Parent. The Registration Statement will comply (with respect to the Company) as to form in all material respects with the provisions of the Securities Act, and the Proxy Statement will comply (with respect to the Company) as to form in all material respects with the provisions of the Exchange Act. Notwithstanding the foregoing provisions of this Section 5.2(d), no representation or warranty is made by the Company with respect to statements made or incorporated by reference in the Proxy Statement or the Registration Statement based on information supplied in writing by Parent or Sub for inclusion or incorporation by reference therein. 30 Section 5.3 ACCESS TO INFORMATION; DUE DILIGENCE. Subject to any currently existing contractual and legal restrictions, during the period from the date of this Agreement through the Effective Time each of Parent and the Company shall, and shall cause each of its Subsidiaries to: (a) afford to the other party and the other party's accountants, counsel, financial advisors and other representatives reasonable access during normal business hours to, and permit them to make such inspections as they may reasonably require of, all of their respective properties, books, contracts, commitments and records (including engineering records and Tax Returns and the work papers of independent accountants, if available and subject to the consent of such independent accountants); and (b) (i) furnish promptly to the other party (A) a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws, and (B) all other information concerning its business, properties and personnel as the other party may reasonably request, (ii) promptly make available to the other party all personnel of it and its Subsidiaries knowledgeable about matters relevant to such inspections as reasonably requested by the other party, and (iii) provide reasonable access to its facilities and operations to enable the other party to conduct a review of the business. No investigation pursuant to this Section 5.3 shall affect any representation or warranty in this Agreement of any party hereto or any condition to the obligations of the parties hereto. All information obtained by either party pursuant to this Section 5.3 shall be kept confidential in accordance with the Mutual Non-Disclosure Agreement currently existing and in effect between Parent and the Company (the "CONFIDENTIALITY AGREEMENT"). Section 5.4 RULE 145 LETTERS. The Company will use all reasonable efforts to deliver or cause to be delivered to Parent, as promptly as practicable following the date hereof, from each person who may reasonably be deemed to be an affiliate of the Company for purposes of Rule 145 under the Securities Act (the "RULE 145 AFFILIATES") an executed affiliate agreement pursuant to which such affiliate shall agree to be bound by the provisions of Rule 145 in a form provided by Parent and reasonably acceptable to the Company. Parent will give stop transfer instructions to its transfer agent with respect to any Parent Common Stock received pursuant to the Merger by any Rule 145 Affiliate and there will be placed on the certificates representing such Parent Common Stock, or any substitutions therefor, a legend stating in substance that the shares were issued in a transaction to which Rule 145 applies and may only be transferred (i) in conformity with Rule 145 or (ii) in accordance with a written opinion of counsel, reasonably acceptable to Parent, in form and substance that such transfer is exempt from registration under the Securities Act. Section 5.5 STOCK EXCHANGE LISTING. Parent shall use its commercially reasonable efforts to list on AMEX, upon official notice of issuance, any and all shares of Parent Common Stock to be issued in connection with the Merger. Section 5.6 FEES AND EXPENSES. Subject to the provisions of Section 7.2: (a) all printing expenses, all expenses associated with obtaining stockholder approval, and all filing fees (including filing fees under the Securities Act, the Exchange Act, as well as applicable AMEX fees) shall be divided and borne equally between Parent and the Company; and (b) all other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby, including the fees and disbursements of counsel, financial advisors and accountants, shall be paid by the party incurring such costs and expenses (the costs and expenses in clauses (a) and (b), to the extent they represent out-of-pocket cash expenses payable to unaffiliated third parties, shall be referred to collectively as the "TRANSACTION EXPENSES"). 31 Section 5.7 COMPANY STOCK OPTIONS. (a) TERMINATION. The Company shall take appropriate actions, in accordance with the terms of the Company Stock Option Plans, to cause all unexercised Company Stock Options to terminate immediately prior to the Effective Time. (b) OPTION POOL. It is the intention of the parties that, following the Merger, the number of shares of Parent Common Stock reserved for issuance upon the exercise of stock options be equal to the sum of (i) the number of shares of Parent Common Stock underlying any Parent Stock Options that remain outstanding following the Merger; and (ii) 5,800,000 shares of Parent Common Stock reserved for issuance pursuant to a new option plan to be approved at the Parent Stockholder Meeting. Section 5.8 REVERSE STOCK SPLIT. Between the date hereof and the date of mailing the Proxy Statement, Parent and the Company shall determine whether it is appropriate to implement a reverse split of Parent Common Stock, and, if they so determine, shall agree upon a reverse split to be presented for approval at the Parent Stockholder Meeting. Section 5.9 EFFORTS REQUIRED. Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including: (i) the obtaining of all necessary actions or non-actions, waivers, consents and approvals from all Governmental Entities and the making of all necessary registrations and filings (including filings with Governmental Entities) and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid or vigorously defend an action or proceeding by, any Governmental Entity, (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) enlisting the cooperation of Parent's largest stockholder, (iv) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed, and (v) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement. No party to this Agreement shall consent to any voluntary delay of the consummation of the Merger at the behest of any Governmental Entity without the consent of the other parties to this Agreement, which consent shall not be unreasonably withheld, conditioned or delayed. Section 5.10 PUBLIC ANNOUNCEMENTS. Parent, Sub and the Company will not issue any press release with respect to the transactions contemplated by this Agreement or otherwise issue any written public statements with respect to such transactions without prior consultation with the other party. If such a press release or written public statement is required by applicable law or by AMEX rules, each party agrees to consult with the other party regarding the form and content of such release or statement prior to issuance thereof. Section 5.11 INDEMNIFICATION; DIRECTORS AND OFFICERS INSURANCE. (a) OFFICERS AND DIRECTORS. From and after the Effective Time, Parent shall indemnify and hold harmless all past and present officers and directors of Parent and each of its Subsidiaries (the "INDEMNIFIED PARTIES") to the same extent and in the same manner such persons are indemnified as of the date of this Agreement for acts or omissions occurring at or prior to the Effective Time (including indemnifying and holding harmless such persons for acts or omissions occurring at or prior to the Effective Time in respect of the Merger and the transactions contemplated thereby). 32 (b) D&O INSURANCE. Parent shall provide, for an aggregate period of not less than six (6) years from the Effective Time, Parent's current directors and officers an insurance and indemnification policy that provides coverage for events occurring prior to the Effective Time (the "D&O INSURANCE") that is substantially similar to Parent's existing policy at the Effective Time or, if substantially equivalent insurance coverage is unavailable, the best available coverage. (c) THIRD-PARTY BENEFICIARIES. This Section 5.11 is intended to be for the benefit of, and shall be enforceable by, the Indemnified Parties and their heirs and personal representatives and shall be binding on Parent and the Surviving Corporation and their successors and assigns. Section 5.12 BOARD OF DIRECTORS, OFFICERS AND EMPLOYEES OF PARENT. (a) COMPANY DESIGNATED DIRECTORS. The Board of Directors of Parent will take all actions necessary such that, immediately following the Effective Time, Parent's Board of Directors shall consist of seven (7) persons, not less than two (2) of whom shall be current members of Parent's Board of Directors, and two (2) of whom (including Henry D. Felton) shall be designated by the Company. (b) OFFICERS AND EMPLOYEES. The Board of Directors of Parent will take all actions necessary such that, immediately following the Effective Time, Henry D. Felton shall become the Chief Executive Officer of Parent. Parent and the Company will negotiate in good faith with certain of their other officers, employees and consultants who are expected to become (or continue to be) officers, employees or consultants of Parent following the Merger for such persons to accept the positions and the terms of employment as Parent and the Company shall agree upon. (c) SEVERANCE AGREEMENTS. Parent shall honor its existing change of control severance agreements. Section 5.13 NOTIFICATION OF CERTAIN MATTERS. Parent shall use its commercially reasonable efforts to give prompt notice to the Company, and the Company shall use its commercially reasonable efforts to give prompt notice to Parent, of: (i) the occurrence, or non-occurrence, of any condition or event the occurrence, or non-occurrence, of which it is aware and which would be reasonably likely (x) to cause any representation or warranty contained in this Agreement and made by it to be untrue or inaccurate in any material respect, (y) any covenant, condition or agreement contained in this Agreement and made by it not to be complied with or satisfied in all material respects, (ii) to cause any failure of Parent or the Company, as the case may be, to comply in a timely manner with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, or (z) to prevent the consummation of the Merger and other transactions contemplated hereby; (iii) any change or event which would be reasonably likely to have a Material Adverse Effect on Parent or the Company, as the case may be; PROVIDED, HOWEVER, that the delivery of any notice pursuant to this Section 5.13 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice Section 5.14 LOCK-UP AGREEMENTS. Each of Parent and the Company will use all commercially reasonable efforts to obtain, as promptly as practicable following the date hereof, from each of its Significant Stockholders an executed lock-up agreement in a form provided by Parent and reasonably acceptable to the Company (a "LOCK-UP AGREEMENT"), providing that seventy-five percent (75%) of the shares of Parent Common Stock held by such stockholder immediately following the Merger may not be sold for a period of 180 days following the Effective Time. Parent will give stop transfer instructions to its transfer agent with respect to all such shares and will place an appropriate restrictive legend on the certificates representing any Parent Common Stock received pursuant to the Merger, or in substitution therefore, by any such stockholder. For purposes of this Agreement, "SIGNIFICANT STOCKHOLDER" shall mean (i) each stockholder of Parent or the Company who, immediately following the 33 Merger, will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of more than two percent (2.0%) of the then outstanding Parent Common Stock, and (ii) each stockholder of Parent described in Section 6.1(d). Section 5.15 STANDSTILL AGREEMENT. The Company acknowledges that its directors, executive officers and significant stockholders shall be deemed to be in possession of material, non-public information regarding Parent as a result of the negotiation of this Agreement. Accordingly, the Company shall not, and shall use its commercially reasonable efforts to ensure that its directors, executive officers or significant stockholders shall not, directly or indirectly, purchase or otherwise acquire any ownership or other interest in Parent Common Stock until the earlier to occur of (i) the date that is ninety (90) days after the termination of this Agreement, and (ii) the Effective Time. 34 ARTICLE 6 CONDITIONS PRECEDENT TO THE MERGER Section 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of each of the following conditions: (a) STOCKHOLDER APPROVAL. This Agreement shall have been duly approved by the requisite vote of (i) the stockholders of the Company in accordance with applicable law, the certificate of incorporation and bylaws of the Company and (ii) the stockholders of Parent in accordance with applicable law, the certificate of incorporation and bylaws of Parent. The stockholders of Parent shall also have duly approved the other matters described in Section 5.1(b). (b) STOCK LISTING. The Parent Common Stock shall continue to be listed on AMEX, and the Parent Common Stock issuable in the Merger shall have been authorized for listing on AMEX, subject to official notice of issuance. (c) DEBT REDUCTION. The Company shall have made appropriate arrangements to obtain debt reduction of approximately $2,000,000. (d) PIPE HOLDERS. The investors in the private placement of Parent Common Stock completed on February 20, 2000, shall have agreed to accept Parent Common Stock or convertible Parent Preferred Stock in exchange for their outstanding claims relating to the registration of the Parent Common Stock they acquired in such placement, on terms and conditions reasonably satisfactory to both Parent and the Company. (e) CONSENTS, ETC. All authorizations, consents, orders, declarations or approvals of, or filings with, or terminations or expirations of waiting periods imposed by any Governmental Entity or any other third party, shall have been obtained, shall have been made or shall have occurred, and no rights to acquire Avatech Common Stock shall remain outstanding following the Effective Time. (f) REGISTRATION STATEMENT. The Registration Statement shall have become effective in accordance with the provisions of the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose shall have been initiated or, to the Knowledge of Parent or the Company, threatened by the SEC. All necessary state securities or blue sky authorizations shall have been received. (g) NO ORDER. No court or other Governmental Entity having jurisdiction over the Company or Parent, or any of their respective Subsidiaries, shall have enacted, issued, promulgated, enforced or entered any law, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is then in effect and has the effect of, directly or indirectly, restraining, prohibiting or restricting the Merger or any of the transactions contemplated hereby; PROVIDED, HOWEVER, that the provisions of this Section 6.1(g) shall not be available to any party whose failure to fulfill its obligations shall have been the cause of, or shall have resulted in, the enforcement or entering into of any such law, rule, regulation, executive order, decree, injunction or other order. (h) RIGHTS AGREEMENT. Parent shall have: (A) taken appropriate actions to ensure that the Merger will not enable or require the Rights to be exercised, distributed or triggered; or (B) redeemed all outstanding Rights and terminated the Rights Agreement. (i) AFFILIATE AGREEMENTS. Parent shall have received the written agreements from the Rule 145 Affiliates. (j) LOCK-UP AGREEMENTS. Parent shall have received the Lock-Up Agreements. 35 (k) LIMIT ON DISSENTERS. The holders of shares representing no more than 50,000 shares of outstanding Company Common Stock shall have provided notice prior to the Effective Time of their intent to exercise dissenter's rights under the DGCL. Section 6.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER. The obligation of the Company to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of each of the following additional conditions: (a) PERFORMANCE OF OBLIGATIONS; REPRESENTATIONS AND WARRANTIES. (i) Each of Parent and Sub shall have performed in all material respects each of its agreements and covenants contained in this Agreement required to be performed on or prior to the Effective Time, (ii) each of the representations and warranties of Parent and Sub contained in this Agreement that is qualified by materiality shall have been true and correct when made, and shall be true and correct on and as of the Effective Time as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct as of such certain date) and (iii) each of the representations and warranties that is not so qualified shall have been true and correct in all material respects when made, and shall be true and correct in all material respects on and as of the Effective Time as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct in all material respects as of such certain date), in each case except as contemplated or permitted by this Agreement, and the Company shall have received certificates signed on behalf of each of Parent and Sub by one of its officers to such effect. (b) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no Material Adverse Change with respect to Parent. The Company shall have received a certificate signed on behalf of Parent by an officer of Parent to such effect. (c) PQA PRODUCT. Parent shall have developed a prototype PQA product for the Autodesk Inventor or the AutoCad platform that is reasonably acceptable to the Company. (d) TAX OPINION. The Company shall have received the written opinion from its counsel, in form and substance reasonably satisfactory to it, to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and such opinion shall not have been withdrawn. (e) AVAILABLE CASH. Parent shall have delivered to the Company a certificate of an officer of Parent certifying that, as of the close of business on a date no earlier than two business days prior to the Closing Date, the Available Cash is not less than $2,000,000. For purposes of this Agreement, "AVAILABLE CASH" means (i) sum of Parent's cash, cash equivalents and accounts receivable, minus its accounts payable (as each is determined in accordance with GAAP applied on a consistent basis), minus (ii) Parent's good faith estimate of any Transaction Expenses of Parent not reflected in such amount, minus (iii) the Company's good faith estimate, as provided to Parent on or before such date, of the total Transaction Expenses of the Company. Section 6.3 CONDITIONS TO OBLIGATIONS OF PARENT AND SUB TO EFFECT THE MERGER. The obligations of Parent and Sub to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of each of the following additional conditions: (a) PERFORMANCE OF OBLIGATIONS; REPRESENTATIONS AND WARRANTIES. The Company shall have performed in all material respects each of its covenants and agreements contained in this Agreement required to be performed on or prior to the Effective Time. Each of the representations and warranties of the Company contained in this Agreement that is qualified by materiality shall have been true and correct when made, and shall be true and correct on 36 and as of the Effective Time as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct as of such certain date), and each of the representations and warranties that is not so qualified shall have been true and correct in all material respects when made, and shall be true and correct in all material respects on and as of the Effective Time as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct in all material respects as of such certain date), in each case except as contemplated or permitted by this Agreement. Parent shall have received a certificate signed on behalf of the Company by one of its officers to such effect. (b) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no Material Adverse Change with respect to the Company. Parent shall have received a certificate signed on behalf of the Company by one of its officers to such effect. (c) FAIRNESS OPINION. Parent shall have received the written opinion from its financial advisor dated as of dated as of a date no later than the date that the definitive Proxy Statement is first mailed or sent to the stockholders of Parent to the effect that the Merger Consideration is fair to Parent's stockholders from a financial point of view. (d) TAX OPINION. Parent shall have received the written opinion from its counsel, in form and substance reasonably satisfactory to it, to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code, and such opinion shall not have been withdrawn. 37 ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER Section 7.1 TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after any approval of the matters presented in connection with the Merger by the stockholders of Parent and the Company, only in the following manner and upon the following events: (a) BY EITHER PARENT OR THE COMPANY: (i) if both of Parent and the Company mutually consent in writing to such termination; or (ii) if: (A) the Merger has not been effected on or prior to the close of business on September 30, 2002, or such later date as shall be mutually agreed upon between Parent and the Company; PROVIDED, HOWEVER, that the right to terminate this Agreement pursuant to this Section 7.1(a)(i) shall not be available to any party whose failure to fulfill any of its obligations contained in this Agreement has been the cause of, or resulted in, the failure of the Merger to have occurred on or prior to the aforesaid date; or (B) any court or other Governmental Entity having jurisdiction over a party hereto shall have issued an order, decree or ruling or taken any other action (which order, decree, ruling or other action the parties shall have used their commercially reasonable efforts to resist, resolve or lift, as applicable, subject to the provisions of Section 5.9) permanently enjoining, restraining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; and (b) BY PARENT: (i) on or before May 15, 2002, if Parent, in its sole discretion, is not satisfied with the results of its due diligence review of the Company, including but not limited to the information disclosed in the Company Letter; (ii) if the Company shall have failed to comply in any material respect with any of its covenants or agreements contained in this Agreement required to be complied with prior to the date of such termination, which failure to comply has not been cured within ten (10) business days following receipt by the Company of written notice of such failure to comply, or such shorter period as may otherwise be specified herein; (iii) if there has been a breach of a representation, warranty, covenant or obligation of the Company that gives rise to a failure of the fulfillment of a condition of Parent's and Sub's obligations to effect the Merger pursuant to Section 6.3(a), which breach has not been cured within ten (10) business days following receipt by the Company of written notice of the breach; or (iv) if (A) the Board of Directors of Parent has made a determination to terminate this Agreement under the circumstances described in Section 4.3(d), or (B) a tender offer or exchange offer for 20% or more of the outstanding Parent Common Stock is commenced by a third party that is not an Affiliate of Parent, and the Board of Directors of Parent fails to recommend against acceptance of such tender offer or exchange offer by its stockholders (including by taking no position with respect to the acceptance of such tender offer or exchange offer by its stockholders); and 38 (c) BY THE COMPANY: (i) on or before May 15, 2002, if the Company, in its sole discretion, is not satisfied with the results of its due diligence review of Parent, including but not limited to the information disclosed in the Parent Letter; (ii) if either Parent or Sub shall have failed to comply in any material respect with any of its covenants or agreements contained in this Agreement required to be complied with prior to the date of such termination, which failure to comply has not been cured within ten (10) business days following receipt by such other party of written notice of such failure to comply; (iii) if there has been a breach of a representation, warranty, covenant or obligation of either Parent or Sub that gives rise to a failure of the fulfillment of a condition of the Company's obligations to effect the Merger pursuant to Section 6.2(a), which breach has not been cured within ten business days following receipt by Parent of written notice of the breach; or (iv) if the Board of Directors of the Company has made a determination to terminate this Agreement under the circumstances described in Section 4.3(d). The right of any party hereto to terminate this Agreement pursuant to this Section 7.1 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any person controlling any such party or any of their respective officers or directors, whether prior to or after the execution of this Agreement. Section 7.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by either Parent or the Company as provided in Section 7.1, this Agreement shall forthwith become void and there shall be no liability hereunder on the part of the Company, Parent, Sub or their respective officers or directors (except for the last sentence of Section 5.3, the entirety of Section 5.6 and the entirety of Section 5.15, each of which shall survive the termination); PROVIDED, HOWEVER: (i) in the event of a termination by Parent under circumstances where the Company continues to be willing and able to proceed with the Merger, then Parent shall immediately reimburse the Company for (A) all of the Company's Transaction Expenses; and (B) up to $50,000 of the Company's actual expenses relating to its development of a marketing plan for Parent's products; (ii) in the event of a termination by the Company under circumstances where Parent continues to be willing and able to proceed with the Merger, then the Company shall immediately reimburse Parent for all of Parent's Transaction Expenses; and (iii) nothing contained in this Section 7.2 shall relieve any party hereto from any liability for any willful breach of a representation or warranty contained in this Agreement or the willful breach of any covenant contained in this Agreement. Section 7.3 AMENDMENT. This Agreement may be amended by the parties hereto, by or pursuant to action taken by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the stockholders of the Company or Parent, but, after any such approval, no amendment shall be made which by law or the rules of AMEX, requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 7.4 WAIVER. At any time prior to the Effective Time, the parties hereto may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein which may legally be waived. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. No delay on the part of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, 39 power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Unless otherwise provided, the rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that the parties hereto may otherwise have at law or in equity. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. 40 ARTICLE 8 GENERAL PROVISIONS Section 8.1 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally or one day after being delivered to an overnight courier for delivery to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) PARENT OR SUB. If to Parent or Sub, to: PlanetCAD Inc. 2520 55th Street, Suite 200 Boulder, Colorado 80301 Attention: Joy Godesiabois with a copy to: Hogan & Hartson L.L.P. One Tabor Center 1200 Seventeenth Street, Suite 1500 Denver, Colorado 80202 Attention: Whitney Holmes, Esq. (b) COMPANY. If to the Company, to: Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, Maryland 21117 Attention: Scott Fischer with a copy to: Shapiro Sher & Guinot 36 South Charles Street Suite 2000 Baltimore, Maryland 21201 Attention: Sheryl N. Stephenson Section 8.2 INTERPRETATION. (a) REFERENCES AND HEADINGS. When a reference is made in this Agreement to a Section, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." (b) "SUBSIDIARY(IES)" means any corporation, partnership, limited liability company, joint venture or other legal entity of which Parent or Company, as the case may be (either alone or through or together with any other Subsidiary), owns or controls, directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation, partnership, limited liability company, joint venture or other legal entity. Section 8.3 COUNTERPARTS. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 41 Section 8.4 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, other than the Confidentiality Agreement. This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder, except as specifically provided, following the Effective Time, in Section 5.11. Section 8.5 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Section 8.6 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors or assigns. Section 8.7 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other terms, conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic and legal substance of the transactions contemplated hereby are not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated by this Agreement may be consummated as originally contemplated to the fullest extent possible. Section 8.8 ENFORCEMENT OF THIS AGREEMENT. The parties hereto agree that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof such remedy being in addition to any other remedy to which any party is entitled at law or in equity. Each party hereto irrevocably submits to the exclusive jurisdiction of the Chancery Court of the State of Delaware. Each party hereto waives any objection based on forum non conveniens or any other objection to venue thereof. 42 Section 8.9 DEFINED TERMS. Each of the following terms is defined in the Section identified below: Agreement................................................... Preamble AMEX........................................................ Section 1.8 Available Cash.............................................. Section 6.2(e) Blue Sky Laws............................................... Section 2.4 Certificate of Merger....................................... Section 1.2 Certificates................................................ Section 1.6(b) Closing..................................................... Section 1.15 Closing Date................................................ Section 1.15 Code........................................................ Recitals Company..................................................... Preamble Company Balance Sheet....................................... Section 3.5(a) Company Common Stock........................................ Section 1.5(d) Company Dissenting Shares................................... Section 1.13(a) Company Financial Statements................................ Section 3.5(a) Company Letter.............................................. Section 3.2(b) Company Licenses............................................ Section 3.13 Company Permits............................................. Section 3.7 Company Plan................................................ Section 2.23(c) Company Stockholder Meeting................................. Section 5.1(a) Company Significant Contracts............................... Section 3.10(b) Company Stock Option Plans.................................. Section 3.2(a) Company Stock Options....................................... Section 3.2(b) Compensation Agreements..................................... Section 2.22(a) Confidentiality Agreement................................... Section 5.3 Constituent Corporations.................................... Preamble DGCL........................................................ Section 1.1 D&O Insurance............................................... Section 5.11(b) Effective Time.............................................. Section 1.2 Environmental Law........................................... Section 2.13(a) Environmental Permit........................................ Section 2.13(a) ERISA....................................................... Section 2.22(a) Exchange Act................................................ Section 2.4 Exchange Agent.............................................. Section 1.6(a) Exchange Fund............................................... Section 1.6(a) Exchange Ratio.............................................. Section 1.5(c)
43 GAAP........................................................ Section 2.6(b) Governmental Entity......................................... Section 2.4 Hazardous Substances........................................ Section 2.13(a) Intellectual Property....................................... Section 2.12 IRS......................................................... Section 2.10 Indemnified Parties......................................... Section 5.11(a) Knowledge................................................... Section 2.9 Lock-Up Agreement........................................... Section 5.14 Material Adverse Change..................................... Section 2.1 Material Adverse Effect..................................... Section 2.1 Merger...................................................... Recitals Merger Consideration........................................ Section 1.5(d) Merger Shares............................................... Section 1.5(d) Parent...................................................... Preamble Parent Balance Sheet........................................ Section 2.6(c) Parent Common Stock......................................... Section 1.5(d) Parent Letter............................................... Section 2.2(b) Parent Licenses............................................. Section 2.12 Parent Permits.............................................. Section 2.9 Parent Plan................................................. Section 2.23(c) Parent Preferred Stock...................................... Section 2.2(a) Parent SEC Documents........................................ Section 2.6(a) Parent Significant Contracts................................ Section 2.22(b) Parent Stockholder Meeting.................................. Section 5.1(b) Parent Stock Option Plans................................... Section 2.2(a) Parent Stock Options........................................ Section 2.2(b) Proxy Statement............................................. Section 5.2(c) Registration Statement...................................... Section 2.3 Rule 145 Affiliates......................................... Section 5.4 SEC......................................................... Section 2.3 Securities Act.............................................. Section 2.3 Significant Stockholder..................................... Section 5.14 Sub......................................................... Preamble Subsidiary(ies)............................................. Section 8.2(b) Superior Transaction........................................ Section 4.3(b) Surviving Corporation....................................... Section 1.1 Takeover Proposal........................................... Section 4.3(a) Tax Return.................................................. Section 2.10 Taxes....................................................... Section 2.10 Third Party................................................. Section 4.3(c) Transaction Expenses........................................ Section 5.6
44 IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized all as of the date first above written. PLANETCAD INC., a Delaware Corporation By: /s/ DAVID HUSHBECK ------------------------------------- David Hushbeck PRESIDENT RAVEN ACQUISITION CORPORATION a Delaware Corporation By: /s/ DAVID HUSHBECK ------------------------------------- David Hushbeck PRESIDENT AVATECH SOLUTIONS INC., a Delaware Corporation By: /s/ HENRY D. FELTON ------------------------------------- Henry D. Felton CHAIRMAN AND CHIEF EXECUTIVE OFFICER 45 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER AMENDMENT NO. 1, dated as of May 29, 2002 (this "AMENDMENT"), to the Agreement and Plan of Merger dated as of May 1, 2002 (the "MERGER AGREEMENT"), by and among PlanetCAD Inc., a Delaware corporation ("PARENT"), Raven Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Parent ("SUB"), and Avatech Solutions, Inc., a Delaware corporation (the "COMPANY"). Capitalized terms used but not defined herein are used as defined in the Merger Agreement. WHEREAS, Parent, Sub and the Company desire to amend the Merger Agreement in certain respects; NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants set forth herein, the parties hereby agree as follows: 1. AMENDMENT TO SECTION 1.6(C). Section 1.6(c) of the Merger Agreement is hereby amended, effective as of the date of the Merger Agreement, to read in its entirety as follows: (c) STOCK OPTIONS AND WARRANTS. Company Stock Options (as defined in Section 3.2(b)) shall be governed by Section 5.7(a). Parent and the Company will make appropriate arrangements to cause each outstanding warrant to purchase Avatech Common Stock to be converted into a right to purchase that number of shares of PlanetCAD Common Stock determined by multiplying the number of shares of Avatech Common Stock subject thereto by the Exchange Ratio, at an exercise price equal to the exercise price thereof divided by the Exchange Ratio. 2. AMENDMENT TO SECTION 5.7. Section 5.7 of the Merger Agreement is hereby amended, effective as of the date of the Merger Agreement, to read in its entirety as follows: Section 5.7 COMPANY STOCK OPTIONS. (a) ASSUMPTION. At the Effective Time, each then outstanding Company Stock Option, whether or not exercisable at the Effective Time and regardless of the exercise price thereof, will be assumed by Parent. Each Company Stock Option so assumed by Parent under this Agreement will continue to have, and be subject to, the same terms and conditions set forth in the applicable Company Stock Option (including any applicable stock option agreement or other document evidencing such Company Stock Option) immediately prior to the Effective Time (including any repurchase rights or vesting provisions), except that (i) each Company Stock Option will be exercisable (or will become exercisable in accordance with its terms) for that number of whole shares of Parent Common Stock equal to the product of the number of shares of Company Common Stock that were issuable upon exercise of such Company Stock Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of Parent Common Stock and (ii) the per share exercise price for the shares of Parent Common Stock issuable upon exercise of such assumed Company Stock Option will be equal to the quotient determined by dividing the exercise price per share of Company Common Stock at which such Company Stock Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, rounded up to the nearest whole cent. Each assumed Company Stock Option shall be vested immediately following the Effective Time as to the same percentage of the total number of shares subject thereto as it was vested as to immediately prior to the Effective Time, except to the extent such Company Stock Option by its terms in effect prior to the date hereof provides for acceleration of vesting. As soon as reasonably practicable following the Effective Time, Parent will issue to each person who holds an assumed Company Stock Option a document evidencing the foregoing assumption of such Company Stock Option by Parent. (b) INCENTIVE STOCK OPTIONS. The conversion of Company Stock Options provided for in Section 5.7(a), with respect to any options that are intended to be "incentive stock options" (as defined in Section 422 of the Code), shall be effected in a manner consistent with Section 424(a) of the Code. (c) FORM S-8. Parent agrees to file with the SEC under the Securities Act a registration statement on Form S-8 for the shares of Parent Common Stock issuable with respect to assumed Company Stock Options, to the extent Form S-8 is available, as soon as is reasonably practicable after the Effective Time and shall maintain the effectiveness of such registration statement thereafter for so long as any of such options or other rights remain outstanding. (d) OPTION POOL. It is the intention of the parties that, following the Merger, the number of shares of Parent Common Stock reserved for issuance upon the exercise of stock options be equal to the sum of (i) the number of shares of Parent Common Stock underlying the Company Stock Options assumed pursuant the Merger, (ii) the number of shares of Parent Common Stock underlying any Parent Stock Options that remain outstanding following the Merger; and (iii) 3,100,000 shares of Parent Common Stock reserved for issuance pursuant to a new option plan to be approved at the Parent Stockholder Meeting. 3. EFFECT OF AMENDMENT. Except as and to the extent expressly modified by this Amendment, the Merger Agreement shall remain in full force and effect in all respects. 4. COUNTERPARTS. This Amendment may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 5. GOVERNING LAW. This Amendment shall be governed by, and construed in accordance with, the internal laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Amendment to be signed by their respective officers thereunto duly authorized all as of the date first above written. PLANETCAD INC., a Delaware Corporation By: /s/ David Hushbeck ----------------------------------- David Hushbeck, President RAVEN ACQUISITION CORPORATION, a Delaware Corporation By: /s/ David Hushbeck ----------------------------------- David Hushbeck, President AVATECH SOLUTIONS, INC., a Delaware Corporation By: /s/ Henry D. Felton ----------------------------------- Henry D. Felton, Chairman and Chief Executive Officer ANNEX B PLANETCAD STOCKHOLDER VOTING AGREEMENT THIS AGREEMENT, dated as of May 1, 2002 (the "Agreement"), is entered into among Avatech Solutions, Inc., a Delaware corporation (the "Company") and certain stockholders of PlanetCAD Inc., a Delaware corporation ("Parent"), whose names appear on SCHEDULE I hereto (collectively, the "Stockholders"). WITNESSETH: WHEREAS, on May 1, 2002, Parent, Raven Acquisition Corporation, a Delaware corporation ("Sub"), and the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), which provides for, upon the terms and subject to the conditions set forth therein, the merger of Sub with and into the Company (the "Merger"); WHEREAS, as of the date hereof, each Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of the number of shares of Parent Common Stock set forth opposite such Stockholder's name on SCHEDULE I hereto (the "Owned Shares"); WHEREAS, as a condition to the Company's obligations under the Merger Agreement, the Company has required that the Stockholders enter into this Agreement; and WHEREAS, in order to induce the Company to consummate the Merger, the Stockholders are willing to enter into this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Company and each of the Stockholders, severally and not jointly, hereby agree as follows: ARTICLE I TRANSFER AND VOTING OF SHARES; OTHER COVENANTS OF THE STOCKHOLDERS 1.1. VOTING OF SHARES. Each Stockholder agrees, at any meeting of the stockholders of Parent, however called, and in any action by consent of the stockholders of Parent, that such Stockholder shall vote the Owned Shares (i) in favor of the approval and adoption of the Merger Agreement (as amended from time to time) and (ii) in favor of any other matter necessary for consummation of the transactions contemplated by the Merger Agreement which is considered at any such meeting of stockholders, and in connection therewith to execute any documents which are necessary or appropriate in order to effectuate the foregoing, including the ability for the Company or its nominees to vote such Owned Shares directly solely with respect to the matters referred to in this Section 1.1. 1.2. NO INCONSISTENT ARRANGEMENTS. Except as contemplated by this Agreement, each Stockholder shall not during the term of this Agreement (i) transfer (which term shall include, without limitation, any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to any transfer of, any or all of such Stockholder's Owned Shares or any interest therein, or create or permit to exist any Encumbrance (as defined below) on such Owned Shares unless such transfer or Encumbrance is done subject to the voting requirements set forth in Section 1.1 and subject to any such transferee or the beneficiary of any such Encumbrance executing a Proxy (as defined below), (ii) enter into any contract, option or other agreement or understanding with respect to any transfer of any or all of such Owned Shares or any interest therein on terms that would, at the time of entering into such contract, option or other agreement or understanding or with the passage of time, violate clause (i) above, (iii) grant any proxy, power-of-attorney or other authorization in or with respect to such Owned Shares, (iv) deposit such Owned Shares into a voting trust or enter into a voting agreement or arrangement with respect to 1 such Owned Shares or (v) take any other action that would in any way restrict, limit or interfere with the performance of such Stockholder's obligations hereunder or the transactions contemplated hereby or by the Merger Agreement. Notwithstanding anything in this Agreement to the contrary, each Stockholder may transfer all or any of such Stockholder's Owned Shares to any trust, partnership or similar vehicle formed for estate, tax or family planning purposes of which such Stockholder controls the vote, provided that as a condition of such transfer, such Stockholder notifies the Company and provides the Company with documentation reasonably satisfactory to the Company as to the consent of the transferee to be bound by all of the provisions of this Agreement. 1.3. PROXY. Each Stockholder hereby revokes any and all prior proxies or powers-of-attorney in respect of any of the Owned Shares and constitutes and agrees to execute the proxy in the form attached hereto as EXHIBIT A (the "Proxy"). 1.4. STOP TRANSFER. Each Stockholder shall not request that Parent register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of the Owned Shares, unless such transfer is made in compliance with this Agreement and acknowledges that Parent and the Company may notify Parent's transfer agent of the terms hereof. 1.5. DISCLOSURE. Each Stockholder hereby authorizes Parent and the Company to publish and disclose in the Proxy Statement/Prospectus (including all documents and schedules filed with the SEC) its identity and ownership of the Owned Shares and the nature of its commitments, arrangements and understandings under this Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER Each Stockholder hereby represents and warrants to the Company as follows: 2.1. DUE AUTHORIZATION, ETC. Such Stockholder has all requisite personal or corporate power and authority to execute, deliver and perform this Agreement, to appoint the Company as its Proxy and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, the appointment of the Company as Stockholder's Proxy and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of such Stockholder. This Agreement has been duly executed and delivered by or on behalf of such Stockholder and constitutes a legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws and except that the. availability of equitable remedies, including specific performance, is subject to the, discretion of the court before which any proceeding for such remedy may be brought.. 2.2. NO CONFLICTS; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of this Agreement by such Stockholder does not, and the performance of this Agreement by such Stockholder will not conflict with or violate any document, agreement, law, regulation or order to which such Stockholder is subject or by which such Stockholder or any of such Stockholder's assets is bound or affected. (b) The execution and delivery of this Agreement by such Stockholder does not, and the performance of this Agreement by such Stockholder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority (other than any necessary filing under the Exchange Act), domestic or foreign, except where the failure to obtain such consents, approvals, authorizations at permits, or to make such filings or notifications, would not prevent or delay the performance by such Stockholder of such Stockholder's obligations under this Agreement. 2 2.3. TITLE TO SHARES. Such Stockholder is the sole record and beneficial owner of the Owned Shares, free and clear of any pledge, lien, security interest, mortgage, charge, claim, equity, option, proxy, voting restriction, voting trust or agreement, understanding, arrangement, right of first refusal, limitation on disposition, adverse claim of ownership or use or encumbrance of any kind ("Encumbrances"), other than restrictions imposed by the securities laws or pursuant to this Agreement or the Merger Agreement or as otherwise disclosed by such Stockholder to the Company. ARTICLE III MISCELLANEOUS 3.1. DEFINITIONS. Terms used but not otherwise defined in this Agreement have the meanings ascribed to such terms in the Merger Agreement. 3.2. TERMINATION. This Agreement shall terminate and be of no further force and effect (i) by the unanimous written consent of the parties hereto or (ii) automatically and without any required action of the parties hereto upon (x) the Effective Time or (y) the termination of the Merger Agreement in accordance with its terms. No such termination of this Agreement shall relieve any party hereto from any liability for any breach of this Agreement prior to termination. 3.3. FURTHER ASSURANCE. From time to time, at another party's request and without consideration, each party hereto shall execute and deliver such additional documents and take all such further action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transaction contemplated by this Agreement. Each Stockholder understands and acknowledges that the Company is proceeding with the Merger in reliance upon each Stockholder's execution and delivery of this Agreement. 3.4. CERTAIN EVENTS. Each Stockholder agrees that this Agreement and such Stockholder's obligations hereunder shall attach to such Stockholder's Owned Shares and shall be binding upon any person or entity to which legal or beneficial ownership of such Owned Shares shall pass, whether by operation of law or otherwise, including, without limitation, such Stockholder's heirs, guardians, administrators, or successors. Notwithstanding any transfer of Owned Shares, the transferor shall remain liable for the performance of all its obligations under this Agreement. 3.5. NO WAIVER. The failure of any party hereto to exercise any right, power, or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, any custom or practice of the parties at variance with the terms hereof shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance. Any party hereto may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties hereto contained herein or in any document delivered pursuant hereto and (iii) waive compliance by the other parties hereto with any of their agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only as against such party and only if set forth in an instrument in writing signed by such party. The failure of any party hereto to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. 3.6. SPECIFIC PERFORMANCE. Each Stockholder acknowledges that if such Stockholder fails to perform any of its obligations under this Agreement immediate and irreparable harm or injury would be caused to the Company for which money damages would not be an adequate remedy. In such event, each Stockholder agrees that the Company shall have the right, in addition to any other rights it may have, to specific performance of this Agreement. Accordingly, if the Company should institute an action or proceeding seeking specific enforcement of the provisions hereof, each Stockholder hereby waives the claim or defense that the Company has an adequate remedy at law and hereby agrees not to assert 3 in any such action or proceeding the claim or defense that such a remedy at law exists. Each Stockholder further agrees to waive any requirements for the securing or posting of any bond in connection with obtaining any such equitable relief. 3.8. EXPENSES. All fees, costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such fees, costs and expenses. 3.9. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the maximum extent possible. 3.10. ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement constitutes the entire agreement and supersedes any and all other prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof, and this Agreement is not intended to confer upon any other person any rights or remedies hereunder. 3.11. ASSIGNMENT. This Agreement shall not be assigned by operation of law or otherwise. 3.12. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed entirely within that State. 3.13. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. 3.14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which shall constitute one and the same agreement. [SIGNATURE PAGE FOLLOWS] 4 IN WITNESS WHEREOF, the Company and the Stockholders have caused this Agreement to be executed as of the date first written above. AVATECH SOLUTIONS, INC. By: ----------------------------------- Name: ---------------------------- Title: ---------------------------- STOCKHOLDERS ---------------------------------------- Print Name: --------------------------- 5 SCHEDULE I
NAME AND ADDRESS OF STOCKHOLDER NUMBER OF SHARES BENEFICIALLY OWNED - ------------------------------------- -------------------------------------
6 EXHIBIT A IRREVOCABLE PROXY By its execution hereof, and in order to secure its obligations under the PlanetCAD Stockholder Voting Agreement (the "Voting Agreement") of even date herewith among Avatech Solutions, Inc., a Delaware corporation (the "Company"), and certain stockholders of PlanetCAD Inc., a Delaware corporation ("Parent"), the undersigned (the "Stockholder") hereby irrevocably constitutes and appoints the Company and its successors and assigns, with full power of substitution and resubstitution, from the date hereof to the termination of the Voting Agreement, as such Stockholder's true and lawful attorney and proxy (its "Proxy"), for and in such Stockholder's name, place and stead, to demand that the Secretary call a special meeting of Stockholders of the Company for the purpose of considering any action related to the Merger Agreement and to vote each of the Owned Shares of the Stockholder as such Stockholder's Proxy at every annual, special or adjourned meeting of stockholders of Parent, and to sign on behalf of such Stockholder (as a Stockholder of Parent) any ballot, proxy, consent, certificate or other document relating to Parent that law permits or requires, in a manner consistent with Section 1.1 of the Voting Agreement. This Proxy is coupled with an interest and the Stockholder intends this Proxy to be irrevocable to the fullest extent permitted by law. The Stockholder hereby revokes any proxy previously granted by such Stockholder with respect to the Owned Shares. Capitalized terms used but not defined herein shall have the meaning set forth in the Voting Agreement. The Stockholder shall perform such further acts and execute such further documents and instruments as may reasonably be required to vest in the Company, or any of its nominees, the power to carry out and give effect to the provisions of this Proxy. IN WITNESS WHEREOF, the undersigned has executed this Irrevocable Proxy this ______ day of ____________, 2002. ---------------------------------------- Name: --------------------------------- Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- 7 ANNEX C AVATECH STOCKHOLDER VOTING AGREEMENT THIS AGREEMENT, dated as of May 1, 2002 (the "Agreement"), is entered into among PlanetCAD Inc., a Delaware corporation ("Parent"), and certain stockholders of Avatech Solutions, Inc., a Delaware corporation (the "Company"), whose names appear on SCHEDULE I hereto (collectively, the "Stockholders"). WITNESSETH: WHEREAS, on May 1, 2002, Parent, Raven Acquisition Corporation, a Delaware corporation ("Sub"), and the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), which provides for, upon the terms and subject to the conditions set forth therein, the merger of Sub with and into the Company (the "Merger"); WHEREAS, as of the date hereof, each Stockholder is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of the number of shares of Company Common Stock set forth opposite such Stockholder's name on SCHEDULE I hereto (the "Owned Shares"); WHEREAS, as a condition to Parent's obligations under the Merger Agreement, Parent has required that the Stockholders enter into this Agreement; and WHEREAS, in order to induce Parent to consummate the Merger, the Stockholders are willing to enter into this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent and each of the Stockholders, severally and not jointly, hereby agree as follows: ARTICLE I TRANSFER AND VOTING OF SHARES; OTHER COVENANTS OF THE STOCKHOLDERS 1.1. VOTING OF SHARES. Each Stockholder agrees, at any meeting of the stockholders of the Company, however called, and in any action by consent of the stockholders of the Company, that such Stockholder shall vote the Owned Shares (i) in favor of the approval and adoption of the Merger Agreement (as amended from time to time) and (ii) in favor of any other matter necessary for consummation of the transactions contemplated by the Merger Agreement which is considered at any such meeting of stockholders, and in connection therewith to execute any documents which are necessary or appropriate in order to effectuate the foregoing, including the ability for Parent or its nominees to vote such Owned Shares directly solely with respect to the matters referred to in this Section 1.1. 1.2. NO INCONSISTENT ARRANGEMENTS. Except as contemplated by this Agreement, each Stockholder shall not during the term of this Agreement (i) transfer (which term shall include, without limitation, any sale, assignment, gift, pledge, hypothecation or other disposition), or consent to any transfer of, any or all of such Stockholder's Owned Shares or any interest therein, or create or permit to exist any Encumbrance (as defined below) on such Owned Shares unless such transfer or Encumbrance is done subject to the voting requirements set forth in Section 1.1 and subject to any such transferee or the beneficiary of any such Encumbrance executing a Proxy (as defined below), (ii) enter into any contract, option or other agreement or understanding with respect to any transfer of any or all of such Owned Shares or any interest therein on terms that would, at the time of entering into such contract, option or other agreement or understanding or with the passage of time, violate clause (i) above, (iii) grant any proxy, power-of-attorney or other authorization in or with respect to such Owned Shares, (iv) deposit 1 such Owned Shares into a voting trust or enter into a voting agreement or arrangement with respect to such Owned Shares or (v) take any other action that would in any way restrict, limit or interfere with the performance of such Stockholder's obligations hereunder or the transactions contemplated hereby or by the Merger Agreement. Notwithstanding anything in this Agreement to the contrary, each Stockholder may transfer all or any of such Stockholder's Owned Shares to any trust, partnership or similar vehicle formed for estate, tax or family planning purposes of which such Stockholder controls the vote, provided that as a condition of such transfer, such Stockholder notifies Parent and provides the Parent with documentation reasonably satisfactory to Parent as to the consent of the transferee to be bound by all of the provisions of this Agreement. 1.3. PROXY. Each Stockholder hereby revokes any and all prior proxies or powers-of-attorney in respect of any of the Owned Shares and constitutes and agrees to execute the proxy in the form attached hereto as EXHIBIT A (the "Proxy"). 1.4. STOP TRANSFER. Each Stockholder shall not request that the Company register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of the Owned Shares, unless such transfer is made in compliance with this Agreement and acknowledges that Parent and the Company may notify the Company's transfer agent of the terms hereof. 1.5. DISCLOSURE. Each Stockholder hereby authorizes Parent and the Company to publish and disclose in the Proxy Statement/Prospectus (including all documents and schedules filed with the SEC) its identity and ownership of the Owned Shares and the nature of its commitments, arrangements and understandings under this Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER Each Stockholder hereby represents and warrants to Parent as follows: 2.1. DUE AUTHORIZATION, ETC. Such Stockholder has all requisite personal or corporate power and authority to execute, deliver and perform this Agreement, to appoint Parent as its Proxy and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, the appointment of Parent as Stockholder's Proxy and the consummation of the transactions contemplated hereby have been duly authorized by all necessary action on the part of such Stockholder. This Agreement has been duly executed and delivered by or on behalf of such Stockholder and constitutes a legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws and except that the. availability of equitable remedies, including specific performance, is subject to the, discretion of the court before which any proceeding for such remedy may be brought.. 2.2. NO CONFLICTS; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of this Agreement by such Stockholder does not, and the performance of this Agreement by such Stockholder will not conflict with or violate any document, agreement, law, regulation or order to which such Stockholder is subject or by which such Stockholder or any of such Stockholder's assets is bound or affected. (b) The execution and delivery of this Agreement by such Stockholder does not, and the performance of this Agreement by such Stockholder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority (other than any necessary filing under the Exchange Act), domestic or foreign, except where the failure to obtain such consents, approvals, authorizations at permits, or to make such filings or notifications, 2 would not prevent or delay the performance by such Stockholder of such Stockholder's obligations under this Agreement. 2.3. TITLE TO SHARES. Such Stockholder is the sole record and beneficial owner of the Owned Shares, free and clear of any pledge, lien, security interest, mortgage, charge, claim, equity, option, proxy, voting restriction, voting trust or agreement, understanding, arrangement, right of first refusal, limitation on disposition, adverse claim of ownership or use or encumbrance of any kind ("Encumbrances"), other than restrictions imposed by the securities laws or pursuant to this Agreement or the Merger Agreement or as otherwise disclosed by such Stockholder to Parent. ARTICLE III MISCELLANEOUS 3.1. DEFINITIONS. Terms used but not otherwise defined in this Agreement have the meanings ascribed to such terms in the Merger Agreement. 3.2. TERMINATION. This Agreement shall terminate and be of no further force and effect (i) by the unanimous written consent of the parties hereto or (ii) automatically and without any required action of the parties hereto upon (x) the Effective Time or (y) the termination of the Merger Agreement in accordance with its terms. No such termination of this Agreement shall relieve any party hereto from any liability for any breach of this Agreement prior to termination. 3.3. FURTHER ASSURANCE. From time to time, at another party's request and without consideration, each party hereto shall execute and deliver such additional documents and take all such further action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transaction contemplated by this Agreement. Each Stockholder understands and acknowledges that Parent is proceeding with the Merger in reliance upon each Stockholder's execution and delivery of this Agreement. 3.4. CERTAIN EVENTS. Each Stockholder agrees that this Agreement and such Stockholder's obligations hereunder shall attach to such Stockholder's Owned Shares and shall be binding upon any person or entity to which legal or beneficial ownership of such Owned Shares shall pass, whether by operation of law or otherwise, including, without limitation, such Stockholder's heirs, guardians, administrators, or successors. Notwithstanding any transfer of Owned Shares, the transferor shall remain liable for the performance of all its obligations under this Agreement. 3.5. NO WAIVER The failure of any party hereto to exercise any right, power, or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, any custom or practice of the parties at variance with the terms hereof shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance. Any party hereto may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties of the other parties hereto contained herein or in any document delivered pursuant hereto and (iii) waive compliance by the other parties hereto with any of their agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only as against such party and only if set forth in an instrument in writing signed by such party. The failure of any party hereto to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. 3.6. SPECIFIC PERFORMANCE. Each Stockholder acknowledges that if such Stockholder fails to perform any of its obligations under this Agreement immediate and irreparable harm or injury would be caused to Parent for which money damages would not be an adequate remedy. In such event, each Stockholder agrees that Parent shall have the right, in addition to any other rights it may have, to specific performance of this Agreement. Accordingly, if Parent should institute an action or proceeding 3 seeking specific enforcement of the provisions hereof, each Stockholder hereby waives the claim or defense that Parent has an adequate remedy at law and hereby agrees not to assert in any such action or proceeding the claim or defense that such a remedy at law exists. Each Stockholder further agrees to waive any requirements for the securing or posting of any bond in connection with obtaining any such equitable relief. 3.8. EXPENSES. All fees, costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such fees, costs and expenses. 3.9. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the maximum extent possible. 3.10. ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement constitutes the entire agreement and supersedes any and all other prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof, and this Agreement is not intended to confer upon any other person any rights or remedies hereunder. 3.11. ASSIGNMENT. This Agreement shall not be assigned by operation of law or otherwise. 3.12. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed entirely within that State. 3.13. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. 3.14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which shall constitute one and the same agreement. [SIGNATURE PAGE FOLLOWS] 4 IN WITNESS WHEREOF, Parent and the Stockholders have caused this Agreement to be executed as of the date first written above. PLANETCAD INC. By: ----------------------------------- Name: ---------------------------- Title: ---------------------------- STOCKHOLDERS ---------------------------------------- Print Name: --------------------------- 5 SCHEDULE I
NAME AND ADDRESS OF STOCKHOLDER NUMBER OF SHARES BENEFICIALLY OWNED - ------------------------------------- -------------------------------------
6 EXHIBIT A IRREVOCABLE PROXY By its execution hereof, and in order to secure its obligations under the Avatech Stockholder Voting Agreement (the "Voting Agreement") of even date herewith among PlanetCAD Inc., a Delaware corporation ("Parent"), and certain stockholders of Avatech Solutions, Inc., a Delaware corporation (the "Company"), the undersigned (the "Stockholder") hereby irrevocably constitutes and appoints Parent and its successors and assigns, with full power of substitution and resubstitution, from the date hereof to the termination of the Voting Agreement, as such Stockholder's true and lawful attorney and proxy (its "Proxy"), for and in such Stockholder's name, place and stead, to demand that the Secretary call a special meeting of Stockholders of the Company for the purpose of considering any action related to the Merger Agreement and to vote each of the Owned Shares of the Stockholder as such Stockholder's Proxy at every annual, special or adjourned meeting of Stockholders of the Company, and to sign on behalf of such Stockholder (as a Stockholder of the Company) any ballot, proxy, consent, certificate or other document relating to the Company that law permits or requires, in a manner consistent with Section 1.1 of the Voting Agreement. This Proxy is coupled with an interest and the Stockholder intends this Proxy to be irrevocable to the fullest extent permitted by law. The Stockholder hereby revokes any proxy previously granted by such Stockholder with respect to the Owned Shares. Capitalized terms used but not defined herein shall have the meaning set forth in the Voting Agreement. The Stockholder shall perform such further acts and execute such further documents and instruments as may reasonably be required to vest in Parent, or any of its nominees, the power to carry out and give effect to the provisions of this Proxy. IN WITNESS WHEREOF, the undersigned has executed this Irrevocable Proxy this ______ day of ____________, 2002. ---------------------------------------- Name: --------------------------------- Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- 7 ANNEX D Set forth below is Section 262 of the General Corporation Law of the State of Delaware regarding appraisal rights. 262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to Section228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to Section251 (other than a merger effected pursuant to Section251(g) of this title), Section252, Section254, Section257, Section258, Section263 or Section264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of Section251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. 1 (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under Section253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of such stockholder's shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder's shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to Section228 or Section253 of this title, then, either a constituent corporation before the effective date of the merger or consolidation, or the surviving or resulting corporation within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the 2 stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder's written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial 3 upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted such stockholder's certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of such stockholder's demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. 4 ANNEX E [LETTERHEAD OF ALLIANT PARTNERS] PERSONAL & CONFIDENTIAL May 1, 2002 Board of Directors PlanetCAD Inc. 2520 55th Street, Suite 200 Boulder, CO 80301 Gentlemen: You have requested our opinion as to the fairness, from a financial point of view, to the stockholders of PlanetCAD Inc. ("PlanetCAD" or the "Company") of the consideration to be provided by PlanetCAD to the stockholders of Avatech Solutions, Inc. ("Avatech") in connection with the proposed merger (the "Merger") between Avatech and a subsidiary of PlanetCAD ("NewCo"). As contemplated in the Agreement and Plan of Merger (the "Agreement") dated May 1, 2002, among PlanetCAD, NewCo and Avatech, as a result of the Merger, at Closing each share of Avatech common stock will be exchanged for a number of shares of PlanetCAD common stock based on the Exchange Ratio. The Exchange Ratio is determined by dividing the Merger Shares, equal to three times the number of PlanetCAD common shares outstanding at Closing by the number of Avatech common shares outstanding at Closing. Post-Merger, current PlanetCAD stockholders will hold 25% of the outstanding common stock of the joint entity and Avatech stockholders will hold 75%. The actual number of shares of PlanetCAD common stock that would be issued or be issuable in exchange for all outstanding securities of Avatech is calculable only upon consummation of the Merger. Nevertheless, assuming that the Merger were to be consummated today, 44,479,931 shares of PlanetCAD common stock would be issued or issuable in exchange for all outstanding common shares of Avatech. Based on the number of Avatech common shares outstanding as of today's date of 5,990,158, the Exchange Ratio is calculated to be 7.43x. Based on information available as of today's date, it is assumed that no Avatech or PlanetCAD stock options or warrants will be exercised and converted to common shares prior to Closing. Accordingly, no common shares underlying these stock options or warrants have been included in the calculation of the Merger Shares number or the Exchange Ratio. An option pool of 5.8 million common shares of PlanetCAD is to be reserved for issuance pursuant to a new option plan to be implemented following the Merger. An option pool is also being held for certain PlanetCAD stock options that are to remain outstanding following the Merger. Per the Agreement, all Avatech stock options will be cancelled immediately prior to Closing and each outstanding warrant to purchase Avatech common stock will be converted into a right to purchase shares of PlanetCAD common stock based on the Exchange Ratio. For purposes of the opinion set forth herein, we have: (a) Discussed the past and current operations, financial condition and prospects for PlanetCAD with senior executives of PlanetCAD and Avatech; (b) Discussed with the senior executives of PlanetCAD and Avatech the strategic objectives of the Merger; (c) Reviewed certain audited and internal financial statements and other financial and operating data concerning Avatech prepared by Avatech management; 1 (d) Compared the financial performance of Avatech with that of certain other comparable publicly-traded companies and the prices paid for securities in those publicly-traded companies; (e) Reviewed the financial terms, to the extent publicly available, of certain acquisition transactions of companies comparable to Avatech; (f) Assessed Avatech's value based upon a forecast of future cash flows using a discounted cash flow analysis; (g) Reviewed certain audited and internal financial statements and other financial and operating data concerning PlanetCAD prepared by the management of PlanetCAD; (h) Reviewed public financial statements and other information concerning PlanetCAD; (i) Compared the financial performance of PlanetCAD with that of certain other comparable publicly-traded companies and the prices paid for securities in those publicly-traded companies; (j) Reviewed the financial terms, to the extent publicly available, of certain acquisition transactions of companies comparable to PlanetCAD; (k) Assessed PlanetCAD's value based upon a forecast of future cash flows using a discounted cash flow analysis; (l) Assessed PlanetCAD's and Avatech's relative contribution to the combined entity based on financial performance; (m) Reviewed the Agreement and certain related documents and discussed the proposed terms of the Merger with senior executives of PlanetCAD and Avatech; and (n) Performed such other analyses and considered such other factors and information as we have deemed appropriate. For the purposes of this opinion, we have assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by us or discussed with us and have further relied upon the assurances of the managements of PlanetCAD and Avatech that they are not aware of any facts that would make any of such information inaccurate or misleading. With respect to the financial projections of PlanetCAD and Avatech, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the future financial performance of the respective Companies. The financial and other information regarding PlanetCAD and Avatech reviewed by or discussed with Alliant Partners in connection with the rendering of this opinion was limited to information provided by PlanetCAD management and Avatech management and certain discussions with both PlanetCAD and Avatech regarding the Companies' respective financial condition and future prospects as well as the strategic objectives of the Merger. In addition, we have assumed that the Merger will be consummated in a timely fashion as a tax-free exchange of stock, in accordance with the terms set forth in the Agreement. We have not made any independent valuation or appraisal of the assets or liabilities of either PlanetCAD or Avatech, nor have we been furnished with any such appraisals. Our opinion is necessarily based on the economic, market and other conditions as in effect on, and the information made available to us as of, the date hereof. Our opinion addresses only the fairness of the consideration to be provided to Avatech, from a financial point of view, and we do not express any views on any other terms of the proposed Merger or the business or economic bases underlying the Agreement. We are not expressing any opinion as to what the value of the PlanetCAD common stock actually will be when issued in the Merger or the price at which the PlanetCAD common stock will trade subsequent to the announcement of the execution of the Agreement or the effective time of the Merger. Our opinion does not address the relative merits of the Merger as compared to other business strategies that might be available to the Company or the allocation, if any, of the total consideration among equity holders; nor does it address 2 the underlying business decision of the Company to proceed with the Merger. Alliant Partners' advisory services and this opinion are provided for the information and assistance of the Board of Directors of the Company in connection with its consideration of the transaction contemplated by the Agreement. This opinion does not constitute a recommendation as to how any holder of Company shares should vote with respect to such transaction. Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the total consideration to be provided by PlanetCAD to the stockholders of Avatech pursuant to the Merger Agreement is fair, from a financial point of view, to PlanetCAD stockholders. Very truly yours, /s/ Alliant Partners Alliant Partners 3 ANNEX F PLANETCAD, INC. 2002 STOCK OPTION PLAN 1. DEFINITIONS. As used in this PlanetCAD, Inc 2002 Stock Option Plan, the following terms shall have the following meanings: (a) "Affiliate" means any affiliate of the Company within the meaning of 17 CFR Section 230.405. (b) "Avatech" means Avatech Solutions, Inc., a Delaware corporation. (c) "Board of Directors" or "Board" means the Company's board of directors. (d) "Change in Control" shall mean: (i) The acquisition, after the Effective Date, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more (on a fully diluted basis) of either (A) the then outstanding shares of Stock, taking into account as outstanding for this purpose such shares issuable upon the exercise of options or warrants, the conversion of convertible shares or debt, and the exercise of any similar right to acquire shares (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors or member managers (the "Outstanding Company Voting Securities"); PROVIDED, HOWEVER, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (X) any acquisition by the Company or any Affiliate, (Y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliate, or (Z) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 1(d)(iii); or (ii) Individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual becoming a director subsequent to the Effective Date whose election, or nomination for election, by the directors then comprising the Incumbent Board, was approved by a vote of at least a majority of the Company's stockholders shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Consummation, after the Effective Date, of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 65% of the then outstanding shares of common stock or interests and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation or other entity resulting from such Business Combination (including, without limitation, a corporation or entity which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting 1 Securities, as the case may be, and (B) no Person (excluding any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliate, or such corporation resulting from such Business Combination or any affiliate of such corporation) beneficially owns, directly or indirectly, 35% or more (on a fully diluted basis) of, respectively, the then outstanding shares of common stock or interests of the corporation or entity resulting from such Business Combination, taking into account as outstanding for this purpose such common stock or interests issuable upon the exercise of options or warrants, the conversion of convertible stock, interests or debt, and the exercise of any similar right to acquire such common stock or interests, or the combined voting power of the then outstanding voting securities of such corporation or other entity except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors or equivalent governing body of the corporation or other entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the stockholders or equity holders of the Company of a complete liquidation or dissolution of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means such committee comprised solely of two or more independent people as the Board of Directors may appoint to administer the Plan, or if such committee has not been appointed, the full Board of Directors, provided, however, that a committee comprised solely of two or more independent people shall be required for the issuance of Options intended to qualify as performance based compensation under Section 162(m) of the Code. (g) "Company" means PlanetCAD, Inc., a Delaware corporation, to be renamed "Avatech Solutions, Inc.", upon the closing of the Merger, and its subsidiaries. (h) "Effective Date" shall have the meaning ascribed to it in Section 21 hereof. (i) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (j) "Fair Market Value" on a given date means (i) if the Stock is listed on a national securities exchange, the mean between the highest and lowest sale prices reported as having occurred on the primary exchange with which the Stock is listed and traded on the date prior to such date, or, if there is no such sale on that date, then on the last preceding date on which such a sale was reported; (ii) if the Stock is not listed on any national securities exchange but is quoted in the National Market System of the National Association of Securities Dealers Automated Quotation System on a last sale basis, the average between the high bid price and low ask price reported on the date prior to such date, or, if there is no such sale on that date, then on the last preceding date on which a sale was reported; or (iii) if the Stock is not listed on a national securities exchange nor quoted in the National Market System of the National Association of Securities Dealers Automated Quotation System on a last sale basis, the amount determined by the Committee to be the fair market value based upon a good faith attempt to value the Stock accurately and computed in accordance with applicable regulations of the Internal Revenue Service; or (iv) in the event of a Change in Control which results in receipt of value by the stockholders, then the same amount received by the stockholders. (k) "Grant Date" means the date on which an Option is granted, as specified in Section 7. (l) "Incentive Option" means an Option which by its terms is intended to be treated as an "incentive stock option" within the meaning of Section 422 of the Code. (m) "Merger" means the proposed merger with Avatech, pursuant to that certain Agreement and Plan of Merger dated May 1, 2002 among the Company, Raven Acquisition Company and Avatech. 2 (n) "Nonemployee Director" means a director of the Company who is not an officer or employee of the Company and who is (i) a "nonemployee director" within the meaning of Rule 16b-3 under the Exchange Act, or any successor rule or regulation and (ii) an "outside director" within the meaning of Section 162(m) of the Code; PROVIDED, HOWEVER, that clause (ii) shall apply only with respect to grants of Options intended by the Committee to qualify as "performance-based compensation" under Section 162(m) of the Code. (o) "Nonstatutory Option" means any Option that is not an Incentive Option. (p) "Option" means an option to purchase shares of the Stock granted under the Plan. (q) "Option Agreement" means an agreement between the Company and an Optionee, setting forth the terms and conditions of an Option. (r) "Option Period" shall have the meaning ascribed to it in Section 9 hereof. (s) "Option Price" means the price paid or to be paid by an Optionee for a share of Stock upon exercise of an Option. (t) "Optionee" means a person eligible to receive an Option, as provided in Section 6, to whom an Option shall have been granted under the Plan. (u) "Plan" means this 2002 Stock Option Plan of the Company. (v) "Securities Act" means the Securities Act of 1933, as amended. (w) "Stock" means common stock, par value $0.01 per share, of the Company. (x) "Subsidiary" means any subsidiary of the Company as defined in Section 424(f) of the Code. (y) "Ten Percent Owner" means a person who owns, or is deemed within the meaning of Section 422(b)(6) of the Code to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or its parent or subsidiary corporations). Whether a person is a Ten Percent Owner shall be determined with respect to each Option based on the facts existing on the Grant Date of such Option. 2. PURPOSE. The Plan is intended to encourage ownership of the Stock by employees and members of the board of directors of the Company and to provide additional incentive for them to promote the success of the Company's business. The Plan is intended to provide for the grant of Incentive Options and Nonstatutory Options. 3. TERM OF THE PLAN. The expiration date of the Plan, after which no Options may be granted hereunder, shall be the date that is ten years following the Effective Date; PROVIDED, HOWEVER, that the administration of the Plan shall continue in effect until all matters relating to the payment or exercise of Options previously granted have been settled. 4. ADMINISTRATION. (a) The Plan shall be administered by the Committee. Unless otherwise determined by the Board of Directors, each member of the Committee shall, at the time he takes any action with respect to an Option under the Plan, be a Nonemployee Director. The majority of the members of the Committee shall constitute a quorum. The acts of a majority of the members present at any meeting at which a quorum is present or acts approved in writing by a majority of the Committee shall be deemed the acts of the Committee. (b) Subject to the provisions of the Plan (including, without limitation, the provisions of Sections 8 and 9) and any Option Agreement, the Committee shall have complete authority, in its discretion, to make the following determinations with respect to each Option to be granted by the Company: (i) the employee or director to receive the Option; (ii) whether the Option (if granted to an employee) will be 3 an Incentive Option or a Nonstatutory Option; (iii) the time of granting the Option; (iv) subject to Section 5, the number of shares of the Stock subject to the Option; (v) the Option Price; (vi) the vesting schedule, if any, over which the Option shall become exercisable; (vii) the expiration date of the Option (which may not be more than ten (10) years after the date of grant thereof); and (viii) the restrictions, if any, to be imposed upon transfer of shares of the Stock purchased by the Optionee upon the exercise of the Option. The Committee shall have complete authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective Option Agreements (which need not be identical), and to make all other determinations necessary or advisable for the administration of the Plan. The Committee's determination on the matters referred to in this Section 4 shall be conclusive. 5. STOCK SUBJECT TO THE PLAN. The Plan covers shares of the Stock, subject, however, to the provisions of Section 11 of the Plan. All of the shares of the Stock covered by the Plan may be granted, at the Committee's discretion, as performance-based compensation pursuant to Section 162(m) of the Code. The number of shares of the Stock purchased pursuant to the exercise of Options and the number of shares of the Stock subject to outstanding Options shall be charged against the shares covered by the Plan; but shares of the Stock subject to Options which terminate without being exercised shall not be so charged. Shares of the Stock to be issued upon the exercise of Options may be either authorized but unissued shares or shares held by the Company in its treasury. During any calendar year no person may be granted Options with respect to more than shares of Stock. 6. ELIGIBILITY. Options may be granted to persons who are, at the time of grant, an employee, member of the Board of Directors, or a consultant of the Company; PROVIDED, HOWEVER, that only employees may be granted Incentive Options. 7. DISCRETIONARY GRANT OF STOCK OPTIONS. The Committee is authorized to grant one or more Incentive Options or Nonstatutory Options to any person who meets the eligibility requirements of Section 6. Each Option so granted shall be subject to the provisions of the Plan, or to such other conditions as may be reflected in the applicable Option Agreement. 8. OPTION PRICE. The Option Price per share of Stock for each Option shall be set by the Committee at the time of grant but shall not be less than, in the case of an Incentive Option, 100% of the Fair Market Value of the Stock on the Grant Date, or not less than 110% of the Fair Market Value of the Stock on the Grant Date if the Optionee is a Ten Percent Owner; PROVIDED, HOWEVER, that all Options intended to qualify as "performance-based compensation" under Section 162(m) of the Code shall have an Option Price per share of Stock no less than the Fair Market Value of a share of Stock on the Grant Date. 9. OPTION PERIOD. Options shall vest and become exercisable in such manner and on such date or dates determined by the Committee and shall expire after such period, not to exceed ten years, as may be determined by the Committee (the "Option Period"); PROVIDED, HOWEVER, that no Incentive Option may be exercised later than the fifth anniversary of the Grant Date if the Optionee is a Ten Percent Owner; FURTHER, PROVIDED, HOWEVER, that notwithstanding any vesting dates set by the Committee, the Committee may in its sole discretion accelerate the exercisability of any Option, which acceleration shall not affect the terms and conditions of any such Option other than with respect to exercisability. If an Option is exercisable in installments, such installments or portions thereof which become exercisable shall remain exercisable until the Option expires. 10. $100,000 PER YEAR LIMITATION FOR INCENTIVE STOCK OPTIONS. To the extent the aggregate Fair Market Value (determined as of the Grant Date) of Stock for which Incentive Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company and its Subsidiaries) exceeds $100,000, such excess Incentive Options shall be treated as Nonstatutory Options. 4 11. MANNER OF EXERCISE AND FORM OF PAYMENT. (a) The Options shall be exercised by delivering written notice to the Company stating the number of shares of Stock to be purchased, the person or persons in whose name the shares of Stock are to be registered and each such person's address and social security number. Such notice shall not be effective unless accompanied by the full purchase price for all shares to be purchased, and any applicable withholding (as described below). The purchase price shall be payable in cash or, in the discretion of the Committee, in shares of Stock, by any other means or method acceptable to the Committee or any combination thereof; provided that the Optionee may use Stock in payment of the exercise price only if the shares so used are considered "mature" for purposes of generally accepted accounting principles, I.E., (i) have been held by the Optionee free and clear for at least six months prior to the use thereof to pay part of an Option exercise price, (ii) have been purchased by the Optionee on the open market, or (iii) meet any other requirements for "mature" shares as may exist on the date of the use thereof to pay part of an Option exercise price. Payment in currency or by certified or cashier's check shall be considered payment in cash. In the event that all or part of the purchase price is paid in shares of Stock, the shares used in payment shall be valued at their Fair Market Value on the date of exercise of the relevant Options. Subject to, and promptly after, the Optionee's compliance with all of the provisions of this Section 11, the Company shall deliver or cause to be delivered to the Optionee a certificate for the number of shares of the Stock then being purchased by him or her. If any law or applicable regulation of the Securities and Exchange Commission or other body having jurisdiction in the premises shall require the Company or the Optionee to take any action in connection with shares of the Stock being purchased upon exercise of the Option, exercise of the Option and delivery of the certificate or certificates for such shares (including, without limitation, any exercise of the Option and delivery of the certificate or certificate for such shares in accordance with the procedures set forth in Section 11(c) below) shall be postponed until completion of the necessary action, which shall be taken at the Company's expense. The number of shares of Stock subject to each outstanding Option shall be reduced by one share for each share of the Stock purchased upon exercise of the Option. (b) The Company's obligation to deliver shares of Stock upon exercise of an Option shall be subject to the Optionee's satisfaction of all applicable federal, state and local income and employment tax withholding obligations. (c) In lieu of the methods of exercise described in Section 11(a) above, an Optionee may, unless prohibited by applicable law, elect to effect payment by including with the written notice of exercise referred to in Section 11(a) above, instructions to the Company to treat the Optionee as exercising the Option for the aggregate number of shares determined as follows: (i) the number of shares to be issued to the Optionee, and (ii) that number of shares so that the aggregate difference between the full market value of a share and the Option Exercise Price is equal to the aggregate Option Exercise Price for the shares referred to in clause (i). 12. TRANSFERABILITY OF OPTIONS. Unless specifically allowed by the Committee and set forth in an Option Agreement, Options shall not be transferable, otherwise than by will or the laws of descent and distribution, and may be exercised during the life of the Optionee only by the Optionee. 13. TERMINATION OF EMPLOYMENT. If an Optionee ceases to be an employee of the Company or a Subsidiary for any reason other than disability (within the meaning of Section 22(e)(3) of the Code) or death of an Optionee, any Option held by that Optionee may be exercised by the Optionee at any time within 3 months after the termination of such relationship, but only to the extent exercisable at termination and in no event after the Option Period. If an Optionee terminates employment because of disability (as defined above) or dies, any Option held by that Optionee may be exercised by the Optionee or the Optionee's trustee, executor or administrator, as applicable, at any time within the shorter of the option period or 12 months after the date of disability or death, but only to the extent 5 exercisable at time of disability or death. Options which are not exercisable at the time of termination of such relationship or which are so exercisable but are not exercised within the time periods described above shall terminate. Military or sick leave shall not be deemed a termination under this Section 13 provided that such leave does not exceed the longer of 3 months or the period during which the reemployment rights of the absent employee are guaranteed by statute or by contract. Notwithstanding anything to the contrary, an employee whose employment terminates because of retirement may exercise the employee's Nonstatutory Options within 12 months after the date of retirement but only to the extent such Nonstatutory Options were exercisable on the date of retirement and in no event after the Option Period. 14. ADJUSTMENT OF NUMBER OF SHARES; FRACTIONAL SHARES. (a) Options granted under the Plan and any agreements evidencing such Options, the maximum number of shares of Stock subject to all Options and the maximum number of shares of Stock with respect to which any one person may be granted Options during any year shall be subject to adjustment or substitution, as determined by the Committee in its sole discretion, reasonably exercised, as to the number, price or kind of a share of Stock or other consideration subject to such Options or as otherwise determined by the Committee to be equitable (i) in the event of changes in the outstanding Stock or in the capital structure of the Company by reason of stock dividends, stock splits, reverse stock splits, recapitalizations, reorganizations, mergers, consolidations, combinations, exchanges, or other relevant changes in capitalization occurring after the Grant Date of any such Option or (ii) in the event of any change in applicable laws or any change in circumstances which results in or would result in any substantial dilution or enlargement of the rights granted to, or available for, Optionees in the Plan, or which otherwise warrants equitable adjustment because it interferes with the intended operation of the Plan. In addition, in the event of any such adjustments or substitution, the aggregate number of shares of Stock available under the Plan, and the aggregate number of shares of Stock as to which Options may be granted to any one person over the term of the Plan, shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Any adjustment in Incentive Options under this Section 14 shall be made only to the extent not constituting a "modification" within the meaning of Section 424(h)(3) of the Code, and any adjustments under this Section 14 shall be made in a manner which does not adversely affect the exemption provided pursuant to Rule 16b-3 under the Exchange Act. Further, with respect to Options intended to qualify as "performance-based compensation" under Section 162(m) of the Code, such adjustments or substitutions shall be made only to the extent that the Committee determines that such adjustments or substitutions may be made without a loss of deductibility for Options under Section 162(m) of the Code. The Company shall give each Optionee notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all purposes. (b) Upon a Change in Control, all outstanding Options that have not yet become fully vested and exercisable shall become fully vested and exercisable. In the event a Change of Control is anticipated, the Committee may, in its discretion and upon at least 10 days advance notice to the affected persons, provide that an Option shall terminate, but the Optionee shall have the right, immediately prior to such event, to exercise the Option, and not theretofore exercised. In the event of a Change in Control, the Committee may also, in its discretion and upon at least 10 days advance notice to the affected persons, cancel any outstanding Options and pay to the Optionees thereof, in cash or stock, or any combination thereof, the value of such Options based upon the price per share of Stock received or to be received by other stockholders of the Company in the event. The terms of this Section 14 may be varied by the Committee in any particular Option Agreement. No fraction of a share of the Stock shall be purchasable or deliverable, but in the event any adjustment of the number of shares of the Stock covered by the Option shall cause such number to include a fraction of a share, such fraction shall be adjusted to the nearest smaller whole number of shares. In the event of changes in the outstanding Stock by reason of any stock dividend, split-up, contraction, reclassification, or change of outstanding 6 shares of the Stock of the nature contemplated by this Section 14 after the Effective Date, the number of shares of the Stock available for the purpose of the Plan as stated in Section 5 and the exercise price per share of each Option shall be correspondingly adjusted. 15. STOCK RESERVED. The Company shall at all times during the term of the Options reserve and keep available such number of shares of the Stock as will be sufficient to satisfy the requirements of this Plan and shall pay all other fees and expenses necessarily incurred by the Company in connection therewith. 16. LIMITATION OF RIGHTS IN OPTION STOCK. The Optionee shall have no rights as a stockholder in respect of shares of the Stock as to which his or her Option shall not have been exercised, certificates issued and delivered and payment as herein provided made in full, and shall have no rights with respect to such shares not expressly conferred by this Plan. 17. PURCHASE FOR INVESTMENT. The Optionee shall make such representations with respect to investment intent and the method of disposal of optioned shares of the Stock as the Board of Directors may deem advisable in order to assure compliance with applicable securities laws. 18. VOLUNTARY SURRENDER. The Committee may permit the voluntary surrender of all or any portion of any Nonstatutory Option granted under the Plan to be conditioned upon the granting to the Optionee of a new Option for the same or a different number of shares as the Option surrendered, subject to the aggregate maximum number of shares available under the Plan as set forth in Section 5, or require such voluntary surrender as a condition precedent to a grant of a new Option to such Optionee. Such new Option shall be exercisable at an Option Price, during an Option Period, and in accordance with any other terms or conditions specified by the Committee at the time the new Option is granted, all determined in accordance with the provisions of the Plan without regard to the Option Price, Option Period, or any other terms and conditions of the Nonstatutory Option surrendered. 19. TERMINATION AND AMENDMENT OF PLAN. The Board of Directors may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable, provided, that the Board of Directors may not, without the approval of the Company's stockholders in a manner which complies with the requirements of Sections 422 and 162(m) of the Code and the requirements of any exchange on which the Stock may be listed, increase the maximum number of shares available for option under the Plan (other than as provided in Section 14). In addition, unless the Committee specifically determines otherwise, approval of the Company's stockholders in a manner which complies with the requirements of Sections 422 and 162(m) of the Code shall be required for any other amendment to the Plan which, without such stockholder approval, would cause (a) Options intended to be Incentive Options to fail to qualify as Incentive Options or (b) Options intended to qualify as "performance-based compensation" under Section 162(m) of the Code to fail to so qualify. No termination or amendment of the Plan may, without the consent of the Optionee to whom any Option shall theretofore have been granted, directly and adversely affect the rights of that Optionee under that Option. 20. GENERAL (a) Government and Other Regulations. Notwithstanding any terms or conditions of any Option to the contrary, the Company shall be under no obligation to offer to sell or to sell and shall be prohibited from offering to sell or selling any shares of Stock pursuant to an Option unless such shares have been properly registered for sale pursuant to the Securities Act with the Securities and Exchange Commission or unless the Company has received an opinion of counsel, satisfactory to the Company, that such shares may be offered or sold without such registration pursuant to an available exemption therefrom and the terms and conditions of such exemption have been fully complied with. The Company shall be under no obligation to register for sale under the Securities Act any of the shares of Stock to be offered or sold under the Plan. If the shares of Stock offered for sale or sold under the 7 Plan are offered or sold pursuant to an exemption from registration under the Securities Act, the Company may restrict the transfer of such shares and may legend the Stock certificates representing such shares in such manner as it deems advisable to ensure the availability of any such exemption. (b) Claim to Options and Employment Rights. No employee or other person shall have any claim or right to be granted an Option under the Plan or, having been selected for the grant of an Option, to be selected for a grant of any other Option. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ or service of the Company, a Subsidiary or an Affiliate. (c) No Liability of Committee Members. No member of the Committee shall be personally liable by reason of any contract or other instrument executed by such member or on his behalf in his capacity as a member of the Committee nor for any mistake of judgment made in good faith, and the Company shall indemnify and hold harmless each member of the Committee and each other employee, officer or director of the Company to whom any duty or power relating to the administration or interpretation of the Plan may be allocated or delegated, against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim) arising out of any act or omission to act in connection with the Plan unless arising out of such person's own fraud or willful bad faith; PROVIDED, HOWEVER, that approval of the Board shall be required for the payment of any amount in settlement of a claim against any such person. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or By-Laws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. (d) Governing law. The Plan shall be governed by and construed in accordance with the internal laws of the State of Delaware without regard to the principles of conflicts of law thereof. (e) Funding. No provision of the Plan shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Holders shall have no rights under the Plan other than as unsecured general creditors of the Company. (f) Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, group insurance or other benefit plan of the Company or any Subsidiary except as otherwise specifically provided in such other plan. (g) Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries and Affiliates. (h) Pronouns. Masculine pronouns and other words of masculine gender shall refer to both men and women. (i) Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings shall control. 21. EFFECTIVE DATE. The Plan is effective as of the date following the effective date of the Merger. The effectiveness of the Plan and the validity of any and all Options granted pursuant to the Plan is contingent upon approval of the Plan by the stockholders of the Company in a manner which complies with Sections 422(b)(1) and 162(m) of the Code, if applicable. Unless and until the stockholders approve the Plan in compliance therewith, no Option granted under the Plan shall be effective. 8 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Delaware General Corporation Law, a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. Although Delaware General Corporation Law permits a corporation to indemnify any person referred to above against expenses (including attorney fees) that are actually and reasonably incurred by such person ("Expenses"), in connection with the defense or settlement of an action by or in the right of the corporation, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the corporation's best interests, if such person has been judged liable to the corporation, indemnification is for such expenses only permitted to the extent that the Court of Chancery, or the court in which the action or suit was brought, determines that, despite the adjudication of liability, such person is entitled to indemnity for such Expenses as the Court of Chancery, or such other court, deems proper. The determination, with respect to a person who is a director of officer at the time of such determination, as to whether a person seeking indemnification has met the required standard of conduct is to be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iv) by the stockholders. Delaware General Corporation Law also provides that to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise defense of any action, suit or proceeding covered by the statute, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. In addition, Delaware General Corporation Law provides for the general authorization of advancement of a director's or officer's litigation expenses, subject to an undertaking by such person to repay any such advancements if such person is ultimately found not to have been entitled to reimbursement for such expenses and that indemnification and advancement of expenses provided by the statute shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. PlanetCAD's Restated certificate of incorporation provides that PlanetCAD shall indemnify its directors, officers, employees and agents to the fullest extent permitted by Delaware General Corporation Law. PlanetCAD also is authorized to secure insurance on behalf of any person it is required or permitted to indemnify. Pursuant to this provision, PlanetCAD maintains liability insurance for the benefit of its directors and officers. II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 2.1 Agreement and Plan of Merger, dated as of May 1, 2002, by and among PlanetCAD Inc., Raven Acquisition Corporation and Avatech Solutions, Inc. and Amendment No. 1 to Agreement and Plan of Merger (included in this Registration Statement as Annex A to the proxy statement/prospectus) 5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the shares of common stock being registered* 8.1 Opinion of Hogan & Hartson L.L.P. regarding the qualification of the merger as a reorganization for federal income tax purposes and related federal income tax consequences* 8.2 Opinion of Shapiro Sher & Guinot, P.A. regarding the qualification of the merger as a reorganization for federal income tax purposes and related federal income tax consequences* 10.01 Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and Autodesk, Inc. effective as of February 1, 1997 and as later amended on February 1,2002 10.02 Bentley Reseller Agreement by and among Avatech Solutions, Inc. and Bentley Systems, Incorporated dated June 11, 2001 and as later amended on March 15, 2002 10.03 CIT Revolving Line of Credit Agreement by and among CIT Group/Business Credit, Inc. and Avatech Solutions, Inc. and its subsidiaries dated October 25, 2000, in the amount up to $4,000,000 10.04 Warrant to purchase up to 16,213 shares of Common Stock issued by Avatech to CIT Group/Business Credit, Inc. dated October 25, 2000 10.05 Warrantholders Rights Agreement by and among CIT Group/Business Credit, Inc. and Avatech Solutions, Inc. and its subsidiaries dated October 25, 2000 10.06 Autodesk Loan Agreement by and among Autodesk, Inc. and Avatech Solutions, Inc. and its subsidiaries dated January 25, 1999 10.07 Autodesk Subordination Agreement by and among Autodesk, Inc., Avatech Solutions, Inc. and its subsidiaries, and CIT Group/Business Credit, Inc., dated October 25, 2000 10.08 Master Lease Agreement by and between Allstate Leasing, Inc. and Avatech Solutions, Inc. dated July 17, 2001 10.09 Form of 10% Subordinated Note with attached Warrant issued by Avatech Solutions, Inc. to certain note holders in connection with Avatech Solutions, Inc.'s 1998 $1,600,000 Subordinated Debt Offering 10.10 Avatech Solutions, Inc. 1998 Stock Option Plan 10.11 Avatech Solutions, Inc. 2000 Stock Option Plan 10.12 Avatech Solutions, Inc. Stockholders' Agreement by and among Avatech Solutions, Inc. and certain stockholders of Avatech Solutions, Inc. who acquired shares of Avatech Solutions, Inc. common stock under Avatech Solutions, Inc.'s terminated employee stock purchase plan 10.13 Severance Agreement dated February 26, 1998, and made effective January 1, 1998, by and between Avatech Solutions, Inc. and Henry D. Felton II-2 10.14 Severance Agreement dated February 27, 1998, and made effective January 1, 1998, by and between Avatech Solutions, Inc. and V. Joel Nicholson 10.15 Letter Agreement dated July 25, 2000, by and between Avatech Solutions, Inc. and A. Gary Rever 23.1 Consent of KPMG LLP (PlanetCAD) 23.2 Consent of Walpert & Wolpoff, LLP (Avatech) 23.3 Consent of Ernst & Young LLP (Avatech) 23.4 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)* 23.5 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)* 23.6 Consent of Shapiro Sher & Guinot, P.A. (included in Exhibit 8.2)* 23.7 Consent of Alliant Partners 24.1 Power of attorney (included on signature page) 99.1 PlanetCAD - Form of Proxy* 99.2 Avatech - Form of Proxy* 99.3 Voting Agreement, dated as of May 1, 2002, by and between Avatech and certain stockholders of PlanetCAD (included in this Registration Statement as Annex B to the proxy statement/prospectus) 99.4 Voting Agreement, dated as of May 1, 2002, by and between PlanetCAD and certain stockholders of Avatech (included in this Registration Statement as Annex C to the proxy statement/prospectus) 99.5 Consent of Henry D. Felton dated May 29, 2002 regarding appointment to PlanetCAD board of directors 99.6 Consent of W. James Hindman dated May 29, 2002 regarding appointment to PlanetCAD board of directors
- ---------- * to be filed by amendment (b) FINANCIAL STATEMENT SCHEDULES
SCHEDULE NO. SCHEDULE DESCRIPTION - ------------ -------------------- Schedule II Valuation and Qualifying Accounts
II-3 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders Avatech Solutions, Inc. We have audited the consolidated financial statements of Avatech Solutions, Inc. as of June 30, 1999 and for the year then ended, and have issued our report thereon dated December 23, 1999 (included elsewhere in this Registration Statement). Our audit also included the 1999 amounts included in the financial statement schedule responsive to Item 21(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the 1999 amounts in the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Baltimore, Maryland December 23, 1999 II-4 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE The Board of Directors and Stockholders Avatech Solutions, Inc. We have audited the consolidated financial statements of Avatech Solutions, Inc. as of June 30, 2001 and 2000 and for the years then ended, and have issued our report thereon dated October 3, 2001 (included elsewhere in this Registration Statement). Our audit also included the 2001 and 2000 amounts included in the financial statement schedule responsive to Item 21(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the 2001 and 2000 amounts in the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Walpert & Wolpoff, LLP Baltimore, Maryland October 3, 2001 II-5 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------------------------------------- ------------ -------------------------------- ---------------- ---------------- ADDITIONS -------------------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS - BALANCE AT END DESCRIPTION PERIOD EXPENSES - DESCRIBE DESCRIBE OF PERIOD - -------------------------------------- ------------ --------------- --------------- ---------------- ---------------- Year Ended June 30, 2001: Deducted from assets accounts: Allowance for doubtful accounts: $ 282,000 $ 7,000 $ - $ (77,000)(1) $ 212,000 ============ =============== =============== ============ ============= Year Ended June 30, 2000: Deducted from assets accounts: Allowance for doubtful accounts: $ 83,000 $ 289,000 $ - $ (90,000)(1) $ 282,000 ============ =============== =============== ============ ============= Year Ended June 30, 1999: Deducted from assets accounts: Allowance for doubtful accounts: $ 176,000 $ 14,000 $ - $ (107,000)(1) $ 83,000 ============ =============== =============== ============ =============
(1) Uncollectible accounts written off, net of recoveries. II-6 ITEM 22. UNDERTAKINGS The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to rule 424(b) if, in the aggregate, such changes in volume and price represent no more than a 20% change in the maximum aggregated offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) That, for the purpose of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) That before any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. (6) That every prospectus: (i) that is filed pursuant to paragraph (5) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (7) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by the registrant of expenses incurred or paid by a II-7 trustee, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding, is asserted by such trustee, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (8) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (9) To supply by means of a post-effective amendment all information concerning a transaction, and PlanetCAD being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-8 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boulder, State of Colorado on May 30, 2002. PlanetCAD INC. By: /s/ David Hushbeck ----------------------------------- David Hushbeck President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David Hushbeck and Joy Godesiabois, and each of them, his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, to sign, execute and file with the Securities and Exchange Commission (or any other governmental or regulatory authority), for us and in our names in the capacities indicated below, this Registration Statement on Form S-4 (including all amendments thereto) with all exhibits and any and all documents required to be filed with respect thereto, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and to perform each and every act and thing necessary and/or desirable to be done in and about the premises in order to effectuate the same as fully to all intents and purposes as he himself/she herself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-4 has been signed on May 30, 2002 by the following persons in the capacities indicated:
SIGNATURE TITLE - --------- ----- /s/ Eugene J. Fischer Chairman of the board - ------------------------------ Eugene J. Fischer /s/ David Hushbeck - ------------------------------ Director, President and Chief Executive Officer David Hushbeck (Principal Executive Officer) /s/ Joy Godesiabois - ------------------------------ Chief Financial Officer Joy Godesiabois (Principal Financial and Accounting Officer) /s/ H. Robert Gill Director - ------------------------------ H. Robert Gill /s/ Philip E. Barak Director - ------------------------------ Philip E. Barak /s/ James A. Fanella Director - ------------------------------ James A. Fanella
II-9 EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- 2.1 Agreement and Plan of Merger, dated as of May 1, 2002, by and among PlanetCAD Inc., Raven Acquisition Corporation and Avatech Solutions, Inc. and Amendment No. 1 to Agreement and Plan of Merger (included in this Registration Statement as Annex A to the proxy statement/prospectus) 5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the shares of common stock being registered* 8.1 Opinion of Hogan & Hartson L.L.P. regarding the qualification of the merger as a reorganization for federal income tax purposes and related federal income tax consequences* 8.2 Opinion of Shapiro Sher & Guinot, P.A. regarding the qualification of the merger as a reorganization for federal income tax purposes and related federal income tax consequences* 10.01 Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and Autodesk, Inc. effective as of February 1, 1997 and as later amended on February 1,2002 10.02 Bentley Reseller Agreement by and among Avatech Solutions, Inc. and Bentley Systems, Incorporated dated June 11, 2001 and as later amended on March 15, 2002 10.03 CIT Revolving Line of Credit Agreement by and among CIT Group/Business Credit, Inc. and Avatech Solutions, Inc. and its subsidiaries dated October 25, 2000, in the amount up to $4,000,000 10.04 Warrant to purchase up to 16,213 shares of Common Stock issued by Avatech to CIT Group/Business Credit, Inc. dated October 25, 2000 10.05 Warrantholders Rights Agreement by and among CIT Group/Business Credit, Inc. and Avatech Solutions, Inc. and its subsidiaries dated October 25, 2000 10.06 Autodesk Loan Agreement by and among Autodesk, Inc. and Avatech Solutions, Inc. and its subsidiaries dated January 25, 1999 10.07 Autodesk Subordination Agreement by and among Autodesk, Inc., Avatech Solutions, Inc. and its subsidiaries, and CIT Group/Business Credit, Inc., dated October 25, 2000 10.08 Master Lease Agreement by and between Allstate Leasing, Inc. and Avatech Solutions, Inc. dated July 17, 2001 10.09 Form of 10% Subordinated Note with attached Warrant issued by Avatech Solutions, Inc. to certain note holders in connection with Avatech Solutions, Inc.'s 1998 $1,600,000 Subordinated Debt Offering 10.10 Avatech Solutions, Inc. 1998 Stock Option Plan 10.11 Avatech Solutions, Inc. 2000 Stock Option Plan 10.12 Avatech Solutions, Inc. Stockholders' Agreement by and among Avatech Solutions, Inc. and certain stockholders of Avatech Solutions, Inc. who acquired shares of Avatech Solutions, Inc. common stock under Avatech Solutions, Inc.'s terminated employee stock purchase plan 10.13 Severance Agreement dated February 26, 1998, and made effective January 1, 1998, by and between Avatech Solutions, Inc. and Henry D. Felton 10.14 Severance Agreement dated February 27, 1998, and made effective January 1, 1998, by and between Avatech Solutions, Inc. and V. Joel Nicholson 10.15 Letter Agreement dated July 25, 2000, by and between Avatech Solutions, Inc. and A. Gary Rever 23.1 Consent of KPMG LLP (PlanetCAD) 23.2 Consent of Walpert & Wolpoff, LLP (Avatech) 23.3 Consent of Ernst & Young LLP (Avatech) 23.4 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)* 23.5 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1)* 23.6 Consent of Shapiro Sher & Guinot, P.A. (included in Exhibit 8.2)* 23.7 Consent of Alliant Partners 24.1 Power of attorney (included on signature page) 99.1 PlanetCAD - Form of Proxy* 99.2 Avatech - Form of Proxy* 99.3 Voting Agreement, dated as of May 1, 2002, by and between Avatech and certain stockholders of PlanetCAD (included in this Registration Statement as Annex B to the proxy statement/prospectus) 99.4 Voting Agreement, dated as of May 1, 2002, by and between PlanetCAD and certain stockholders of Avatech (included in this Registration Statement as Annex C to the proxy statement/prospectus) 99.5 Consent of Henry D. Felton dated May 29, 2002 regarding appointment to PlanetCAD board of directors 99.6 Consent of W. James Hindman dated May 29, 2002 regarding appointment to PlanetCAD board of directors
- ---------- * to be filed by amendment II-10 EX-10.01 3 a2080957zex-10_01.txt EXHIBIT 10.01 EXHIBIT 10.01 December 19, 2001 [LETTERHEAD OF AUTODESK] Dear Authorized Autodesk Channel Partner: I am pleased to present you with the new Authorized Autodesk Channel Partner Agreement ("Agreement") and Addendums that will take effect February 1, 2002. The changes to Autodesk's Channel Strategy and Agreements have been summarized in the enclosed Autodesk FY03 Channel Partner Program Guide and accompanying Q&A document. Please take the time to read the documents carefully. Discuss these with your staff, and file in an accessible place so that you can refer to the documents during the year. These documents will also be posted to AutoAccess Online in the Policies and Procedures section. In addition, we have included a Personnel Matrix for you to complete for each product authorization in all your authorized selling locations. The personnel you name for each location and authorization will be entered into our database and these people will be required to take the online competency exams for the product(s) they support. Please refer to the Products Requirements Chart (Exhibit A) and the accompanying online Products Requirements Sheets for information on what is needed to fill each position, or work with your Channel Account Representative. THE COMPLETED PERSONNEL MATRIX MUST BE RETURNED WITH YOUR AGREEMENT. After reviewing the terms of the Agreement, PLEASE SIGN THE SIGNATURE BLOCKS ON THE MAIN AGREEMENT, EXHIBIT(S) B, ALL ADDENDUMS and return the entire Agreement including your Sales Tax Exemption Certificate with the COMPLETED PERSONNEL MATRIX by February 1, 2002 to: AUTODESK, INC. ATTN: JANET SIDELINGER 111 MCINNIS PARKWAY SAN RAFAEL, CA 94903 We suggest that you return the Agreement by traceable courier. An executed copy will be returned to you. Please note, the Agreement must be signed by an authorized representative of your organization (i.e. for a corporation--an officer; a partnership--a partner; or a sole proprietorship--an owner). MODIFICATIONS TO THE AGREEMENT OR ADDENDUMS WILL NOT BE CONSIDERED. If you have questions about the new contract or programs, please contact your Regional Sales Team. I look forward to working with all of you as valued members of Autodesk's virtual corporation. Best wishes for a record setting year, /s/ Lawrence Lahl Lawrence Lahl Director, Channel Development Americas UNIFORM SALES & USE TAX CERTIFICATE--MULTIJURISDICTION The below-listed states have indicated that this form of certificate is acceptable, subject to the notes on pages 2 - 4. The issuer and the recipient have the responsibility of determining the proper use of this certificate under applicable laws in each state, as these may change from time to time. Issued to Seller: ----------------------------------------------------------- Address: ------------------------------------------------------------ I certify that: is engaged as a registered Name of Firm (Buyer): Avatech Solutions, Inc. Wholesaler ------------------------- ---------- Retailer X ---------- Address 11403 A Cronhill Drive Manufacturer ------------------------- ---------- Seller (California) ---------- Owings Mills MD 21117 Lessor (see notes ------------------------- on pages 2 - 4) ---------- Other (Specify) ------------------------- ---------- and is registered with the below listed states and cities within which your firm would deliver purchases to us and that any such purchases are for wholesale, resale, ingredients or components of a new product or service(1) to be resold, leased, or rented in the normal course of business. We are in the business of wholesaling, retailing, manufacturing, leasing (renting) the following: Description of Business: Added Value Reseller ------------------------------------------------------- General description of tangible property or taxable services to be purchased from the seller: ---------------------------------------------------------------- - --------------------------------------------------------------------------------
State State Registration, Seller's State State Registration, Seller's Permit, or ID Number Permit, or ID Number of Purchaser of Purchaser AL(2) MO(13) --------------------------------- ------------------------------ AR NE(14) 01-7887973 --------------------------------- ------------------------------ AZ(22) NV --------------------------------- ------------------------------ CA(3) 97259495 NJ 223-601-819 --------------------------------- ------------------------------ CO(1) 32-44819 NM(1),(15) --------------------------------- ------------------------------ CT(4) 9530338000 NC(25) --------------------------------- ------------------------------ DC(5) ND --------------------------------- ------------------------------ FL(23) 68-00-076434-32-8 OH(26) 99-040336 --------------------------------- ------------------------------ GA(6) OK(16) --------------------------------- ------------------------------ HI(1),(7) PA(27) 80-649 823 --------------------------------- ------------------------------ ID RI(17) --------------------------------- ------------------------------ IL(1),(8) 3035-6172 SC --------------------------------- ------------------------------ IA 1-77-093340 SD(18) [ILLEGIBLE] --------------------------------- ------------------------------ KS TN --------------------------------- ------------------------------ KY(24) TX(19) 1-52-2023997-2 --------------------------------- ------------------------------ ME(9) UT --------------------------------- ------------------------------ MD(10) 03336586 VT --------------------------------- ------------------------------ MI(11) ME-0140869 WA(20) --------------------------------- ------------------------------ MN(12) 5315082 WI(21) --------------------------------- ------------------------------
I further certify that if any property or service so purchased tax free is used or consumed by the firm as to make it subject to a Sales or Use Tax we will pay the tax due directly to the proper taxing authority when state law so provides or inform the seller for added tax billing. This certificate shall be a part of each order which we may hereafter give to you, unless otherwise specified, and shall be valid until canceled by us in writing or revoked by the city or state. Under penalties of perjury, I swear or affirm that the information on this form is true and correct as to every material matter. Authorized Signature: ------------------------------------------- (Owner, Partner or Corporate Officer) Title: EXECUTIVE VP -------------------------------------------- Date: January 30, 2002 -------------------------------------------- VAR PERSONNEL AUDIT FORM - FY01 ================================================================================ COMPANY NAME AVATECH SOLUTIONS RESELLER # EAST REGION PRINCIPAL NAME DEBRA KEITH PAGE 1 ================================================================================ FILL OUT FOR CURRENT PRODUCT AUTHORIZATIONS IN EACH LOCATION AS LISTED IN YOUR NEW FY01 PRODUCTS REQUIREMENTS SHEETS - DO NOT FILL OUT FOR AUTHORIZATIONS NOT CURRENTLY EXISTING
- --------------------------------------------------------------------------------------------------------------------- ASC Y/N REGIONAL HQ OFFICE SATELLITE OFFICE SATELLITE OFFICE - --------------------------------------------------------------------------------------------------------------------- LOCATION CITY BALTIMORE VIRGINIA SYRACUSE - --------------------------------------------------------------------------------------------------------------------- AUTOCAD SALES REP Dottie Marsh, All Kurt Von Koch Joyce Ciciriello - --------------------------------------------------------------------------------------------------------------------- AUTOCAD AE Trevon Price, All Brian Smith Robert Wilson - --------------------------------------------------------------------------------------------------------------------- MECHANICAL SALES REP Y Ken Marino Fred Stewart John Liebel - --------------------------------------------------------------------------------------------------------------------- MECHANICAL AE Michael Ilkenberry Rusty Belcher Robert Wilson - --------------------------------------------------------------------------------------------------------------------- CIVIL SALES REP Stephen Bamberger, Shannon Jon Rittling Joyce Ciciriello Y Perry - --------------------------------------------------------------------------------------------------------------------- CIVIL AE Ron Santos Joe Hedrick Chuck Pietra - --------------------------------------------------------------------------------------------------------------------- ARCHITECTURAL SALES REP Y Dottie Marsh, Faye Caplan Brad Martin Joyce Ciciriello - --------------------------------------------------------------------------------------------------------------------- ARCHITECTURAL AE Trevon Price, Jeanne Carey Lonnie Cumpton, Brian Phil Russo Smith - --------------------------------------------------------------------------------------------------------------------- GIS SALES REP Y Shannon Perry Jon Rittling Chuck Pietra - --------------------------------------------------------------------------------------------------------------------- GIS AE Chris Grande Joe Hedrick Chuck Pietra - --------------------------------------------------------------------------------------------------------------------- GOVERNMENT SPECIALIST Eric Zetterberg John Hoebeke Joyce Ciciriello - --------------------------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #1 Nat'l Support Center Nat'l Support Center Nat'l Support Center - --------------------------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #2 Nat'l Support Center Nat'l Support Center Nat'l Support Center - --------------------------------------------------------------------------------------------------------------------- ASC TRAINER All AE's listed above All AE's listed above All AE's listed above - --------------------------------------------------------------------------------------------------------------------- EDUCATIONAL REP Robert E. Lee - --------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- SATELLITE OFFICE SATELLITE OFFICE - ------------------------------------------------------------------------------------- LOCATION CITY NEW JERSEY CONNECTICUT - ------------------------------------------------------------------------------------- AUTOCAD SALES REP Debbie Masia Ilene Moore - ------------------------------------------------------------------------------------- AUTOCAD AE Jim Henn Dan Brown - ------------------------------------------------------------------------------------- MECHANICAL SALES REP Debbie Masia Ilene Moore - ------------------------------------------------------------------------------------- MECHANICAL AE Jim Henn Dan Brown - ------------------------------------------------------------------------------------- CIVIL SALES REP Sal Alini Not Authorized - ------------------------------------------------------------------------------------- CIVIL AE Bernie Duncan Not Authorized - ------------------------------------------------------------------------------------- ARCHITECTURAL SALES REP Sal Alini Not Authorized - ------------------------------------------------------------------------------------- ARCHITECTURAL AE Bernie Duncan Not Authorized - ------------------------------------------------------------------------------------- GIS SALES REP Chuck Pietra Chuck Pietra - ------------------------------------------------------------------------------------- GIS AE Chuck Pietra Chuck Pietra - ------------------------------------------------------------------------------------- GOVERNMENT SPECIALIST Debbie Masia Ilene Moore - ------------------------------------------------------------------------------------- SUPPORT ENGINEER #1 Nat'l Support Center Nat'l Support Center - ------------------------------------------------------------------------------------- SUPPORT ENGINEER #2 Nat'l Support Center Nat'l Support Center - ------------------------------------------------------------------------------------- ASC TRAINER All AE's listed above All AE's listed above - ------------------------------------------------------------------------------------- EDUCATIONAL REP - -------------------------------------------------------------------------------------
VAR PERSONNEL AUDIT FORM - FY01 ================================================================================ COMPANY NAME AVATECH SOLUTIONS RESELLER # CENTRAL REGION PRINCIPAL NAME DEBRA KEITH PAGE 1 ================================================================================ FILL OUT ONLY FOR CURRENT PRODUCT AUTHORIZATIONS IN EACH LOCATION AS LISTED IN YOUR NEW FY01 PRODUCTS REQUIREMENTS SHEETS - DO NOT FILL OUT FOR AUTHORIZATIONS NOT CURRENTLY EXISTING
- --------------------------------------------------------------------------------------------------------------------- ASC Y/N REGIONAL HQ OFFICE SATELLITE OFFICE SATELLITE OFFICE - --------------------------------------------------------------------------------------------------------------------- LOCATION CITY OMAHA DES MOINES CEDAR RAPIDS - --------------------------------------------------------------------------------------------------------------------- AUTOCAD SALES REP Matt Haney Bill Mayfield Kimm Ropp - --------------------------------------------------------------------------------------------------------------------- AUTOCAD AE Robert Cohee Tim Strandberg Jerry Berns - --------------------------------------------------------------------------------------------------------------------- MECHANICAL SALES REP Y Mike Peterson Laddle Devine Don Claassen - --------------------------------------------------------------------------------------------------------------------- MECHANICAL AE Tim Strandberg Scott Hale Jerry Berns - --------------------------------------------------------------------------------------------------------------------- CIVIL SALES REP Y Gary Raftery Bill Mayfield Michelle Hilton - --------------------------------------------------------------------------------------------------------------------- CIVIL AE Gerry Tener (CR) Brian Timmerman (CR) Brian Timmerman - --------------------------------------------------------------------------------------------------------------------- ARCHITECTURAL SALES REP Y Matt Haney Bill Mayfield Michelle Hilton - --------------------------------------------------------------------------------------------------------------------- ARCHITECTURAL AE Jeanne Aarhus Brian Timmerman Brian Timmerman - --------------------------------------------------------------------------------------------------------------------- GIS SALES REP Y Gary Raftery Bill Mayfield Bill Mayfield - --------------------------------------------------------------------------------------------------------------------- GIS AE Gerry Tener Gerry Tener Gerry Tener - --------------------------------------------------------------------------------------------------------------------- GOVERNMENT SPECIALIST Bill Mayfield Bill Mayfield Bill Mayfield - --------------------------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #1 Nat'l Support Center Nat'l Support Center Nat'l Support Center - --------------------------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #2 Nat'l Support Center Nat'l Support Center Nat'l Support Center - --------------------------------------------------------------------------------------------------------------------- ASC TRAINER Jeanne Aarhus Tim Standberg Jerry Berns - --------------------------------------------------------------------------------------------------------------------- EDUCATIONAL REP John Olson - --------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- UNAUTHORIZED UNAUTHORIZED UNAUTHORIZED SATELLITE OFFICE SATELLITE OFFICE SATELLITE OFFICE SATELLITE OFFICE - ----------------------------------------------------------------------------------------------------------------------------------- LOCATION CITY ANN ARBOR DAYTON CHICAGO ST. PAUL - ----------------------------------------------------------------------------------------------------------------------------------- AUTOCAD SALES REP Charles Turok Tom Naser Steve Martin Russ Patten - ----------------------------------------------------------------------------------------------------------------------------------- AUTOCAD AE Dustin Tiemeyer Rich Bailey George Augustin Gray Carlson - ----------------------------------------------------------------------------------------------------------------------------------- MECHANICAL SALES REP Not Authorized Not Authorized Not Authorized Jenny Noecker - ----------------------------------------------------------------------------------------------------------------------------------- MECHANICAL AE Not Authorized Not Authorized Not Authorized Shawn Turek - ----------------------------------------------------------------------------------------------------------------------------------- CIVIL SALES REP Charles Turok Tom Naser Steve Martin Russ Patten - ----------------------------------------------------------------------------------------------------------------------------------- CIVIL AE Richard Bailey Rich Bailey George Augustin TBH (Dayton) - ----------------------------------------------------------------------------------------------------------------------------------- ARCHITECTURAL SALES REP Arno Poerner Tom Naser Steve Martin Russ Patten - ----------------------------------------------------------------------------------------------------------------------------------- ARCHITECTURAL AE Dustin Tiemeyer Rich Bailey George Augustin TBH - ----------------------------------------------------------------------------------------------------------------------------------- GIS SALES REP Bill Mayfield Bill Mayfield Bill Mayfield Bill Mayfield - ----------------------------------------------------------------------------------------------------------------------------------- GIS AE Gerry Tener Gerry Tener Gerry Tener Gerry Tener - ----------------------------------------------------------------------------------------------------------------------------------- GOVERNMENT SPECIALIST Bill Mayfield Tom Naser Steve Martin Jenny Noecker - ----------------------------------------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #1 Nat'l Support Center Nat'l Support Center Nat'l Support Center Nat'l Support Center - ----------------------------------------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #2 Nat'l Support Center Nat'l Support Center Nat'l Support Center Nat'l Support Center - ----------------------------------------------------------------------------------------------------------------------------------- ASC TRAINER Dustin Tiemeyer Rich Bailey Geogre Augustin Gray Carlson - ----------------------------------------------------------------------------------------------------------------------------------- EDUCATIONAL REP - -----------------------------------------------------------------------------------------------------------------------------------
The people named here will be added to our database and will be required to fulfill the SCE/TCE requirements. Please use the Reseller and ASC Requirements Grids in the FY01 VAR Value Proposition as a reference guide as to who can fill each position. Make copies if additional authorized satellite offices. VAR PERSONNEL AUDIT FORM - FY01 ================================================================================ COMPANY NAME AVATECH SOLUTIONS RESELLER # SOUTHERN REGION PRINCIPAL NAME DEBRA KEITH PAGE 1 ================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ ASC Y/N REGIONAL HQ OFFICE SATELLITE OFFICE SATELLITE OFFICE SATELLITE OFFICE - ------------------------------------------------------------------------------------------------------------------------------------ LOCATION CITY DALLAS AUSTIN SARASOTA TAMPA - ------------------------------------------------------------------------------------------------------------------------------------ AUTOCAD SALES REP Tim Nasky Elissa Flores Patti Deer Christine Joseph - ----------------------------------------------------------------------------------------------------------------------------------- AUTOCAD AE Steve Butler Kevin Knippa Wayne Deer Brian Morse - ----------------------------------------------------------------------------------------------------------------------------------- MECHANICAL SALES REP Y Kristy Millette Chris Dimler Not Authorized Not Authorized - ----------------------------------------------------------------------------------------------------------------------------------- MECHANICAL AE Jason Lane Chris Dimler Not Authorized Not Authorized - ----------------------------------------------------------------------------------------------------------------------------------- CIVIL SALES REP Y Heather Livesey Peter Kiely Kim Valdes Kim Valdes - ----------------------------------------------------------------------------------------------------------------------------------- CIVIL AE Scott McEachron Kevin Knippa Brian Morse Brian Morse - ----------------------------------------------------------------------------------------------------------------------------------- ARCHITECTURAL SALES REP Y Heather Livesey Matt Bernstein Patti Deer Kim Valdes - ----------------------------------------------------------------------------------------------------------------------------------- ARCHITECTURAL AE Gary Ponsell, Steve Butler Kevin Knippa Wayne Deer Wayne Deer - ----------------------------------------------------------------------------------------------------------------------------------- GIS SALES REP Y Dave Meister Peter Kiely Patti Deer Kim Valdes - ----------------------------------------------------------------------------------------------------------------------------------- GIS AE Paul Cleveland Kevin Knippa Wayne Deer Wayne Deer - ----------------------------------------------------------------------------------------------------------------------------------- GOVERNMENT SPECIALIST Tim Nasky Elissa Flores Patti Deer Christine Joseph - ----------------------------------------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #1 Nat'l Support Center Nat'l Support Center Nat'l Support Center Nat'l Support Center - ----------------------------------------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #2 Nat'l Support Center Nat'l Support Center Nat'l Support Center Nat'l Support Center - ----------------------------------------------------------------------------------------------------------------------------------- ASC TRAINER All AE's listed above Kevin Knippa Wayne Deer Brian Morse - -----------------------------------------------------------------------------------------------------------------------------------
The people named here will be added to our database and will be required to fulfill the SCE/TCE requirements. Please use the Reseller and ASC Requirements Grids in the FY01 VAR Value Proposition as a reference guide as to who can fill each position. Make copies if additional authorized satellite offices. VAR PERSONNEL AUDIT FORM - FY01
- -------------------------------------------------------------------------------------------------- ASC Y/N REGIONAL HQ OFFICE SATELLITE OFFICE - -------------------------------------------------------------------------------------------------- LOCATION CITY DENVER SACRAMENTO - -------------------------------------------------------------------------------------------------- AUTOCAD SALES REP David Berger Abigayle Curtis - -------------------------------------------------------------------------------------------------- AUTOCAD AE Jamie Jagla Jeff Berg - -------------------------------------------------------------------------------------------------- MECHANICAL SALES REP Y Phil Phistry Not Authorized - -------------------------------------------------------------------------------------------------- MECHANICAL AE Eric France Not Authorized - -------------------------------------------------------------------------------------------------- CIVIL SALES REP Y Ashley Mosley Carot Avina - -------------------------------------------------------------------------------------------------- CIVIL AE TBH Jeff Berg - -------------------------------------------------------------------------------------------------- ARCHITECTURAL SALES REP Y David Berger Carol Avina - -------------------------------------------------------------------------------------------------- ARCHITECTURAL AE Joe Eichenseer Jeff Berg - -------------------------------------------------------------------------------------------------- GIS SALES REP Y Ashley Mosley Ashley Mosley - -------------------------------------------------------------------------------------------------- GIS AE Jamie Jagla Chuck Pietra - -------------------------------------------------------------------------------------------------- GOVERNMENT SPECIALIST David Berger David Beger - -------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #1 Nat'l Support Center Nat'l Support Center - -------------------------------------------------------------------------------------------------- SUPPORT ENGINEER #2 Nat'l Support Center Nat'l Support Center - -------------------------------------------------------------------------------------------------- ASC TRAINER ALL AE'S Jeff Berg - --------------------------------------------------------------------------------------------------
The people named here will be added to our database and will be required to fulfill the SCE/TCE requirements. Please use the Reseller and ASC Requirements Grids in the FY01 VAR Value Proposition as a reference guide as to who can fill each position. Make copies if additional authorized satellite offices. Autodesk and Autodesk Channel Partner Confidential [AUTODESK LOGO] FY03 AUTODESK CHANNEL PARTNER AGREEMENT AND PROGRAMS GUIDE QUESTIONS AND ANSWERS WHAT IS THE AUTODESK CHANNEL PARTNER PROGRAM? The Autodesk Channel Partner Program is the foundation for establishing and developing a more strategic business relationship with Autodesk. The program delivers financial incentives and channel programs to expand your business opportunities and enhance your profitability. With these objectives in mind, the Channel Partner Program is flexible and it effectively meets the needs of a diverse group of partners, regardless of their business model. Through the Channel Partner Program, a partner can advance to higher partner levels and gain access to greater levels of benefits by meeting established performance criteria. WHAT IS DRIVING SOME OF THE KEY CHANGES FORM FY02 TO THE FY03 CHANNEL PARTNER PROGRAM? The goal of the FY03 Channel Partner Program is to incent and reward partners that are focused on the more difficult and higher value-add sales. Therefore, the program's commission and earnback rewards structure has been redesigned accordingly. For instance, Autodesk ASC Partners will now earn earnback commissions for achieving their overall sales target and for hitting their individual vertical target(s). EXPECTATIONS OF ALL AUTODESK PARTNERS ARE THERE ANY CHANGES TO THE VALUE-ADD REQUIREMENTS IN FY03? No. All the value-add requirements remain the same. At a minimum, Autodesk expects channel partners to perform and properly document the following tasks: 1) establishment of the customer relationship, 2) solution selection, 3) implementation and training plans, and 4) post-sales support offerings. Page 1 Autodesk and Autodesk Channel Partner Confidential [AUTODESK LOGO] WHAT ARE THE RESTRICTIONS RELATING TO PRICE ADVERTISING THIS YEAR? As in the FY02 Value Proposition, channel partners who wish to earn MDF funds and/or qualify for Co-op programs are not permitted to engage in any type of price advertising without Autodesk's approval. Furthermore, due to the vital value-add nature of a customer needs assessment, the contract requires channel partners to conduct a telephone or in-person customer needs assessment as part of the Value Added Services. As always, channel partners will be bound by their Autodesk product authorizations, and all other value-added sales provisions will still apply. Failure of any channel partner to add value in each and every sale of Autodesk restricted products will result in termination of that partner's Autodesk Channel Partner Agreement. The value-add requirements for resellers who sell Autodesk products over the Internet have been changed slightly. A thorough needs analysis is still required before an Autodesk prospect may gain access to web pricing; however, the needs analysis may be conducted virtually via a live web-chat session in lieu of a phone conversation. For more details, please refer to Reseller Online Store Rules located on AutoAccess/Programs/Store. AUTODESK CHANNEL PARTNER AUTHORIZATIONS WHY HAVE YOU CREATED THREE ASC LEVELS; LEVEL I, LEVEL II AND LEVEL III? Autodesk's commitment to all relationships with its channel partners is stronger than ever. Autodesk also believes that the greater your commitment to Autodesk, the more Autodesk is able to help you grow your business. The flexibility gained by having three ASC levels presents Autodesk with an opportunity to introduce enhanced partner benefits in a more cost-effective manner to all ASC partners than would be possible through a single level ASC model. HAVE ANY BENEFITS BEEN TAKEN AWAY OR REDUCED FROM LAST YEARS VALUE PROP? No, all the basic partner benefits from last year remain the same. Only the enhanced benefits (like reimbursement for testing) are varied by partner level. DOES A LEVEL I ASC RECEIVE BETTER PRICING OR HIGHER COMMISSIONS THAN A LEVEL II OR III ASC? No, enhanced benefits do not include pricing preference based on ASC level. Pricing, agency fees, and commissions are the same for all ASC partners. In addition, Value-Added Reseller (VAR) partners receive the same agency commissions as ASC Partners. HOW OFTEN WILL AUTODESK REVIEW PARTNER STATUS IN FY03? Autodesk will review eligibility to enter the ASC program on an annual basis. The next review will take place in Q3 FY03. ASC authorization guidelines are included in Exhibits A and C of your FY03 Channel Partner Agreement. At the same time, ASC partnership levels will be reviewed. Page 2 Autodesk and Autodesk Channel Partner Confidential [AUTODESK LOGO] AS AN AUTODESK VALUE ADDED RESELLER IN FY03, DO I HAVE TO SUBMIT A MARKETING PLAN TO AUTODESK IN ORDER TO QUALIFY FOR THE AUTODESK CO-OP PROGRAM? No. A marketing plan is not required as part of the Autodesk Co-op Program. AS AN AUTODESK VALUE ADDED RESELLER IN FY03, HOW DO I PARTICIPATE IN THE AUTODESK CO-OP PROGRAM THAT IS OUTLINED IN THE CHANNEL PARTNER PROGRAM GUIDE? Autodesk VARs will be eligible to receive 2% of their commercial purchases in the form of cooperative marketing funds. Each quarter, Autodesk will send its co-op vendor a file with each Autodesk VARs co-op budget in it and the Autodesk VAR will be able to receive reimbursement for qualifying marketing activities. A detailed Autodesk Co-op Program Guide will be posted to AutoAccess in January 2002. AS AN ASC IN FY03, DO I HAVE TO SUBMIT A Q1 MARKETING PLAN? The schedule for submitting marketing plans will not change in FY03 and a plan for Q1FY03 is due by January 4, 2002. Please call your local Marketing Coordinator if you have questions. Please refer to the MDF Guidelines document posted on AutoAccess and on the MDF Online System site for more details. IF I QUALIFY AS AN ASC NOW, CAN I LOSE MY ASC STATUS DURING FY03? In order to maintain ASC status in FY03, channel partners must meet ASC criteria on a continuous basis. The primarily means maintaining an adequate credit rating, meeting all minimum support, personnel and revenue criteria, and offering appropriate support services. WHAT DOES "TELEPHONE INSTALLATION SUPPORT" MEAN? Telephone installation support is technical assistance provided to a customer with the primary purpose of getting the Autodesk software up and running on their system. It is designed to provide the customer with a technical resource in the event they should encounter faulty media, or experience some other issue that prevents the software from running upon installation. Telephone support is not intended to include technical support beyond installation and does not include training or other technical assistance beyond installation support. COMMISSIONS AND EARNBACKS WHAT ARE THE AGENCY COMMISSION PROGRAMS AVAILABLE TO THE CHANNEL PARTNERS THIS YEAR? The FY03 commissionable agency programs available this year are the same as in FY02: Major Accounts, Government Accounts, Autodesk Subscription (for Government & Major Account customers) and the Autodesk Store Agency Program. Agency commissions may also be available for Self-Hosted Products. More information regarding this program will communicated via AutoNews and AutoAccess Online. Page 3 Autodesk and Autodesk Channel Partner Confidential [AUTODESK LOGO] HAVE THE AGENCY COMMISSION RATES CHANGED? Yes, commission rates for Major Account sales and Government Specialist sales have been slightly reduced. This agency sale represents the highest cost per sale for Autodesk, and commission rates have been adjusted in accordance with the rates paid by manufacturers with similar business models. WHAT EARNBACK PROGRAMS ARE AVAILABLE FOR ASCS THIS YEAR? Autodesk will pay earnback credits to ASCs who achieve their overall quarterly attainment target and, additionally, to those who hit their vertical attainment target(s). Earnback credits for overall sales target attainment will be paid only on commercial sales excluding AutoCAD upgrades (AutoCAD to AutoCAD). Commercial, major account, government, and AutoCAD upgrade sales are counted towards overall sales target attainment however. Earnback credits for vertical target attainment are paid on all sales within the vertical segment (ABC, GIS, MCAD). Through the FY03 earnback program, Autodesk is committed to providing extra incentives and rewards to partners who focus their efforts on the value-add commercial sales. WHY ARE EARNBACK CREDITS NO LONGER AVAILABLE ON AUTOCAD UPGRADES? Autodesk wants to reward channel partners for making sales that are difficult to close. An upgrade from one version of AutoCAD to a newer version is perhaps the easiest sale to make. With the introduction of Vertical Sales Targets and associated earnback credits, Autodesk seeks to reward reseller sales efforts accordingly. Autodesk will continue to pay earnback credits on upgrades from AutoCAD to a vertical product. HOW WILL EARNBACK TARGETS BE SET? Targets are based on the revenue goals of the Americas for FY03, local partner business opportunities, historical run rates, and product release cycles. The Autodesk sales teams will carry the same quotas and targets as our partners. Page 4 Autodesk and Autodesk Channel Partner Confidential [AUTODESK LOGO] FY03 AUTODESK CHANNEL SALES PROGRAMS WHY DOES AUTODESK USE THE WORD "AGENCY" THROUGHOUT THE FY03 CHANNEL PARTNER PROGRAM GUIDE? Autodesk partners have always acted in an agency capacity through participation in sales to major and government accounts. Autodesk has added and improved a number of similar programs with other select Autodesk direct customers wherein channel partners may act in an agency capacity and receive commissions for their efforts. Changing the name of these programs better reflects the nature of the programs and the channel partner relationship to Autodesk in such sales. HOW DO I APPLY TO BE A GOVERNMENT SPECIALIST? The Government Specialist application is posted to AutoAccess Online and must be completed and submitted for approval. Only upon authorization by Autodesk will a channel partner achieve the status of Government Specialist, and only then will that partner be eligible for the higher commission rate on government sales. DO MY AUTHORIZED TERRITORY AND PRODUCT AUTHORIZATIONS APPLY TO GOVERNMENT AGENCY SALES? Yes. All sales to government customers must be in compliance with your individual channel partner authorization(s) as stated in the FY03 Agreement and Exhibit(s) B. WHAT REQUIREMENTS MUST BE MET IN ORDER TO RECEIVE COMMISSIONS ON MAJOR ACCOUNT SALES? The Major Account Policies and Procedures document may be found on AutoAccess Online/Policies and Procedures. FY03 AUTODESK PRODUCT AUTHORIZATIONS WHAT HAPPENS IF I DON'T MEET THE VERTICAL PRODUCT TWO-QUARTER CONTRACTUAL MINIMUM? Any channel partner who does not meet their two-quarter contractual minimum(s) on the product(s) for which they are authorized will subsequently lose their authorization to continue selling that product. Channel partners who lose their Autodesk authorization to sell a vertical or horizontal product cannot buy that vertical or horizontal product after the date of de-authorization. A deauthorized channel partner may not re-apply for any Autodesk Channel Partner Program for a minimum of six-months after the effective date of the de-authorization. However, deauthorized channel partners will be permitted to sell-through existing inventory of that product. ARE THERE ANY CHANGES TO THE AUTODESK PRODUCT AUTHORIZATIONS INCLUDED IN THIS YEAR'S CHANNEL PARTNER PROGRAM GUIDE? No. The product authorizations in FY03 remain the same as in FY02. Page 5 Autodesk and Autodesk Channel Partner Confidential [AUTODESK LOGO] IF I AM ALREADY MANUFACTURING AUTHORIZED, DO I NEED TO APPLY FOR THE MECHANICAL DRAFTING AUTHORIZATION? No. All Manufacturing authorized channel partners will automatically qualify for Mechanical Drafting authorization. WHY DOES THE MANUFACTURING VERTICAL REQUIRE "DEDICATED" SALESPEOPLE AND APPLICATION ENGINEERS WHEN THE OTHER VERTICALS DO NOT? The Mechanical space has become very competitive and Autodesk believes that the best way to remain competitive is to provide the most complete sales solution to customers. Requiring each of our authorized channel partners to employ a dedicated salesperson and application engineer works towards achieving this goal. FOR THE MANUFACTURING VERTICAL, WHY AM I REQUIRED TO HAVE A "DEDICATED" SALESPERSON IN MY SATELLITE OFFICE RATHER THAN A "QUALIFIED" SALESPERSON? Autodesk believes that the best way to remain competitive is to provide the most complete sales solution to customers. Requiring each of our authorized channel partners to employ a dedicated sales person in each satellite office works towards achieving this goal. Accordingly, Autodesk expects channel partners to employ a qualified person who only sells products within the Manufacturing vertical in each of its manufacturing-authorized offices. IF I AM ALREADY MANUFACTURING AUTHORIZED AND I WANT TO CARRY THE MECHANICAL DRAFTING AUTHORIZATION, DO I NEED TO ADD ANY ADDITIONAL EMPLOYEES? No. Channel partners who are Manufacturing Authorized and meet all the current requirements for that authorization will meet the qualifications for the Mechanical Drafting Authorization without any further personnel. However, they will have to meet the revenue minimums of the Mechanical Drafting Authorization to remain authorized. Page 6 [AUTODESK LOGO] AUTODESK FY03 CHANNEL PARTNER AGREEMENT AND PROGRAMS GUIDE With the Autodesk Channel Partner Program, Autodesk has embraced a company-wide business strategy with emphasis on partner relationships, a philosophy that extends throughout the company. Autodesk believes that establishing and developing these relationships will ensure an ideal win-win situation for both our partners and for Autodesk. Autodesk's Channel Partner Program forges a strong working relationship between Autodesk and its reseller partners. Through our company-wide commitment to channel-focused processes, Autodesk channel programs offer incentives, marketing, support and effective dialogue, as well as exciting sales opportunities, to our authorized resellers. This guide contains a description of the different types of partner authorizations, sales programs, and product authorizations that make up the FY03 Channel Partner Program. AUTODESK FY03 CHANNEL PARTNER PROGRAM OVERVIEW The Autodesk Channel Partner Program is a comprehensive program that is the foundation upon which a strategic business relationship with Autodesk is built. The Channel Partner Program was founded on the basic premise of providing our channel partners flexibility, and to reward growth and expansion. The benefits available in this program include the critical tools and information necessary to develop, promote and sell Autodesk-based customer solutions. To ensure your success, Autodesk has created a multi-level approach to the Autodesk Channel Partner Program, which includes: - Authorization to market and sell Autodesk products and services - Sales support and training - Technical support and training - Marketing programs, promotions and sales collateral - Advertising and branding - Channel Partner communications through AutoNews & AutoAccess Online - Market Development (MDF) and Co-op Funds - Access to leads and referrals - An invitation to Autodesk's One Team Conference Page 1 [AUTODESK LOGO] FY03 EXPECTATIONS OF AUTODESK CHANNEL PARTNERS Autodesk is committed to providing a successful customer experience by supporting its channel partners with top quality training, marketing programs, and sales tools. Given the complex nature of purchasing and implementing design solutions, it is Autodesk's expectation that channel partners will conduct themselves with the thorough professionalism that customers expect of a technical value-add sale. At a minimum, Autodesk expects channel partners to perform and properly document the following tasks; 1) establishment of the customer relationship; 2) solution selection; 3) implementation and training plans, and 4) post-sales support offerings. Channel partners are expected to use a contact management system to track Autodesk customer information and to provide Autodesk with evidence of the value-add customer relationship upon request, DOCUMENTATION OF CUSTOMER RELATIONSHIP The following areas need to be explored with each customer and all appropriate corresponding data should be gathered and documented: - Basic Rolodex information including: Company name; Contact name; Title; Address; Phone number; Email address; Date of contacts; Log of discussion points and actions; Copies of proposals. - Assessrnent of customer's design needs - Problem assessment(s) - Application success metric(s) - Training assessment and needs analysis - Customization requirements - Implementation plan - Post-sales support plan SOLUTION SELECTION It is crucial that each customer understand the full range and variety of current Autodesk product options available in order to choose the most appropriate solution to meet their business needs. Both the channel partner and Autodesk benefit when a customer purchases the solution that is best for them and their individual design goals. IMPLEMENTATION AND TRAINING As an Autodesk Channel Partner you are expected to assist and enable the customer in the successful implementation of the Autodesk solution they have purchased. Your expert guidance is crucial to the success of the sale and, ultimately, to the customer's successful use of the solution. Page 2 [AUTODESK LOGO] PAST-SALES SUPPORT After the sale and implementation of an Autodesk solution, the Autodesk Channel Partner is expected to be the first line of technical support for the customer. Channel partners are required to offer post-sales support solutions to every customer and it is expected that there will be a corresponding charge to the customer. In the few instances where the channel partner cannot satisfactorily resolve a customer problem and where escalation to Autodesk is necessary, the channel partner continues to "OWN" the problem and the customer relationship, and it is that channel partner's responsibility to follow the issue through to a suitable resolution. Autodesk reserves the right to contact customers in order to validate the value-add provided by the Autodesk Channel Partner, and to require the channel partner to present evidence of a value-add relationship. Page 3 [AUTODESK LOGO] FY03 AUTODESK CHANNEL PARTNER PROGRAM AUTHORIZATIONS The Channel Partner Program includes three levels of partners: Autodesk Systems Centers (Level I, II & III), Autodesk Value Added Resellers and Autodesk Education Resellers. The following illustrates the basic differences between the three levels, with more detail to follow in this document. AUTODESK SYSTEMS CENTER (ASC) -LEVELS I, II, III - ASC Level I, II & III determined by overall and vertical revenue attainment and by resource commitment (see ASC Requirements and Benefits Charts, pages 5 & 7 of this document) - Authorization by individual product lines (see Exhibit A, FY03 Product Authorization Requirements) - May purchase all products directly from Autodesk or an Autodesk Authorized Distribution Partner - Eligible to participate in all Autodesk Channel Sales Programs - Eligible for Market Development Funds (MDF) programs - Eligible for earnback credits for exceeding assigned sales targets - Must offer training on all authorized products and have a training lab - Must meet minimum yearly vertical product sales volumes (see Exhibit A, FY03 Product Authorization Requirements) AUTODESK VALUE ADDED RESELLER (VAR) - Authorization by individual product lines (see Exhibit A, FY03 Product Authorization Requirements) - Must purchase all products directly from Autodesk Authorized Distribution Partners - Eligible to participate in all Autodesk Channel Sales Programs - Eligible for Cooperative Marketing Funds (Co-op) - Must offer training on all authorized products AUTODESK EDUCATION RESELLER (AER) - Authorization to sell all educational products into designated market segment - Must purchase all products directly from Autodesk - Eligible for educational pricing for sales to education institutions and students - Eligible for Market Development Funds (MDF) programs - Eligible for earnback credits for exceeding assigned sales targets - Teacher training and technical support must be offered Page 4 [AUTODESK LOGO] FY03 AUTHORISED SYSTEMS CENTER (ASC) REQUIREMENTS Autodesk ASC Partners are categorized within the Channel Partner Program as a Level I, II or III based on each partner's revenue and resource commitment to Autodesk products. The higher the level of partnership, the greater access to enhanced benefits and to Autodesk resources. This is not a pricing program and partner levels do not imply an entitlement for special pricing. Commissions and agency fees are discussed on page 10 of this document. To become an Authorized Systems Center (ASC), reseller must meet the following requirements. Please see your Autodesk Authorized Channel Partner Agreement for additional requirements.
ASC REQUIREMENTS - --------------------------------------------------------------------------------------------------------------------------------- LEVEL I LEVEL II LEVEL III - --------------------------------------------------------------------------------------------------------------------------------- REVENUE REQUIREMENTS - --------------------------------------------------------------------------------------------------------------------------------- Overall Annual Revenue Minimum $7M $2.5M See Below - --------------------------------------------------------------------------------------------------------------------------------- Annual Vertical Revenue $2.5M $870K $300K Total Vertical OR $150K Architectural $200K Manufacturing $200K Land Development - --------------------------------------------------------------------------------------------------------------------------------- COVERAGE AND PERSONNEL REQUIREMENT - --------------------------------------------------------------------------------------------------------------------------------- * Sales Reps One qualified per One qualified per One qualified per location location per vertical location per vertical per vertical - --------------------------------------------------------------------------------------------------------------------------------- *AE's One qualified per One qualified per One qualified per location location per vertical location per vertical per vertical - --------------------------------------------------------------------------------------------------------------------------------- Marketing** One dedicated Autodesk One Marketing Rep. One Marketing Associate Marketing Rep. - --------------------------------------------------------------------------------------------------------------------------------- Training Four qualified trainers Access to a Access to a qualified qualified trainer trainer - --------------------------------------------------------------------------------------------------------------------------------- Sales support/ Administration** One dedicated Rep. One dedicated Rep. Not Required - --------------------------------------------------------------------------------------------------------------------------------- Post-Sales Technical Support See Level I Support Two accredited Two accredited full-time Center Requirements full-time engineers engineers (page 6) - ---------------------------------------------------------------------------------------------------------------------------------
* Manufacturing authorization requires a dedicated Sales Rep and AE for the headquarters office and a dedicated Sales Rep and a qualified AE for each authorized satellite office. The dedicated Sales Rep and AE may not perform post-sales activities. ** New FY03 requirements Page 5 [AUTODESK LOGO] POST-SALES TECHNICAL SUPPORT REQUIREMENTS FOR LEVEL 1 ASC'S All Level I ASC's must: - Offer toll-free telephone support, Monday thru Friday, 8 AM-9PM EST - Offer web-based support - Have a minimum of 5 full-time Support Engineers Level I ASC's may link multiple Support Centers together to meet the above support requirements. There must be only one toll-free 800# for customers to call, however. Page 6 [AUTODESK LOGO] FY03 AUTHORIZED SYSTEMS CENTER (ASC) BENEFITS Upon fulfillment of the Autodesk System Center requirements and acceptance as an Autodesk ASC, you will be able to access a comprehensive set of benefits as listed in the following matrix. Benefits are dependent on ASC Level.
ASC BENEFITS - ---------------------------------------------------------------------------------------------------------------------------- LEVEL 1 LEVEL II LEVEL III - ---------------------------------------------------------------------------------------------------------------------------- SALES AND MARKETING - ---------------------------------------------------------------------------------------------------------------------------- Marketing plan Assistance Dedicated Autodesk Scheduled marketing plan Scheduled marketing plan marketing team assistance assistance - ---------------------------------------------------------------------------------------------------------------------------- Public Relations Assistance One case study per year Partner name recognition Partner name recognition (minimum) in customer success stories in customer success stories - ---------------------------------------------------------------------------------------------------------------------------- Source Funds Available: Based on Available: Based on annual Available: Based on annual annual revenue quota revenue quota revenue quota - ---------------------------------------------------------------------------------------------------------------------------- EBC Briefings $2,000 per quarter & MDF $500 per quarter & MDF MDF utilization utilization utilization - ---------------------------------------------------------------------------------------------------------------------------- Web-based forecasting tool, i.e., Access to Autodesk Access to Autodesk Channel Access to Autodesk Channel salesforce.com Channel Partner rate Partner rate Partner rate - ---------------------------------------------------------------------------------------------------------------------------- Sales Administration Support Autodesk ABC dedicated Autodesk ABC support Autodesk ABC support support team - ---------------------------------------------------------------------------------------------------------------------------- TRAINING AND TESTING - ---------------------------------------------------------------------------------------------------------------------------- Testing Exams Costs 100% covered if Costs of four tests MDF utilization taken and passed covered if taken and on-time/MDF utilization passed on-time/ MDF utilization - ---------------------------------------------------------------------------------------------------------------------------- Product Training via Placeware Free Free Free - ---------------------------------------------------------------------------------------------------------------------------- Sales & AE Training Value Vision 10 free passes plus 50% 50% off enrollment 50% off enrollment fee Events off additional attendees fee - ---------------------------------------------------------------------------------------------------------------------------- EVENTS - ---------------------------------------------------------------------------------------------------------------------------- Gunslinger Events Priority Participation Priority Participation Eligible for Participation - ---------------------------------------------------------------------------------------------------------------------------- One Team Conference 10 passes & MDF Three passes & MDF MDF utilization utilization utilization - ---------------------------------------------------------------------------------------------------------------------------- Autodesk University Three free passes & MDF One free pass & MDF MDF utilization utilization utilization - ---------------------------------------------------------------------------------------------------------------------------- OTHER - ---------------------------------------------------------------------------------------------------------------------------- Beta Program Participation Priority Participation Priority participation Eligible for Participation - ---------------------------------------------------------------------------------------------------------------------------- Recruiting Assistance $2,500 per quarter & MDF $1,000 per quarter & MDF MDF utilization utilization utilization - ----------------------------------------------------------------------------------------------------------------------------
Page 7 [AUTODESK LOGO] FY03 VALUE ADDED RESELLER (VAR) BENEFITS Upon fulfillment of the Autodesk Product Authorization requirements, (see Exhibit A, FY03 Product Authorization Requirements), Autodesk Value Added Resellers, will have access to a comprehensive set of benefits as listed in the following matrix.
VAR BENEFITS - ----------------------------------------------------------------------------------------------------------------------- Commissions Eligible to receive commissions on - Autodesk Major Account Sales - Autodesk Government Sales - Autodesk Online Store Sales - ----------------------------------------------------------------------------------------------------------------------- Co-op Funds Based on percentage of sales from an Autodesk Authorized Distributor - ----------------------------------------------------------------------------------------------------------------------- Channel Sales and Marketing Programs May participate in Autodesk Channel Sales and Marketing Programs - ----------------------------------------------------------------------------------------------------------------------- Source Funds Available. Based on annual revenue quota - ----------------------------------------------------------------------------------------------------------------------- Sales and Marketing Support Autodesk Channel Account Rep and Marketing Coordinator - ----------------------------------------------------------------------------------------------------------------------- Product Training via Placeware Free - Sales - Marketing - AE - ----------------------------------------------------------------------------------------------------------------------- Listed on Autodesk.com Yes - ----------------------------------------------------------------------------------------------------------------------- Autodesk Communications - Access to AutoAccess Online - Weekly AutoNews updates - -----------------------------------------------------------------------------------------------------------------------
Page 8 [AUTODESK LOGO] FY03 AUTODESK EDUCATION RESELLER (AER) PROGRAM In FY03, the Autodesk Education Reseller (AER) Program will include new, more logical sales territories, each having specific sales targets. In FY03, MDF will continue to be provided to AERs in the form of an additional up-front product discount. AERs are required to provide Autodesk with supporting documentation and receipts for all MDF-related activities. AERs are responsible for tracking their MDF discount on all invoices form Autodesk, and for spending the MDF provided only on approved activities. SUMMARY OF FY03 AER PROGRAM CHANGES - Creation of logical territories with each territory having specific requirements and sales targets. - Marketing plans for each territory are required and will be reviewed quarterly between the AER and Autodesk. - AERs are required to provide sufficient documentation in order to obtain the pre-approval needed for continuation of MDF discounts. AER commissions will be posted on AutoAccess Online. Page 9 [AUTODESK LOGO] FY03 COMMISSION AND EARNBACKS STRUCTURE For FY03, Autodesk has established vertical earnback targets. This represents a key change from last year's Channel Partner Agreement and reflects Autodesk's commitment to incent and reward channel partners who focus on the higher value-add vertical product sales. ASC Partners who achieve their vertical sales target will receive a 2% earnback credit on all vertical product sales. ASC Partners who achieve 100% or 115% of their overall sales target will receive a 3% or 5% earnback credit on all commercial purchases. All sales will count towards overall target attainment but earnback commissions are only paid on commercial product sales (excluding AutoCAD upgrades). FY03 ASC EARNBACKS
TARGET FY03 EARNBACK - -------------------------------------------------------------------------------- Quarterly Target - AEC 2% @ 100% - GIS 2% @ 100% - MCAD 2% @ 100% - -------------------------------------------------------------------------------- Overall Quarterly Attainment 3% @ 100% 5% @ 115% - --------------------------------------------------------------------------------
FY03 COMMISSIONS
FY03 SEGMENT PRODUCT COMMISSION RATE - ---------------------------------------------------------------------------------------- Major Account Vertical 23% Horizontal 17% Subscription NEW 20% RENEWAL 20% - ---------------------------------------------------------------------------------------- Government Subscription NEW 20% RENEWAL 20% Government Specialist Vertical 23% Horizontal 17% - ---------------------------------------------------------------------------------------- Non-Government Specialist All Products 10% - ---------------------------------------------------------------------------------------- Online Store Vertical 20% Horizontal 18% - ----------------------------------------------------------------------------------------
Page 10 [AUTODESK LOGO] FY03 AUTODESK CHANNEL SALES PROGRAMS Autodesk's various agency programs allow channel partners to receive commissions for assisting Autodesk in the sale, support, and implementation of Autodesk software to select Autodesk direct customers. Agency commissions are paid to channel partners for both their pre-sales activities and for technical installation support to Major Account, Government, and Autodesk Store customers through these various programs. These programs include: - Autodesk Major Account Program - Autodesk Government Account Program - Autodesk Store Program - Autodesk Hosted Products Program - Autodesk Direct Support Program KEY FY03 CHANGE: EXCEPT FOR DIRECT MAJOR ACCOUNT BUSINESS (WHERE AUTODESK INVOICES/COLLECTS FROM THE CUSTOMER DIRECTLY), THE AUTODESK SUBSCRIPTION PROGRAM WILL NO LONGER OPERATE UNDER THE AGENCY BUSINESS TRANSACTION MODEL. EFFECTIVE FEBRUARY 1, 2002, SUBSCRIPTION SALES WILL FOLLOW THE STANDARD BUY/SELL RESELLER MODEL THAT EXISTS FOR MOST AUTODESK PRODUCTS. Autodesk expects its partners to perform the following activities in order to be eligible for agency commissions: PRE-SALES ACTIVITIES - Account coordination with Autodesk Major Account Rep. - Opportunity forecasting - Pre-sales demos - Meeting coordination - Reference site visits - Needs assessment and solution recommendation POST-SALES ACTIVITIES - 60-days of basic telephone installation support (see attached Questions & Answers document for more details) - New product demonstrations - Marketing events and promotions - Subscription program assistance - Post-sale fee-based support offering Page 11 [AUTODESK LOGO] MAJOR ACCOUNT AGENCY PROGRAM Large corporations have product needs and requirements that are different from those of smaller customers. Because of the larger size of these types of customers and the extended length of the sales cycle, and due to the complexity of transactions that is intrinsic to these types of sales, Autodesk has established a Major Account Program. The Major Account Program is specifically designed to address the unique needs of these larger customers. While Autodesk takes these orders directly, our channel partners play a crucial role in closing the sale, in the implementation process, and in providing other services during the on-going relationship with these Major Account customers. Autodesk relies on its channel partners for much of the delivery, implementation, integration, training, and technical support to Major Account customers. In addition to the benefit of earning agency commissions on qualified Major Account sales, the channel partner has an opportunity to sell a myriad of its own services to these Major Account customers directly and to participate in non-going training, upgrades and technical support with Autodesk. In order to earn a commission on a Major Account sale, channel partners must meet certain requirements, including: 1) Having the appropriate product authorization and, 2) Having the proven ability to add significant value to the customer in both the pre-sale and post-sale process. Detailed requirements will be posted to AutoAccess. For FY03, Autodesk Major Account agents can earn commission rates of up to 17% of the Major Account customer's Autodesk software purchases on horizontal product sales and up to 23% of the Major Account customer's software purchases on vertical product sales. If, in the sole and exclusive judgment of Autodesk Sales management, a channel partner has not successfully completed the required pre- and post-sales activities, Autodesk reserves the right to pay reduced agency commissions or no agency commissions. Major Account Subscription commissions will be paid at 20% on both new and renewal Subscription contracts. NOTE: Resellers are prohibited from selling commercial inventory or Subscription to any Major Account customer directly. A list of Major Accounts may be found on AutoAccess Online/Policies and Procedures. AUTODESK GOVERNMENT AGENCY PROGRAM Government Accounts, similar to Major Accounts, may be complex. Additionally, Government Accounts are highly regulated by State and Federal governments. In an effort to address these unique needs, Autodesk has developed a GSA Schedule and has partnered exclusively with DLT Solutions to administer sales to our government customers. For FY03 we will continue to have two channel partner tiers for reselling products to government customers: - Autodesk Government Affiliate - Autodesk Government Specialist Page 12 [AUTODESK LOGO] Every Autodesk Systems Center and Autodesk Value Added Reseller qualifies as an Autodesk Government Affiliate and can participate in the Autodesk Government Agency Program. Requirements to earn commissions under this program include holding the required product authorization and adding significant value in both the pre-sale and post-sales process. In FY03, Autodesk Government Affiliates can earn up to 10% of the sales amount in commissions for all product sales. Detailed requirements will be posted to AutoAccess. In addition, if a channel partner focuses on the government sector they may qualify as an Autodesk Government Specialist, which offers the opportunity for an increased commission rate. To qualify as an Autodesk Government Specialist you must: - Be an Autodesk Systems Center or Autodesk Value Added Reseller - Maintain a designated qualified government sales specialist on staff - Conduct a minimum of two government specific marketing events per quarter - Sell at least $40K of Autodesk products every two quarters to government accounts In FY03, Autodesk Government Specialists may earn up to 17% of the Government customer's Autodesk software purchases on horizontal product sales and up to 23% of the Government customer's Autodesk software purchases on vertical product sales. If, in the sole and exclusive judgment of Autodesk sales management, channel partners have not successfully completed the required pre- and post-sales activities, Autodesk reserves the right to pay reduced commissions or no commissions to that channel partner. Government Subscription commissions will be paid at 20% on both new and renewal Subscription contracts. NOTE: Resellers are prohibited from selling commercial inventory or Subscription to any Government customer directly. AUTODESK STORE AGENCY PROGRAM The Autodesk Store provides customers the speed and convenience of ordering online. Autodesk Channel Partners may be eligible to receive agency commissions on Autodesk Store sales when they are actively engaged in the Autodesk Store sales process and when they fulfill the requirements of the Autodesk Store Agency Program. In FY03, Autodesk Store Agents may earn up to 18% in commissions on Autodesk software purchases of horizontal products and up to 20% in commissions on Autodesk software purchases of vertical products. For a channel partner to be eligible to receive the Autodesk Store Agency commission, the Store purchaser/customer must select the channel partner from a drop-down pick list at time of purchase. If, in the sole and exclusive judgment of Autodesk sales management, channel partners have not successfully completed the required pre- and post-sales activities, Autodesk reserves the right to pay reduced commissions or no commissions to that channel partner. Page 13 [AUTODESK LOGO] In addition to receiving an agency fee when named at point of purchase, channel partners can also receive sales fees through participation in the Autodesk Store General Affiliate Program. Affiliate Program partners will receive a 3% sales fee based on the Store purchase price each time a customer links from the affiliate partner's website to the Autodesk Store and makes a purchase. Each participating affiliate partner will receive a unique identifying graphical link to place on their website which enables the Autodesk Store to track affiliate sales traffic. There is no product or territory restrictions for affiliate partners. More information on the Autodesk General Affiliate Program can be found on AutoAccess/Programs/Store. AUTODESK HOSTED PRODUCTS PROGRAM Autodesk hosted products are fully functioning versions of the standard commercial products, with the same features, compatibility, and extensibility. Hosting refers to running an Autodesk product on a central server and then allowing users to access the application through the network. This method of deployment is particularly attractive to customers with large numbers of geographically dispersed users who would like to decrease their software administration and support costs, and who would like to manage their licenses in a more efficient manner. In FY03, Autodesk will no longer be supporting the Citrix Metaframe technology for hosted products. Although Citrix is a workable solution for certain Autodesk products and situations, it has proven unable to support our more powerful products with the level of performance and scalability required by the majority of our customers. Autodesk is exploring a number of alternative streaming-based technologies that appear to be capable of supporting our entire product line, and with far superior performance, flexibility and scalability. In order to focus resources on the exploration of these new technologies, Autodesk has decided to discontinue its support for its Citrix-based products at this time. If and when Autodesk hosted products become available utilizing the newer streaming technologies, we will announce our reseller sales and support polices at that time. AUTODESK DIRECT SUPPORT PROGRAM (ADSP) The Autodesk Direct Support Program provides direct technical support to customers who have made a significant investment in Autodesk software. With multiple levels of support to choose from, the Autodesk Direct Support Program enables customers to choose the support offering that best suits their business needs. There are two ways in which a reseller can earn agency commissions when the reseller is active in the sale of an Autodesk Direct Support agreement: - A reseller can earn a 10% commission for a new ADSP agreement sale when they sell the ADSP agreement without assistance from an Autodesk Sales Representative. - A reseller can earn a 5% commission when the ADSP agreement sale is made in collaboration with an Autodesk Sales Representative. No commission will be paid when the reseller is not active in the ADSP sale, regardless of other reseller activity in the account. ADSP agreement sales do not count towards overall sales target attainment nor will earnbacks be paid on ADSP agreement sales. Page 14 [AUTODESK LOGO] FY03 AUTODESK CHANNEL EXPANSION PROGRAM Throughout FY03, Autodesk, at its discretion, may provide financial, sales, technical, and/or marketing assistance to channel partners who would like to expand their resources to meet mutually defined critical needs. This expansion program will assist resellers who are looking to grow and expand into new sales territories or markets while assisting Autodesk in increasing sales coverage in key areas as needed. Details of this program will be communicated via AutoAccess and AutoNews upon availability. Page 15 [AUTODESK LOGO] FY03 AUTODESK PRODUCT AUTHORIZATIONS Autodesk will maintain its practice of authorizing its channel partners to sell product lines in which they have shown expertise and where they can add specific value to the customer in achieving a whole product solution. For FY03, there will be seven different product authorizations: - AUTOCAD AND HORIZONTAL PRODUCTS - ARCHITECTURE AND BUILDING DESIGN - LAND DEVELOPMENT - MECHANICAL DRAFTING - MANUFACTURING - MAPPING - WEB & MOBILE Each product authorization has specific qualifying criteria that channel partners need to meet on a continuous basis in order to ensure that Autodesk software is implemented successfully. Channel partners must meet standards in the following areas: - QUALIFIED SALES SPECIALISTS AND APPLICATION ENGINEERS - TRAINING, TESTING, AND ACCREDITATION - PRODUCT SALES REVENUE MINIMUMS - SERVICE ACCREDITED SUPPORT PERSONNEL - TECHNICAL SUPPORT INFRASTRUCTURE Both Autodesk Systems Centers and Autodesk Value-Added Resellers must meet the same requirements in order to maintain product authorization. More details about the specific product authorization requirements may be found in Exhibit A. Page 16 [AUTODESK LOGO] SUMMARY The following is a summary of partner program changes from FY02 to FY03. THERE ARE THREE ASC LEVELS: Level I, Level II and Level III. Autodesk ASC Partners are categorized within the Channel Partner Program as a Level I, II, or III based on each partner's revenue and resource commitment to Autodesk products. EARNBACK CREDITS FOR ACHIEVING OVERALL QUARTERLY SALES TARGETS. AutoCAD upgrades will count towards overall sales target attainment, however, earnback credits will not be paid on AutoCAD upgrades (upgrades from AutoCAD to AutoCAD). EARNBACK CREDITS ON VERTICAL PRODUCT SALES. ASC Partners who achieve their vertical sales target will receive a 2% earnback credit on all vertical product sales within the vertical segment (AEC, GIS, MCAD). MAJOR ACCOUNT COMMISSION. The commission rates for major account sales are 17% and 23% for horizontal and vertical products respectively. Major Account Subscription commission rates will remain at 20% for both new and renewal Subscription contracts. GOVERNMENT COMMISSIONS. The commission rates for government specialists are 17% and 23% for horizontal and vertical products respectively. Government Subscription commission rates will remain at 20% for both new and renewal Subscription contracts. AUTODESK SUBSCRIPTION PROGRAM. Effective February 1, 2002 Autodesk Subscription sales will follow the standard buy/sell reseller model that exists for most Autodesk products. The agency model will still exist for Major Account and Government Subscription sales. Page 17 EXHIBIT A - AUTODESK AUTHORIZED PRODUCTS REQUIREMENTS CHART
TRAINING SATELLITE AND/OR ROLLING 2 QTR OFFICE REQUIRED PRODUC HQ PERSONNES TESTING CONTRACTUAL SALES PERSONNEL PRODUCT AUTHORIZATION AUTHORIZATION REQUIREMENTS REQUIREMENTS MINIMUMS TERRITORY REQUIREMENTS - ------------------------------------------------------------------------------------------------------------------------------------ HORIZONTAL (REQUIRED AutoCAD, 1 Qualified Mandatory $30,000 of Territory Same FOR VERTICAL Autodesk Raster Design, Salesperson Sales, total Autodesk assigned by requirements as AUTHORIZATIONS) Autodesk Viz, Lightscape 1 Qualified Technical, purchases per region HQ or submit Application and AE demo authorized Alternative Engineer training as location Sales and required AND Support Plan pass for approval Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ WEB & MOBILE (NO Autodesk MapGuide; 1 Qualified Mandatory $20,000 per U.S. except Same HORIZONTAL AUTH. MapGuide Author, Salesperson Sales, authorized P.R. & USVI requirements as REQUIRED) MapGuide Server, 1 Qualified Technical, location HQ or submit MapGuide Viewer, Application and AE demo Alternative Engineer training as Sales and required AND Support Plan pass for approval Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ ONSITE ENTERPRISE (NO Autodesk OnSite 1 Qualified Mandatory $20,000 per U.S. except Same HORIZONTAL AUTH. Enterprise Salesperson Sales, authorized P.R. & USVI requirements as REQUIRED) 1 Qualified Technical, location HQ or submit Application and AE demo Alternative Engineer training as Sales and required AND Support Plan pass for approval Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ MECHANICAL DRAFTING AutoCAD Mechanical, 1 Qualified Mandatory $12,000 per Territory Same Autodesk Data Exchange, Salesperson Sales, authorized assigned by requirements as IGES Translator, STEP 1 Qualified Technical, location region HQ or submit Translator Application and AE demo Alternative Engineer training as Sales and required AND Support Plan pass for approval Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ MANUFACTURING Autodesk Inventor, 1 Qualified Mandatory $40,000 per Territory 1 Dedicated Autodesk Streamline, Salesperson Sales, authorized assigned by Salesperson 1 Mechanical Desktop 1 Qualified Technical, location region Qualified Application and AE demo Application Engineer training as Engineer required AND pass Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ ARCHITECTURE AND Architectural Desktop, 1 Qualified Mandatory $40,000 per Territory Same BUILDING DESIGN Building Mechanical, Salesperson Sales, authorized assigned by requirements as Building Electrical, 1 Qualified Technical, location region HQ or submit Architectural Studio Application and AE demo Alternative Engineer training as Sales and required AND Support Plan pass for approval Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ LAND DEVELOPMENT Land Development 1 Qualified Mandatory $40,000 per Territory Same Desktop, Autodesk Civil Salesperson Sales, authorized assigned by requirements as Design, Autodesk Survey, 1 Qualified Technical, location region HQ or submit Autodesk Field Survey Application and AE demo Alternative Engineer training as Sales and required AND Support Plan pass for approval Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ MAPPING Autodesk Map 1 Qualified Mandatory $12,000 per Territory Same Salesperson Sales, authorized assigned by requirements as 1 Qualified Technical, location region HQ or submit Application and AE demo Alternative Engineer training as Sales and required AND Support Plan pass for approval Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------
These authorization requirements may be modified at any time by Autodesk. In the event Autodesk modifies such authorization requirements, Autodesk will forward a revised Products Requirements Chart(s) and Exhibit(s) B to VAR. AUTODESK AUTHORIZED CHANNEL PARTNER AGREEMENT AUTODESK SYSTEMS CENTER (UNITED STATES) This Autodesk Authorized Channel Partner Agreement ("ASC AGREEMENT"), effective on February 1, 2002 ("Effective Date") is made between Autodesk, Inc., a Delaware corporation ("AUTODESK"), and Autodesk Systems Center ("ASC") as set forth below: AVATECH SOLUTIONS, INC. (EAST, CENTRAL, SOUTH AND WEST) 11400-A Cronridge Drive Ownings Mills, MD 21117 FAX: 410-581-8088 0070001471, 0070001359, 0070000270 & 0070001091 01 1. DEFINITIONS 1.1 "AUTODESK CHANNEL PARTNER POLICIES AND PROCEDURES" shall mean the documents posted to the AACPW, as periodically amended by Autodesk, in its sole discretion, that sets forth the policies and procedures to be followed by ASC, which is hereby incorporated by reference. 1.2 "AUTHORIZED LOCATION" shall mean each physical location as identified in Exhibit(s) B where ASC is authorized to market and distribute Authorized Products to End Users and offer support thereto, as identified in the Product Requirements Chart covering each such Authorized Product(s). 1.3 "AUTHORIZED PRODUCT(S)" shall mean the Autodesk software product(s), Updates, Bug Fixes or Enhancements thereto, which (a) ASC has procured directly from Autodesk or from an Autodesk Distribution Partner in accordance with this ASC Agreement, and (b) ASC is authorized to market and distribute to End Users only in accordance with the Product Requirements Chart and Exhibit B which corresponds to such Authorized Product(s). 1.4 "AUTODESK AUTHORIZED CHANNEL PARTNER WEBSITE ("AACPW")" shall mean AutoAccess on-line or any other successor site as designated by Autodesk. ASC is required to review the AACPW at least weekly. 1.5 "AUTHORIZED TERRITORY" shall mean the geographical area of the United States identified in Exhibit B within which ASC is authorized to market and distribute Authorized Products to End Users and offer support thereto corresponding to such Product Requirements Chart. 1.6 "AUTODESK DISTRIBUTION PARTNER" shall mean any entity currently authorized in writing by Autodesk to distribute Autodesk software products to third parties other than End Users. 1.7 "AUTODESK DIRECT CUSTOMER(S)" shall mean any End User to whom Autodesk sells Autodesk software products directly. Autodesk Direct Customers include all named accounts, Autodesk e-store and all state, local and federal government End Users. 1.8 "DEDICATED PERSONNEL" means that each qualified employee only sells or supports a single Vertical Product in addition to the Horizontal Products. 1.9 "EARNBACKS" shall mean rebates that ASC may receive, under the terms of this ASC Agreement, upon the achievement of ASC's Target. 1.10 "END USER" shall mean a customer of Autodesk who has acquired a license for one or more Authorized Products from ASC for the personal or business use of such customer and not for transfer or resale. 1.11 "END USER LICENSE" shall mean the then-current license agreement shipped with, or incorporated in, each Authorized Product(s), which sets forth the terms and conditions under which an End User may use such product(s). 1.12 "END USER RECORDS" shall mean the records maintained by ASC that show, at minimum, the name and address of each End User to whom ASC has sold the Authorized Product(s). 1.13 "EXTENSIONS" shall mean a license to use a modular addition to a Software Program incorporating corrections or enhancements under Autodesk Subscription Program which supplement and enhance that software program. 1.14 "HORIZONTAL PRODUCTS" shall mean AutoCAD, Autodesk Viz, Autodesk Raster Design, Lightscape, On-Site View and any other Autodesk products as Autodesk may designate in its sole and absolute discretion during the Term. Note - verify 1.15 "GOVERNMENT ACCOUNT GUIDE" shall mean the document separately published by Autodesk that sets forth the requirements for government accounts which may be updated by Autodesk from time to time in its sole discretion. 1.16 "MAJOR ACCOUNT GUIDE" shall mean the document separately published by Autodesk that sets forth the requirements for major accounts which may be updated by Autodesk from time to time in its sole discretion. 1.17 "MARKET DEVELOPMENT FUNDS" OR "MDF" shall mean funds provided by Autodesk which are made available to ASC for the promotion of Authorized Products, under the terms of this ASC Agreement and the MDF Guide, Separately published by Autodesk, which may be updated by Autodesk from time to time in its sole discretion. 1.18 "MDF GUIDE" shall mean the document separately published by Autodesk that sets forth the requirements for obtaining MDF. 1.19 "MINIMUM PURCHASE REQUIREMENT" shall mean the minimum purchase requirements as set forth in the Products Requirement Chart, and/or as set periodically by Autodesk in its sole and absolute discretion. 1.20 "PREMIERE SUPPORT PROGRAM" means the minimum End User support training, authorization and tracking requirements as set forth in Exhibit F hereto. 1.21 "PRODUCT REQUIREMENTS CHART" shall mean the Exhibit A to this ASC Agreement which sets forth the terms and conditions under which ASC is authorized to market, distribute, and support one or more Authorized Products to End Users. The Product Requirements Chart is supplemented by the detailed Product Requirements Sheets available on the AACPW. ASC may not market or distribute any Authorized Product(s) to End Users until Autodesk has delivered to it a fully executed copy of this ASC Agreement with a completed Product Requirements Chart corresponding to such Authorized Product(s). ASC must continuously meet the requirements set forth in the Product Requirements Chart and the corresponding Products Requirements Sheets for each Authorized Location in which ASC intends to market, distribute, and support the Authorized Products. The Product Requirements Chart and each of the Products Requirements Sheets are hereby incorporated into and made part of this ASC Agreement. 1.22 "QUALIFIED PERSONNEL" means that the full-time ASC employee has passed the appropriate Autodesk exam, continues to maintain the appropriate technical skill and product experience as stated in detail in the AACPW. 1.23 "TARGET" shall mean the revenue target set by Autodesk based upon purchases of Authorized Product(s). 1.24 "TERM" shall mean the period of time beginning with the Effective date, and shall continue in effect through midnight on January 31, 2003 when it shall then terminate, unless terminated earlier under the provisions of this ASC Agreement. 1.25 "UPDATES, BUG FIXES, AND ENHANCEMENTS" collectively shall mean additions or corrections to any Authorized Product(s) which (a) Autodesk designates as a modified or updated version of such Authorized Product(s), and (b) requires the End user to whom it is distributed to have previously licensed the Authorized Product(s) corresponding to such modified or upgraded version. In no event shall this include an Extension. 2 1.26 "VALUE ADDED SERVICES" shall mean the services, as defined in Section 5.1 below, that ASC must provide to each End User in order to qualify as an ASC. 1.27 "VERTICAL PRODUCTS" shall mean Autodesk MapGuide, Mapguide Author, MapGuide Server, MapGuide Viewer, Autodesk On-Site Enterprise, AutoCAD Mechanical, Autodesk Data Exchange, IGES Translator, STEP Translator, Autodesk Inventor, Autodesk Streamline, Mechanical Desktop, Architectural Desktop, Architectural Studio, Building Mechanical, Building Electrical, Autodesk Land Desktop, Autodesk Civil Design, Autodesk Survey, Autodesk Field Survey, AutoCAD Map and any other Autodesk products that Autodesk may designate in its sole and absolute discretion during the Term. 1.28 All references in this ASC Agreement to the "sale" of or "selling" or "purchase" of Software shall mean the sale or purchase of a license to use such software. 1.29 Vertical Products and Horizontal Products will be collectively referred to as the Authroized Products. 2. APPOINTMENT. 2.1 NON-EXCLUSIVE ASC. Autodesk appoints ASC as a non-exclusive reseller (and on occasion a non-exclusive agent) to, during the Term, market, distribute, and support only the Authorized Products identified on the Product Requirements Chart(s) and Exhibit(s) B, solely to End Users within the Authorized Territory, pursuant to an End User License. 2.2 RETENTION OF RIGHTS BY AUTODESK. Autodesk reserves the unrestricted right (a) to market, distribute, and support any Authorized Product(s) worldwide in any location, including in the Authorized Territory, directly to End Users or through any other channel, including, but not limited to, original equipment manufacturers, Channel Partners, distributors, on-line sales or retail outlets, and (b) to modify, augment, or otherwise change the methods in which Autodesk markets, distributes, or supports any Authorized Product(s), without any liability to ASC. Autodesk hereby gives ASC notice that it has reserved all AutoDesk Direct Customers for direct sales from Autodesk or its designated agents only. 3. RESTRICTIONS. ASC agrees as follows: 3.1 END USER LICENSE TERMS AND NFR'S. ASC shall use its best efforts to enforce the terms of the End User License and to advise Autodesk promptly of any known breach of the terms of the End User License. ASC shall not distribute copies of any Authorized Product(s) that are marked "Not for Resale" ("NFR") or otherwise provided to ASC for demonstration purposes only. 3.2 RESTRICTIONS. ASC shall not market, distribute, or support any Authorized Product(s) to or for any third party other than an End User. ASC expressly acknowledges and agrees that ASC is not an Autodesk Distribution Partner and further acknowledges and agrees that the distribution rights granted under Section 2 may not be construed so as to allow ASC to market or distribute Authorized Products to any person or entity other than an End User. This restriction notwithstanding, ASC may permit the financing of any Authorized Products by an End User through a financial institution approved by Autodesk. Such financing shall be restricted to a loan arrangement or permitting an End User to enter into a buy-out lease, provided; however, such financial institution shall not be an End User and shall have no rights to such product as a licensee thereof. In any event, this consent shall not be construed to permit short-term rental of Authorized Products. 3.3 AGENCY AUTHORIZATION. This ASC Agreement allows ASC to act as Autodesk's non-exclusive agent to assist with sales activities to Autodesk Direct Customers at AutoDesk's sole discretion. Unless otherwise directed by Autodesk in writing, ASC may only engage in sales activities for Authorized Products to such Autodesk Direct Customers as AutoDesk's agent and may not sell Authorized Products from its commercial inventory. (a) MAJOR ACCOUNTS. From time to time Autodesk may allow ASC to act as its non-exclusive agent in sales to Autodesk Direct major account Customers, for the delivery and support of Autodesk products for which ASC has a current authorization. ASC may receive a commission based on receipt and approval by Autodesk of all back up documentation from ASC evidencing its performance of Value Added Services to the respective major account as outlined in the Major Account Guide. 3 (b) GOVERNMENT. Autodesk has designated DLT Solutions, Inc. ("DLT") as its Authorized Government Sales Agent. Autodesk shall provide thirty (30) day written notice to ASC of any change in Autodesk's designated Government Sales Agent. ASC may receive a commission on orders placed with DLT by government End Users for which ASC has fulfilled obligations as set forth in the Government Account Guide. (c) ONLINE STORE. From time to time Autodesk may allow ASC to act as its non-exclusive agent in sales to Autodesk direct online store customers, for the pre and post sale support of Autodesk products in ASC's territory for software products which ASC has a current authorization. ASC may receive a commission based on receipt and approvals by Autodesk of all back up documentation from ASC evidencing its performance of Value Added Services to the respective End User. 3.4 LICENSE ACQUISITION LIMITATION. ASC shall not purchase, license or otherwise acquire or attempt to acquire licenses for Authorized Products from (i) an End User, (ii) an agent acting on behalf of an End User, or (iii) any person or party other than Autodesk or an Autodesk Authorized Distribution Partner. 3.5 UNAUTHORIZED ACQUISITION. ASC shall not attempt to upgrade, exchange, or otherwise procure an economic benefit from any Authorized Product(s) purchased, licensed, or otherwise acquire from (i) an End User, (ii) an agent acting on behalf of an End User, or (iii) any person or party other than Autodesk or an Autodesk Authorized Distribution Partner. 3.6 NO MISCHARACTERIZATION. ASC shall not attempt to mischaracterize an Update, Bug Fix, Enhancement, or Extension as a stand-alone, fully paid-up license to the corresponding Authorized Product(s) for the purpose of attempting to upgrade, exchange, or otherwise procure an economic benefit from such Update, Bug Fix, Enhancement, or Extension. 3.7 EXPORT LIMITATIONS. ASC shall not market, distribute, or support any Authorized Product(s) (i) to any entity purporting to be an End User but which is either known to ASC or known to Autodesk and communicated to ASC to have the intent to, or have attempted to, sublicense such Authorized Product(s) to bona fide End users or other third parties, or (ii) to any End User or other third party who intends to export the Authorized Products, without written authorization from Autodesk. 3.8 TERRITORY LIMITATIONS. ASC shall not attempt to market or distribute Authorized Product(s) other than in the Authorized Territory as outlined in Exhibit(s) B, unless authorized by Autodesk in writing. Any advertising, including but not limited to, trade magazine and Web based advertising, which will be seen by customers outside of ASC's Authorized Territory, must contain a disclaimer notifying such customers that ASC may not sell to customers outside of ASC's Authorized Territory. ASC shall refrain from marketing or promoting, in any manner, brokering or attempting to broker, solicit or arrange for the sale of any Authorized Product(s) other than the Authorized Product(s) for which ASC has been approved in Exhibit(s) B. 3.9 REMEDY FOR VIOLATION. In addition to all other remedies available to Autodesk under law or equity or this ASC Agreement, including termination, in the event that ASC violates any of the provisions of this subsection 3 or the Autodesk Channel Partner Policies and Procedures, ASC shall pay to Autodesk, as liquidated damages and not as a penalty, an amount equal to the difference between the then-current Autodesk suggested retail price and the price ASC actually paid for the Autodesk software product used, procured or distributed in contravention of this Section 3 or the sum of $500.00 for each copy of the Autodesk software product used, procured or distributed in contravention of this Section 3, whichever is greater. Additionally, ASC shall not be eligible for MDF for, at minimum, the remainder of the Autodesk fiscal quarter in which the violation occurred (or the remainder of the Autodesk fiscal quarter in which Autodesk learned of such violation by ASC) and the subsequent Autodesk fiscal quarter. 3.10 MODIFICATIONS TO AGREEMENT. Lastly, Autodesk reserves the right, in its sole and exclusive discretion, to amend, supplement, change or discontinue any part of this ASC Agreement, any exhibits or amendments thereto, on thirty (30) day notice to ASC. This notice may come in the form of an updated posting to AACPW. 4. AGENCY COMMISSION RECOVERY. For all agency sale commissions paid pursuant to this ASC Agreement, in the event the commissioned product or service is returned or cancelled for any reason Autodesk may recover from the ASC, by means of a deduction from future commissions, that portion of the commission attributable, on a straight-line basis, to: (a) in the case of a product or service with an expiration date, the period from the date of return or cancellation to the date on which the product or service would have expired; or (b) for a product with a perpetual license, the period from the date the 4 product was delivered to ASC by Autodesk to the date the product was returned, assuming a useful life of twenty-four (24) months for the product. In the event such agency commission is paid to ASC pursuant to a revenue authorization obligation, then Autodesk may recover the pro rata portion of such commission which is attributable on a straight-line basis, for the period from the date of termination until the date when the revenue would have been fully recognized. 5. ASC OBLIGATIONS. ASC agrees to perform all of the following obligations in good faith: 5.1 VALUE ADDED SERVICES. ASC is required to provide Value Added Services beyond mere product fulfillment to End Users. Value Added Services include, but are not limited to, assessing each End User's software needs via the telephone or in person, as further described on AACPW, providing product demonstrations, recommending the appropriate Authorized Product(s) to an End User based upon End User's needs and offering pre and post-sales technical support. ASC shall be required to maintain written records that demonstrate such Value Added Services were offered for each sale of Authorized Products to an End User. Autodesk reserves the right to contact End Users to validate that such Value Added Services were provided and require ASC to provide Autodesk with evidence of Value Added Services, upon request. 5.2 MINIMUM VOLUME COMMITMENT. To be eligible to purchase Authorized Product(s) directly from Autodesk pursuant to this ASC Agreement, ASC must meet yearly Vertical Product revenue minimums as outlined in the ASC Requirements Chart set forth in Exhibit C. 5.3 VERTICAL REQUIREMENT. In order to achieve and maintain ASC status, ASC must be authorized for and actively carry and market Vertical Product(s). 5.4 SUPPORT. ASC must, at minimum, offer support services at the Premier Support Services Program level as described in the Support Program Requirements as outlined in Exhibit F. 5.5 REPORTING. ASC, at its own expense and in the format requested by Autodesk, shall provide sell through reports, forecasts and personnel reports pursuant to the Autodesk Channel Partner Policies and Procedures on a quarterly basis. Failure to provide any required report may consider a breach of this ASC Agreement by Autodesk and shall constitute termination for cause. 5.6 END USER RECORDS. As between Autodesk and ASC, Autodesk shall be the exclusive owner of the End User Records and it shall be treated by ASC as Autodesk's valuable trade secret. ASC may not use the End User Records for any reason except promotion, sale and support of the Authorized Products pursuant to this ASC Agreement without the prior written consent of Autodesk. 5.7 OPT-OUT REQUIREMENT. In using End User Records for the promotion, sale and support of the Authorized Products pursuant to this ASC Agreement, ASC shall, at minimum, utilize the following; (i) an "unsubscribe" or "opt-out" option on every marketing piece sent to End User regardless of form, (ii) a limitation on marketing contact with End Users to no more frequently then one time per calendar month. Additionally, ASC shall comply with any and all federal, state, county, and local laws, statues, ordinances, and regulations that are related to privacy, customer data and anything thereto related and shall hereby indemnify Autodesk for any failure of it to do so. 5.8 PRODUCT REQUIREMENTS CHART. Each Authorized Location of ASC shall continuously comply with the specific requirements ("PRODUCT REQUIREMENTS") set forth in each Product Requirements Chart and the Product Requirement Sheets, as amended by Autodesk from time to time in its sole and absolute discretion. 5.9 MINIMUM PURCHASE REQUIREMENTS. ASC agrees to satisfy all Minimum Purchase Requirements as outlined in Exhibit A. 5.10 APPROVALS. ASC shall obtain and maintain at its own expense all approvals, consents, permissions, licenses, and other governmental or other third party approvals necessary to enable ASC to market, distribute, and support the software products for which ASC is authorized in accordance with this ASC Agreement. ASC shall comply with all applicable federal, state, county and local laws, statutes, ordinances, and regulations that apply to the activities of ASC including relevant piracy laws. 5 5.11 MARKETING ACTIVITIES. ASC shall use its best efforts to actively market, promote, and distribute, at ASC's expense, the Authorized Products only within the Authroized Territory under the terms of this ASC Agreement and the Product Requirements, applicable Major Account Guide and Government Account Guide. 5.12 UPDATES, BUG FIXES, AND ENHANCEMENTS. ASC, at its own expense, shall be responsible for distribution and support of any Updates and/or Bug Fixes to any Authorized Product(s) that ASC has sold to an End User promptly after delivery to ASC of such Update or Bug Fix. Autodesk reserves the right to distribute Updates, Bug Fixes, and Enhancements to End Users directly or through alternative channels, including, but not limited to, electronic distribution. ASC shall promptly notify Autodesk of any defect in any Authorized Product(s) which is discovered by or reported to ASC. 5.13 AUTODESK CHANNEL PARTNER POLICY AND PROCEDURES. ASC shall comply with all terms and conditions of all current Autodesk Channel Partner Policies and Procedures. Failure to abide by such policies and procedures shall be considered a breach of this ASC Agreement and shall constitute termination for cause. Autodesk reserves the right to modify such policies and procedures at anytime by posting an update to AACPW. 5.14 FULFILLMENT OF REBATE COUPONS. From time to time Autodesk may run a promotion whereby End Users may receive a rebate offer for Authorized Products. Autodesk appoints ASC as a non-exclusive agent for the fulfillment of rebate claims ("Rebate Claims") submitted by End Users for the various promotions ("Promotions"). ASC shall pay to an End User who has submitted a Rebate Claim the specified dollar amount as set forth on the rebate coupon, according to the terms and conditions stated on the rebate coupon. ASC shall only pay End User for Rebate Claims that have been received for the Promotions for which ASC has been authorized by Autodesk. ASC shall pay a rebate to End User only if the rebate coupons have been completely filled out by the End User, if all required documentation is attached, and the Rebate Claim was postmarked or received prior to the expiration date printed on the rebate coupon, unless otherwise instructed by Autodesk. After submission to Autodesk of all required End User documentation by ASC, Autodesk shall credit ASC's account for the amount of the rebate coupon. 5.15 ASC'S OFFICE. ASC shall maintain an office within a commercial facility that is suitable to adequately represent Authorized Products and reflect a professional image to End Users. Such office may not be a home-office. ASC shall submit to Autodesk photographs of ASC's office along with this ASC Agreement. In the event that ASC loses its commercial office ASC shall have thirty (30) days in which to establish a new office as defined above. The establishment of a new office that is more than five miles from ASC's Authorized location is subject to written approval by Autodesk. ASC, at minimum, shall maintain a T1 line or equivalent. 5.16 CREDIT ESTABLISHMENT. ASC shall provide Autodesk with all reasonable financial information, including but not limited to financial statements, letter(s) of credit, credit reports, federal tax return(s) and any other documents reasonably requested by Autodesk to allow Autodesk to establish credit for ASC. ASC may not purchase direct from Autodesk pursuant to this ASC Agreement until a credit account has been established. Autodesk may cancel or suspend credit to ASC at any time, in its sole discretion. 5.17 UPDATED FINANCIAL STATEMENTS. ASC shall be required to submit updated financial statements to Autodesk, within five (5) business days following Autodesk's request during the term of this ASC Agreement. 5.18 BREACH OF OBLIGATIONS. In the event that ASC breaches any of the terms under this Section 5, in addition to all other remedies available to Autodesk at law or in equity or pursuant to this ASC Agreement, at Autodesk's sole discretion, Autodesk may terminate this ASC Agreement. 6. AUDIT RIGHTS. In addition to Autodesk's audit rights under Section 5 of this ASC Agreement, Autodesk, in its sole and absolute discretion, may conduct an audit of the financial and other records of ASC for the purpose of validating or augmenting the ASC reports identified in Section 4 above and otherwise ensuring that ASC is complying with the terms of this ASC Agreement. Autodesk shall bear the cost of such audit, unless the audit determines that ASC has underpaid Autodesk by more than five percent (5%) for any Autodesk fiscal quarter OR unless such audit reveals the ASC is not in compliance with this ASC Agreement. In the event of an underpayment by ASC, ASC shall pay to Autodesk the full amount of any underpayment disclosed by such audit, plus interest at the rate of 1.5% per month or the highest rate allowed by law, whichever is lower, within five (5) days of Autodesk's notification of such underpayment as well as bearing the 6 costs of the audit. And in the event a breach of this ASC Agreement is discovered, ASC shall bear the cost of the audit in addition to all other rights Autodesk has under this ASC Agreement, at law or in equity. 6.1 INVESTIGATIONS. From time to time Autodesk shall conduct investigations related to, among other things, alleged piracy and gray market sales. In the event ASC is found to be involved in any activity Autodesk investigates hereunder, in addition to all other rights and remedies available to Autodesk pursuant to this ASC Agreement, in law or in equity, ASC shall reimburse Autodesk for the costs of such investigation. 7. SALES TOOLKIT AND SUPPORT 7.1 SALES TOOLKIT. ASC shall purchase from Autodesk at the price of $495.00, each year this ASC Agreement is in force, one ASC sales toolkit per Authorized Location that will include one NFR copy of certain Authorized Products and certain marketing materials as deemed appropriate by Autodesk. Autodesk reserves the right to distribute Updates, Bug Fixes, and Enhancements to End Users directly or through alternative channels, including, but not limited to, electronic distribution. 7.2 SUPPORT. Pursuant to the terms and conditions of this ASC Agreement, ASC will be granted access to all Autodesk self service support tools as made available on the ASC support portal at www.autodesk.com (or any other site as designated by Autodesk.) Additionally, ASC shall be entitled to reasonable e-mail support from Autodesk. 8. ASC ORDERS, PAYMENT TERMS AND RETURNS 8.1 PURCHASE OF AUTHORIZED PRODUCTS. ASC may procure Authorized Products from either Autodesk or an Autodesk Authorized Distribution Partner in accordance with this ASC Agreement, the Authorized Products Requirements Charts and Exhibit(s) B. 8.2 PRICES AND ORDERS. The prices paid by ASC shall be the prices reflected on the ASC Price List as posted to the AACPW. Autodesk may change prices at any time effective thirty (30) days after publication of a new ASC Price List or other similar notice to ASC. Purchase orders must be in writing (including facsimile, telex, telecopy or electronic communication such as email, but only if such form of electronic communication has been previously agreed to by Autodesk) and must request a delivery date during the Term of this ASC Agreement. Autodesk reserves the right to accept or reject orders, in whole or in part, and shall make reasonable commercial efforts to advise ASC promptly of any order rejected hereunder. Upon acceptance by Autodesk, purchase orders shall be binding as to the products and services ordered and place of delivery, but not as to any other term appearing on such purchase order. Autodesk reserves the right to reject any order or to cancel any order previously accepted if Autodesk determines that ASC is in breach under this ASC Agreement. 8.3 TAXES. ASC shall be responsible for the collection and payment of all federal, state, country, or local taxes, fees, and other charges, including all applicable income and sales taxes, as well as all penalties and interest, with respect to the Authorized Products. 8.4 PAYMENT. Autodesk shall submit an invoice to ASC upon shipment of an order or partial order. If Autodesk elects to grant credit to ASC, all invoiced amounts shall be due and payable net thirty (30) days from the date of invoice. If ASC fails to pay any invoiced amounts when due, Autodesk may at its sole and absolute discretion, and in addition to any other remedies available to it at law or in equity or under this ASC Agreement, revoke or suspend ASC's credit terms, require further assurances from ASC that such invoiced amounts shall be paid, require ASC to prepay for all Authorized Products ordered and/or terminate this ASC Agreement. Overdue amounts shall be subject to a late payment charge of one and one-half percent (1.5%) per month or the highest rate allowed by law, whichever is lower. Additionally, any invoice not paid by ASC with in sixty (60) days shall, in Autodesk's sole and absolute discretion, cause ASC to forfeit any and all Earnbacks achieved by ASC in the previous fiscal quarter and lose eligibility for Earnbacks for the current quarter. Additionally, Autodesk may terminate this ASC Agreement for failure to pay. 8.5 SHIPMENT. Autodesk will ship orders to the address designated in ASC's purchase order F.O.B. or Free Carrier Autodesk's manufacturing plant, at which time risk of loss shall pass to ASC. All freight, insurance, customs duties, and other shipping expenses shall be paid by ASC. 7 8.6 SOFTWARE PRODUCT RETURNS. Autodesk shall post any then-current software product returns policies on the AACPW or any Autodesk site as designated by Autodesk. Autodesk reserves the right to change, amend or discontinue any software product returns policies on thirty (30) day notice. 9. COMMISSIONS, EARNBACKS AND MDF. 9.1 COMMISSIONS. ASC may receive a commission for various activities, provided that ASC is authorized to sell such products and ASC complies with all terms and conditions for receiving a commission, as set forth in the then current documentation (including but not limited to Major Account Program, Autodesk Online Store Program, Government Program, and relevant information published on AACPW. The commission structure is set forth in Exhibit D. Autodesk reserves the right to pay no commissions, or reduced commissions, if ASC fails to adequately perform the required sales, support and marketing activities as set forth in the AACPW. Autodesk reserves the right in its sole and absolute discretion to change the commission structure upon thirty (30) day notice. Changes to the commission structure shall be posted on AACPW. 9.2 TARGETS AND EARNBACKS. In the event ASC achieves its quarterly Target, ASC shall be eligible to receive Earnbacks. Earnback percentages shall be posted to AACPW. Earnbacks due shall be credited to ASC's account with Autodesk thirty (30) days after the last day of the Autodesk fiscal quarter. Targets shall be assigned to ASC by Autodesk for each quarter. Target attainment shall be based upon all sales by ASC to End Users of Authorized Products acquired directly from Autodesk by ASC, and the gross sales amount of those Authorized Products sold to Major Accounts and net sales amount purchased by Government sales agent. 9.3 MDF. ASC shall receive MDF pursuant to the Autodesk MDF Guide which shall be distributed separately from this ASC Agreement, but which terms are hereby incorporated by reference. MDF shall be distributed to ASC as an up front advance, credited to each order for the Authorized Products. Failure to comply with the requirements of the Autodesk MDF Guide shall result in the loss or reduction of MDF for the following Autodesk fiscal quarter as set forth in the MDF Guide. 10. TRADEMARKS. During the term of this ASC Agreement, ASC shall have a nonexclusive, nontransferable right to indicate to the public that it is an Autodesk Authorized ASC and to advertise the Authorized Products within the United States under the trademarks and slogans adopted by Autodesk from time to time ("Trademarks"). ASC's use of the Trademarks in any literature, promotion, or advertising shall be in accordance with Autodesk guidelines for such usage. ASC shall not contest, oppose, or challenge Autodesk's ownership of the Trademarks. All representations of Autodesk Trademarks that ASC intends to use shall be exact copies of those used by Autodesk, or shall first be submitted to the appropriate Autodesk personnel for approval of design, color, and other details, such approval shall not be unreasonably withheld. If any of the Autodesk Trademarks are to be used in conjunction with another trademark on or in relation to the Authorized Products, then the Autodesk Trademarks shall be presented equally legibly, equally prominently, but nevertheless separated from the other so that each appears to be a trademark in its own right, distinct from the other mark. All use of the Trademarks shall inure to the sole benefit of Autodesk. Effective upon the termination of this ASC Agreement, ASC shall immediately cease all usage of Autodesk Trademarks. 11. TITLE AND PROPRIETARY RIGHTS. The Authorized Products and other materials included in or incorporated in the Authorized Products and included on an Autodesk web site (collectively the "Materials") remain at all times the property of Autodesk. ASC acknowledges and agrees that Autodesk holds the copyright to the Materials and, except as expressly provided herein, ASC is not granted any other right or license to patents, copyrights, trade secrets, or trademarks with respect to the Materials. ASC shall take all reasonable measures to protect Autodesk's proprietary rights in the Materials and shall not copy, use or distribute the Materials, or any derivative thereof, in any manner or for any purpose, except as expressly authorized in this ASC Agreement. ASC shall not disassemble, decompile, or reverse-engineer the Materials, including any Authorized Product(s) source code, or otherwise attempt to discover any Autodesk trade secret or other proprietary information, or hack, impede, change or interfere with any Autodesk web site. ASC acknowledges that Autodesk has an Anti-Piracy Program and ASC agrees to review and follow the Anti-Piracy Program guidelines as published by Autodesk from time to time. ASC shall notify Autodesk promptly in writing upon its discovery of any unauthorized use of the Authorized Products or infringement of Autodesk's patent, copyright, trade secret, trademark, or other intellectual property rights. ASC shall not distribute any Authorized Product(s) to any person or entity if ASC is aware that such person or entity may be involved in potential unauthorized use of the Materials or other infringement of Autodesk's proprietary rights. 8 12. CUSTOMER DATA. All customer data, including End User Records, is and shall remain the sole and exclusive property of Autodesk and ASC shall have no right, title or interest in or to such customer data. All customer data is Autodesk confidential information. On occasion and at Autodesk's sole discretion, ASC may have access to Autodesk's customer database. ASC's access to such database shall be limited to customers with which ASC has a pre-existing business relationship. In the event that ASC loses its authorization for any Authorized Product(s), Autodesk reserves the right to provide another Autodesk Authorized Reseller with access to Autodesk's customer database for the customers to which ASC can no longer sell such Authorized Product(s). Autodesk does not represent or warrant to ASC that the information in Autodesk's customer database is current, correct or complete and Autodesk shall have no liability to ASC for any information contained in the Autodesk's customer database. 13. WARRANTY AND LIMITATIONS OF WARRANTY. Autodesk makes certain limited warranties to the End User in the End User License and disclaims all other warranties. ASC SHALL NOT MAKE ANY WARRANTY OR REPRESENTATION ACTUALLY, APPARENTLY OR OSTENSIBLY ON BEHALF OF AUTODESK. EXCEPT FOR THE EXPRESS END USER WARRANTY REFERRED TO HEREIN, AUTODESK MAKES NO OTHER WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, BY STATUTE OR OTHERWISE, REGARDING THE AUTHORIZED PRODUCTS. AUTODESK EXPRESSLY EXCLUDE ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY OR NONINFRINGEMENT. 14. SECURITY INTEREST. As security for ASC's payment of all monetary obligations to Autodesk, ASC hereby grants to Autodesk a security interest in all of ASC's inventory purchased from Autodesk ("ASC's Inventory"), all of ASC's accounts receivable evidencing any obligation to ASC for payment for Authorized Products sold, and all proceeds of any character, whether cash or non-cash, arising from the disposition of ASC's Inventory and accounts. ASC agrees to execute all documents necessary to perfect Autodesk's security interest described herein upon request by Autodesk. 15. INDEMNITY 15.1 INFRINGEMENT INDEMNITY BY AUTODESK. Autodesk shall indemnify, hold harmless, and defend, at its expense, ASC from any action brought against ASC which alleges that any Authorized Product(s) infringes a registered United States patent, copyright, or trade secret, provided that ASC promptly notifies Autodesk in writing of any claim, gives Autodesk sole control of the defense and settlement thereof, and provides all reasonable assistance in connection therewith. If the Authorized Product is finally adjudged to so infringe, Autodesk, at its exclusive option, (a) shall procure for ASC the right to continue distribution of such Authorized Product(s); (b) shall modify or replace such Authorized Product(s) with a noninfringing product; or (c) shall authorize return of the Authorized Products and terminate this ASC Agreement. Autodesk shall have no liability regarding any claim (i) arising out of the use of the Authorized Products in combination with other products, or modification of the Authorized Products, if the infringement would not have occurred but for such combination, modification, or usage, or (ii) for use of the Authorized Products which does not comply with the terms of the End User License or this ASC Agreement. THE FOREGOING STATES ASC'S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO CLAIMS OF INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS OF ANY KIND. 15.2 INDEMNITY BY ASC. ASC agrees to indemnify, hold harmless and defend Autodesk from any cost, loss, liability, or expense, including court costs and reasonable fees for attorneys or other professionals, arising out of or resulting from (a) any claim or demand brought against Autodesk or its directors, employees, or agents by a third party arising from or in connection with any breach by ASC of the terms of this ASC Agreement or any End User License, (b) any action brought by an End User or Autodesk Distribution Partner except as set forth in Section 15.1 above, (c) any breach by ASC of any provision of this ASC Agreement including, but not limited to, confidentiality and trade secrets, or (d) any negligent or willful act or omission by ASC, ASC's employees, or ASC's sales channel including, but not limited to, any act or omission that contributes to (i) any bodily injury, sickness, disease, or death; (ii) any injury or destruction to tangible property or loss of use resulting there from; or (iii) any violation of any statue, ordinance or regulation including but not limited to privacy laws. 16. LIMITATION OF LIABILITY. AUTODESK'S LIABILITY. AUTODESK'S ENTIRE CUMULATIVE LIABILITY ARISING OUT OF THIS ASC AGREEMENT, INCLUDING THE ORDER, DELIVERY OR NON-DELIVERY OF ANY AUTHORIZED PRODUCT(S), SHALL NOT EXCEED THE GREATER OF: (A) THE AMOUNT PAID TO AUTODESK BY ASC IN 9 THE SIX (6) MONTHS PRECEDING THE EVENT OR, (B) $500.00, WHICH EVER IS LESS. IN NO EVENT SHALL AUTODESK BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, OR INDIRECT DAMAGES ARISING OUT OF THIS ASC AGREEMENT, HOWEVER CAUSED, WHETHER FOR BREACH OF CONTRACT, TORT, (INCLUDING NEGLIGENCE) OR ANY OTHER LEGAL THEORY, AND WHETHER OR NOT AUTODESK HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FUNDAMENTAL BREACH, BREACH OF A FUNDAMENTAL TERM OR FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. 17. CONFIDENTIALITY 17.1 CONFIDENTIAL INFORMATION. As used in this ASC Agreement, confidential information shall mean any information (a) designated as confidential orally or in writing by either party hereto, (b) related to any Authorized Product(s), (c) related to Autodesk's business, or (d) other information received by ASC by virtue of ASC's relationship with Autodesk including, but not limited to, product plans, product designs product costs, product prices, product names, finances, marketing plans, business opportunities, Autodesk customer data, personnel, research, development, customer data or know-how ("Confidential Information"). 17.2 LIMITATIONS ON DISCLOSURE AND USE OF CONFIDENTIAL INFORMATION. Each party shall exercise reasonable care to prevent the unauthorized disclosure of Confidential Information by employing no less than the same degree of care employed by such party to prevent the unauthorized disclosure of its own Confidential Information. Confidential Information disclosed under this ASC Agreement shall only be used by the receiving party in the furtherance of this ASC Agreement or the performance of its obligations hereunder. Neither party shall disclose the terms of this ASC Agreement to any third party without the prior written consent of the other, except pursuant to a valid and enforceable order of a court or government agency. 17.3 EXCEPTIONS. Confidential Information does not include information which (a) is rightfully received by the receiving party from a third party without restriction or violation of confidentiality, (b) is known to or developed by the receiving party independently without use of the Confidential Information, (c) is or becomes generally known to the public by other than a breach of duty hereunder by the receiving party, or (d) has been approved in advance for release by written authorization of the non-disclosing party. 18. TERM, TERMINATION, AND OTHER REMEDIES 18.1 TERM. This ASC Agreement, when fully executed by the parties, shall begin on the Effective Date, and shall continue in effect through midnight on January 31, 2003 when it shall then terminate, unless terminated earlier under the provisions of this ASC Agreement. 18.2 TERMINATION FOR BREACH. Either party may terminate this ASC Agreement upon thirty (30) days advance written notice if the other party breaches any term or condition of this ASC Agreement and fails to cure such breach to the reasonable satisfaction of the non-breaching party within the thirty (30) day written notice period. 18.3 BREACH OF PAYMENT OBLIGATIONS. In the event that ASC breaches any of the terms of this ASC Agreement, including any payment obligations, at Autodesk's sole discretion, ASC shall not be eligible for MDF for the remainder of the fiscal quarter in which the violation occurred (or the quarter in which Autodesk discovered the violation) and the subsequent fiscal quarter. In addition, Autodesk may, in its sole and absolute discretion, terminate this ASC Agreement. 18.4 TERMINATION FOR INSOLVENCY. Autodesk may immediately terminate this ASC Agreement with or without notice if ASC becomes insolvent, or the subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership, liquidation, or assignment for the benefit of creditors, if that proceeding is not dismissed with prejudice within sixty (60) days after filing. In addition to the foregoing, in the event ASC either voluntarily files for protection against its creditors under the United States Bankruptcy Code or is the subject of an involuntary petition in bankruptcy, ASC agrees that Autodesk shall be entitled to all rights to retain the benefits of this ASC Agreement which are set forth in 11 U.S.C. 365(n). No right granted to Autodesk under 11 U.S.C. 365 shall be deemed to have been waived either expressly or by implication without a written agreement confirming such waiver. 10 18.5 TERMINATION FOR CUSTOMER DISSATISFACTION. In consideration for its authorization, Autodesk is relying upon ASC to behave in a professional and upstanding manner in its relationship with all End Users. Failure to attain a high level of customer satisfaction shall be considered a material breach of this ASC Agreement, and Autodesk reserves the right to terminate this ASC Agreement in the event that Autodesk receives customer dissatisfaction complaints from an End User, regarding ASC. 18.6 TERMINATION FOR FAILURE TO MEET MINIMUM PURCHASE REQUIREMENTS OR TARGET (a) PURCHASE REQUIREMENTS. Failure by ASC to achieve the Purchase Requirements may result in the termination of this ASC Agreement or the applicable Autodesk Product authorization by Autodesk, in its sole discretion. (b) TARGET. Failure by ASC to meet or exceed the Target may result in ASC being ineligible from applying to the ASC program or any other Autodesk Channel Partner program in any subsequent year(s) in which Autodesk elects to continue to offer such program(s), in Autodesk's sole discretion. Nothing herein shall prevent Autodesk from discontinuing this or any subsequent ASC program or other Autodesk Channel Partner program at any time. 18.7 BREACH OF OTHER AGREEMENTS WITH AUTODESK. In the event ASC has any other current agreements of any other type with Autodesk ("Other Autodesk Agreement"), the breach of any term of any such Other Autodesk Agreement may, at Autodesk's option, be deemed a breach of this ASC Agreement and shall permit Autodesk to terminate this ASC Agreement in the same manner as if a breach of the terms of this ASC Agreement had occurred. Any alleged breach by Autodesk of any Other Autodesk Agreement shall not be deemed a breach of this ASC Agreement by Autodesk and shall not constitute cause for termination by ASC or support an allegation by ASC of damages under this ASC Agreement. 18.8 BREACH OF PRODUCT REQUIREMENTS CHART, SUSPENSION OF PRODUCT AUTHORIZATION AND PARTIAL TERMINATION. Autodesk, at its sole discretion, may exercise its termination rights or suspension of product authorization under this Section 18 solely with respect to the Product Requirements Chart, Authorized Locations, Authorized Territories, or Authorized Products, or with respect to any Other Autodesk Agreement, which partial termination shall not affect this ASC Agreement's application to the remaining Product Requirements Chart, Authorized Locations, Authorized Territories, or Authorized Products, or affect any remaining part of any Other Autodesk Agreement. 18.9 DE-AUTHORIZATION OF ASC STATUS. ASC's status as an ASC and/or ASC's authorization to distribute and market the software products may be terminated independently on a product by product basis, or as a part of this ASC Agreement. 18.10 TERMINATION FOR CONVENIENCE. Either party may terminate this ASC Agreement for any or no reason, upon sixty (60) days advance written notice to other party. 18.11 EFFECT OF TERMINATION (a) MONIES DUE AND PAYABLE. Notwithstanding any credit terms previously established with ASC or any other provision of this ASC Agreement, upon notice of termination of this ASC Agreement, all monies owed by ASC to Autodesk shall become immediately due and payable. Overdue amounts shall be subject to a late payment charge of one and one-half percent (1.5%) per month, or the maximum amount allowed by law, whichever is less. (b) FULFILLMENT OF ASC ORDERS. Upon delivery of notice of a breach or notice of termination of this ASC Agreement, Autodesk shall not be obligated to fulfill any orders by ASC. Additionally, Autodesk shall not be obligated to fulfill any orders received by Autodesk subsequent to the effective date of termination. In Autodesk's sole discretion, Autodesk may continue to fulfill orders provided that ASC (i) submits prepayments for any such order and (ii) pays all outstanding obligations to Autodesk prior to any shipment by Autodesk. (c) RETURN OR DEPLETION OF INVENTORY. Subject to the limitations set forth below, upon termination, Autodesk, at its sole discretion, may either (i) repurchase all or any part of ASC's inventory of Authorized Products at the price paid by ASC to Autodesk and/or (ii) allow ASC to continue to distribute those Authorized Products in inventory until the inventory is depleted, subject to the terms and conditions set forth in this ASC Agreement and whatever additional terms and conditions may be imposed by Autodesk in its sole and absolute discretion. Except as expressly set forth above, under no circumstances shall ASC be entitled to a refund for all or any portion of the Authorized Products in ASC's inventory. 11 (d) RETURN OF MATERIALS. Within thirty (30) days after the termination of this ASC Agreement, ASC shall return to Autodesk, at its sole expense, all Autodesk Confidential Information, data, photographs, samples, literature and sales aids, and any other property of Autodesk then in ASC's possession. 18.12 ATTORNEYS' FEES FOR COLLECTIONS. In any action brought by Autodesk to collect monies due under this ASC Agreement, Autodesk shall be entitled to recover all costs and attorneys' fees incurred in maintaining such action. 18.13 NO TERMINATION COMPENSATION. Except as expressly set forth herein, the parties expressly agree that no damages, indemnity or termination benefits whatsoever (including without limitation, any compensation for goodwill established by ASC during the term of this ASC Agreement or for any lost profits or expenses of ASC) shall be due or payable to ASC by reason of any termination of this ASC Agreement in accordance with its terms, and ASC expressly waives the application of any statute, law or custom to the contrary. 18.14 OTHER REMEDIES. In addition to the right to terminate this ASC Agreement, Autodesk reserves all rights and remedies available to Autodesk under law or equity, including the right to seek damages and injunctive relief for breach or threatened breach of this ASC Agreement by ASC. 18.15 REAPPLICATION POST TERMINATION. In the Event this ASC Agreement is terminated or ASC loses one or more product authorizations for any reason, ASC may not reapply for any Autodesk Channel Partner program, including any then existing ASC program, for a minimum of six (6) months after the effective date of the termination. Nothing herein shall require Autodesk to consider ASC for any Autodesk Channel Partner program. 18.16 SURVIVING PROVISIONS. The terms and conditions, which by their nature should survive, shall survive and continue after termination of this ASC Agreement. 19. GENERAL PROVISIONS 19.1 ASSIGNMENT. ASC acknowledges that Autodesk is relying upon ASC's reputation, business standing, and goodwill under ASC's present ownership in entering into this ASC Agreement. Accordingly, ASC agrees that its rights and obligations under this ASC Agreement may not be transferred or assigned and its duties may not be delegated directly or indirectly without the prior written consent of Autodesk in its sole and absolute discretion. ASC shall notify Autodesk promptly in writing of any change of ownership of ASC or any sale of all or substantially all of ASC's assets. ASC acknowledges that any change of ownership, sale of all or substantially all of ASC's assets, or attempted assignment by ASC of this ASC Agreement, or any part thereof, without Autodesk's prior written consent may result in immediate termination of this ASC Agreement by Autodesk. Autodesk may assign or otherwise transfer its rights and obligations to successors-in-interest (whether by purchase of stock or assets, merger, operation of law, or otherwise) of that portion of its business related to the subject matter hereof. Subject to the restrictions set forth in this Section 19.1, all of the terms and conditions of this ASC Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and permitted assigns of the parties hereto. 19.2 DISPUTE RESOLUTION (a) The parties will attempt in good faith to promptly resolve any controversy or claim arising out of or relating to this ASC Agreement through negotiations between the parties before resorting to other remedies available to them. Any such dispute shall be referred to appropriate senior executives of each party who shall have the authority to resolve the matter. If the senior executives are unable to resolve the dispute, the parties may be agreement refer the matter to an appropriate forum of alternative dispute resolution ranging from mediation to arbitration. If the parties cannot resolve the matter or if they cannot agree upon an alternative form of dispute resolution, then either party may pursue resolution of the matter through litigation pursuant to section 19 herein. (b) The forgoing shall not apply to a dispute or controversy involving either party's Confidential Information or intellectual property. In the event of such a dispute or controversy, either may immediately seek any legal and/or equitable remedies it deems necessary. 19.3 VENUE/CHOICE OF LAW. This ASC Agreement shall be construed in accordance with the laws of the State of California (excluding rules regarding conflicts of law) and the United States of America. The parties hereby submit to the 12 exclusive personal jurisdiction of and venue in the Superior Court of the State of California, County of Marin or County of Santa Clara, and the United States District Court for the Northern District of California in San Francisco. 19.4 PUBLICITY. ASC may not issue any press release or any other public announcement regarding this ASC Agreement or any aspect of its relationship with Autodesk without the prior written consent of Autodesk, which may be withheld in its sole discretion. Additionally, ASC is prohibited from utilizing the Autodesk stock ticker ("ADSK") in any press release or other public announcement unless such release is a joint release with Autodesk or Autodesk otherwise permits same, for each single release, in writing in advance. 19.5 NOTICES. Any notices required under the terms of this ASC Agreement will be given in writing either (a) to the persons at the addresses set forth below, or to such other address as either party may substitute by written notice to the other in the manner contemplated herein, and will be deemed served when received by Autodesk from ASC or when sent to ASC by Autodesk, or (b) by facsimile, and will be deemed served when received by Autodesk from ASC or when sent to ASC by Autodesk. If to Autodesk: Autodesk, Inc. 111 McInnis Parkway San Rafael, California 94903 Attn: General Counsel Facsimile: (415) 507-6126 If to ASC, to the address and facsimile number identified on the first page of this ASC Agreement. Additionally, Autodesk may notify ASC of any changes by posting such changes to AACPW. 19.6 INDEPENDENT CONTRACTORS. In performing their respective duties under this ASC Agreement, each of the parties will be operating as an independent contractor. Nothing contained herein will in any way constitute any association, partnership, or joint venture between the parties hereto, or be construed to evidence the intention of the parties to establish any such relationship. Neither of the parties will hold itself out in any manner that would be contrary to the provisions of this Section 19.6. 19.7 ENTIRE AGREEMENT. This document, together with its exhibits, contains the entire agreement and understanding between ASC and Autodesk concerning the subject matter of this ASC Agreement including, but not limited to, its duration and manner of expiration, termination, and Autodesk's sole and absolute discretion in determining to offer, or accept any extension of this ASC Agreement. This document supercedes all prior communications, discussions, negotiations, proposed agreements and all other agreements, whether written or oral, excepting solely all prior confidentiality and nondisclosure agreements to the extent they are not expressly superceded by this ASC Agreement. Autodesk has not made and ASC has not relied upon any representations not expressly set forth in this document in making this ASC Agreement. This ASC Agreement may be amended or interpreted only by a writing signed both by authorized individuals for Autodesk and ASC. It is the express intent of the parties that this ASC Agreement and any amendment thereto shall be interpreted solely by reference to their written terms. Any handwritten or typed changes to this ASC Agreement must be initialed by both parties in order to become effective. 19.8 SEVERABILITY. In the event that it is determined by a court of competent jurisdiction as a part of a final non-appealable judgement that any provision of this ASC Agreement or part thereof is invalid, illegal, or otherwise unenforceable, such provision will be enforced or reformed as nearly as possible in accordance with the stated intention of the parties, while the remainder of this ASC Agreement will remain in full force and effect. 19.9 CONSTRUCTION. This ASC Agreement has been negotiated by the parties and their respective counsel. This ASC Agreement will be interpreted in accordance with its terms and without any strict construction against either party. Ambiguity will not be interpreted against the drafting party. 19.10 COUNTERPARTS. This ASC Agreement may be executed in separate counterparts and shall become effective when the separate counterparts have been exchanged between the parties. 19.11 FORCE MAJEURE. Except for the failure to make payments, neither party will be liable for any loss, damage or penalty resulting from delays or failures in performance resulting from acts of God, supplier delay or other causes beyond 13 the non-performing party's reasonable control and not caused by the negligence of the non-performing party, provided that the non-performing party promptly notifies the other party of the delay and the cause thereof and promptly resumes performance as soon as it is possible to do so. 19.12 WAIVER. The waiver of any breach or default will not constitute a waiver of any other right in this ASC Agreement or any subsequent breach or default. No waiver shall be effective unless in writing and signed by an authorized representative of the party to be bound. Failure to pursue, or delay in pursuing, any remedy for a breach shall not constitute a waiver of such breach. The undersigned are duly authorized to execute this ASC Agreement on behalf of their respective parties. AUTODESK, INC. ASC By: By: /s/ Joel Nickolson --------------------------------- --------------------------------- Doug May Joel Nickolson - ------------------------------------ ------------------------------------ Printed Name Printed Name Vice President- Americas Executive Vice President - ------------------------------------ ------------------------------------ Title Title 1-29-02 - ------------------------------------ ------------------------------------ Date Date 14 EXHIBIT A - AUTODESK AUTHORIZED PRODUCTS REQUIREMENTS CHART
- ------------------------------------------------------------------------------------------------------------------------------------ HQ ROLLING 2 QTR PRODUCT REQUIRED PRODUCT PERSONNEL TRAINING AND/OR TESTING CONTRACTUAL AUTHORIZATION AUTHORIZATIONS REQUIREMENTS REQUIREMENTS MINIMUMS - ------------------------------------------------------------------------------------------------------------------------------------ HORIZONTAL AutoCAD, 1 Qualified Salesperson Mandatory Sales, Technical, $30,000 of total (REQUIRED FOR Autodesk Raster Design, 1 Qualified Application and AE demo training as Autodesk VERTICAL Autodesk Viz, Engineer required AND pass purchases per AUTHORIZATIONS) Lightscape Competency Exams authorized location - ------------------------------------------------------------------------------------------------------------------------------------ WEB & MOBILE Autodesk MapGuide; 1 Qualified Salesperson Mandatory Sales, $20,000 per (NO HORIZONTAL MapGuide Author, 1 Qualified Application Technical, and AE demo training as authorized AUTH. REQUIRED) MapGuide Server, Engineer required AND pass location MapGuide Viewer, Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ ONSITE 1 Qualified Salesperson Mandatory Sales, Technical, $20,000 per ENTERPRISE Autodesk OnSite Enterprise 1 Qualified Application and AE demo training as authorized (NO HORIZONTAL Engineer required AND pass location AUTH. REQUIRED) Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ MECHANICAL AutoCAD Mechanical, 1 Qualified Salesperson Mandatory Sales, Technical, $12,000 per DRAFTING Autodesk Data Exchange, 1 Qualified Application and AE demo training as authorized IGES Translator, Engineer required AND pass location STEP Translator Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ MANUFACTURING Autodesk Inventor, 1 Dedicated Salesperson Mandatory Sales, Technical, $40,000 per Autodesk Streamline, 1 Dedicated Application and AE demo training as authorized Mechanical Desktop Engineer required AND pass location Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ ARCHITECTURE AND Architectural Desktop, 1 Qualified Salesperson Mandatory Sales, Technical, $40,000 per BUILDING DESIGN Building Mechanical, 1 Qualified Application and AE demo training as authorized Building Electrical, Engineer required AND pass location Architectural Studio Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ LAND Land Development 1 Qualified Salesperson Mandatory Sales, Technical, $40,000 per DEVELOPMENT Desktop, 1 Qualified Application and AE demo training as authorized Autodesk Civil Design, Engineer required AND pass location Autodesk Survey, Autodesk Competency Exams Field Survey - ------------------------------------------------------------------------------------------------------------------------------------ MAPPING Autodesk Map 1 Qualified Salesperson Mandatory Sales, Technical, $12,000 per 1 Qualified Application and AE demo training as authorized Engineer required AND pass location Competency Exams - ------------------------------------------------------------------------------------------------------------------------------------ - -------------------------------------------------------- SATELLITE OFFICE PRODUCT SALES PERSONNEL AUTHORIZATION TERRITORY REQUIREMENTS - -------------------------------------------------------- HORIZONTAL Territory Same requirements as HQ (REQUIRED FOR assigned by or submit Alternative VERTICAL region Sales and Support Plan AUTHORIZATIONS) for approval - -------------------------------------------------------- WEB & MOBILE U.S. except Same requirements as HQ (NO HORIZONTAL P.R. & USVI or submit Alternative AUTH. REQUIRED) Sales and Support Plan for approval - -------------------------------------------------------- ONSITE U.S. except Same requirements as HQ ENTERPRISE P.R. & or submit Alternative (NO HORIZONTAL USVI Sales and Support Plan AUTH. REQUIRED) for approval - -------------------------------------------------------- MECHANICAL Territory Same requirements as HQ DRAFTING assigned by or submit Alternative region Sales and Support Plan for approval - -------------------------------------------------------- MANUFACTURING Territory 1 Dedicated Salesperson assigned by 1 Qualified Application region Engineer - -------------------------------------------------------- ARCHITECTURE AND Territory Same requirements as HQ BUILDING DESIGN assigned by or submit Alternative region Sales and Support Plan for approval - -------------------------------------------------------- LAND Territory Same requirements as HQ DEVELOPMENT assigned by or submit Alternative region Sales and Support Plan for approval - -------------------------------------------------------- MAPPING Territory Same requirements as HQ assigned by or submit Alternative region Sales and Support Plan for approval - --------------------------------------------------------
These authorization requirements may be modified at any time by Autodesk. In the event Autodesk modifies such authorization requirements, Autodesk will forward a revised Products Requirements Chart(s) and Exhibit(s) B to VAR. AUTODESK AUTHORIZED PRODUCTS REQUIRMENTS CHART (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------- SUPPORT OFFERINGS AND FACILITY AND REQUIREMENTS WORKSTATION RESPONSE TIME CALL TRACKING CUSTOMER SATISFACTION PHONE SYSTEM - -------------------------------------------------------------------------------------------------------------------------- REQUIRED OF ALL Full Internet SLA initial Call Tracking and Satisfactory results Multi-line phone VERTICAL access, email and response within 4 Reporting System from periodic system w/ RESELLERS workstation hours by accredited in place customer satisfaction voicemail or dedicated solely technician; surveys conducted by other recording to support and resolution within Autodesk. device for support lab with 72 hours messages systems capable of after-hours running all supported products. - --------------------------------------------------------------------------------------------------------------------------
16 EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES AUTOCAD AND HORIZONTAL SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ----------------------- ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (EAST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 11400-A Cronridge Drive 150 Owings Mills MD 21117 FAX: 410-581-8088 0070001471 0070001471 01 180 Tices Lane 150 E. Brunswick NJ 08816 FAX: 732-220-9406 0070001471 0070001096 03 890 7th North Street, Ste. 110 150 Liverpool NY 13088 FAX: 315-453-2380 0070001471 0070001328 04 60 Commerce Park Road 150 Milford CT 06460 FAX: 203-882-5864 0070001471 0070001411 05 5656 Shell Road 250 Virginia Beach VA 23455 FAX: 757-460-8400 0070001471 0070004855 06
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES AUTOCAD AND HORIZONTAL SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (CENTRAL) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8319 N. 30th Street 250 Omaha NE 68112 FAX: 402-451-8007 0070001359 0070001359 01 1370 NW 114th St, Ste 200 250 Clive IA 50325 FAX: 515-224-5833 0070001359 0070030470 02 1221 Park Place NE, Ste. C 250 Cedar Rapids IA 52401 FAX: 319-393-8171 0070001359 0070039306 03 5864 Interface Drive 250 Ann Arbor MI 48103 FAX: 734-769-4727 0070001359 0070000177 04
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES AUTOCAD AND HORIZONTAL SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Nam Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (SOUTH) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 4322 N. Beltline #B-110 250 Irving TX 75038 FAX: 972-570-7505 0070000270 0070000270 01 8160 Woodland Center Blvd 250 Tampa FL 33614 FAX: 813-496-8871 0070000270 0070195691 02 8015 Shoal Creek Blvd., Ste 211 250 Austin TX 78757 FAX: 512-407-8822 0070000270 0070000268 03 536 Interstate Court 250 Sarasota FL 34240 FAX: 941-379-6719 0070000270 0070004220 04
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES AUTOCAD AND HORIZONTAL SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (WEST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8101 E. Prentice #200 250 Englewood CO 80111 FAX: 303-796-7646 0070001091 0070001091 01 2130 Professional Dr. Ste 120 150 Roseville CA 95661 FAX: 916-774-2626 0070001091 0070155453 02
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES ARCHITECTURAL AND BUILDING DESIGN SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby: By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (EAST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 11400-A Cronridge Drive 150 Owings Mills MD 21117 FAX: 410-581-8088 0070001471 0070001471 01 180 Tices Lane 150 E. Brunswick NJ 08816 FAX: 732-220-9406 0070001471 0070001096 03 890 7th North Street, Ste. 110 150 Liverpool NY 13088 FAX: 315-453-2380 00700014712 0070001328 04 5656 Shell Road 250 Virginia Beach VA 23455 FAX: 757-460-8400 0070001471 0070004855 06
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES ARCHITECTURAL AND BUILDING DESIGN SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorizations, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date *** BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (CENTRAL) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8319 N. 30th Street 250 Omaha NE 68112 FAX: 402-451-8007 0070001359 0070001359 01 5864 Interface Drive 250 Ann Arbor MI 48103 FAX: 734-769-4727 0070001359 0070000177 04
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES ARCHITECTURAL AND BUILDING DESIGN SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (SOUTH) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 4322 N. Beltline #B-110 250 Irving TX 75038 FAX: 972-570-7505 0070000270 0070000270 01 8015 Shoal Creek Blvd., Ste 211 250 Austin TX 78757 FAX: 512-407-8822 0070000270 0070000268 03 536 Interstate Court 250 Sarasota FL 34240 FAX: 941-379-6719 0070000270 0070004220 04
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES ARCHITECTURAL AND BUILDING DESIGN SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (WEST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8101 E.Prentice#200 250 Englewood CO 80111 FAX: 303-796-7646 0070001091 0070001091 01 2130 Professional Dr. Ste 120 150 Roseville CA 95661 FAX: 916-774-2626 0070001091 0070155453 02
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MECHANICAL DRAFTING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (EAST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 11400-A Cronridge Drive 150 Owings Mills MD 21117 FAX 410-581-8088 0070001471 0070001471 01 180 Tices Lane 150 E.Brunswick NJ 08816 FAX 732-220-9406 0070001471 0070001096 03 890 7th North Street, Ste. 110 150 Liverpool NY 13088 FAX 315-453-2380 0070001471 0070001328 04 60 Commerce Park Road 150 Milford CT 06460 FAX 203-882-5864 0070001471 0070001411 05 5656 Shell Road 250 Virginia Beach VA 23455 FAX 757-460-8400 0070001471 0070004855 06
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MECHANICAL DRAFTING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (CENTRAL) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8319 N. 30th Street 250 Omaha NE 68112 FAX 402-451-8007 0070001359 0070001359 01 1370 NW 114th St, Ste 200 250 Clive IA 50325 FAX 515-224-5833 0070001359 0070030470 02 1221 Park Place NE, Ste. C 250 Cedar Rapids IA 52401 FAX 319-393-8171 0070001359 0070039306 03
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MECHANICAL DRAFTING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (SOUTH) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 4322 N. Beltline #B-110 250 Irving TX 75038 FAX 972-570-7505 0070000270 0070000270 01
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MECHANICAL DRAFTING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (WEST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8101 E. Prentice #200 250 Englewood CO 80111 FAX 303-796-7646 0070001091 0070001091 01
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MANUFACTURING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (EAST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 11400-A Cronridge Drive 150 Owings Mills MD 21117 FAX 410-581-8088 0070001471 0070001471 01 180 Tices Lane 150 E. Brunswick NJ 08816 FAX 732-220-9406 0070001471 0070001096 03 890 7th North Street, Ste. 110 150 Liverpool NY 13088 FAX 315-453-2380 0070001471 0070001328 04 60 Commerce Park Road 150 Milford CT 06460 FAX 203-882-5864 0070001471 0070001411 05 5656 Shell Road 250 Virginia Beach VA 23455 FAX 757-460-8400 0070001471 0070004855 06
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MANUFACTURING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (CENTRAL) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8319 N. 30th Street 250 Omaha NE 68112 FAX 402-451-8007 0070001359 0070001359 01 1370 NW 114th St, Ste 200 250 Clive IA 50325 FAX 515-224-5833 0070001359 0070030470 02 1221 Park Place NE, Ste. C 250 Cedar Rapids IA 52401 FAX 319-393-8171 0070001359 0070039306 03
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MANUFACTURING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholso 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (SOUTH) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 4322 N. Beltline #B-110 250 Irving TX 75038 FAX 972-570-7505 0070000270 0070000270 01
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MANUFACTURING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (WEST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8101 E. Prentice #200 250 Englewood CO 80111 FAX 303-796-7646 0070001091 0070001091 01
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES LAND DEVELOPMENT SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (EAST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 11400-A Cronridge Drive 150 Owings Mills MD 21117 FAX 410-581-8088 0070001471 0070001471 01 180 Tices Lane 150 E. Brunswick NJ 08816 FAX 732-220-9406 0070001471 0070001096 03 890 7th North Street, Ste. 110 150 Liverpool NY 13088 FAX 315-453-2380 0070001471 0070001328 04 5656 Shell Road 250 Virginia Beach VA 23455 FAX 757-460-8400 0070001471 0070004855 06
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES LAND DEVELOPMENT SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (CENTRAL) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8319 N. 30th Street 250 Omaha NE 68112 FAX 402-451-8007 0070001359 0070001359 01 5864 Interface Drive 250 Ann Arbor MI 48103 FAX 734-769-4727 0070001359 0070000177 04
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES LAND DEVELOPMENT SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (SOUTH) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 4322 N. Beltline #B-110 250 Irving TX 75038 FAX 972-570-7505 0070000270 0070000270 01 8015 Shoal Creek Blvd.,Ste 211 250 Austin TX 78757 FAX 512-407-8822 0070000270 0070000268 03 536 Interstate Court 250 Sarasota FL 34240 FAX 941-379-6719 0070000270 0070004220 04
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES LAND DEVELOPMENT SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (WEST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8101 E. Prentice #200 250 Englewood CO 80111 FAX 303-796-7646 0070001091 0070001091 01 2130 Professional Dr. Ste 120 150 Roseville CA 95661 FAX 916-774-2626 0070001091 0070155453 02
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MAPPING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (EAST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 11400-A Cronridge Drive 150 Owings Mills MD 21117 FAX 410-581-8088 0070001471 0070001471 01 180 Tices Lane 150 E. Brunswick NJ 08816 FAX 732-220-9406 0070001471 0070001096 03 890 7th North Street, Ste. 110 150 Liverpool NY 13088 FAX 315-453-2380 0070001471 0070001328 04 5656 Shell Road 250 Virginia Beach VA 23455 FAX 757-460-8400 0070001471 0070004855 06
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MAPPING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ------------------------ ------------------------------ ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (CENTRAL) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8319 N. 30th Street 250 Omaha NE 68112 FAX 402-451-8007 0070001359 0070001359 01
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MAPPING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ----------------------- ------------------------- ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY***
AVATECH SOLUTIONS, INC. (SOUTH) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 4322 N. Beltline #B-110 250 Irving TX 75038 FAX 972-570-7505 0070000270 0070000270 01 8015 Shoal Creek Blvd., Ste 211 250 Austin TX 78757 FAX 512-407-8822 0070000270 0070000268 03 536 Interstate Court 250 Sarasota FL 34240 FAX 941-379-6719 0070000270 0070004220 04
EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES MAPPING SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ----------------------- ------------------------- ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY*** AVATECH SOLUTIONS, INC. (WEST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 8101 E. Prentice #200 250 Englewood CO 80111 FAX 303-796-7646 0070001091 0070001091 01 EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES WEB & MOBILE SOFTWARE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholon 1-29-02 ----------------------- ------------------------- ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY*** AVATECH SOLUTIONS, INC. (EAST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 11400-A Cronridge Drive 50 States + Guam Owings Mills MD 21117 FAX 410-581-8088 0070001471 0070001471 01 EXHIBIT B ASC'S AUTHORIZED LOCATIONS AND TERRITORIES ON-SITE ENTERPRISE Autodesk authorizes ASC to market and distribute the Authorized Products only from the Authorized Location(s) and only in the Authorized Territory(ies) identified below: I agree that these are they authorized locations and territory for this product authorization, as an authorized representative, agree to be bound thereby. By: /s/ Joel Nicholson /s/ Joel Nicholson 1-29-02 ----------------------- ------------------------- ---------- Signature Printed Name Date ***BELOW TO BE FILLED IN BY AUTODESK ONLY*** AVATECH SOLUTIONS, INC. (EAST) AUTHORIZED PROVINCE/TERRITORY (MILE RADIUS) 11400-A Cronridge Drive 50 States + Guam Owings Mills MD 21117 FAX 410-581-8088 0070001471 0070001471 01 EXHIBIT C AUTODESK SYSTEMS CENTER REQUIREMENTS CHART Must be Vertically Authorized and meet the following requirements:
- ------------------------------------------------------------------------------------------------------------------------------------ YEARLY REVENUE MINIMUM ADDITIONAL PERSONNEL FACILITY PHONES COMMITMENT - ------------------------------------------------------------------------------------------------------------------------------------ $300K total vertical Two accredited full- Support lab with Multi-line phone system w/ REQUIRED OF ALL revenue or time post-sale support systems capable of voicemail or other recording ASCS $150K Architectural, or engineers running all supported device for messages after- $200K Manufacturing, or products hours $200K Land Development - ------------------------------------------------------------------------------------------------------------------------------------ SUPPORT OFFERINGS AND WORKSTATION RESPONSE TIME CALL TRACKING CUSTOMER SATISFACTION REQUIREMENTS - ------------------------------------------------------------------------------------------------------------------------------------ SLA initial response Full Internet access, within 4 hours by Satisfactory results from REQUIRED OF ALL ASCs email and workstation accredited technician; Call Tracking and periodic customer satisfaction dedicated solely to resolution within 72 Reporting System in surveys conducted by support hours place Autodesk. - ------------------------------------------------------------------------------------------------------------------------------------ TRAINING CENTER FACILITY CLASS OFFERINGS TRAINER REQUIREMENTS - --------------------------------------------------------------------------------------------------- REQUIRED OF ALL 5-seat training lab Must be able to offer Resellers must have ASCS capable of running customized classes on access to a qualified current Autodesk the products within the trainer, provide name products Vertical markets and submit a training plan - --------------------------------------------------------------------------------------------------- - ----------------------------------------------- OTHER - ----------------------------------------------- Must have good credit REQUIRED OF ALL standing with Autodesk. ASCS - ----------------------------------------------- SUPPORT OFFERINGS AND SATELLITE OFFICE REQUIREMENTS - ----------------------------------------------- Requirements met by REQUIRED OF ALL ASCS HQ location - ------------------------------------------------------------------- TRAINING CENTER SATELLITE OFFICE REQUIREMENTS - ------------------------------------------------------------------- REQUIRED OF ALL Each ASC satellite must have a training lab ASCS or reseller can use a portable training lab. - -------------------------------------------------------------------
18 EXHIBIT D COMMISSION ELIGIBILITY 1. MAJOR ACCOUNTS. 1.1 ELIGIBILITY. In order to be eligible to receive commissions on Autodesk sales to Autodesk Major Account Customers, ASCs shall be required to complete a Major Account Commission Claim Form or other appropriate documentation, which shall provide evidence of ASC's value added activities into such account which supported the actual sale for which ASC is seeking commission. 1.2 COMMISSIONS.
--------------------------------------------------------------------------------------------- AUTHORIZED PRODUCT CONTRACT TYPE COMMISSION --------------------------------------------------------------------------------------------- Horizontal Global or Major To be posted on AACPW --------------------------------------------------------------------------------------------- Vertical Global or Major To be posted on AACPW --------------------------------------------------------------------------------------------- All One time purchase order To be posted on AACPW ---------------------------------------------------------------------------------------------
2. GOVERNMENT CUSTOMERS. 2.1 ELIGIBILITY. In order to be eligible to receive commissions on Autodesk's sales to Autodesk Government Direct Customers ASCs shall be required to complete an Autodesk Government Commission Claim Form or other appropriate documentation, which shall provide evidence of ASC's activities in the account. Required activities in order to receive a commission include, but are not limited to, marketing, demonstrations, and the general promotion of the Authorized Products. All government orders shall be processed through DLT Solutions, Inc. 2.2 QUALIFIED GOVERNMENT SPECIALIST. In order to be qualified as an Autodesk Government Specialist, ASC shall be required to comply with the terms of the Autodesk Government Specialist Addendum. 2.3 COMMISSIONS.
--------------------------------------------------------------------------------------------- AUTHORIZED PRODUCT ASC STATUS COMMISSION --------------------------------------------------------------------------------------------- Horizontal ASC To be posted on AACPW --------------------------------------------------------------------------------------------- Autodesk Government Specialist To be posted on AACPW --------------------------------------------------------------------------------------------- Vertical ASC To be posted on AACPW --------------------------------------------------------------------------------------------- Autodesk Government Specialist To be posted on AACPW ---------------------------------------------------------------------------------------------
3. ONLINE STORE. 3.1 ELIGIBILITY. In order to be eligible to receive commission for sales on Autodesk's Online Store, ASC must hold a current authorization for the product sold, be named on the sale and provide the appropriate post-sales support. The customer's ship to address must be within ASC's Authorized Territory. 3.2 COMMISSIONS.
-------------------------------------------------------------- AUTHORIZED PRODUCT COMMISSION -------------------------------------------------------------- Horizontal To be posted on AACPW -------------------------------------------------------------- Vertical To be posted on AACPW --------------------------------------------------------------
19 EXHIBIT E EARNBACK ELIGIBILITY
----------------------------------------------------------------------- QUARTERLY TARGET ATTAINMENT EARNBACK PERCENTAGE ----------------------------------------------------------------------- 100% To be posted on AACPW ----------------------------------------------------------------------- 115% To be posted on AACPW -----------------------------------------------------------------------
When ASC purchases meet sales Target and Earnback credits are issued, the resulting invoices from those same purchases must be paid within a time not to exceed 90 days from invoice date, or Autodesk has the right to reverse that previous quarter's Earnback credits. Direct sales by Autodesk of Authorized Products for which ASC is the designated agent on Autodesk products that ASC is authorized to sell, shall count towards Target attainment, however, ASC shall not receive Earnbacks on such sales. Authorized Products acquired by ASC through Autodesk Distribution Partner(s) shall count towards ASC's Target attainment, however, ASC shall not receive Earnbacks on Authorized Products so acquired. 20 EXHIBIT F PREMIER SUPPORT PROGRAM REQUIREMENTS 1. PREMIER SUPPORT PROGRAM MINIMUM REQUIREMENTS - - Multi-line phone system w/ voicemail or other recording device for messages after-hours - - Support lab with systems capable of running all supported products - - Technician accreditation for all technicians (Autodesk sponsored examination(s) when and if available) - - Call tracking system for monthly reporting purposes - - One full time support person - - End User query response time within four hours of queuing - - Best efforts to resolve End User issues within seventy two hours of initial queuing - - Full Internet access, email and workstation dedicated solely to support 2. REPORTING REQUIREMENTS. ASC will provide the following reports to Autodesk upon request. (a) CUSTOMER INFORMATION. All calls received will be entered into a database that contains the standard fields shown below. - - Name - Country - - Company - Telephone number (including area code) - - Address 1 - Products - - Address 2 - Version - - City - Products Serial number - - State - Date entered into system - - Zip/Postal Code - Questions and answers (b) ASC PERFORMANCE. Performance Reports utilizing data from the telephone system to reflect the following elements: - - Average and longest call wait time - - % calls abandoned - - average and longest wait before abandonment - - average call duration 3. END USER PREMIER SUPPORT PROGRAM SATISFACTION SURVEYS. Autodesk reserves the right, in its sole and exclusive discretion, to perform periodic End User satisfaction surveys regarding ASC's Premier Support Program. In the event that one or more End Users serviced by ASC pursuant to a Premier Support Program as described herein registers dissatisfaction, ASC will be placed on probation and given ninety (90) days to improve its Premier Support Program to a satisfactory level or its Premier Support Program Authorization will be terminated. Accordingly, ASC's Vertical Product Authorization(s) will be at risk of termination. 4. BENEFITS OF PREMIER SUPPORT PROGRAM AUTHORIZATION. - - Priority telephone support by Autodesk at no additional charge. - - Priority e-mail support. 21 AUTODESK AUTHORIZED CHANNEL PARTNER AGREEMENT GOVERNMENT SPECIALIST ADDENDUM (UNITED STATES) In addition to the terms and conditions set forth in the Autodesk Authorized Channel Partner Agreement (the "AGREEMENT"), with the effective date of February 1, 2002, to market, sell and support Autodesk Software to Government customers, Autodesk Channel Partner ("ACP") shall comply with the following: 1. AUTHORIZED PRODUCTS AND TERRITORY. (a) AUTHORIZED PRODUCTS. Only those products ACP is currently authorized to sell as noted in the FY03 Agreement Products Requirements Chart and Exhibit(s) B. (b) AUTHORIZED TERRITORY. ACP's Authorized Territory is defined in the FY03 Agreement Products Requirements Chart and Exhibit(s) B. 2. AUTHORIZED GOVERNMENT SALES AGENT. Autodesk has designated DLT Solutions, Inc. ("DLT") as its Authorized Government Sales Agent. Autodesk shall provide thirty (30) day written notice to ACP of any change in Autodesk's designated Government Sales Agent. 3. MINIMUM VOLUME COMMITMENT. ACP must demonstrably facilitate sales to Government End Users of not less than Forty Thousand Dollars ($40,000) every two (2) quarters of Authorized Autodesk Product(s) which ACP is authorized to sell in the Authorized Territory as defined in Exhibit(s) B of the Agreement. 4. MINIMUM STAFFING. ACP shall employ a minimum of one (1) fully qualified sales person designated to government sales. ACP shall forward the name and resume of each such employee to Autodesk and keep Autodesk apprised of any changes in personnel. ACP shall notify Autodesk immediately should the qualified employees leave ACP's employment for any reason, and ACP shall hire a suitable trained replacement within sixty (60) days from the date such qualified employee leaves. In order to be "qualified" hereunder, such staff personnel shall be a full time, W2 employee, demonstrate significant competency in product presentation, use and operation, and have past experience selling into government accounts. 5. MINIMUM MARKETING COMMITMENT. Consistent with the marketing and distribution policies of Autodesk, ACP, at its own expense, shall conduct two government focused marketing activities per quarter that actively promote the Authorized Autodesk Product(s) to government accounts within the Authorized Territory. Such promotion shall include, but not be limited to, advertising in trade publications, participating in trade shows and directly soliciting orders for the Authorized Autodesk Product(s) from government accounts. 6. AUDIT RIGHTS. In addition to Autodesk's audit rights under Section 6 of the ACP Agreement, Autodesk, in its sole and absolute discretion, may conduct an audit of all relevant records of ACP for the purpose of validating or augmenting the ACP reports exhibiting value add services and ensuring that ACP is complying with the terms of this Government Addendum and the ACP Agreement. Autodesk shall bear the cost of such audit, unless the audit determines that ACP has breached this Government Specialist Addendum or the ACP Agreement, in which case ACP shall bear the cost of the audit. 7. TERMINATION AND EFFECT 7.1 BREACH OF OBLIGATIONS. In the event that ACP breaches any of the terms of the Agreement or this Government Addendum, including any payment or value add service obligations, at Autodesk's sole discretion, ACP shall not be eligible for commissions on some or all government accounts for which it has provided value add services, or will receive only a proportional amount of the commission. In addition, Autodesk may, in its sole and absolute discretion, terminate the Agreement and/or this Government Specialist Addendum. 1 7.2 TERMINATION FOR DISSATISFACTION. Autodesk may immediately terminate this Government Specialist Addendum and/or the Agreement if Autodesk receives a complaint or other registration of dissatisfaction regarding ACP from DLT or any government account for which ACP has been adding value add services pursuant to this Government Specialist Addendum. 7.3 ACP's authorization as a Government Specialist may be terminated independently, or in connection with Autodesk's termination of the Agreement. 7.4 In the event that the Agreement is terminated, this Government Specialist Addendum shall concurrently terminate. 8. EFFECTIVE DATE AND MODIFICATION. The effective date of this Government Specialist Addendum is February 1, 2002 ("Effective Date"). These authorization requirements for the Government Specialist Program may be modified at any time by Autodesk by forwarding a revised Government Specialist Addendum to ACP. Except as modified in this Government Specialist Addendum, the Agreement shall remain in full force and effect. The Undersigned are duly authorized to execute this Government Specialist Addendum on behalf of their respective parties. "Autodesk" "ACP" AUTODESK, INC. COMPANY: Avatech Solutions, Inc. ------------------------ By: By: /s/ Joel Nicholson --------------------------------------- ------------------------------ Doug May Joel Nicholson - ------------------------------------------ ------------------------------ Printed Name Vice President - Americas Executive Vice President - ------------------------------------------ ------------------------------ Title Title 1-29-02 - ------------------------------------------ ------------------------------ Date Date 2 EXHIBIT A ASC'S AUTHORIZED LOCATIONS GOVERNMENT SPECIALIST Autodesk authorizes ASC to market and support Government customers based on the Authorized Products, from the Authorized Location(s), and only in the Authorized Territory(ies) as identified in the FYO3 Agreement. ***BELOW TO BE FILLED IN BY AUTODESK ONLY*** AVATECH SOLUTIONS, INC. (EAST) 11400-A Cronridge Drive Owings Mills MD 21117 FAX 410-581-8088 0070001471 0070001471 01 180 Tices Lane E. Brunswick NJ 08816 FAX 732-220-9406 0070001471 0070001096 03 890 7th North Street, Ste. 110 Liverpool NY 13088 FAX 315-453-2380 0070001471 0070001328 04 60 Commerce Park Road Milford CT 06460 FAX 203-882-5864 0070001471 0070001411 05 5656 Shell Road Virginia Beach VA 23455 FAX 757-460-8400 0070001471 0070004855 06 EXHIBIT A ASC'S AUTHORIZED LOCATION GOVERNMENT SPECIALIST Autodesk authorizes ASC to market and support Government customers based on the Authorized Products, from the Authorized Location(s), and only in the Authorized Territory(ies) as identified in the FYO3 Agreement. ***BELOW TO BE FILLED IN BY AUTODESK ONLY*** AVATECH SOLUTIONS, INC. (CENTRAL) 8319 N. 30th Street Omaha NE 68112 FAX 402-451-8007 0070001359 0070001359 01 1370 NW 114th St, Ste 200 Clive IA 50325 FAX 515-224-5833 0070001359 0070030470 02 1221 Park Place NE, Ste. C Cedar Rapids IA 52401 FAX 319-393-8171 0070001359 0070039306 03 5864 Interface Drive Ann Arbor MI 48103 FAX 734-769-4727 0070001359 0070000177 04 EXHIBIT A ASC'S AUTHORIZED LOCATION GOVERNMENT SPECIALIST Autodesk authorizes ASC to market and support Government customers based on the Authorized Products, from the Authorized Location(s), and only in the Authorized Territory(ies) as identified in the FYO3 Agreement. ***BELOW TO BE FILLED IN BY AUTODESK ONLY*** AVATECH SOLUTIONS, INC. (SOUTH) 4322 N. Beltline #B-110 Irving TX 75038 FAX 972-570-7505 0070000270 0070000270 01 8160 Woodland Center Blvd Tampa FL 33614 FAX 813-496-8871 0070000270 0070195691 02 8015 Shoal Creek Blvd., Ste 211 Austin TX 78757 FAX 512-407-8822 0070000270 0070000268 03 536 Interstate Court Sarasota FL 34240 FAX 941-379-6719 0070000270 0070004220 04 EXHIBIT A ASC'S AUTHORIZED LOCATION GOVERNMENT SPECIALIST Autodesk authorizes ASC to market and support Government customers based on the Authorized Products, from the Authorized Location(s), and only in the Authorized Territory(ies) as identified in the FYO3 Agreement. ***BELOW TO BE FILLED IN BY AUTODESK ONLY*** AVATECH SOLUTIONS, INC. (WEST) 8101 E. Prentice #200 Englewood CO 80111 FAX 303-796-7646 0070001091 0070001091 01 2130 Professional Dr. Ste 120 Roseville CA 95661 FAX 916-774-2626 0070001091 0070155453 02 EX-10.02 4 a2080957zex-10_02.txt EXHIBIT 10.02 EXHIBIT 10.02 BENTLEY RESELLER AGREEMENT NORTH AMERICA This BENTLEY RESELLER AGREEMENT is made this 11th day of June, 2001 (this "AGREEMENT"), between Bentley Systems, Incorporated, a Delaware corporation with its principal place of business at 685 Stockton Drive, Exton, Pennsylvania 19341, United States of America ("BENTLEY"), and Avatech Solutions with its principal place of business at 5864 Interface Drive Ann Arbor, MI 48103 ("RESELLER"). This Agreement and the terms contained herein supersede and replace any and all prior agreements between Reseller and Bentley. In consideration of the mutual covenants and agreements contained in this Agreement, the parties agree as follows: 1. DEFINITIONS 1.01 "ASSIGNED SALES PARTNER" shall mean, with respect to any End User Site, the reseller that has been authorized by Bentley to offer and sell Bentley Products to such End User Site. 1.02 "BENTLEY INSTITUTE COURSES" shall mean the training courses offered by Bentley or an authorized third party to End Users and prospective users from time to time on the use of one or more Bentley Products. 1.03 "BENTLEY PRICEBOOK" shall mean the pricing and other information published by Bentley, in hardcopy, electronic or such other form selected by Bentley, as updated from time to time with or without notice at Bentley's discretion. Bentley reserves the right to publish separate Bentley Pricebooks for different geographical regions or countries. 1.04 "BENTLEY PRODUCTS" shall mean any and all products and services offered by Bentley from time to time including, without limitation, Bentley Software Products, Maintenance Subscriptions, Subscription Products, and Bentley Institute Courses. 1.05 "BENTLEY SELECT PROGRAM" shall mean the Bentley sponsored program by which an End User can license products and purchase support and maintenance services from Bentley, as in effect from time to time. 1.06 "BENTLEY SOFTWARE PRODUCTS" shall mean the software products in object code form that are offered by Bentley from time to time under a perpetual license and any updates or upgrades thereto. 1.07 "BUSINESS SEGMENTS" shall mean the business segments defined by Bentley from time to time and described and set forth on the Bentley Reseller Website or such other medium selected by Bentley from time to time. 1.08 "DOCUMENT SET" shall mean, with respect to a Bentley Product, the user guides and reference and other materials developed by Bentley for use with a Bentley Product. Document Sets may be available in electronic, hardcopy and/or other form in the sole discretion of Bentley. 1.09 "EFFECTIVE DATE" shall mean July 1, 2001, that this Agreement is accepted and countersigned by Bentley. 1.10 "END USER" shall mean a user or user organization that licenses copies of one or more of the Bentley Products, and uses such Bentley Products solely for its own internal use (and not for redistribution, remarketing, or timesharing) under the terms of an End User License Agreement. 1.11 "END USER LICENSE AGREEMENT" shall mean the license agreement distributed to an End User of a Bentley Product, whether in written, electronic or other form selected by Bentley, pursuant to which Bentley grants to an End User the limited right to use such Bentley Product under the terms and conditions of such license agreement including, without limitation, the contractual agreement between Bentley and subscribers to the Bentley SELECT Program, as in effect from time to time. 1 1.12 "END USER SITE" shall mean any office(s), location(s), division(s) or other unit(s) of an End User designated by Bentley from time to time. 1.13 "EXHIBIT(s)" shall mean the Exhibit(s) to this Agreement (individually or collectively, as the case may be) as in effect on the date hereof and as amended from time to time upon written notice from Bentley to Reseller, and such additional exhibits as Bentley may add from time to time upon written notice to Reseller. 1.14 "MAINTENANCE SUBSCRIPTIONS" shall mean the contractual maintenance offered by Bentley, and subscribed by an End User, for a Bentley Software Product licensed under a perpetual license. 1.15 "MANUFACTURER'S SUGGESTED RETAIL PRICE" of "MSRP" shall mean the list price for Bentley Products and as set forth in the applicable local Bentley Pricebook from time to time. 1.16 "MARKET" shall mean, with respect to each Business Segment set forth in EXHIBIT A, the geographical area for which Reseller is the Assigned Sales Partner set forth opposite such Business Segment in EXHIBIT A. 1.17 "PRODUCT ORDERS" shall mean written or electronic orders for Bentley Products. 1.18 "QUOTA" shall mean the revenue target established by Bentley and assigned to Reseller for measurement of quarterly and annual sales performance. The Quotas are set forth in EXHIBIT A and in such other Exhibits (if any) designated by Bentley from time to time. 1.19 "SALES AUTHORIZATION" shall mean, with respect to each Business Segment, the minimum requirements and standards set forth on the Bentley Reseller Website or such other medium selected by Bentley from time to time which Reseller must meet and maintain in order to offer End User Sites the Bentley Products designated from time to time by Bentley. 1.20 "SUBSCRIPTION PRODUCTS" shall mean any subscription program for products and services offered by Bentley from time to time other than Bentley Software Products and Maintenance Subscriptions. 2. APPOINTMENT AND GRANT RIGHTS 2.01 APPOINTMENT. Bentley grants Reseller a nontransferable, nonexclusive right during the term of this Agreement to (a) promote the sale and distribution of Bentley Products to End User Sites and prospective users in the Market for use in the Business Segments set forth in EXHIBIT A, provided that Reseller has completed and maintains the appropriate Sales Authorizations, and (b) where permitted by Bentley, purchase Bentley Software Products for resale to End User Sites and prospective users in the Market for use in the Business Segments set forth in EXHIBIT A, provided that Reseller has completed and maintains the appropriate Sales Authorizations. Bentley shall have the right to revoke Reseller's designation as the Assigned Sales Partner for any End User Site at any time upon notice to Reseller. 2.02 RESELLER RESTRICTIONS. Reseller shall not engage in any activities regarding Bentley Products which are not authorized or contemplated in this Agreement. Among other things, without limitation, Reseller shall not (i) sell, distribute, market or offer Bentley Products to or through other resellers, remarketers or distributors; (ii) sell, distribute, market or offer Bentley Products to End Users or prospective users outside of the Business Segments and the related Markets; (iii) sell, distribute, market or offer Bentley Products to End User Sites in which Bentley or another reseller is the Assigned Sales Partner; (iv) provide support and maintenance services to subscribers to the Bentley SELECT Program without the express written consent of Bentley; (v) rent or lease Bentley Products or make them available on a timesharing or "ASP" or hosted basis without Bentley's written consent; or (vi) provide training courses or course materials on the use of any Bentley Product except as an authorized participant in the Bentley Institute or such other training program sponsored by Bentley from time to time. 3. OBLIGATIONS OF RESELLER 2 3.01 BEST EFFORTS. Reseller shall use its best efforts to promote the sale of the Bentley Products in a commercially reasonable manner and in accordance with the terms of this Agreement. 3.02 BENTLEY'S STANDARD POLICIES AND PROCEDURES. Reseller shall at all times during the term of this Agreement comply with the standard policies and procedures governing the Bentley Reseller Program as set forth from time to time on the Bentley Reseller Website or on such other medium selected by Bentley. 3.03 BUSINESS SEGMENTS AND SALES AUTHORIZATION. Reseller shall meet and maintain the Sales Authorizations for each Business Segment set forth in EXHIBIT A. If Reseller fails to meet and maintain the Sales Authorization for any Business Segment set forth in EXHIBIT A, Bentley shall have the right, in its sole discretion, to (a) terminate Reseller's authorization to offer Bentley Products to End User Sites and prospective users for use in such Business Segment; (b) designate another reseller or no reseller as the Assigned Sales Partner for any End User Site that fits within the definition of such Business Segment; (c) withhold compensation to Reseller for the sale of Bentley Products to End User Sites for use in such Business Segment; or (d) terminate this Agreement. 3.04 REPORTS. Reseller shall provide Bentley the business plans, forecasts, financial statements and other reports set forth in EXHIBIT C and such business plans, forecasts and other reports shall be prepared and delivered in accordance with the requirements set forth in EXHIBIT C. 3.05 REGULATIONS. Reseller shall be responsible for ensuring its compliance with all legal requirements in force in the countries in which it performs under this Agreement and shall obtain all necessary authorizations. 3.06 PRIVACY POLICY. Reseller agrees that all information obtained by Reseller from Bentley or a Bentley website regarding Bentley users and subscribers or any other information shall be subject to the terms and conditions of Bentley's privacy policies as in effect from time to time and published on Bentley websites including but not limited to the Bentley Reseller Website or such other medium selected by Bentley. 3.07 LEADS. Bentley may, but is not obligated to, provide leads to Reseller from time to time. Reseller shall respond to leads provided by Bentley within two business days. Reseller agrees to report to Bentley on a monthly basis as to the status of leads provided by Bentley. The reports must follow the electronic file format in which the leads are provided. Failure to provide such reports will result in a suspension or termination of the provision of leads by Bentley. 3.08 EXPENSES AND COSTS. Reseller shall pay its own costs and expenses in connection with the promotion, sale and/or distribution of any Bentley Product under this Agreement. 3.09 PAYMENTS TO THIRD PARTIES. Reseller shall not, directly or indirectly, offer or furnish to any End User, prospective End User or to any employee or representative of such an End User or Bentley any bribe, kickback, payment, compensation, gift, service or anything else of value in connection with or related to any activity or payment under this Agreement, except for the nominal cost of routine business entertainment of such person in the ordinary course of business or as may be expressly permitted by this Agreement. A violation of this provision shall constitute a material breach of this Agreement. 4. OBLIGATIONS OF BENTLEY 4.01 BENTLEY PRODUCTS. Bentley will supply such Bentley Products as may be ordered and accepted under this Agreement. Bentley reserves the right at any time without liability or prior notice to (a) change or terminate any of the specifications, features, functions or terms of the Bentley Products; (b) discontinue, change or retain any model or type of any of the Bentley Products; and (c) determine from time to time the Bentley Products that may be sold in connection with each Business Segment. 4.02 MARKETING AND ADVERTISING. Public relations and press releases regarding any Bentley Product shall be the sole and exclusive responsibility of Bentley. Reseller shall not advertise or make any representation regarding any Bentley Product without prior written consent of Bentley. 3 4.03 MARKETING DEVELOPMENT FUND. Bentley may make available to Reseller a cooperative marketing fund that may be used by Reseller in promoting Bentley Products ("MDF"). The terms and conditions of the MDF are set forth in EXHIBIT B. Bentley reserves the right to modify or terminate the MDF at any time. 4.04 RESELLER QUOTAS. Bentley shall define the Quotas based on Bentley's analysis of Reseller's assigned Business Segments and related Markets, projected market demand, current End User base and projected growth opportunities. Upon prior notice to Reseller, Bentley may change the Quotas annually, and at any other time upon a change in the End User Sites for which Reseller is the Assigned Sales Partner. 5. DISTRIBUTION 5.01 DISTRIBUTION. Bentley shall deliver the Bentley Products ordered and accepted pursuant to this Agreement in accordance with Bentley's standard policies and procedures in effect from time to time as set forth on the Bentley Reseller Website or such other medium selected by Bentley. 5.02 END USER LICENSE AGREEMENT. All software distributed under this Agreement shall be subject to the terms of Bentley's End User License Agreement for the applicable Bentley Product. 6. PRICE, ORDER PROCEDURE AND RESELLER COMPENSATION-SALES BY BENTLEY TO END USERS 6.01 PRICE. The sales price for any Bentley Product sold pursuant to this Agreement to an End User shall be the MSRP for such Bentley Product LESS the volume or other discounts, if any, provided by Bentley to such End User. 6.02 COMPENSATION. Bentley will pay Reseller compensation for each Bentley sold by Bentley to an End User Site for which Reseller is the Assigned Sales Partner in accordance with the terms and conditions set forth in EXHIBIT B. The payment terms for any compensation earned by Reseller under this Section 6.02 shall be in accordance with the terms set forth in EXHIBIT B. Reseller compensation for special programs and promotions shall be in accordance with the terms and conditions for such programs and promotions set forth in the Bentley Pricebook in effect from time to time. The compensation terms set forth in EXHIBIT B are subject to change from time to time upon prior notice to Reseller. 6.03 PRODUCT ORDERS. An End User Site may place Product Orders for Bentley Products during the term of this Agreement. Reseller will instruct End User Sites for which Reseller is the Assigned Sales Partner to provide the following information in each Product Order: (i) identification of each Bentley Product ordered by part number and quantity; (ii) delivery instructions; (iii) contact information; (iv) requested delivery date for the items ordered; and (v) a reference to Reseller. 6.04 ORDER ACCEPTANCE. Bentley reserves the right to accept or reject any Product Order in its sole discretion. 6.05 INVOICE. Bentley will invoice the End User submitting a Product Order for the Bentley Products ordered in such Product Order. 7. PRICE, ORDER PROCEDURE, PRICE AND RECORDS - PRODUCT SALES BY BENTLEY TO RESELLER FOR RESALE TO END USERS. 7.01 PRICE. The sales price for any Bentley Software Product sold pursuant to this Agreement to Reseller for resale to an End User shall be the MSRP for such Bentley Software Product LESS the applicable sales discount provided by Bentley to Reseller as set forth in EXHIBIT B. Reseller will have the right to establish its resale prices for Bentley Software Products purchased by it and resold to End Users under this Section 7. Bentley may modify the MSRPs set forth in the Bentley Pricebook at any time in its sole discretion; PROVIDED, HOWEVER, that Bentley shall price-protect for thirty (30) days any Reseller proposal that was detailed in Reseller's forecast at the MSRP on the date of such proposal. The discounts set forth in EXHIBIT B are subject to change from time to time upon prior notice to Reseller. 4 7.02 PRODUCT ORDERS. A Reseller may place Product Orders for Bentley Software Products during the term of this Agreement. Each Product Order shall contain the following information: (i) identification of each Bentley Software Product ordered by part number and quantity; (ii) delivery instructions; (iii) contact information; (iv) requested delivery date for the items ordered; (v) a reference to Reseller and this Agreement; and (vi) a reference to the End User or prospective End User to whom Reseller intends to resell such Bentley Software Product. 7.03 ORDER ACCEPTANCE. Bentley will consider Product Orders only if the items ordered therein are in then-current Bentley Pricebook, and Reseller has been authorized hereunder to distribute such items and has the appropriate Sales Authorizations. All Product Orders shall be in a Bentley approved format and are subject to acceptance by Bentley and shall not be binding until confirmed by Bentley. 7.04 INVOICE. Bentley will invoice Reseller for the Bentley Software Products ordered by Reseller pursuant to this Section 7. 7.05 SECURITY INTEREST. Reseller hereby pledges, assigns and grants to Bentley, its successors and assigns, a continuing security interest in and to all Bentley Software Products delivered by Bentley to Reseller under this Section 7 to secure payment in full to Bentley. Reseller shall execute such documents reasonably requested by Bentley to perfect such security interest. 7.06 CONTROLLING TERMS. The terms and conditions of this Agreement and of the applicable Bentley confirmation shall apply to each Reseller Product Order accepted by Bentley hereunder. Any additional or different terms or conditions appearing on the Product Order shall not be binding on the parties unless both parties expressly agree in a separate writing. 7.07 TAXES. Unless otherwise expressly noted in the Bentley Pricebook, all prices in the Bentley Pricebook are exclusive of taxes, and the party submitting a Product Order shall be responsible for, and shall pay, any and all taxes, duties, withholdings or similar charges that are due and payable as a result of the distribution or licensing of the items purchased pursuant to such Product Order. 7.08 RECORDS; AUDIT. Reseller will, during the term of this Agreement and for a period of two (2) years thereafter, maintain complete records of the distribution and sale of the Bentley Software Products purchased by Reseller for resale to End Users pursuant to this Section 7. Reseller shall, upon seven (7) day advance written notice by Bentley, permit reasonable inspection of such records by Bentley or a third-party auditor retained by Bentley at the offices of Reseller during regular working hours. 7.09 NO RETURNS. Subject to Section 9.02 of this Agreement (defective products), Reseller may not return any Bentley Software Products delivered by Bentley to Reseller pursuant to this Section 7. 8. INTELLECTUAL PROPERTY 8.01 NO RIGHT TO MODIFY OR TRANSLATE. Reseller shall not have the right to modify or translate the Bentley Products or to prepare derivative works thereof unless expressly approved in writing by Bentley. 8.02 RESERVED RIGHTS. Bentley hereby reserves all rights not specifically granted herein to Reseller. Except as expressly provided herein in connection with the distribution of Bentley Products, Bentley does not convey any intellectual property rights to Reseller in this Agreement. Reseller shall not have the right to receive, review or otherwise use or have access to the source code for the Bentley Products. Title to the Bentley Products and to all copies thereof shall remain with Bentley or relevant third parties, and shall not pass to Reseller, End Users or any third party. 8.03 USE OF BENTLEY TRADEMARKS. Bentley shall have and retain sole ownership of the trademarks, service marks, trade names and logos used by Bentley in connection with the Bentley Products (the "BENTLEY MARKS"), including the goodwill pertaining thereto. Reseller acknowledges and agrees that it has no rights in the Bentley Marks, and that it has paid no consideration for the use of the Bentley Marks. Reseller shall market, distribute and support the Bentley Products only under the applicable Bentley Marks, and not under 5 any other mark or name. Reseller shall not (a) take any action or make any registration that would otherwise convey or grant an interest in the Bentley Marks, (b) contest or take any action to contest Bentley's ownership of the Bentley Marks, (c) attempt to register any Bentley Mark without the prior written consent of Bentley, (d) use or attempt to register any trademark, service mark, trade name or logo in any country in the world that is confusingly similar to the Bentley Marks, (e) assert or claim any interest in the Bentley Marks, (f) remove or alter any Bentley Marks from the Bentley Products, or (g) register or attempt to register any domain name in any jurisdiction which incorporates the Bentley Marks or any name or word confusingly similar to the Bentley Marks therein. 8.04 NOTIFICATION OF INFRINGEMENT. Reseller shall promptly notify Bentley of (a) any claims, allegations or notification that the marketing, licensing or use of a Bentley Products may or will infringe any patent, copyright, trademark or other intellectual property right of any other person or entity; (b) any determination or discovery that any person or entity is or may be infringing any patent, copyright, trademark or other intellectual property right owned by Bentley, and (c) any failure of an End User to abide by the terms of an End User License Agreement, or such other agreement(s) as may be applicable. 8.05 INDEMNIFICATION BY BENTLEY. Bentley shall defend and hold Reseller harmless from all claims, suits, damages and expenses (including reasonable attorneys' fees) arising from a claim against Reseller that the Bentley Products which are developed and owned by Bentley infringe a United States patent or copyright, provided that Reseller provides to Bentley (a) prompt written notice of any such claim, (b) all available information and assistance, and (c) the opportunity to exercise sole control of the defense and all negotiations pertaining to such claim. Bentley shall also have the right, at its expense, either to procure the right for Reseller to continue to distribute the Bentley Products or to replace or modify them so that they become non-infringing. If neither of the foregoing alternatives is available on terms that Bentley, in its sole discretion, deems desirable, Reseller shall, upon written request from Bentley, return the infringing Bentley Product in its possession, in which event Bentley shall refund to Reseller the price paid, if any, by Reseller for such returns, provided that they are in original and unopened condition. This provision shall not apply to Bentley Products that are not developed and owned by Bentely or if the alleged infringement is due to combination, operation or use of a Bentley Product with other software, hardware or other products that does not originate from Bentley or from modifications of a Bentley Software Product by Reseller or any third party. 8.06 INDEMNIFICATION BY RESELLER. Reseller may from time to time bear sole responsibility for the distribution, installation and/or marketing of Bentley Products for End Users. Consequently, Reseller shall defend, indemnify and hold Bentley harmless from any and all claims, suits, damages and expenses (including reasonable attorneys' fees) arising from the acts, omissions or services of Reseller hereunder or from its relations with End Users or other third parties, including without limitation claims arising by reason of any representations, warranties or commitments made by Reseller in breach of this Agreement. 9. WARRANTIES 9.01 WARRANTY TO RESELLER. Bentley warrants all Bentley Products only to the extent expressed in the End User License Agreement. The warranty is void if Reseller or End User modifies the delivered software. 9.02 REPLACEMENT OF DEFECTIVE BENTLEY SOFTWARE PRODUCTS. Bentley shall replace defective Bentley Software Products that are returned by Reseller to Bentley, shipping charges prepaid, and Bentley shall provide reimbursement of shipping charges for such returns. This shall be the sole and exclusive remedy of Reseller for any breach of Bentley's warranty to Reseller. 9.03 WARRANTY TO END USERS. The sold and exclusive warranty of Bentley to End Users is set forth in the End User License Agreement covering each Bentley Product. Bentley makes no other warranties to or for the benefit of End Users. Reseller shall not make any representations or warranties inconsistent with or in addition to those made by Bentley concerning Bentley Products. 9.04 END USER REQUESTS FOR REPLACEMENTS AND RETURNS. Reseller shall honor all requests from End Users for return or replacement of Bentley Software Products purchased by reseller from Bentley and resold to End 6 Users pursuant to the terms of the warranty from Bentley to End Users contained in Bentley's End User License Agreement. In the event Reseller provides a refund to an End User for return of a Bentley Software Product in accordance with this section, Bentley shall credit the account of Reseller for such return in an amount equal to the lesser of the refund paid by Reseller to such End User and the price paid by Reseller to Bentley for such Bentley Software Product, provided that Bentley shall have the right to confirm that copies of returned Bentley Software Products distributed to End Users have been removed at all applicable End User locations prior to crediting Reseller. In the event Reseller replaces a Bentley Software Product returned by End User in accordance with this section Bentley shall, at the election of Reseller, (i) deliver at no charge another copy of such Bentley Software Product to Reseller or (ii) credit the account of Reseller for such return in an mount equal to the price paid by Reseller to Bentley for such returned Bentley Software Product. Reseller shall return to Bentley, shipping charges prepaid, all Bentley Software Products returned to Reseller by End Users in accordance with this section, regardless of whether they are defective. Bentley shall provide annual reimbursement of shipping charges for such returns. This provision sets forth the sole and exclusive remedies for breach of Bentley's warranty to End Users. 9.05 INDEMNITY. In all cases, to the extent representations, warranties or commitments are extended by Reseller to End Users, such representations, warranties, and commitments will be those of Reseller alone and will not be attributed to Bentley, and Reseller agrees to defend, indemnify and hold Bentley harmless against any and all claims by any third parties whatsoever arising by reason of any such representations, warranties or commitments made by Reseller. 9.06 WARRANTY DISCLAIMER. EXCEPT AS EXPRESSLY STATED HEREIN, THERE ARE NO OTHER WARRANTIES EXPRESS OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE, WITH RESPECT TO ALL SOFTWARE, SERVICES AND RELATED MATERIALS TO BE SUPPLIED UNDER THIS AGREEMENT. BENTLEY DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 9.07 LIMITATION OF LIABILITY. IN NO EVENT SHALL BENTLY BE LIABLE FOR ANY INCIDENTAL, INDIRECT, PUNATIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOSS OF USE, REVENUE OR PROFIT, INTERRUPTION OF BUSINESS, LOST OR DAMAGED DATA OR CLAIMS AGAINST RESELLER, PROSPECTIVE END USERS, CUSTOMERS, OR END USERS BY ANY THIRD PARTY, REGARDLESS OF THE NATURE OF THE CLAIM RAISED, EVEN IF BENTLEY HAS BEEN ADVISED, KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES OR CLAIMS. IN NO EVENT SHALL BENTLEY'S LIABILITY FOR DAMAGES EXCEED THE MAXIMUM AMOUNT OF $100,000. 10. TERM; TERMINATION 10.01 TERM - NEW RESELLER. If Reseller is not an authorized reseller of Bentley products immediately prior to the Effective Date, then this Agreement shall become effective on the Effective Date and, subject to earlier termination as set forth herein, shall remain in effect for a term of six (6) months ("EVALUATION PERIOD"). Following the Evaluation Period, subject to earlier termination as set forth herein, this Agreement shall renew for an additional period of eighteen (18) months ("INITIAL PERIOD"), unless Bentley gives fifteen (15) day advance written notice of termination to Reseller during the Evaluation Period. Thereafter, this Agreement may be renewed for successive one (1) year terms by mutual written consent of both parties TERM - RENEWAL RESELLER. If Reseller is an authorized reseller of Bentley products immediately prior to the Effective Date, then this Agreement shall become effective on the Effective Date and, subject to earlier termination as set forth herein, shall remain in effect for a term of two (2) years. Therafter, this Agreement may be renewed for successive one (1) year terms by mutual written consent of both parties. 10.02 TERMINATION WITHOUT CAUSE. Either party may terminate this Agreement at any time and for any reason upon providing sixty (60) days prior written notice to the other party. 10.03 DEFAULT. Either party may terminate this Agreement in the event of default by the other party thirty (30) days after the delivery of the notice of the default, unless the defaulting party has cured the default within 7 the notice period. Notwithstanding anything contained herein to the contrary, Bentley may terminate this Agreement immediately if Reseller defaults on its obligations under Sections 8 or 11.03 of this Agreement. 10.04 INSOLVENCY. If under applicable insolvency laws, Reseller becomes unable to pay its debts or becomes insolvent or bankrupt or makes arrangements with its creditors, or otherwise goes into liquidation, administration or receivership, then Bentley shall have the right to terminate this Agreement immediately by written notice. 10.05 CONSEQUENCES OF TERMINATION. Upon the termination or expiration of this Agreement for any reason: (a) this Agreement shall remain applicable to all orders not filled or for which full payment has not yet been received; (b) Reseller shall return to Bentley all advertising, logo's, samples, literature, price lists, demonstration and training software, and any material containing the Bentley Marks; and (c) at Bentley's request, Reseller shall return all unsold inventory of Bentley Products regardless of whether Reseller has paid Bentley for such inventory upon refund of the price paid (if any) by Reseller for such inventory. Neither party will be liable to the other because of such termination or expiration for compensation, reimbursement, or damages for the loss of prospective profits, anticipated sales, good will, or for expenditures, investments or commitments made in connection with this Agreement, provided that termination or expiration shall not relive either party from its liability to pay any amounts which have accrued to the other party on or before the date of termination or expiration, including amounts owed by Reseller to Bentley for the purchase of Bentley Products. Notwithstanding anything contained in this Agreement to the contrary, Sections 3.06, 7, 8, 9.05, 9.06, 9.07, 10.05 and 11 shall survive the termination of this Agreement. 11. MISCELLANEOUS 11.01 NOTICES AND MODIFICATIONS. Except as otherwise provided for herein, any notice required or permitted to be given hereunder shall be provided to the person listed below by hand delivery, prepaid certified mail, next day air delivery, or electronically, and the date upon which any such notice is received at the designated address shall be deemed to be the date of such notice. If to Bentley: If to Reseller: Bentley Systems, Incorporated Avatech Solutions of Michigan 685 Stockton Drive 5864 Interface Drive Exton, PA 19341 Ann Arbor, MI 48103 Email: ___________________ Email: jnicholson@avat.com Attn: General Counsel Attn: V. Joel Nicholson 11.02 ASSIGNMENT. This Agreement is not assignable or transferable in whole or in part by either party without the prior written consent of the other party except that this Agreement is assignable by Bentley to any company controlling, controlled by or under common control with Bentley or to any successor in interest to Bentley's business. The sale or transfer (in one or a series of related transactions) of a controlling interest in Reseller shall be considered an assignment of this Agreement requiring Bentley's consent. 11.03 CONFIDENTIALITY. Reseller shall maintain the confidentiality of all business information, Bentley product pricing, Bentley technology and confidential documents, and technology and documents of Bentley licensors, including but not limited to agreements, business plans, software, price books and related documentation, technical documentation, Bentley end user and subscriber information, and other information which is not publicly available. Reseller obligations hereunder shall survive termination of this Agreement, but shall exclude information that is or becomes part of the public domain through no act or omission of Reseller. 11.04 FORCE MAJEURE. Neither Bentley nor Reseller shall have any liability for failure to fulfill the terms of this Agreement due to fire, strike, war, government regulations, acts of God or other causes which are unavoidable and beyond its control. These provisions shall not be construed as relieving either party from its obligation to pay any sums due to the other party. 8 11.05 WAIVER. The failure of Bentley to insist upon any of its rights under this Agreement upon one or more occasions shall not be deemed a waiver of such rights on any subsequent occasions. 11.06 ENTIRE AGREEMENT. This Agreement and the Exhibits hereto incorporate the entire agreement of the parties and there are no other provisions, whether oral or written, between the parties unless contained herein. Bentley shall have the right, upon 30 days written or electronic notice, to modify, supplement or replace the Exhibits to this Agreement. Following such notice period, such revised Exhibits shall bind Reseller. 11.07 HEADINGS. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the interpretation of the Agreement. 11.08 COVENANTS. The covenants contained in this agreement which, by their terms, require or contemplate performance by the parties after the expiration or termination of the Agreement shall be enforceable notwithstanding said expiration or termination. 11.09 SEVERABILITY. The provisions of this Agreement shall be severable and the invalidity or unenforceability of any one provision shall not affect any other unless otherwise noted. 11.10 GOVERNING LAW. This Agreement shall be governed by, interpreted, and enforced in accordance with the substantive laws of the Commonwealth of Pennsylvania. The parties agree that the United Nation Convention on Contracts for the International Sale of Goods and the Uniform Computer Information Transactions Act are expressly excluded from application to this Agreement. 11.11 ARBITRATION. In the event of any dispute, controversy or claim between the parties arising under or related to this Agreement, the parties shall submit to binding arbitration before a single arbitrator in Philadelphia, Pennsylvania in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The decision of the arbitrator shall be final and binding on the parties, and the judgment upon the award rendered by the arbitrator shall be enforceable in any court of competent jurisdiction. Each party shall bear its own attorney's fees, costs, and expenses incurred in such arbitration. 11.12 NO AGENCY. This Agreement does not appoint and shall not be interpreted to constitute, Reseller as an agent or legal representative of Bentley for any purpose whatsoever, not shall Reseller hold itself out as such. This Agreement does not create any relationship between Reseller and Bentley as joint ventures, partners, associates, or principal and agent, but rather both parties are acting and shall act as independent contractors. Reseller is not granted any right of authority, and shall not assume or create any obligation or responsibility for or on behalf of Bentley or otherwise bind Bentley, or otherwise use Bentley's name, other than as expressly authorized by Bentley in a separate written agreement. Reseller shall bear all of its own expenses for its operation and staff, except for such items, as Bentley shall agree to pay in a separate written agreement. 11.13 EXPORT RESTRICTIONS. Reseller shall not distribute Bentley products with knowledge or reason to know that they will be transported outside the country in which Reseller's principal place of business is located, excepted as permitted by Bentley. In addition to the foregoing, and not in lieu thereof, Reseller agrees to comply with the export laws and regulations of the United States Government and other jurisdictions as they apply to the exports of Bentley products and technical data from the United States and re-exports or transfers of Bentley products and technical data from Bentley countries. 9 IN WITNESS WHEREOF, the parties each by its duly authorized signature, have executed this Agreement. RESELLER: BENTLEY SYSTEMS, INCORPORATED Avatech Solutions, Inc - ------------------------- Reseller Company Name /s/ Joel Nicholson - -------------------------- -------------------------- Authorized Signature Authorized Signature Joel Nickolson - -------------------------- -------------------------- Name Name Executive Vice President - ------------------------ -------------------------- Title Title 1-31-01 - -------- -------------------------- Date Date 10 EXHIBIT A BUSINESS SEGMENTS, MARKET, QUOTAS AND BONUSES BUSINESS SEGMENTS AND MARKET DESIGNATIONS Upon completion of the appropriate Sales Authorization, Bentley authorizes Reseller to offer Bentley Products to prospective End Users in the Business Segments designated below in the Market described below opposite such Business Segment.
BENTLEY CATEGORY /X/ BUSINESS SEGMENT AUTHORIZED MARKET INDUSTRY GROUP - ------------------------------------------------------------------------------------------------------------------------------------ BUILDING A/E Firm /X/ Architect-Engineer MI, OH, IN, IL, IA, NE /X/ Engineer-Architect MI, OH, IN, IL, IA, NE Architectural Firm / / Architectural Design Firm Commercial Facility Owner / / General Merchandise Stores / / Air Transportation / / Airport Operations / / Commercial Banking / / Real Estate Management / / Hospitals Construction Company / / Buildings, Developing, & General Contracting / / Design Build Firms / / Heavy Construction Engineering Consultant /X/ Engineering Firm MI, OH, IN, IL, IA, NE /X/ Engineer-Contractor MI, OH, IN, IL, IA, NE /X/ Environmental Engineer MI, OH, IN, IL, IA, NE /X/ Geotechnical Engineer MI, OH, IN, IL, IA, NE /X/ Drafting Services MI, OH, IN, IL, IA, NE PLANT Plant Owner/Operator / / Mining / / Oil and Gas Exploration/Operations / / Food Manufacturing / / Petroleum & Coal Products Manufacturing / / Chemical Manufacturing / / Plastics & Rubber Products Manufacturing Engineering, Procurement, Construction Firm / / Engineering, Procurement, Construction Firms Industrial Facility Owner / / Industrial Manufacturing / / Discrete Manufacturing / / Motor Vehicle Manufacturing / / Aerospace Product & Parts Manufacturing / / Ship & Boat Building
11
BENTLEY CATEGORY /X/ BUSINESS SEGMENT AUTHORIZED MARKET INDUSTRY GROUP - ------------------------------------------------------------------------------------------------------------------------------------ CIVIL Civil Design and Engineering /X/ Civil Design Firm/Consultant MI, OH, IN, IL, IA, NE Transportation Operations and Maintenance / / Rail Transportation / / Transit Authorities / / State/Provincial Transportation Agencies GEOENGINEERING Government / / Public Administration / / Environmental Quality Agencies / / Infrastructure Agencies / / National Security / / State/Provincial Public Administration Telecommunication / / Broadcasting & Telecommunications Utility /X/ Electric Power Generation, Transmission and Distribution MI, OH, IN, IL, IA, NE /X/ Natural Gas Distribution MI, OH, IN, IL, IA, NE /X/ Water Supply & Irrigation Systems MI, OH, IN, IL, IA, NE /X/ Sewage Treatment Facilities MI, OH, IN, IL, IA, NE /X/ Pipeline Transportation MI, OH, IN, IL, IA, NE Mapping / / Cadastral Agencies / / Surveying and Mapping Services EDUCATIONAL SERVICES /X/ Elementary & Secondary Schools /X/ Junior Colleges /X/ Colleges, Universities, & Professional Schools /X/ Technical & Trade Schools OTHER (TO BE WRITTEN IN BY BENTLEY CHANNEL MANAGER) / / / / / / / /
12 PRODUCT PERFORMANCE QUOTAS AND BONUSES PRODUCT PERFORMANCE QUOTA. Reseller shall use its best and commercially reasonable efforts to meet the minimum quarterly and year-to-date sales quotas set forth below. The quotas will be based upon the aggregate revenues recognized by Bentley (in accordance with generally accepted accounting principles) for the period of determination from the sale or license of (i) Bentley Software Products by Bentley to Reseller for resale to End User Sites, and (ii) Bentley Software Products and Subscription Products by Bentley to End User Sites for which Reseller is the Assigned Sales Partner, in each case, LESS any Reseller compensation under Section 6.02 of this Agreement in connection with such sales or licenses (the "PRODUCT PERFORMANCE NET REVENUE"). Notwithstanding anything herein to the contrary, sales or licenses of Bentley Software Products under Section 7 of this Agreement which occur after the Notification Date (as defined in Exhibit E) will not be credited towards the quotas set forth below, and the term "Product Performance Net Revenue" will not include such sales or licenses. PRODUCT PERFORMANCE BONUS. Reseller, if eligible, may receive a bonus for achieving the minimum quarterly and/or year-to-date quotas set forth below in an amount equal to the percentage, set forth opposite such quota, of the Product Performance Net Revenue for the period of determination (the "PRODUCT PERFORMANCE BONUSES"). The eligibility requirements for the Product Performance Bonuses will be set forth on the Bentley Reseller Website or such other medium selected by Bentley from time to time. In addition to any other eligibility requirements, Reseller will not be eligible for any Product Performance Bonus if, on the last day of the period of determination, Reseller is past due on any account balance owed by Reseller to Bentley. Notwithstanding the foregoing, Bentley reserves the right to apply any Product Performance Bonus earned by Reseller against any current or past due account balances owed by Reseller to Bentley.
- ----------------------- --------------------- -------------------- --------------------- -------------------- FILL IN QUARTERLY QUOTAS QUARTERLY BONUS YEAR-TO-DATE YEAR-TO-DATE QUARTER PERCENTAGE QUOTAS BONUS PERCENTAGE - ----------------------- --------------------- -------------------- --------------------- -------------------- Q1 2001 $163,749.00 4% $ 163,749.00 4% - ----------------------- --------------------- -------------------- --------------------- -------------------- Q2 2001 $508,706.00 4% $ 672,445.00 4% - ----------------------- --------------------- -------------------- --------------------- -------------------- Q3 2001 $442,495.00 5% $1,114,950.00 5% - ----------------------- --------------------- -------------------- --------------------- -------------------- Q4 2001 $550,050.00 5% $1,665,000.00 5% - ----------------------- --------------------- -------------------- --------------------- --------------------
13 EXHIBIT B COMPENSATION, DISCOUNTS AND MDF 1. SALES BY BENTLEY TO END USERS PURSUANT TO SECTION 6. COMPENSATION. Bentley will pay Reseller compensation in the amount set forth below for each Bentley Software Product, Maintenance Subscription, Subscription Product, and Bentley Institute Course purchased by an End User Site for which Reseller is the Assigned Sales Partner, provided that Reseller has obtained the appropriate Sales Authorization. (i) BENTLEY SOFTWARE PRODUCTS. For the sale of any Bentley Software Product to an End User Site for which Reseller is the Assigned Sales Partner, Bentley will pay Reseller compensation equal to 20% of the Net End User Price (as defined below) for "Category A Products" and 40% of the Net End User Price for "Category B Products." The terms "CATEGORY A PRODUCTS" and "CATEGORY B PRODUCTS" shall mean the categories established by Bentley from time to time for the purpose of setting forth reseller compensation rates for the sale of Bentley products and services to End Users and such categories will be published on the Bentley Reseller Website or on such other medium selected by Bentley from time to time. Bentley shall have the right to change the products and services within such categories and create new categories at any time upon thirty (30) days advance written or electronic notice to Reseller. The term "NET END USER PRICE" shall mean the applicable MSRP LESS any volume or other discounts provided by Bentley to the End User. (ii) MAINTENANCE SUBSCRIPTIONS. For the sale or renewal of a Maintenance Subscription to an End User Site for which Reseller is the Assigned Sales Partner, Bentley will pay Reseller compensation equal to 10% of the revenue recognized by Bentley (in accordance with generally accepted accounting principles) under such Maintenance Subscription until the earlier of (x) the end of the payment period, and (y) the termination date of this Agreement. Notwithstanding the foregoing, Reseller shall not be entitled to compenstion for the sale of any Manitenance Subscriptions to End User Sites that have another reseller as its assigned support provider. (iii) SUBSCRIPTION PRODUCTS. For the sale or renewal of any Subscription Product in the Category A Products to an End User Site for which Reseller is the Assigned Sales Partner, Bentley will pay Reseller compensation equal to 20% of the revenue recognized by Bentley (in accordance with generally accepted accounting principles) for such Subscription Product until the earlier of (x) the end of the payment period, and (y) the termination date of this Agreement. For the sale of any Subscription Product in the Category B Products to an End User Site for which Reseller is the Assigned Sales Partner, Bentley will pay Reseller compensation equal to 40% of the revenue recognized by Bentley (in accordance with generally accepted accounting principles) for such Subscription Product until the earlier of (a) the end of the payment period, and (b) the termination date of this Agreement. (iv) BENTLEY INSTITUTE COURSES. For the sale of a Bentley Institute Course offered by Bentley to an End User Site for which Reseller is the Assigned Sales Partner, Bentley will pay Reseller compensation equal to 10% of the Net End User Price. PAYMENT TERM. For the Bentley Software Products, and Bentley Institute Courses purchased by End User Sites for which Reseller is the Assigned Sales Partner, Bentley will pay all compensation under this Section 1 of EXHIBIT B within forty-five (45) days after the end of the month of the date of the invoice. For the Maintenance Subscriptions, and Subscription Products purchased by End User Sites for which Reseller is the Assigned Sales Partner, Bentley will pay monthly compensation under this Section 1 of EXHIBIT B within forty-five (45) days after the end of the month in which Bentley recognizes the revenue. In the event that revenue from any sale, license or subscription on which Bentley paid Reseller compensation pursuant to Section 6.02 of this Agreement is deemed uncollectable by Bentley, Bentley may apply the amount of such compensation paid (which shall be deemed not to have been earned) against any subsequent compensation earned by Reseller under Section 6.02 of this Agreement, and, upon termination of this Agreement, the unapplied balance of any such unearned compensation shall be immediately due and payable by Reseller to Bentley. WITHHOLDING OF COMPENSATIONS. Bentley may withhold payment of compensation to Reseller if (i) Reseller is past due on any invoice to Bentley; or (ii) Reseller has exceeded its Credit Limit (as defined below). In each instance, compensation will be withheld until Reseller has paid its outstanding Bentley invoices and/or 14 has paid moneys to Bentley sufficient to bring Reseller within its Credit Limit. Bentley reserves the right to apply any and all compensation under this Section 1 of Exhibit B against any past due account balances of Reseller (in which case Bentley shall have the right in its sole discretion to apply such compensation first to the oldest such balances), or, in the event Reseller has exceeded its Credit Limit (as defined below), against any current or past due account balances of Reseller. NONSTANDARD END USER TERMS. In the event Bentley offers an End User Site for which Reseller is the Assigned Sales Partner discount or payment terms that are extraordinarily different than the standard terms offered by Bentley from time to time as published by Bentley, Bentley and Reseller agree to negotiate Reseller's compensation for any sale resulting from any such offer. 2. SALES BY BENTLEY TO RESELLER FOR RESALE PURSUANT TO SECTION 7. DISCOUNTS. For Bentley Software Products ordered by Reseller pursuant to a Product Order submitted by Reseller for resale to an End User or prospective user, Reseller may purchase such Bentley Software Products at a 20% discount off the MSRP. For the sale of course materials for a Bentley Institute Course offered by Reseller with prior consent and approval of Bentley, Reseller may purchase such course materials at the MSRP without discount. PAYMENT TERM. Bentley will invoice Reseller for all orders made pursuant to Section 7. Reseller shall pay the invoiced amount within forty-five (45) days from the date of the invoice, failing which Bentley shall be entitled to cancel or suspend any further deliveries, payment, or compensation to Reseller under this or any other contract. All payments shall be made in the currency of the invoice and shall be executed in accordance with written instructions provided by Bentley to Reseller. Payment terms and conditions may vary for special programs and promotions outlined in the Bentley Pricebook. Reseller may not offset any amounts owing by Bentley to Reseller against any amounts owing from Reseller to Bentley under Section 7. CREDIT LIMIT. Bentley may, at its discretion, establish and adjust from time to time a line of credit for use by Reseller in ordering products and services from Bentley (the "CREDIT LIMIT"), based upon the payment history of Reseller, financial references and other financial information. Should Reseller receive a notice of termination pursuant to this Agreement, Reseller's credit limit shall be set to $0.00 as of the date of the notice. All transactions during the notice period shall be conducted on a cash basis. Reseller may continue to purchase Bentley Software Products using the following methods: (1) wire transfer; (2) credit card; or (3) certified check. CONDITIONAL ORDERS. Any Reseller order for Bentley Software Products that would place Reseller over its Credit Limit or any Reseller order that requires special pricing beyond the discount margin set forth in this Agreement shall be considered a "CONDITIONAL ORDER". Bentley reserves the right, with respect to any Conditional Order, to define any and all special payment procedures, sales, order terms, special pricing and Reseller compensation for such Conditional Order. 3. MARKETING DEVELOPMENT FUND. Reseller will be eligible for reimbursement of preapproved marketing related expenses in an amount equal to the "MDF Percentage" set forth below of the invoice amount of sales pursuant to Section 6 of this Agreement of qualified Bentley products net of any Reseller compensation and End User or Reseller discounts, subject to the terms and conditions of the MDF as set forth on the Bentley Reseller Website or such other medium selected by Bentley. In order to be eligible for the MDF in any quarter Reseller must, among other things, be in good standing with no past due account balances with Bentley, and have sold pursuant to Section 6 of this Agreement the "MDF Threshold Amount" set forth below of qualified Bentley products during the previous quarter. MDF Percentage 5 % MDF Threshold Amount $83,250.00 4. SPECIAL PROGRAMS AND PROMOTIONS. Bentley may provide from time to time sales programs and/or promotions that supersede standard Reseller compensation, pricing and discounts. These sales programs and/or promotions may contain limitations and restrictions and will only be offered for a limited time. 15 EXHIBIT C REPORTING REQUIREMENTS A. BUSINESS PLAN. Within sixty (60) days from the date of signature of the Bentley Reseller Agreement by Bentley and annually thereafter, Reseller shall provide Bentley, for Bentley's approval, a detailed two-year business plan (the "PLAN"). The Plan must indicate the efforts, resources, programs and Reseller organization to be implemented and dedicated to marketing, selling and supporting each Business Segment set forth in EXHIBIT A in which Reseller is authorized to offer Bentley Products, together with a minimum purchase forecast by Reseller during the duration of this Agreement. Reseller shall prepare the Plan in accordance with the guidelines established by Bentley from time to time and published on the Bentley Reseller Website or such other medium selected by Bentley. B. FORECAST. Reseller shall provide Bentley, at the dates determined by Bentley, a forecast detailing the prospective sales activity of the current and prospective user base serviced by Reseller. Such forecast shall include without limitation user names, main contact, the applicable Business Segment for such user, all Bentley Products in question, respective dollar amounts, and projected close date of the opportunity. The forecast shall be for all Bentley opportunities over a six (6) month period and shall be due in a format compatible with Siebel or such other form provided by Bentley. Bentley reserves the right to revoke Reseller's designation as the Assigned Sales Partner for any End User Site in which Reseller fails to provide timely and complete forecasts. Bentley will hold all non-public information provided by Reseller under this paragraph in confidence unless such non-public information is disclosed other than by Bentley. C. POINT OF SALE REPORT. Reseller shall provide Bentley within fourteen (14) days after the end of each month during the term of this Agreement and maintain for a period of one (1) year thereafter a complete record of all resales of Bentley Software Products purchased by Reseller pursuant to Section 7 of this Agreement during such month showing End User name, installation site, address, date of sales, product identification codes, serial numbers, and such other information as Bentley shall reasonably request. Reseller shall provide Bentley, upon Bentley's request, a report of its unsold inventory of Bentley Software Products purchased by Reseller pursuant to Section 7 of this Agreement, and such report shall be reconciled to the Point of Sales Report described in the foregoing sentence. Bentley will hold all non-public information provided by Reseller under this paragraph in confidence unless such non-public information is disclosed other than by Bentley. D. FINANCIAL STATEMENTS. Upon Bentley's request from time to time, Reseller shall provide Bentley with Reseller's financial statements (balance sheet and income statement) for its most recent fiscal year ended no less than 120 days before the request is made, and for such interim periods as Reseller may have available. Bentley will hold all financial statements provided by Reseller under this paragraph in confidence unless such financial statements are disclosed other than by Bentley; PROVIDED, HOWEVER, that Bentley may disclose any financial statements and related information provided by Reseller under this paragraph to banks, credit insurers and other third parties in connection with any financing transaction of Bentley that is based upon in part or otherwise involves the creditworthiness of Reseller. 16 EXHIBIT D SELECT SERVICES AND COMPENSATION Bentley and Reseller intend that Reseller provide support services to subscribers to the Bentley SELECT Program and therefore desire to supplement and modify the terms of the Bentley Reseller Agreement (of which this is an exhibit thereto) in the manner set forth below. 1. AUTHORIZATION. Bentley authorizes Reseller to provide support services to any Subscriber Site (as defined below) for which Reseller is the Assigned Support Provider (as defined below); provided that such support services are provided by an employee of Reseller who has met and maintains the appropriate Technical Certification (as defined below). The term "SUBSCRIBER SITE" shall mean any office(s), location(s), division(s) or other unit(s) of a subscriber to the Bentley SELECT Program designated by Bentley from time to time. The term "TECHNICAL CERTIFICATION" shall mean the minimum requirements and standards set forth on the Bentley Reseller Website or such other medium selected by Bentley in which an employee of Reseller must meet and maintain in order for Reseller to provide support services to Subscriber Sites for which Reseller is the Assigned Support Provider. The term "ASSIGNED SUPPORT PROVIDER" shall mean, with respect to any Subscriber Site, the reseller, if any, that has been authorized by Bentley to provide support services under the Bentley SELECT Program to such Subscriber Site. Bentley shall have the right to revoke Reseller's designation as the Assigned Support Provider for any Subscriber Site at any time upon notice to Reseller. As the Assigned Support Provider for any Subscriber Site, Reseller will perform the duties and services designated by Bentley from time to time including, without limitation, providing first line support to such Subscriber Sites, and, after the Notification Date (as defined in Exhibit E), using Bentley's Siebel customer relationship management software system for all contacts with such Subscriber Sites. 2. COMPENSATION. Reseller's compensation during any calendar quarter for providing support services under the Bentley SELECT Program shall be in an amount equal to the product of (a) the In-Service SELECT Coverage (as defined below) for such quarter, and (b) the Applicable SELECT Compensation Rate (as defined below) for such quarter. "APPLICABLE SELECT COMPENSATION RATE" for any quarter will be based on the percentage set forth in the table below opposite the Reinvestment Ratio (as defined below). "REINVESTMENT RATIO" for any quarter is computed by dividing (a) the aggregate revenues from the sale or license pursuant to Section 6 of this Agreement of Bentley Software Products, Bentley Institute Courses and Subscription Products to End User Sites for which Reseller was at the time of such sale or license the Assigned Sales Partner (excluding any revenues from sales or licenses of Bentley Software Products, Bentley Institute Courses and Subscription Products to End User Sites for which, at the time of such sale or license, Bentley or another reseller was the Assigned Support Provider) and that were recognized by Bentley (in accordance with generally accepted accounting principles) during the previous four quarters LESS any Reseller compensation and End User or Reseller discounts given by Bentley in connection with such sales or licenses ("NET RIR REVENUES"), BY (b) the sum of In-Service SELECT Coverage (as defined below) for the previous four quarters. For example, the calculation of the Reinvestment Ratio for the second quarter of any year will include the Net RIR Revenues and In-Service SELECT Coverage for the first quarter of such year and the Net RIR Revenues and In-Service SELECT Coverage for the fourth, third and second quarters of the year immediately preceding the first quarter. "IN-SERVICE SELECT COVERAGE" for any quarter equals the SELECT support revenues recognized by Bentley in accordance with generally accepted accounting principles during such quarter from Subscriber Sites for which Reseller is the Assigned Support Provider pro rata based on the number of days during such quarter that Reseller is the Assigned Support Provider for any such Subscriber Site. 17 Based on the Reinvestment Ratio for the quarter, the Applicable SELECT Compensation Rate is determined from the following table:
Reinvestment Ratio Applicable SELECT Compensation Rate ------------------ ----------------------------------- Less than 0.10 0% 0.10-0.1999 10% 0.20-0.3999 20% 0.40-0.5199 21% 0.52-0.5999 22% 0.60-0.6599 23% 0.66-0.7199 24% 0.72-0.7799 25% 0.78-0.8399 26% 0.84-0.8999 27% 0.90-0.9599 28% 0.96-1.0199 29% 1.02-1.0799 30% 1.08-1.1399 31% 1.14-1.1999 32% 1.20-1.2499 33% 1.25-1.2999 34% 1.30-1.3499 35% 1.35-1.3999 36% 1.40-1.4499 37% 1.45-1.4999 38% 1.50-1.5999 39% 1.60+ 40%
3. PAYMENT OF SELECT COMPENSATION. Bentley shall make monthly SELECT compensation payments to Reseller within 45 days after the end of each month. Bentley may without payment of SELECT compensation to Reseller and apply such compensation against any account balance of Reseller, to the extent Reseller is past due on any invoice from Bentley or Reseller has exceeded its Credit Limit (in either case Bentley shall have the right in its sole discretion to apply any SELECT compensation first to the oldest invoices). 4. MAINTENANCE SUBSCRIPTIONS. Notwithstanding anything contained in this Agreement to the contrary, Reseller (a) shall not receive any compensation in accordance with Section 6.02 and EXHIBIT B to this Agreement for the sale of Maintenance Subscriptions to Subscriber Sites for which Reseller is the Assigned Support Provider, and (b) shall receive compensation in accordance with Section 6.02 and EXHIBIT B to this Agreement for the sale of Maintenance Subscriptions to Subscriber Sites for which Reseller is the Assigned Sales Partner and Bentley is the Assigned Support Provider. 18 EXHIBIT E TRANSITION PERIOD Notwithstanding anything in this Agreement to the contrary, the following terms and conditions shall govern the parties to this Agreement, and shall supercede any conflicting terms in this Agreement, during the period beginning on the Effective Date and ending on the Notification Date. The term "NOTIFICATION DATE" shall mean the date on which Bentley delivers notice to Reseller that Bentley's Siebel customer relationship management software system and related systems have been fully deployed, and that Bentley is ready to offer Bentley Products directly to End Users pursuant to the terms and conditions of Section 6 of this Agreement. 1. During the period beginning on the Effective Date and ending on the Notification Date, Bentley will not accept any Products Order submitted pursuant to Section 6 of this Agreement, and Reseller will not be entitled to any compensation pursuant to Section 6.02 of this Agreement. For any product orders accepted by Bentley directly from an End User prior to the Notification Date in accordance with historical practices, the compensation (if any) paid by Bentley to Reseller shall be agreed to in advance. 2. During the period beginning on the Effective Date and ending on the Notification Date, Reseller may submit Product Orders for any Bentley Product pursuant to Section 7 of this Agreement, and, if such Product Order is accepted by Bentley, Reseller may purchase such Bentley Products for resale to an End User site at the following discount off the applicable MSRP: (a) if the Product Order contains the name and address of the End User Site for which Reseller is the Assigned Sales Provider and to which Reseller commits to resell such Bentley Products, Bentley will offer Reseller the same discount off the applicable MSRP that Bentley offered Reseller for such Bentley Products under the applicable MVAR Agreement (or other reseller agreement with Bentley) immediately prior to the Effective Date, and (b) otherwise, Bentley will offer Reseller a 20% discount off the applicable MSRP. 3. This paragraph 3 only applies to those Bentley Reseller Agreements that contain an EXHIBIT D (SELECT Services and Compensation Terms). During the period beginning on the Effective Date and ending on the Notification Date, notwithstanding anything in EXHIBIT D to the contrary, SELECT compensation shall be calculated on the basis of a Reinvestment Ratio defined as follows: "REINVESTMENT RATIO" for any quarter is computed by dividing (a) the aggregate revenues recognized by Bentley (in accordance with generally accepted accounting principles) during such quarter from (i) the sale or license pursuant to Section 7 of this Agreement of Bentley Software Products to Reseller, and (ii) the sale or license of Bentley Software Products to Subscriber Sites for whom Reseller is the Assigned Support Provider, LESS any Reseller compensation given by Bentley in connection with such sales or licenses, BY (b) the sum of In-Service SELECT Coverage for such quarter." 4. This paragraph 4 only applies to those Bentley Reseller Agreements that contain an EXHIBIT D (SELECT Services and Compensation Terms). Notwithstanding anything contained in EXHIBIT D to the contrary, the calculation of (i) the Reinvestment Ratio for the first quarter following the Notification Date shall be based on the Net RIR Revenues and In-Service SELECT Coverage for such quarter, and (ii) the Reinvestment Ratio for the second, third and fourth quarters following the Notification Date shall be based on the Net RIR Revenues and In-Service SELECT Coverage for those quarters immediately following the Notification Date and immediately preceding the quarter of determination. 19 EX-10.03 5 a2080957zex-10_03.txt EXHIBIT 10.03 EXHIBIT 10.03 FINANCING AGREEMENT THE CIT GROUP/BUSINESS CREDIT, INC. (AS LENDER) AND AVATECH SOLUTIONS, INC. AND ITS SUBSIDIARIES SET FORTH ON THE SIGNATURE PAGES HERETO (AS BORROWER) DATED: OCTOBER 25, 2000 TABLE OF CONTENTS
Page SECTION 1. DEFINITIONS.....................................................1 SECTION 2. CONDITIONS PRECEDENT............................................9 SECTION 3. REVOLVING LOANS................................................12 SECTION 4. INTENTIONALLY OMITTED..........................................16 SECTION 5. INTENTIONALLY OMITTED..........................................16 SECTION 6. COLLATERAL.....................................................16 SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS......................17 SECTION 8. INTEREST, FEES AND EXPENSES....................................21 SECTION 9. POWERS.........................................................24 SECTION 10. EVENTS OF DEFAULT AND REMEDIES.................................25 SECTION 11. TERMINATION....................................................28 SECTION 12. MISCELLANEOUS..................................................28
EXHIBIT SCHEDULES Schedule 1 - Collateral Information Schedule 2 - Investor Debt i THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation, with offices located at Two First Union Center, Charlotte, North Carolina 28230-337 (hereinafter "CIT"), is pleased to confirm the terms and conditions under which CIT shall make revolving loans and other financial accommodations to AVATECH SOLUTIONS, INC., a Maryland corporation with a principal place of business at 11403 Cronhill Drive, Suite A, Owings Mills, Maryland 21117 (herein the "Company") and its subsidiaries listed on the signature pages hereto (hereinafter the Company and such subsidiaries shall be collectively referred to as the "Borrowers" or individually as a "Borrower"). SECTION 1. DEFINITIONS ACCOUNTS shall mean all of each Borrower's now existing and future: (a) accounts (as defined in the UCC), and any and all other receivables (whether or not specifically listed on schedules furnished to CIT), including, without limitation, all accounts created by, or arising from, all of each Borrower's sales, leases, rentals of goods or renditions of services to its customers, including but not limited to, those accounts arising under any of each Borrower's trade names or styles, or through any of each Borrower's divisions; (b) any and all instruments, documents, chattel paper (including electronic chattel paper) (all as defined in the UCC); (c) unpaid seller's or lessor's rights (including rescission, replevin, reclamation, repossession and stoppage in transit) relating to the foregoing or arising therefrom; (d) rights to any goods represented by any of the foregoing, including rights to returned, reclaimed or repossessed goods; (e) reserves and credit balances arising in connection with or pursuant hereto; (f) guarantees, supporting obligations, payment intangibles and letter of credit rights (all as defined in the UCC); (g) insurance policies or rights relating to any of the foregoing; (h) general intangibles pertaining to any and all of the foregoing (including all rights to payment, including those arising in connection with bank and non-bank credit cards), and including books and records and any electronic media and software thereto; (i) notes, deposits or property of account debtors securing the obligations of any such account debtors to each Borrower; and (j) cash and non-cash proceeds (as defined in the UCC) of any and all of the foregoing. ADMINISTRATIVE MANAGEMENT FEE shall mean the sum of $1,000.00 per month which shall be paid to CIT in accordance with Section 8, paragraph 8.8 hereof to offset the expenses and costs (excluding Out-of-Pocket Expenses and auditor fees) of CIT in connection with administration, record keeping, analyzing and evaluating the Collateral. ANNIVERSARY DATE shall mean the date occurring three (3) years from the Closing Date and the same date in every year thereafter. AVAILABILITY shall mean at any time the amount by which: (a) the Borrowing Base exceeds (b) the sum of (i) the outstanding aggregate amount of all Obligations, including without limitation, all Obligations with respect to Revolving Loans, and (ii) the Availability Reserve. AVAILABILITY RESERVE shall mean (a) any reserve which CIT may reasonably require from time to time pursuant to this Financing Agreement; and (b) such other reserves as CIT deems necessary in its reasonable judgment as a result of (i) negative forecasts and/or trends in any Borrower's business, industry, prospects, profits, operations or financial condition or (ii) other issues, circumstances or facts that could otherwise negatively impact any Borrower, its business, prospects, profits, operations, industry, financial condition or assets. BORROWING BASE shall mean seventy-five percent (75%) of the Borrowers' aggregate outstanding Eligible Accounts Receivable. BUSINESS DAY shall mean any day on which CIT and The Chase Manhattan Bank are open for business. CAPITAL EXPENDITURES shall mean, for any period, the aggregate expenditures of the Borrowers during such period on account of, property, plant, equipment or similar fixed assets that in conformity with GAAP, are required to be reflected in the balance sheet of the Borrowers. CAPITAL IMPROVEMENTS shall mean operating Equipment facilities (other than land) acquired or installed for use in any Borrower's business operations. CAPITAL LEASE shall mean any lease of property (whether real, personal or mixed) which, in conformity with GAAP, is accounted for as a capital lease or a Capital Expenditure in the balance sheet of the Borrowers. CHASE BANK RATE shall mean the rate of interest per annum announced by The Chase Manhattan Bank from time to time as its prime rate in effect at its principal office in New York City. (The prime rate is not intended to be the lowest rate of interest charged by The Chase Manhattan Bank to its borrowers). CHASE BANK RATE LOANS shall mean any loans or advances pursuant to this Financing Agreement made or maintained at a rate of interest based upon the Chase Bank Rate. CLOSING DATE shall mean the date that this Financing Agreement has been duly executed by the parties hereto and delivered to CIT. COLLATERAL shall mean all present and future Accounts, Documents of Title, General Intangibles and Other Collateral. COLLECTION DAYS shall mean two (2) Business Days to provide for the deposit, clearance and collection of checks or other instruments representing the proceeds of Collateral, the amount of which has been credited to the Borrowers' Revolving Loan Account, and for which interest may be charged on the aggregate amount of such deposits, at the rate provided for in Paragraph 8.1 of Section 8 of this Financing Agreement. CONSOLIDATED BALANCE SHEET shall mean a consolidated or compiled, as applicable, balance sheet of the Company and its consolidated subsidiaries, eliminating all inter-company transactions and prepared in accordance with GAAP. 2 CONSOLIDATING BALANCE SHEET shall mean a Consolidated Balance Sheet plus individual balance sheets for the Company and its consolidated subsidiaries, showing all eliminations of inter-company transactions, including a balance sheet for the Company exclusively, all prepared in accordance with GAAP. COPYRIGHTS shall mean all present and hereafter acquired copyrights, copyright registrations, recordings, applications, designs, styles, licenses, marks, prints and labels bearing any of the foregoing, goodwill, any and all general intangibles, intellectual property and rights pertaining thereto, and all cash and non-cash proceeds thereof. CURRENT ASSETS shall mean those assets of the Borrowers which, in accordance with GAAP, are classified as current. CURRENT LIABILITIES shall mean those liabilities of the Borrowers which, in accordance with GAAP, are classified as "current," provided however, that, notwithstanding GAAP, the Revolving Loans and the current portion of Permitted Indebtedness shall be considered "current liabilities." DEFAULT shall mean any event specified in Section 10 hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, even or act, has been satisfied. DEFAULT RATE OF INTEREST shall mean a rate of interest per annum on any Obligations hereunder, equal to the sum of: (a) two percent (2%) and (b) the applicable increment over the Chase Bank Rate (as set forth in paragraph 8.1 hereof) plus the Chase Bank Rate, which CIT shall be entitled to charge the Borrowers on all Obligations due CIT by the Company, as further set forth in Paragraph 10.2 of Section 10 of this Financing Agreement. DEPOSITORY ACCOUNTS shall mean the collection accounts, which are subject to CIT's instructions, as specified in Paragraph 3.4 of Section 3 of this Financing Agreement. DOCUMENTATION FEE shall mean subsequent to the Closing Date, CIT's standard fees relating to any and all modifications, waivers, releases, amendments or additional collateral with respect to this Financing Agreement, the Collateral and/or the Obligations. DOCUMENTS OF TITLE shall mean all present and future documents (as defined in the UCC), and any and all warehouse receipts, bills of lading, shipping documents, chattel paper, instruments and similar documents, all whether negotiable or not and all goods and Inventory relating thereto and all cash and non-cash proceeds of the foregoing. EARLY TERMINATION DATE shall mean the date on which the Borrowers terminate this Financing Agreement or the Revolving Line of Credit which date is prior to an Anniversary Date. EARLY TERMINATION FEE shall: (a) mean the fee CIT is entitled to charge the Borrowers in the event the Borrowers terminate the Revolving Line of Credit or this Financing Agreement on a date prior to an Anniversary Date; and (b) be determined by multiplying the Revolving Line of 3 Credit by (x) three percent (3%) if the Early Termination Date occurs on or before one (1) year from the Closing Date, (y) two percent (2%) if the Early Termination Date occurs after one (1) year from the Closing Date but on or before two (2) years from the Closing Date; and (z) one percent (1%) if the Early Termination Date occurs after two (2) years from the Closing Date but prior to an Anniversary Date. EBIT shall mean, in any period, all earnings of the Borrowers for said period before all interest and tax obligations of the Borrowers for said period, determined in accordance with GAAP on a consistent basis with the latest audited financial statements of the Borrowers, but excluding the effect of extraordinary or non-reoccurring gains or losses for such period. ELIGIBLE ACCOUNTS RECEIVABLE shall mean the gross amount of each Borrower's Trade Accounts Receivable that are subject to a valid, exclusive, first priority and fully perfected security interest in favor of CIT, which conform to the warranties contained herein and which, at all times, continue to be acceptable to CIT in the exercise of its reasonable judgment, LESS, without duplication, the sum of: (a) any returns, discounts, claims, credits and allowances of any nature (whether issued, owing, granted, claimed or outstanding), and (b) reserves for any such Trade Accounts Receivable that arise from or are subject to or include: (i) sales to the United States of America, any state or other governmental entity or to any agency, department or division thereof, except for any such sales as to which any Borrower has complied with the Assignment of Claims Act of 1940 or any other applicable statute, rules or regulation, to CIT's satisfaction in the exercise of its reasonable business judgment; (ii) foreign sales, other than sales which otherwise comply with all of the other criteria for eligibility hereunder and are (x) secured by letters of credit (in form and substance satisfactory to CIT) issued or confirmed by, and payable at, banks having a place of business in the United States of America, (y) to customers residing in Canada, or (z) insured by credit insurance satisfactory to CIT, (iii) Accounts that remain unpaid more than ninety (90) days from invoice date or sixty (60) days from due date; (iv) contra accounts; (v) sales to any subsidiary, or to any company affiliated with any Borrower or in any way; (vi) bill and hold (deferred shipment) or consignment sales; (vii) sales to any customer which is: (A) insolvent, (B) the debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law, (C) negotiating, or has called a meeting of its creditors for purposes of negotiating, a compromise of its debts, or (D) financially unacceptable to CIT or has a credit rating unacceptable to CIT; (viii) all sales to any customer if fifty percent (50%) or more of the aggregate dollar amount of all outstanding invoices to such customer are unpaid more than ninety (90) days from invoice date; (ix) sales to any customer and/or its affiliates to the extent such sales exceed at any one time twenty percent (20%) or more of all Eligible Accounts Receivable; (x) pre-billed receivables and receivables arising from progress billing; (xi) an amount representing, historically, returns, discounts, claims, credits, allowances and applicable terms; (xii) sales not payable in United States currency; and (xiii) any other reasons deemed necessary by CIT in its reasonable judgment, including without limitation those which are customary either in the commercial finance industry or in the lending practices of CIT. EQUIPMENT shall mean all present and hereafter acquired equipment (as defined in the UCC) including, without limitation, all machinery, equipment, furnishings and fixtures, and all additions, substitutions and replacements thereof, wherever located, together with all 4 attachments, components, parts, equipment and accessories installed thereon or affixed thereto and all proceeds thereof of whatever sort. ERISA shall mean the Employee Retirement Income Security Act or 1974, as amended from time to time and the rules and regulations promulgated thereunder from time to time. EVENT(S) OF DEFAULT shall have the meaning provided for in Section 10 of this Financing Agreement. EXECUTIVE OFFICERS shall mean the Chairman, President, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Executive Vice President(s), Senior Vice President(s), Treasurer, Controller and Secretary of each Borrower. GAAP shall mean generally accepted accounting principles in the United States of America as in effect from time to time and for the period as to which such accounting principles are to apply, provided that in the event the Borrowers modifies its accounting principles and procedures as applied as of the Closing Date, the Borrowers shall provide such statements of reconciliation as shall be in form and substance acceptable to CIT. GENERAL INTANGIBLES shall mean all present and hereafter acquired general intangibles (as defined in the UCC), and shall include, without limitation, all present and future right, title and interest in and to: (a) all Trademarks, tradenames, corporate names, business names, logos and any other designs or sources of business identities, (b) Patents, together with any improvements on said Patents, utility models, industrial models, and designs, (c) Copyrights, (d) trade secrets, (e) licenses, permits and franchises, (f) all applications with respect to the foregoing, (g) all right, title and interest in and to any and all extensions and renewals, (h) goodwill with respect to any of the foregoing, (i) any other forms of similar intellectual property, (j) all customer lists, contract rights, distribution agreements, supply agreements, blueprints, indemnification rights and tax refunds, together with all monies and claims for monies now or hereafter due and payable in connection with any of the foregoing or otherwise, and all cash and non-cash proceeds thereof, including, without limitation, the proceeds or royalties of any licensing agreements between any Borrower and any licensee of any of such Borrower's General Intangibles. GUARANTY shall mean the fraud and performance guaranty from the Guarantor. GUARANTOR shall mean Henry Felton. INDEBTEDNESS shall mean, without duplication, all liabilities, contingent or otherwise, which are any of the following: (a) obligations in respect of borrowed money or for the deferred purchase price of property, services or assets, other than Inventory, or (b) lease obligations which, in accordance with GAAP, have been, or which should be capitalized. INSURANCE PROCEEDS shall mean proceeds or payments from an insurance carrier with respect to any loss, casualty or damage to Collateral. 5 INVENTORY shall mean all of each Borrower's present and hereafter acquired inventory (as defined in the UCC) and including, without limitation, all merchandise, inventory and goods, and all additions, substitutions and replacements thereof, wherever located, together with all goods and materials used or usable in manufacturing, processing, packaging or shipping same in all stages of production from raw materials through work-in-process to finished goods and all proceeds thereof of whatever sort. LINE OF CREDIT shall mean the aggregate commitment of CIT to make Revolving Loans pursuant to Section 3 of this Financing Agreement in the aggregate amount equal to $4,000,000. LOAN DOCUMENTS shall mean this Financing Agreement, the mortgage, the other closing documents and any other ancillary loan and security agreements executed from time to time in connection with this Financing Agreement, all as may be renewed, amended, extended, increased or supplemented from time to time. LOAN FACILITY FEE shall mean the fee payable to CIT in accordance with, and pursuant to, the provisions to Paragraph 8.7 of Section 8 of this Financing Agreement. NET WORTH shall mean, at any date of determination, an amount equal to (a) Total Assets minus (b) Total Liabilities, and shall be determined in accordance with GAAP, on a consistent basis with the latest audited financial statements of the Borrowers. OBLIGATIONS shall mean all loans, advances and extensions of credit made or to be made by CIT to any Borrower or to others for any Borrower's account (including, without limitation, all Revolving Loans); any and all indebtedness and obligations which may at any time be owing by any Borrower to CIT howsoever arising, whether now in existence or incurred by any Borrower from time to time hereafter; whether principal, interest, fees, costs, expenses or otherwise; whether secured by pledge, lien upon or security interest in any of any Borrower's Collateral, assets or property or the assets or property of any other person, firm, entity or corporation; whether such indebtedness is absolute or contingent, joint or several, matured or unmatured, direct or indirect and whether any Borrower is liable to CIT for such indebtedness as principal, surety, endorser, guarantor or otherwise. Obligations shall also include indebtedness owing to CIT by any Borrower under any Loan Document or under any other agreement or arrangement now or hereafter entered into between any Borrower and CIT; indebtedness or obligations incurred by, or imposed on, CIT as a result of environmental claims arising out of any Borrower's operations, premises or waste disposal practices or sites in accordance with paragraph 7.7 hereof; any Borrower's liability to CIT as maker or endorser of any promissory note or other instrument for the payment of money; any Borrower's liability to CIT under any instrument of guaranty or indemnity, or arising under any guaranty, endorsement or undertaking which CIT may make or issue to others for any Borrower's account, CIT's acceptance of drafts or CIT's endorsement of notes or other instruments for any Borrower's account and benefit; and any and all indebtedness, liabilities or obligations or every kind, nature and description owing by any Borrower to any affiliate of CIT. OPERATING LEASES shall mean all leases of property (whether real, personal or mixed) other than Capital Leases. 6 OTHER COLLATERAL shall mean all now owned and hereafter acquired lockbox, blocked account and any other deposit accounts maintained with any bank or financial institutions into which the proceeds of Collateral are or may be deposited; all cash and other monies and property in the possession or control of CIT; all books, records, ledger cards, disks and related data processing software at any time evidencing or containing information relating to any of the Collateral described herein or otherwise necessary or helpful in the collection thereof or realization thereon; and all cash and non-cash proceeds of the foregoing. OUT-OF-POCKET EXPENSES shall mean all of CIT's present and future expenses incurred relative to this Financing Agreement or any other Loan Documents, whether incurred heretofore or hereafter, which expenses shall include, without being limited to: the cost of record searches, all costs and expenses incurred by CIT in opening bank accounts, depositing checks, receiving and transferring funds, and wire transfer charges, any charges imposed on CIT due to returned items and "insufficient funds" of deposited checks and CIT's standard fees relating thereto, and travel, lodging and similar expenses of CIT's personnel in connection with inspecting and monitoring the Collateral from time to time hereunder, any applicable counsel fees and disbursements, fees and taxes relative to the filing of financing statements, all expenses, costs and fees set forth in Paragraph 10.3 of Section 10 of this Financing Agreement. OVERADVANCE RATE shall mean a rate equal to one-half of one percent (1/2%) per annum in excess of the applicable contract rate of interest determined in accordance with Section 8, Paragraph 8.1(a) of this Financing Agreement. OVERADVANCES shall mean the amount by which (a) the sum of all outstanding Revolving Loans and advances made hereunder exceed (b) the Borrowing Base. PATENTS shall mean all of each Borrower's present and hereafter acquired patents, patent applications, registrations, any reissues or renewals thereof, licenses, any inventions and improvements claimed thereunder, and all general intangible, intellectual property and patent rights with respect thereto of each Borrower, and all income, royalties, cash and non-cash proceeds thereof. PERMITTED ENCUMBRANCES shall mean: (a) liens existing on the date hereof expressly permitted, or consented to in writing by CIT; (b) purchase Money Liens: (c) liens of local or state authorities for franchise or other like Taxes, provided that the aggregate amounts of such liens shall not exceed $25,000.00 in the aggregate at any one time; (d) statutory liens of landlords and liens of carriers, warehousemen, bailees, mechanics, materialmen and other like liens imposed by law, created in the ordinary course of business and for amounts not yet due (or which are being contested in good faith, by appropriate proceedings or other appropriate actions which are sufficient to prevent imminent foreclosure of such liens) and with respect to which adequate reserves or other appropriate provisions are being maintained by the Borrowers in accordance with GAAP; (e) deposits made (and the liens thereon) in the ordinary course of business of each Borrower (including, without limitation, security deposits for leases, indemnity bonds, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, contracts 7 (other than for the repayment or guarantee of borrowed money or purchase money obligations), statutory obligations and other similar obligations arising as a result of progress payments under government contracts; (f) easements (including, without limitation, reciprocal easement agreements and utility agreements), encroachments, minor defects or irregularities in title, variation and other restrictions, charges or encumbrances (whether or not recorded) affecting the Real Estate, if applicable, and which in the aggregate (A) do not materially interfere with the occupation, use or enjoyment by any Borrower of its business or property so encumbered and (B) in the reasonable business judgment of CIT do not materially and adversely affect the value of such Real Estate; and (g) liens granted CIT by the Borrowers; (h) liens of judgment creditors provided such liens do not exceed, in the aggregate, at any time, $25,000.00 (other than liens bonded or insured to the reasonable satisfaction of CIT); and (i) tax liens which are not yet due and payable or which are being diligently contested in good faith by the applicable Borrower by appropriate proceedings, and which liens are not (x) filed on any public records, (y) senior to the liens of CIT or (z) for Taxes due the United States of America or any state thereof having similar priority statutes, as further set forth in paragraph 7.6 hereof. PERMITTED INDEBTEDNESS shall mean: (a) current Indebtedness maturing in less than one year and incurred in the ordinary course of business for raw materials, supplies, equipment, services, Taxes or labor; (b) the Indebtedness secured by Purchase Money Liens; (c) Subordinated Debt; (d) Indebtedness arising under this Financing Agreement; (e) deferred Taxes and other expenses incurred in the ordinary course of business; and (f) other Indebtedness existing on the date of execution of this Financing Agreement and listed in the most recent financial statement delivered to CIT or otherwise disclosed to CIT in writing prior to the Closing Date. PURCHASE MONEY LIENS shall mean liens on any item of Equipment acquired after the date of this Financing Agreement provided that (a) each such lien shall attach only to the property to be acquired, (b) a description of the Equipment so acquired is furnished to CIT, and (c) the debt incurred in connection with such acquisitions shall not exceed, in the aggregate, $50,000.00 in any fiscal year. REAL ESTATE shall mean each Borrower's fee and/or leasehold interests in the real property. REVOLVING LINE OF CREDIT shall mean the aggregate commitment of CIT to make loans and advances pursuant to Section 3 of this Financing Agreement to the Company, in the aggregate amount equal to the sum of $4,000,000.00. REVOLVING LOAN ACCOUNT shall mean the account on CIT's books, in the Borrower's names, in which the Borrowers will be charged with all Obligations under this Financing Agreement. REVOLVING LOANS shall mean the loans and advances made, from time to time, to or for the account of the Borrowers by CIT pursuant to Section 3 of this Financing Agreement. SUBORDINATED DEBT shall mean (i) the debt due to (A) Autodesk, Inc., in the original principal amount of $2,960,645.77 evidenced by that certain Promissory Note, dated July 27, 2000, executed by the Borrowers in favor of Autodesk, Inc. in the original principal amount of $2,960,645.77 and (B) the debt due to the investors listed on Schedule 2 attached hereto and (ii) 8 the debt due a Subordinating Creditor (and the note(s) evidencing such) which has been subordinated, by a Subordination Agreement, to the prior payment and satisfaction of the Obligations of the Company to CIT. SUBORDINATING CREDITOR shall mean any party hereafter executing a Subordination Agreement. SUBORDINATION AGREEMENT shall mean the agreement (in form and substance satisfactory to CIT) among any Borrower, a Subordinating Creditor and CIT pursuant to which Subordinated Debt is subordinated to the prior payment and satisfaction of such Borrower's Obligations to CIT. TAXES shall mean all federal, state, municipal and other governmental taxes, levies, charges, claims and assessments which are or may be due by any Borrower with respect to its business, operations, Collateral or otherwise. TOTAL ASSETS shall mean total assets determined in accordance with GAAP, on a basis consistent with the latest audited financial statements of the Borrowers. TOTAL LIABILITIES shall mean total liabilities determined in accordance with GAAP, on a basis consistent with the latest audited financial statements of the Company. TRADE ACCOUNTS RECEIVABLE shall mean that portion of each Borrower's Accounts which arises from the sale of Inventory or the rendition of services in the ordinary course of such Borrower's business. TRADEMARKS shall mean all present and hereafter acquired trademarks, trademark registrations, recordings, applications, tradenames, trade styles, service marks, prints and labels (on which any of the foregoing may appear), licenses, reissues, renewals, and any other intellectual property and trademark rights pertaining to any of the foregoing, together with the goodwill associated therewith, and all cash and non-cash proceeds thereof. UCC shall mean the Uniform Commercial Code as the same may be amended and in effect from time to time in the state of North Carolina. WORKING CAPITAL shall mean Current Assets in excess of Current Liabilities. WORKING DAY shall mean any Business Day on which dealings in foreign currencies and exchanges between banks may be transacted. SECTION 2. CONDITIONS PRECEDENT The obligation of CIT to make the initial loans hereunder is subject to the satisfaction of, extension of or waiver of in writing, on or prior to, the Closing Date, the following conditions precedent: 9 (a) LIEN SEARCHES - CIT shall have received tax, judgment and Uniform Commercial Code searches satisfactory to CIT for all locations presently occupied or used by the Borrowers. (b) INTENTIONALLY OMITTED. (c) UCC FILINGS - Any financing statements required to be filed in order to create, in favor of CIT, a first perfected security interest in the Collateral, subject only to the Permitted Encumbrances, shall have been properly filed in each office in each jurisdiction required in order to create in favor of CIT a perfected lien on the Collateral. CIT shall have received acknowledgment copies of all such filings (or, in lieu thereof, CIT shall have received other evidence satisfactory to CIT that all such filings have been made) and CIT shall have received evidence that all necessary filing fees and all taxes or other expenses related to such filings have been paid in full. (d) BOARD AND SHAREHOLDER RESOLUTIONS - CIT shall have received a copy of the resolutions of the Board of Directors of each Borrower authorizing the execution, delivery and performance of (i) this Financing Agreement, (ii) and any related agreements, in each case certified by the Secretary or Assistant Secretary of each Borrower as of the date hereof, together with a certificate of the Secretary or Assistant Secretary of each Borrower as to the incumbency and signature of the officers of each Borrower executing such Loan Documents and any certificate or other documents to be delivered by them pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary. If any subsidiary of the Company is not wholly owned by the Company, CIT shall also have received shareholder consents satisfactory to CIT with respect to the matters referenced above. (e) CORPORATE ORGANIZATION - CIT shall have received (i) a copy of the Certificate of Incorporation of each Borrower certified by the Secretary of State of the state of its incorporation with respect to the Company and certified by the applicable Secretary or Assistant Secretary with respect to each other Borrower, and (ii) a copy of the By-Laws of each Borrower certified by the Secretary or Assistant Secretary thereof, all as amended through the date hereof. (f) OFFICER'S CERTIFICATE - CIT shall have received an executed Officer's Certificate of each Borrower, satisfactory in form and substance to CIT, certifying that (i) the representations and warranties contained herein are true and correct in all material respects on and as of the Closing Date; (ii) each Borrower is in compliance with all of the terms and provisions set forth herein; and (iii) no Default or Event of Default has occurred. (g) OPINIONS - Counsel for the Borrowers and the Guarantor shall have delivered to CIT opinions satisfactory to CIT opining, inter alia, that, subject to the (i) filing, priority and remedies provisions of the Uniform Commercial Code, (ii) the provisions of the Bankruptcy Code, insolvency statutes or other like laws, (iii) the equity powers of a court of law and (iv) such other matters as may be agreed upon with CIT: (x) this Financing Agreement, the Guaranty and all other Loan Documents of the Borrowers and the Guarantor are (A) valid, binding and enforceable according to their terms, (B) are duly authorized, executed, and delivered, and (C) do not violate any terms, provisions, representations or convenants in the charter or by-laws of any Borrower or, to the best knowledge of such counsel, of any loan agreement, mortgage, deed of trust, note, security or pledge agreement, indenture or other contract to which any Borrower or the Guarantor are signatories or by which any Borrower or the Guarantor or their assets are bound; and (y) the provisions of all federal and state securities laws, Bulk Sales Law and the Hart-Scott-Rodino Anti-Trust Improvements Act have been fully complied with or that compliance is not legally required and the reasons supporting such non-compliance. 10 (h) ABSENCE OF DEFAULT - No Default or Event of Default shall have occurred and no material adverse change shall have occurred in the financial condition, business, prospects, profits, operations or assets of the company or the Company's subsidiaries. (i) LEGAL RESTRAINTS/LITIGATION - As of the Closing Date, there shall be no: (x) litigation, investigation or proceeding (judicial or administrative) pending or threatened against any Borrower or the Guarantor or their assets, by any agency, division or department of any county, city, state or federal government arising out of this Financing Agreements; (y) injunction, writ or restraining order restraining or prohibiting the financing arrangements contemplated under this Financing Agreement; or (z) suit, action, investigation or proceeding (judicial or administrative) pending against any Borrower or the Guarantor or their assets, which, in the opinion of CIT, if adversely determined, could have a material adverse effect on the business, operation, assets, financial condition or Collateral of any Borrower and/or the Guarantor. (j) GUARANTY - The Guarantor shall have executed and delivered to CIT the Guaranty. (k) SUBORDINATION AGREEMENT - Autodesk, Inc. shall have executed and delivered to CIT a Subordination Agreement in form and substance satisfactory to CIT, subordinating the repayment of certain debt of the Company to Autodesk, Inc. to the repayment of the Obligations. CIT shall have reviewed and approved the terms and conditions of the subordinated promissory notes issued to the investors listed on Schedule 2 attached hereto. (l) ADDITIONAL DOCUMENTS - The Borrowers shall have executed and delivered to CIT all Loan Documents necessary to consummate the lending arrangement contemplated between the Borrowers and CIT. (m) DISBURSEMENT AUTHORIZATION - The Borrowers shall have delivered to CIT all information necessary for CIT to issue wire transfer instructions on behalf of the Borrowers for the initial and subsequent loans and/or advances to be made under this Financing Agreement including, but not limited to, disbursement authorization in form acceptable to CIT. (n) EXAMINATION & VERIFICATION - CIT shall have completed, to CIT's satisfaction, an examination and verification of the Accounts, financial statements, books and records of the Borrowers which examination shall indicate that, after giving effect to all Revolving Loans, advances and extensions of credit to be made at closing, the Borrowers shall have an opening additional Availability of at least $500,000 as evidenced by a Borrowing Base certificate delivered by the Company to CIT as of the Closing Date. It is understood that such requirement contemplates that all debts and obligations are current, and that all payables are being handled in the normal course of the Company's business and consistent with its past practice. (o) DEPOSITORY ACCOUNTS - The Company shall have established a system of lockbox and blocked accounts with respect to the collection of Accounts and the deposit of proceeds of Collateral as shall be acceptable to CIT in all respects. Such accounts shall be subject to three party agreements (between the Company, CIT and the depository bank), which shall be in form and substance satisfactory to CIT. (p) EXISTING REVOLVING CREDIT AGREEMENT - The Company's existing credit agreement with Summit Bank (the "Existing Lender") shall be: (i) terminated; (ii) all loans and obligations of the Borrowers and/or the Guarantor thereunder shall be paid or satisfied in full, including through utilization of the proceeds of the initial Revolving Loans to be made under this Financing Agreement; and (iii) all liens or security interests in favor of the Existing Lender on the Collateral and otherwise in connection therewith shall be terminated and/or released upon such payment. 11 (q) WARRANTS - CIT shall have received documentation satisfactory to it regarding the granting to CIT of warrants to purchase up to one-quarter of one percent (.25%) of the present and future outstanding shares of voting common stock of the Company for a nominal amount. The terms and provisions of the Warrant (including, without limitation, anti-dilution, registration and put/call rights) shall be mutually agreed upon between CIT and the Company. (r) SCHEDULES The Company or its counsel shall provide CIT with schedules of: (a) any of the Company's and its subsidiaries (i) Trademarks, (ii) Patents, and (iii) Copyrights, as applicable and all in such detail as to provide appropriate recording information with respect thereto, (b) any tradenames, (c) monthly rental payments for any leased premises or any other premises where any Collateral may be stored or processed, and (d) Permitted Encumbrances, all of the foregoing in form and substance satisfactory to CIT. Upon the execution of this Financing Agreement and the initial disbursement of loans hereunder, all of the above Conditions Precedent shall have been deemed satisfied except as otherwise set forth hereinabove or as the Borrowers and CIT shall otherwise agree in writing. 2.2 CONDITIONS TO EACH EXTENSION OF CREDIT Except to the extent expressly set forth in this Financing Agreement, the agreement of CIT to make any extension of credit requested to be made by it to the Borrowers on any date (including without limitation, the initial extension of credit) is subject to the satisfaction of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES - Each of the representations and warranties made by the Borrowers in or pursuant to this Financing Agreement shall be true and correct in all material respects on and as of such date as if made on and as of such date. (b) NO DEFAULT - No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extension of credit requested to be made on such date. (c) BORROWING BASE - Except as may be otherwise agreed to from time to time by CIT and the Borrowers in writing and except for the consensual Overadvances made pursuant to Section 3.1, after giving effect to the extension of credit requested to be made by the Borrowers on such date, the aggregate outstanding balance of the Revolving Loans owing by the Borrowers will not exceed the lesser of (i) the Revolving Line of Credit or (ii) the Borrowing Base. Each borrowing by the Borrowers hereunder shall constitute a representation and warranty by the Borrowers as of the date of such loan or advance that each of the representations, warranties and covenants contained in the Financing Agreement have been satisfied and are true and correct, except as the Borrowers and CIT shall otherwise agree herein or in a separate writing. SECTION 3. REVOLVING LOANS 3.1 CIT agrees, subject to the terms and conditions of this Financing Agreement, from time to time (but subject to CIT's right to make "Overadvances"), to make loans and advances to the Borrowers on a revolving basis (i.e. subject to the limitations set forth herein, the Borrowers may borrow, repay and re-borrow Revolving Loans). Such requests for loans and advances shall 12 be in amounts not to exceed the lesser of (a) the Availability or (b) the Revolving Line of Credit. All requests for loans and advances must be received by an officer of CIT no later than 1:00 p.m., New York time, of the Business Day on which any such Chase Bank Rate Loans and advances are required. Should CIT for any reason honor requests for Overadvances, any such Overadvances shall be made in CIT's sole discretion and subject to any additional terms CIT deems necessary. 3.2 In furtherance of the continuing assignment and security interest in each Borrower's Accounts, each Borrower will, upon the creation of Accounts, execute and deliver to CIT in such form and manner as CIT may reasonably require, solely for CIT's convenience in maintaining records of Collateral, such confirmatory schedules of Accounts as CIT may reasonably request, including, without limitation, daily schedules of Accounts, all in form and substance satisfactory to CIT, and such other appropriate reports designating, identifying and describing the Accounts as CIT may reasonably request, and provided further that CIT may request any such information more frequently, from time to time, upon its reasonable prior request. In addition, each Borrower shall provide CIT with copies of agreements with, or purchase orders from, such Borrower's customers, and copies of invoices to customers, proof of shipment or delivery, access to its computers, electronic media and software programs associated therewith (including any electronic records, contracts and signatures) and such other documentation and information relating to said Accounts and other Collateral as CIT may reasonably require. Failure to provide CIT with any of the foregoing shall in no way affect, diminish, modify or otherwise limit the security interests granted herein. Each Borrower hereby authorizes CIT to regard such Borrower's printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by one of such Borrower's authorized officers or agents. 3.3 Each Borrower hereby represents and warrants that: each Trade Account Receivable is based on an actual and bona fide sale and delivery of Inventory or rendition of services to customers made by each Borrower in the ordinary course of its business; the Inventory being sold, and the Trade Accounts Receivable created, are the exclusive property of the applicable Borrower and are not and shall not be subject to any lien, consignment arrangement, encumbrance, security interest or financing statement whatsoever, other than the Permitted Encumbrances; the invoices evidencing such Trade Accounts Receivable are in the name of the applicable Borrower; and the customers of such Borrower have accepted the Inventory or services, owe and are obligated to pay the full amounts stated in the invoices according to their terms, without dispute, offset, defense, counterclaim or contra, except for disputes and other matters arising in the ordinary course of business with respect to which such Borrower has complied with the notification requirements of Paragraph 3.5 of this Section 3. Each Borrower confirms to CIT that any and all Taxes or fees relating to its business, its sales, the Accounts or Inventory relating thereto, are its sole responsibility and that same will be paid by each Borrower when due, subject to Paragraph 7.6 of Section 6 of this Financing Agreement, and that none of said Taxes or fees represent a lien on or claim agianst the Accounts. Each Borrower hereby further represents and warrants that it shall not acquire any Inventory on a consignment basis, not co-mingle its Inventory with any of it customers or any other person, including pursuant to any bill and hold sale or otherwise, and that its Inventory is marketable to its customers in the ordinary course of business of such Borrower, except as it may otherwise report in writing to CIT pursuant to Paragraph 3.5 hereof from time to time. Each Borrower also warrants and 13 represents that it is a duly and validly existing corporation and is qualified in all states where the failure to so qualify would have an adverse effect on the business of such Borrower or the ability of such Borrower to enforce collection of Accounts due from customers residing in that state. Each Borrower agrees to maintain such books and records regarding Accounts and Inventory as CIT may reasonably require and agrees that the books and records of such Borrower will reflect CIT's interest in the Accounts. All of the books and records of each Borrower will be available to CIT at normal business hours, including any records handled or maintained for each Borrower by any other company or entity. 3.4 (a) Until CIT has advised the Borrowers to the contrary after the occurrence of an Event of Default, each Borrower, at its expense, will enforce, collect and receive all amounts owing on the Accounts in the ordinary course of its business and any proceeds it so receives shall be subject to the terms hereof, and held on behalf of and in trust for CIT. Such privilege shall terminate at the election of CIT, upon the occurrence of an Event of Default. Any checks, cash, credit card sales and receipts, notes or other instruments or property received by any Borrower with respect to any Collateral, including Accounts, shall be held by such Borrower in trust for CIT, separate from such Borrower's own property and funds, and promptly turned over to CIT with proper assignments or endorsements by deposit to the Depository Accounts. Each Borrower shall: (i) indicate on all of its invoices that funds should be delivered to and deposited in a Depository Account; (ii) direct all of its account debtors to deposit any and all proceeds of Collateral into the Depository Accounts; (iii) irrevocably authorize and direct any banks which maintain such Borrower's initial receipt of cash, checks and other items to promptly wire transfer all available funds to a Depository Account; and (iv) advise all such banks of CIT's security interest in such funds. Each Borrower shall provide CIT with prior written notice of any and all deposit accounts opened or to be opened subsequent to the Closing Date. Subject to Collection Days, all amounts received by CIT in payment of Accounts will be credited to the Revolving Loan Account when CIT is advised by its bank of its receipt of "collected funds" at CIT's bank account in New York, New York on the Business Day of such advise if advised no later than 1:00 p.m. EST or on the next succeeding Business Day if so advised after 1:00 PM EST. No checks, drafts or other instrument received by CIT shall constitute final payment to CIT unless and until such instruments have actually been collected. (b) Each Borrower shall establish and maintain, in its name and at its expense, lockbox and deposit accounts with such banks as are acceptable to CIT (the "Blocked Accounts") into which such Borrower shall promptly cause to be deposited: (i) all proceeds of Collateral received by such Borrowers including all amounts payable to such Borrower from credit card issuers and credit card processors, and (ii) all amounts on deposit in deposit accounts used by such Borrower at each of its locations, all as further provided in Paragraph 3.4(a) above. The banks at which the Blocked Accounts are established shall enter into an agreement, in form and substance satisfactory to CIT (the "Blocked Account Agreements"), providing that all cash, checks and items received or deposited in the Blocked Accounts are the property of CIT, that the depository bank has no lien upon, or right of set off against, the Blocked Accounts and any cash, checks, items, wires or other funds from time to time on deposit therein, except as otherwise provided in the Blocked Account Agreements, and that automatically, on a daily basis the depository bank will wire, or otherwise transfer, in immediately available funds, all funds received or deposited into the Blocked Accounts to such bank account as CIT may from time to time designate for 14 such purpose. Each Borrower hereby confirms and agrees that all amounts deposited in such Blocked Accounts and any other funds received and collected by CIT, whether as proceeds of other Collateral or otherwise, shall be the property of CIT. 3.5 Each Borrower agrees to notify CIT: (a) of any matters affecting the value, enforceability or collectibility of any Account and of all customer disputes, offsets, defenses, counterclaims, returns, rejections and all reclaimed or repossessed merchandise or goods, in its daily and monthly collateral reports (as applicable) provided to CIT hereunder, in such detail and format as CIT may reasonably require from time to time; and (b) promptly of any such matters which (i) are material, as a whole, to the Accounts, or (ii) which adversely affect the value of any Account in an amount of $25,000 or more. Each Borrower agrees to issue credit memoranda promptly (with duplicates to be immediately forwarded to CIT) upon accepting returns or granting allowances. Upon the occurrence of an Event of Default (which is not waived in writing by CIT) and on notice from CIT, the Borrowers agree that all returned, reclaimed or repossessed merchandise or goods shall be set aside by the Borrowers, marked with CIT's name (as secured party) and held by the Borrowers for CIT's account. 3.6 CIT shall maintain a Revolving Loan Account on its book in which the Borrowers will be charged with all loans and advances made by CIT to them or for their account, and with any other Obligations, including any and all costs, expenses and reasonable attorney's fees which CIT may incur in connection with the exercise by or for CIT of any of the rights or powers herein conferred upon CIT, or in the prosecution or defense of any action or proceeding to enforce or protect any rights of CIT in connection with this Financing Agreement, the other Loan Documents or the Collateral assigned hereunder, or any Obligations owing by the Borrowers. The Borrowers will be credited with all amounts received by CIT from the Borrowers or from others for the Borrowers' account, including, as above set forth, all amounts received by CIT in payment of Accounts, and such amounts will be applied to payment of the Obligations as set forth herein. In no event shall prior recourse to any Accounts or other security granted to or by the Borrowers be a prerequisite to CIT's right to demand payment of any Obligation. Further, it is understood that CIT shall have no obligation whatsoever to perform in any respect any of any Borrower's contracts or obligations relating to the Accounts. 3.7 After the end of each month, CIT shall promptly send the Borrowers a statement showing the accounting for the charges, loans, advances and other transactions occurring between CIT and the Borrowers during that month. The monthly statements shall be deemed correct and binding upon the Borrowers and shall constitute an account stated between the Borrowers and CIT unless CIT receives a written statement of the exceptions within thirty (30) days of the date of the monthly statement. 3.8 Subject to the terms and provisions regarding consensual Overadvances made pursuant to Section 3.1, in the event that any requested advance exceeds Availability or that the outstanding balance of Revolving Loans exceeds (b)(x) the Borrowing Base or (y) the Revolving Line of Credit, any such Overadvance shall be due and payable to CIT immediately upon CIT's demand therefor. 15 SECTION 4. INTENTIONALLY OMITTED SECTION 5. INTENTIONALLY OMITTED SECTION 6. COLLATERAL 6.1 As security for the prompt payment in full of all Obligations, each Borrower hereby pledges and grants to CIT a continuing general lien upon, and security interest in, all of its: (a) Accounts; (b) General Intangibles; (c) Documents of Title; and (d) Other Collateral. 6.2 The security interests granted hereunder shall extend and attach to all Collateral which is owned by any Borrower or in which any Borrower has any interest, whether held by any Borrower or others for its account; and 6.3 Each Borrower hereby agrees to immediately forward any and all proceeds of Collateral to the Depository Account, and to hold any such proceeds (including any notes and instruments), in trust for CIT pending delivery to CIT. 6.4 The rights and security interests granted to CIT hereunder are to continue in full force and effect, notwithstanding the termination of this Financing Agreement or the fact that the Revolving Loan Account may from time to time be temporarily in a credit position, until the final payment in full to CIT of all Obligations and the termination of this Financing Agreement. Any delay, or omission by CIT to exercise any right hereunder shall not be deemed a waiver thereof, or be deemed a waiver of any other right, unless such waiver shall be in writing and signed by CIT. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. 6.5 Notwithstanding CIT's security interest in the Collateral and to the extent that the Obligations are now or hereafter secured by any assets or property other than the Collateral or by the guarantee, endorsement, assets or property of any other person, CIT shall have the right in its sole discretion to determine which rights, liens, security interests or remedies CIT shall at any time pursue, foreclose upon, relinquish, subordinate, modify or take any other action with respect to, without in any way modifying or affecting any of them, or any of CIT's rights hereunder. 6.6 Any balances to the credit of any Borrower and any other property or assets of any Borrower in the possession or control of CIT may be held by CIT as security for any Obligations and applied in whole or partial satisfaction of such Obligations when due. The liens and security interests granted herein, and any other lien or security interest CIT may have in any other assets of any Borrower, shall secure payment and performance of all now existing and future 16 Obligations. CIT may in its discretion charge any or all of the Obligations to the Revolving Loan Account when due. 6.7 Each Borrower possesses all General Intangibles and rights thereto necessary to conduct its business as conducted as of the Closing Date and each Borrower shall maintain its rights in, and the value of, the foregoing in the ordinary course of its business, including, without limitation, by making timely payment with respect to any applicable licensed rights. Each Borrower shall deliver to CIT, and/or shall cause the appropriate party to deliver to CIT, from time to time such pledge or security agreements with respect to General Intangibles (now or hereafter acquired) of each Borrower and its subsidiaries as CIT shall require to obtain valid first liens thereon. In furtherance of the foregoing, each Borrower shall provide timely notice to CIT of any additional Patents, Trademarks, tradenames, service marks, Copyrights, brand names, trade names, logos and other trade designations acquired or applied for subsequent to the Closing Date and each Borrower shall execute such documentation as CIT may reasonably require to obtain and perfect its lien thereon. SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS 7.1 Each Borrower warrants, and represents that: (i) Schedule 1 hereto correctly and completely sets forth each Borrower's (A) chief executive office, (B) Collateral locations, (C) tradenames, and (D) all the other information listed on said Schedule; (ii) except for the Permitted Encumbrances, after filing of financing statements in the applicable filing clerks office at the locations set forth in Schedule 1, this Financing Agreement creates a valid, perfected and first priority security interest in the Collateral and the security interests granted herein constitute and shall at all times constitute the first and only liens on the Collateral; (iii) except for the Permitted Encumbrances, each Borrower is, or will be, at the time additional Collateral is acquired by it, the absolute owner of the Collateral with full right to pledge, sell, consign, transfer and create a security interest therein, free and clear of any and all claims or liens in favor of others; (iv) each Borrower will, at its expense, forever warrant and, at CIT's request, defend the same from any and all claims and demands of any other person other than a holder of a Permitted Encumbrance; (v) each Borrower will not grant, create or permit to exist, any lien upon, or security interest in, the Collateral, or any proceeds thereof, in favor of any other person other than the holders of the Permitted Encumbrances; and (vi) the Equipment is and will only be used by each Borrower in its business and will not be held for sale or lease, or removed from its premises, or otherwise disposed of by each Borrower except as otherwise permitted in this Financing Agreement. 7.2 Each Borrower agrees to maintain books and records pertaining to the Collateral in accordance with GAAP and in such additional detail, form and scope as CIT shall reasonably require. Each Borrower agrees that CIT or its agents may enter upon each Borrower's premises at any time during normal business hours, and from time to time in its reasonable business judgement, for the purpose of inspecting the Collateral and any and all records pertaining thereto. Each Borrower irrevocably authorizes all accountants and third parties (other than its attorneys) to disclose and deliver directly to CIT, at the Borrowers' expense, all financial statements and information, books, records, work papers, management reports and other information generated 17 by them or in their possession regarding any Borrower and/or the Collateral. Each Borrower agrees to afford CIT thirty (30) days prior written notice of any change in the location of any Collateral, other than to locations, that as of the Closing Date, are known to CIT and at which CIT has filed financing statements and otherwise fully perfected its liens thereon. Each Borrower is also to advise CIT promptly, in sufficient detail, of any material adverse change relating to the type, quantity or quality of the Collateral or on the security interests granted to CIT therein. 7.3 Each Borrower agrees to execute and deliver to CIT, from time to time, solely for CIT's convenience in maintaining a record of the Collateral, such written statements, and schedules as CIT may reasonably require, designating, identifying or describing the Collateral. Each Borrower's failure, however, to promptly give CIT such statements, or schedules shall not affect, diminish, modify or otherwise limit CIT's security interests in the Collateral. 7.4 Each Borrower agrees to comply with the requirements of all state and federal laws in order to grant to CIT valid and perfected first security interests in the Collateral, subject only to the Permitted Encumbrances. CIT is hereby authorized by each Borrower to file (including pursuant to the applicable terms of the UCC) from time to time any financing statements, continuations or amendments covering the Collateral whether or not such Borrower's signature appears thereon. Each Borrower hereby consents to and ratifies any and all execution and/or filing of financing statements on or prior to the Closing Date by CIT. Each Borrower agrees to do whatever CIT may reasonably request, from time to time, by way of: (a) filing notices of liens, financing statements, amendments, renewals and continuations thereof; (b) cooperating with CIT's agents and employees; (c) keeping Collateral records; (d) transferring proceeds of Collateral to CIT's possession; and (e) performing such further acts as CIT may reasonably require in order to effect the purposes of this Financing Agreement. 7.5 INTENTIONALLY OMITTED. 7.6 Each Borrower agrees to pay, when due, all Taxes, including sales taxes, assessments, claims and other charges lawfully levied or assessed upon any Borrower or the Collateral unless such Taxes are being diligently contested in good faith by the applicable Borrower by appropriate proceedings and adequate reserves are established in accordance with GAAP. Notwithstanding the foregoing, if any lien shall be filed or claimed thereunder (a) for Taxes due the United States of America, or (b) which in CIT's opinion might create a valid obligation having priority over the rights granted to CIT herein (exclusive of Real Estate), such lien shall not be deemed to be a Permitted Encumbrance hereunder and the Borrowers shall immediately pay such tax and remove the lien of record. If the Borrowers fail to do so promptly, then at CIT's election, CIT may (i) create an Availability Reserve in such amount as it may deem appropriate in its business judgement, or (ii) upon the occurrence of a Default or Event of Default, imminent risk of seizure, filing of any priority lien, forfeiture, or sale of the Collateral, pay Taxes on the Borrowers' behalf, and the amount thereof shall be an Obligation secured hereby and due on demand. 7.7 Each Borrower: (a) agrees to comply with all acts, rules, regulations and orders of any legislative, administrative or judicial body or official, which the failure to comply with would have a material and adverse impact on the Collateral, or any material part thereof, or on 18 the business or operations of any Borrower, provided that the applicable Borrower may contest any acts, rules, regulations, orders and directions of such bodies or officials in any reasonable manner which will not, in CIT's reasonable opinion, materially and adversely effect CIT's rights or priority in the Collateral; (b) agrees to comply with all environmental statutes, acts, rules, regulations or orders as presently existing or as adopted or amended in the future, applicable to the Collateral, the ownership and/or use of its real property and operation of its business, which the failure to comply with would have a material and adverse impact on the Collateral, or any material part thereof, or on the operation of the business of any Borrower; and (c) shall not be deemed to have breached any provision of this Paragraph 7.7 if (i) the failure to comply with the requirements of this Paragraph 7.7 resulted from good faith error or innocent omission, (ii) each Borrower promptly commences and diligently pursues a cure of such breach, and (iii) such failure is cured within (30) days following the applicable Borrower's receipt of notice of such failure, or if such cannot in good faith be cured within thirty (30) days, then such breach is cured within a reasonable time frame based upon the extent and nature of the breach and the necessary remediation, and in conformity with any applicable consent order, consensual agreement and applicable law. 7.8 Until termination of this Financing Agreement and payment and satisfaction of all Obligations due hereunder, the Borrowers agree that, unless CIT shall have otherwise consented in writing, the Borrowers will furnish to CIT: (a) within ninety (90) days after the end of each fiscal year of the Company, an audited Consolidated Balance Sheet, with a Consolidating Balance Sheet attached thereto, as at the close of such year, and statements of profit and loss, cash flow and reconciliation of surplus of the Company and its consolidated subsidiaries for such year, audited by independent public accountants selected by the Company and satisfactory to CIT; (b) within thirty (30) days after the end of each month a Consolidated Balance Sheet as at the end of such period and statements of profit and loss and surplus of the Company and all subsidiaries for such period, certified by an authorized financial or accounting officer of the Company; and (c) from time to time, such further information regarding the business affairs and financial condition of the Company and its consolidated subsidiaries as CIT may reasonably request, including, without limitation (i) the accountant's management practice letter and (ii) annual cash flow projections in form satisfactory to CIT. Each financial statement which the Borrowers are required to submit hereunder must be accompanied by an officer's certificate, signed by the President, Vice President, Controller, or Treasurer, pursuant to which any one such officer must certify that: (x) the financial statement(s) fairly and accurately represent(s) the Borrowers' financial condition at the end of the particular accounting period, as well as the Borrowers' operating results during such accounting period, subject to year-end audit adjustments; and (y) during the particular accounting period: (A) there has been no Default or Event of Default under this Financing Agreement, PROVIDED, HOWEVER, that if any such officer has knowledge that any such Default or Event of Default, has occurred during such period, the existence of and a detailed description of same shall be set forth in such officer's certificate; (B) no Borrower has received any notice of cancellation with respect to its property insurance policies; (C) no Borrower has received any notice that could result in a material adverse effect on the value of the Collateral taken as a whole; and (D) the exhibits attached to such financial statement(s) constitute detailed calculations showing compliance with all financial covenants contained in this Financing Agreement. 19 7.9 Until termination of the Financing Agreement and payment and satisfaction of all Obligations hereunder, each Borrower agrees that, without the prior written consent of CIT, except as otherwise herein provided, each Borrower will not: (a) Mortgage, assign, pledge, transfer or otherwise permit any lien, charge, security interest, encumbrance or judgment, (whether as a result of a purchase money or title retention transaction, or other security interest, or otherwise) to exist on any of any Borrower's Collateral or any other assets, whether now owned or hereafter acquired, except for the Permitted Encumbrances; (b) Incur or create any Indebtedness other than the Permitted Indebtedness; (c) Sell, lease, assign, transfer or otherwise dispose of (i) Collateral, except as otherwise specifically permitted by this Financing Agreement, or (ii) either all or substantially all of any Borrower's assets, which do not constitute Collateral; (d) Merge, consolidate or otherwise alter or modify its corporate name, principal place of business, structure, or existence, re-incorporate or re-organize, or enter into or engage in any operation or activity materially different from that presently being conducted by any Borrower, except that any Borrower may change its corporate name or address; provided that: (i) such Borrower shall give CIT thirty (30) days prior written notice thereof, and (ii) such Borrower shall execute and deliver, prior to or simultaneously with any such action, any and all documents and agreements requested by CIT to confirm the continuation and preservation of all security interests and liens granted to CIT hereunder; (e) Assume, guarantee, endorse, or otherwise become liable upon the obligations of any person, firm, entity or corporation, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; (f) Declare or pay any dividend or distributions of any kind on, or purchase, acquire, redeem or retire, any of the capital stock or equity interest, of any class whatsoever, whether now or hereafter outstanding; provided, however, (i) the Borrowers may continue to make payments with respect to previous stock repurchases which have been approved by CIT and (ii) the Borrowers may repurchase stock from employees pursuant to employee stock option plans so long as CIT approves in writing all payments with respect thereto; (g) Make any advance or loan to, or any investment in, any firm, entity, person or corporation or purchase or acquire all or substantially all of the stock or assets of any entity, person or corporation; or (h) Pay any management, consulting or other similar fees to any person, corporation or other entity affiliated with any Borrower. 7.10 INTENTIONALLY OMITTED. 7.11 INTENTIONALLY OMITTED. 7.12 Each Borrower hereby agrees to indemnify and hold harmless CIT and its officers, directors, employees, attorneys and agents (each an "Indemnified Party") from, and holds each of them harmless against, any and all losses, liabilities, obligations, claims, actions, damages, costs 20 and expenses (including attorney's fees) and any payments made by CIT pursuant to any indemnity provided by CIT with respect to or to which any Indemnified Party could be subject insofar as such losses, liabilities, obligations, claims, actions, damages, costs, fees or expenses with respect to the Loan Documents, including without limitation those which may arise from or relate to: (a) the Depository Account, the Blocked Accounts, the lockbox and/or any other depository account and/or the agreements executed in connection therewith; and (b) any and all claims or expenses asserted against CIT as a result of any environmental pollution, hazardous material or environmental clean-up relating to the Real Estate; or any claim or expense which results from any Borrower's operations (including, but not limited to, any Borrower's site disposal practices) and use of the Real Estate, which CIT may sustain or incur (other than solely as a result of the physical actions of CIT on any Borrower's premises which are determined to constitute gross negligence or willful misconduct by a court of competent jurisdiction), all whether through the alleged or actual negligence of such person or otherwise, except and to the extent that the same results solely and directly from the gross negligence or willful misconduct of such Indemnified Party as finally determined by a court of competent jurisdiction. Each Borrower hereby agrees that this indemnity shall survive termination of this Financing Agreement, as well as payments of Obligations which may be due hereunder. CIT may, in its sole business judgement, establish such Availability Reserves with respect thereto as it may deem advisable under the circumstances and, upon any termination hereof, hold such reserves as cash reserves for any such contingent liabilities. 7.13 Without the prior written consent of CIT, each Borrower agrees that it will not enter into any transaction, including, without limitation, any purchase, sale, lease, loan or exchange of property with any other Borrower or any subsidiary or affiliate of any other Borrower, provided that, except as otherwise set forth in this Financing Agreement, any Borrower may enter into sale and service transactions in the ordinary course of its business and pursuant to the reasonable requirements of such Borrower, and upon standard terms and conditions and fair and reasonable terms, no less favorable to such Borrower than such Borrower could obtain in a comparable arms length transaction with an unrelated third party, provided further that no Default or Event of Default exists or will occur hereunder prior to and after giving effect to any such transaction. SECTION 8. INTEREST, FEES AND EXPENSES 8.1 (a) Interest shall be payable monthly as of the end of each month in an amount equal to the Chase Bank Rate plus one and one-half percent (1 1/2%) per annum on the average of the net balances owing by the Company to CIT in the Revolving Loan Account at the close of each day during such month. In the event of any change in said Chase Bank Rate, the rate hereunder for Chase Bank Rate Loans shall change, as of the date of such change, so as to remain one and one-half percent (1 1/2%) above the Chase Bank Rate. The rate hereunder shall be calculated based on a 360-day year. CIT shall be entitled to charge the Revolving Loan Account at the rate provided for herein when due until all Obligations have been paid in full. (b) Notwithstanding any provision to the contrary contained in this section 8, in the event that the outstanding Revolving Loans exceed the lesser of either (x) the maximum aggregate amount available under Section 3 of this Financing Agreement or (y) the Revolving Line of Credit: (A) as a result of Revolving Loans advanced by CIT at the request of the 21 Borrowers (herein "Requested Overadvances"), for any one (1) or more days in any month, or (B) for any other reason whatsoever (herein "Other Overadvances") and such Other Overadvances continue for five (5) or more days in any month, the average net balance of all Revolving Loans for such month shall bear interest at the Overadvance Rate. (c) Upon and after the occurrence of an Event of Default and the giving of any required notice by CIT in accordance with the provisions of Section 10, Paragraph 10.2 hereof, all Obligations shall bear interest at the Default Rate of Interest. 8.2 INTENTIONALLY OMITTED 8.3 INTENTIONALLY OMITTED 8.4 INTENTIONALLY OMITTED 8.5 The Borrowers shall reimburse or pay CIT, as the case may be, for: (a) all Out-of-Pocket Expenses and (b) any applicable Documentation Fee. 8.6 Upon the last Business Day of each month, commencing on October 31, 2000, the Borrowers shall pay to CIT interest on the Collection Days. Interest will be computed at the rate, and in the manner, set forth in Paragraph 8.1 of this Financing Agreement. 8.7 To induce CIT to enter into this Financing Agreement and to extend to the Borrowers the Revolving Loan, the Borrowers shall pay to CIT a Loan Facility Fee in the amount of: $25,000.00 upon execution of this Financing Agreement. 8.8 The Borrowers shall pay to CIT the Administrative Management Fee in the amount of $1,000.00 per month on the first Business Day of each month. 8.9 The Borrowers shall pay CIT's standard charges and fees for CIT's personnel used by CIT for reviewing the books and records of the Borrowers and for verifying, testing, protecting, safeguarding, preserving or disposing of all or any part of the Collateral (which fees shall be in addition to the Administrative Management Fee and any Out-of-Pocket Expenses). 8.10 The Borrowers hereby authorizes CIT to charge the Revolving Loan Account with the amount of all payments due hereunder as such payments become due. The Borrowers confirm that any charges which CIT may so make to the Revolving Loan Account as herein provided will be made as an accommodation to the Borrowers and solely at CIT's discretion. 8.11 In the event that CIT or any participant hereunder (or any financial institution which may from time to time become a participant or lender hereunder) shall have determined in the exercise of its reasonable business judgement that, subsequent to the Closing Date, any change in applicable law, rule, regulation or guideline regarding capital adequacy, or any change in the interpretation or administration thereof, or compliance by CIT or such participant with any new request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the 22 rate of return on CIT's or such participant's capital as a consequence of its obligations hereunder to a level below that which CIT or such participant could have achieved but for such adoption, change or compliance (taking into consideration CIT or such participant's policies with respect to capital adequacy) by an amount reasonably deemed by CIT or such participant to be material, then, from time to time, the Borrowers shall pay no later that five (5) days following demand to CIT or such participant such additional amount or amounts as will compensate CIT's or such participant's for such reduction. In determining such amount or amounts, CIT or such participant may use any reasonable averaging or attribution methods. The protection of this Paragraph 8.11 shall be available to CIT or such participant regardless of any possible contention of invalidity or inappicability with respect to the applicable law, regulation or condition. A certificate of CIT or such participant setting forth such amount or amounts as shall be necessary to compensate CIT or such participant with respect to this Section 8 and the calculation thereof when delivered to the Borrowers shall be conclusive on the Borrowers absent manifest error. Notwithstanding anything in this paragraph to the contrary, in the event CIT or such participant has exercised its rights pursuant to this paragraph, and subsequent thereto determines that the additional amounts paid by the Borrowers in whole or in part exceed the amount which CIT or such participant actually required to be made whole, the excess, if any, shall be returned to the Borrowers by CIT or such participant. 8.12. In the event that any applicable law, treaty or governmental regulation, or any change therein or in the interpretation or application thereof, or compliance by CIT or such participant with any request or directive (whether or not having the force of law) from any central bank or other financial, monetary or other authority, shall: (a) subject CIT or such participant to any tax of any kind whatsoever with respect to this Financing Agreement or change the basis of taxation of payments to CIT or such participant of principal, fees, interest or any other amount payable hereunder or under any other documents (except for changes in the rate of tax on the overall net income of CIT or such participant by the federal government or the jurisdiction in which it maintains its principal office); (b) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by CIT or such participant by reason of or in respect to this Financing Agreement and the Loan Documents, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (c) impose on CIT or such participant any other condition with respect to this Financing Agreement or any other document, and the result of any of the foregoing is to increase the cost to CIT or such participant of making, renewing or maintaining its loans hereunder by an amount that CIT or such participant deems to be material in the exercise of its reasonable business judgement or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the loans by an amount that CIT or such participant deems to be material in the exercise of its reasonable business judgment, then, in any case the Borrowers shall pay CIT or such participant, within five (5) days following its demand, such additional cost or such reduction, as the case may be. CIT or such participant shall certify the amount of such additional cost or reduced amount to the Borrowers and the calculation thereof and such certification shall 23 be conclusive upon the Borrowers absent manifest error. Notwithstanding anything in this paragraph to the contrary, in the event CIT or such participant has exercised its rights pursuant to this paragraph, and subsequent thereto determine that the additional amounts paid by the Borrowers in whole or in part exceed the amount which CIT or such participant actually required pursuant hereto, the excess, if any, shall be returned to the Borrowers by CIT or such participant. 8.13 For purposes of this Financing Agreement and Section 8 thereof, any reference to CIT shall include any financial institution which may become a participant or co-lender subsequent to the Closing Date. SECTION 9. POWERS Each Borrower hereby constitutes CIT, or any person or agent CIT may designate, as its attorney-in-fact, at the Borrowers' cost and expense, to exercise all of the following powers, which being coupled with an interest, shall be irrevocable until all Obligations to CIT have been paid in full: (a) To receive, take, endorse, sign, assign and deliver, all in the name of CIT or any Borrower, any and all checks, notes, drafts, and other documents or instruments relating to the Collateral; (b) To receive, open and dispose of all mail addressed to any Borrower and to notify postal authorities to change the address for delivery thereof to such address as CIT may designate; (c) To request from customers indebted on Accounts at any time, in the name of CIT information concerning the amounts owing on the Accounts; (d) To request from customers indebted on Accounts at any time, in the name the applicable Borrower, in the name of certified public accountant designated by CIT or in the name of CIT's designee, information concerning the amounts owing on the Accounts; (e) To transmit to customers indebted on Accounts notice of CIT's interest therein and to notify customers indebted on Accounts to make payment directly to CIT for the applicable Borrower's account; and (f) To take or bring, in the name of CIT or any Borrower, all steps, actions, suits or proceedings deemed by CIT necessary or desirable to enforce or effect collection of the Accounts. Notwithstanding anything hereinabove contained to the contrary, the powers set forth in (b) and (f) above may only be exercised after the occurrence of an Event of Default and until such time as such Event of Default is waived in writing by CIT. 24 SECTION 10. EVENTS OF DEFAULT AND REMEDIES 10.1 Notwithstanding anything hereinabove to the company, CIT may terminate this Financing Agreement immediately upon the occurrence of any of the following Events of Default: (a) cessation of the business of any Borrower or of the Guarantor or the calling of a meeting of the creditors of any Borrower or of the Guarantor for purposes of compromising the debts and obligations of any Borrower or the Guarantor; (b) the failure of any Borrower or of the Guarantor to generally meet its or his debts as they mature; (c) (i) the commencement by any Borrower or by the Guarantor of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law; (ii) the commencement against any Borrower or the Guarantor of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under any federal or state law by creditors of any Borrower or of the Guarantor, provided that such Default shall not be deemed an Event of default if such proceeding is controverted within ten (10) days and dismissed and vacated within thirty (30) days of commencement, except in the event that any of the actions sought in any such proceeding shall occur or any Borrower or the Guarantor shall take action to authorize or effect any of the actions in any such proceeding; or (iii) the commencement (x) by any subsidiaries of any Borrower, or any one of them, of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under any applicable state law, or (y) against any Borrower's subsidiaries, or any one of them, of any involuntary bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under applicable law, provided that such Default shall not be deemed an event of Default if such proceeding is controverted within ten (10) days and dismissed or vacated within thirty (30) days of commencement, except in the event that any of the actions sought in any such proceeding shall occur or any of any Borrower's subsidiaries, or any one of them, shall take action to authorize or effect any of the actions in any such proceeding; (d) breach by any Borrower of any warranty, representation or covenant contained herein (other than those referred to in sub-paragraph (e) below) or in any other written agreement between any Borrower or CIT, provided that such Default by any Borrower of any of the warranties, representations or covenants referred in this clause (d) shall not be deemed to be an Event of Default unless and until such Default shall remain unremedied to CIT's satisfaction for a period of ten (10) days from the date of such breach; (e) breach by any Borrower of any warranty, representation or covenant of Paragraphs 3.3 (other than the fourth sentence or Paragraph 3.3) and 3.4 of Section 3 hereof; Paragraphs 6.3 and 6.4 (other than the first sentence of Paragraph 6.4) of Section 6 hereof; Paragraphs 7.1, 7.5, 7.6, and 7.8 through 7.14 hereof; (f) failure of any Borrower to pay any of the Obligations within five (5) Business Days of the due date thereof, provided that nothing contained herein shall prohibit 25 CIT from charging such amounts to the Revolving Loan Account on the due date thereof; (g) any Borrower shall (i) engage in any "prohibited transaction" as defined in ERISA, (ii) have any "accumulated funding deficiency" as defined in ERISA, (iii) have any "reportable event" as defined in ERISA, (iv) terminate any "plan", as defined in ERISA or (v) be engaged in any proceeding in which the Pension Benefit Guaranty Corporation shall seek appointment, or is appointed, as trustee or administrator of any "plan", as defined in ERISA, and with respect to this sub-paragraph (h) such event or condition (x) remains uncured for a period of thirty (30) days from date or occurrence and (y) could, in the reasonable opinion of CIT, subject any Borrower to any tax, penalty or other liability material to the business, operations or financial condition of any Borrower; (h) without the prior written consent of CIT and, except as permitted in the Subordination Agreement, any Borrower shall (x) amend or modify the Subordinated Debt, (y) make any prepayment on account of Subordinated Debt or (z) make any payment on account of the Subordination Agreement; (i) the occurrence of any default or event of default (after giving effect to any applicable grace or cure periods) under any instrument or agreement evidencing (x) Subordinated Debt or (y) any other Indebtedness of any Borrower having a principal amount in excess of $25,000; (j) (i) The Guarantor ceases for any reason whatsoever (other than as a result of death) to be actively engaged in the management of the Borrowers, (ii) the Company fails to own 100% of the issued and outstanding capital stock of any of its subsidiaries or (iii) any change in control with respect to the Company shall occur; (k) if the Guarantor dies or terminates his Guaranty or otherwise fails to perform any of the terms of the Guaranty, all prior to termination of this Financing Agreement and payment in full of all Obligations; (l) any judgment or judgments aggregating in excess of $25,000 or any injunction or attachment is obtained or enforced against the Guarantor and which remains unstayed for more than ten (10) Business Days; or (m) Autodesk, Inc. shall at any time fail to provide trade credit to the Borrowers on terms satisfactory to CIT. 10.2 Upon the occurrence of a Default and/or an Event of Default, at the option of CIT, all loans, advances and extensions of credit provided for in Sections 3, 4 and 5 of this Financing Agreement shall be thereafter in CIT's sole discretion and the obligation of CIT to make Revolving Loans shall cease unless such Default is cured to CIT's satisfaction or Event of Default is waived in writing by CIT, and at the option of CIT upon the occurrence of an Event of Default; (a) all Obligations shall become immediately due and payable; (b) CIT may charge the Borrowers the Default Rate of Interest on all then outstanding or thereafter incurred Obligations in lieu of the interest provided for in Section 8 of this Financing Agreement, and (c) CIT may immediately terminate this Financing Agreement upon notice to the Borrowers; provided, however, that upon the occurrence of an Event of Default listed in Paragraph 10.1(c) of this Section 10, this Financing Agreement shall automatically terminate and all Obligations 26 shall become due and payable, without any action, declaration, notice or demand by CIT. The exercise of any option is not exclusive of any other option, which may be exercised at any time by CIT. 10.3 Immediately upon the occurrence of any Event of Default, CIT may, to the extent permitted by law: (a) remove from any premises where same may be located any and all books and records, computers, electronic media and software programs associated with any Collateral (including any electronic records, contracts and signatures pertaining thereto), documents, instruments, files and records, and any receptacles or cabinets containing same, relating to the Accounts, or CIT may use, at the Borrowers' expense, such of any Borrower's personnel, supplies or space at any Borrower's places of business or otherwise, as may be necessary to properly administer and control the Accounts or the handling of collections and realizations thereon; (b) bring suit, in the name of any Borrower or CIT, and generally shall have all other rights respecting said Accounts, including without limitation the right to: accelerate or extend the time of payment, settle, compromise, release in whole or in part any amounts owing on any Accounts and issue credits in the name of any Borrower or CIT; (c) sell, assign and deliver the Collateral, with or without advertisement, at public or private sale, for cash, on credit or otherwise, at CIT's sole option and discretion, and CIT may bid or become a purchaser at any such sale, free from any right of redemption, which right is hereby expressly waived by each Borrower; (d) foreclose the security interests in the Collateral created herein or by the Loan Documents by any available judicial procedure, or to take possession of any or all of the Collateral, including Other Collateral without judicial process, and to enter any premises where any Other Collateral may be located for the purpose of taking possession of or removing the same; and (e) exercise any other rights and remedies provided in law, in equity, by contract or otherwise. CIT shall have the right, without notice or advertisement, to sell, lease, or otherwise dispose of all or any part of the Collateral, whether in its then condition or after further preparation or processing, in the name of any Borrower or CIT, or in the name of such other party as CIT may designate, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such other terms and conditions as CIT in its sole discretion may deem advisable, and CIT shall have the right to purchase at any such sale. If notice of intended disposition of any Collateral is required by law, it is agreed that ten (10) days notice shall constitute reasonable notification and full compliance with the law. The net cash proceeds resulting from CIT's exercise of any of the foregoing rights, (after deducting all charges, costs and expenses, including reasonable attorneys' fees) shall be applied by CIT to the payment of the Obligations, whether due or to become due, in such order as CIT may elect, and the Borrowers shall remain liable to CIT for any deficiencies, and CIT in turn agrees to remit to the applicable Borrower or its successors or assigns, any surplus resulting therefrom. The enumeration of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other rights, all of which shall be cumulative. Each Borrower hereby indemnifies CIT and holds CIT harmless from any and all costs, expenses, claims, liabilities, Out-of-Pocket Expenses or otherwise, incurred or imposed on CIT by reason of the exercise of any of its rights, remedies and interests hereunder, including, without limitation, from any sale or transfer of Collateral, preserving, maintaining or securing the Collateral, defending its interests in Collateral (including pursuant to any claims brought by any Borrower, any Borrower as debtor-in-possession, any secured or unsecured creditors of any Borrower, any trustee or receiver in bankruptcy, or otherwise), and 27 each Borrower hereby agrees to so indemnify and hold CIT harmless, absent CIT's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. The foregoing indemnification shall survive termination of this Financing Agreement until such time as all Obligations (including the foregoing) have been finally and indefeasibly paid in full. In furtherance thereof CIT, may establish such reserves for Obligations hereunder (including any contingent Obligations) as it may deem advisable in its reasonable business judgement. SECTION 11. TERMINATION Except as otherwise permitted herein, CIT may terminate this Financing Agreement at any time by giving the Company at least sixty (60) days prior written notice of termination. Notwithstanding the foregoing CIT may terminate the Financing Agreement immediately upon the occurrence of an Event of Default, provided, however, that if the Event of Default is an event listed in Paragraph 10.1(c) of Section 10 of this Financing Agreement, this Financing Agreement shall terminate in accordance with paragraph 10.2 of Section 10. This Financing Agreement, unless terminated as herein provided, shall automatically continue from Anniversary Date to Anniversary Date. The Borrowers may terminate this Financing Agreement at any time upon sixty (60) days' prior written notice to CIT, provided that the Borrowers pay to CIT on the applicable termination date an Early Termination Fee, if applicable. All Obligations shall become due and payable as of any termination hereunder or under Section 10 hereof and, pending a final accounting, CIT may withhold any balances in the Company's account (unless supplied with an indemnity satisfactory to CIT) to cover all of the Obligations, whether absolute or contingent, including, but not limited to, cash reserves for any contingent Obligations. All of CIT's rights, liens and security interests shall continue after any termination until all Obligations have been paid and satisfied in full. SECTION 12. MISCELLANEOUS 12.1 The Borrowers hereby waives diligence, notice of intent to accelerate, notice of acceleration, demand, presentment and protest and any notices thereof as well as notice of nonpayment. No delay or omission of CIT or the Borrowers to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by CIT of any right or remedy precludes any other or further exercise thereof, or precludes any other right or remedy. 12.2 This Financing Agreement and the Loan Documents executed and delivered in connection therewith constitute the entire agreement between the Borrowers and CIT; supersede any prior agreements; can be changed only by a writing signed by both the Borrowers and CIT; and shall bind and benefit the Borrowers and CIT and their respective successors and assigns. 12.3 In no event shall the Borrowers, upon demand by CIT for payment of any Indebtedness relating hereto, by acceleration of the maturity thereof, or otherwise, be obligated to pay interest and fees in excess of the amount permitted by law. Regardless of any provision herein or in any agreement made in connection herewith, CIT shall never be entitled to receive, charge or apply, as interest on any indebtedness relating hereto, any amount in excess of the 28 maximum amount of interest permissible under applicable law. If CIT ever receives, collects or applies any such excess, it shall be deemed a partial repayment of principal and treated as such; and if principal is paid in full, any remaining excess shall be refunded to the Borrowers. This paragraph shall control every other provision hereof, the Loan Documents and of any other agreement made in connection herewith. 12.4 If any provision hereof or of any other agreement made in connection herewith is held to be illegal or unenforceable, such provision shall be fully severable, and the remaining provisions of the applicable agreement shall remain in full force and effect and shall not be affected by such provision's severance. Furthermore, in lieu of any such provision, there shall be added automatically as a part of the applicable agreement a legal and enforceable provision as similar in terms to the severed provision as may be possible. 12.5 EACH BORROWER AND CIT EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREUNDER. EACH BORROWER HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED. IN NO EVENT WILL CIT BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 12.6 Except as otherwise herein provided, any notice or other communication required hereunder shall be in writing (provided that, any electronic communications from the Borrowers with respect to any request, transmission, document, electronic signature, electronic mail or facsimile transmission shall be deemed binding on the Borrowers for purposes of this Financing Agreement, provided further that any such transmission shall not relieve the Borrowers from any other obligation hereunder to communicate further in writing), and shall be deemed to have been validly served, given or delivered when hand delivered or sent by facsimile, or three days after deposit in the United State mails, with proper first class postage prepaid and addressed to the party to be notified or to such other address as any party hereto may designate for itself by like notice, as follows: (A) if to CIT, at: The CIT Group/Business Credit, Inc. Two First Union Center Charlotte, North Carolina 28230-0337 Attn: Regional Credit Manager Fax No.: (704) 339-2208 (B) if to the Company at: Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, Maryland 21117 29 Attn: Henry Felton Fax No. 410-902-8324 With a copy to: Shapiro Sher & Guinot 36 South Charles Street Baltimore, Maryland 21201 Attn: K. Lee Riley, Jr., Esq. Fax. No. 410-539-7611 12.7 THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA, EXCEPT TO THE EXTENT THAT ANY OTHER LOAN DOCUMENT INCLUDES AN EXPRESS ELECTION TO BE GOVERNED BY THE LAWS OF ANOTHER JURISDICTION. 12.8 CONCERNING JOINT AND SEVERAL LIABILITY OF BORROWERS. (a) Each Borrower is accepting joint and several liability hereunder in consideration of the financial accommodation to be provided by CIT under this Financing Agreement, for the mutual benefit, directly and indirectly, of each of such Borrowers and in consideration of the undertakings of each of such Borrowers to accept joint and several liability for the obligations of each of them. (b) Each of the Borrowers jointly and severally hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers with respect to the payment and performance of all of the Obligations, it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each of the Borrowers with preferences or distinction among them; (c) If and to the extent that any of the Borrowers shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event, the other Borrowers will make such payment with respect to, or perform, such Obligation. (d) The obligations of each Borrower under the provisions of this Section 12.8 constitute full recourse obligations of such Borrower, enforceable against it to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Financing Agreement or any other circumstances whatsoever. (e) Except as otherwise expressly provided herein or required by law, each Borrower hereby waives notice of acceptance of its joint and several liability, notice of any Revolving Loan made under this Financing Agreement, notice of occurrence of any Event of Default, or of any demand for any payment under this Financing Agreement, notice of occurrence of any Event of Default, or of any demand for any payment under this Financing Agreement, notice of any action at any time taken or omitted by CIT under or in respect of any of the Obligations, any requirement of diligence and, generally, all demands, notices and other formalities of every kind 30 in connection with this Financing Agreement. Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by CIT at any time or times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this Financing Agreement, any and all other indulgences whatsoever by CIT in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any other action or delay in acting or failure to act on the part of CIT, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with the applicable laws or regulations thereunder which might, but for the provisions of this Section 12.8, afford grounds for terminating, discharging or relieving such Borrower, in whole or in part, from any of its obligations under this Section 12.8, it being the intention of each Borrower that, so long as any of the Obligations remain unsatisfied, the obligations of such Borrower under this Section 12.8 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each Borrower under this Section 12.8 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or CIT. The joint and several liability of the Borrowers hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, membership, constitution or place of formation of any Borrower or CIT. (f) The provisions of this Section 12.8 are made for the benefit of CIT and its successors and assigns, and may be enforced by CIT from time to time against any of the Borrowers as often as occasion therefor may arise and without requirement on the part of CIT first to marshal any of its claims or to exercise any of its rights against any of the other Borrowers or to exhaust any remedies available to it against any of the other Borrowers or to resort to any other source or means of obtaining payment of any of the Obligations or to elect any other remedy. The provisions of this Section 12.8 shall remain in effect until all the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by CIT upon the insolvency, bankruptcy or reorganization of any of the Borrowers, or otherwise, the provisions of this Section 12.8 will forthwith be reinstated in effect, as though such payment had not been made. (g) Notwithstanding any provision to be contrary contained herein or in the Revolving Note, to the extent the joint obligations of a Borrower shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers) then the obligations of each Borrower hereunder shall be limited to be maximum amount that is permissible under applicable law (whether federal or state and including, without limitation, the federal bankruptcy code). (h) The Borrowers hereby agree, as among themselves, that if any Borrower shall become an Excess Funding Borrower (as defined below), each other Borrower shall, on demand 31 of such Excess Funding Borrower (but subject to the next sentence hereof and to subsection (B) below), pay to such Excess Funding Borrower an amount equal to such Borrower's Pro Rata Share (as defined below and determined, for this purpose, without reference to the properties, assets, liabilities and debts of such Excess Funding Borrower) of such Excess Payment (as defined below). The payment obligation of any Borrower to any Excess Funding Borrower under this Section 12.8(h) shall be subordinate and subject in right of payment to the prior payment in full of the obligations of such Borrower under the other provisions of this Financing Agreement, and such Excess Funding Borrower shall not exercise any right or remedy with respect to such excess until payment and satisfaction in full of all of such obligations. For purposes hereof, (i) "Excess Funding Borrower" shall mean, in respect of any Obligations arising under the other provisions of this Financing Agreement (hereafter, the "Joint Obligations"), a Borrower that has paid an amount in excess of its Pro Rata Share of the Joint Obligations; (ii) "Excess Payment" shall mean, in respect of any Joint Obligations, the amount paid by an Excess Funding Borrower in excess of its Pro Rata Share of such Joint Obligations; and (iii) "Pro Rata Share", for the purposes of this Section 12.8(h), shall mean, for any Borrower, the ratio (expressed as a percentage) of (A) the amount by which the aggregate present fair salable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Borrower (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Borrower hereunder) to (B) the amount by which the aggregate present fair salable value of all assets and other properties of such Borrower and all of the other Borrowers exceeds the amount of all of the debts and liabilities (including contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Borrower and the other Borrowers hereunder) of such Borrower and all of the other Borrowers, all as of the date hereof (if any Borrower becomes a party hereto subsequent to the date hereof, then for the purposes of this Section 12.8(h) such subsequent Borrower shall be deemed to have been a Borrower as of the date hereof and the information pertaining to, and only pertaining to, such Borrower as of the date such Borrower became a Borrower shall be deemed true as of the date hereof). 32 IN WITNESS WHEREOF, the parties hereto have caused this Financing Agreement to be effective, executed, accepted and delivered at Charlotte, North Carolina, by their proper and duly authorized officers as of the date set forth above. AVATECH SOLUTIONS, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: CHMN & CEO -------------------------- AVATECH OF CALIFORNIA, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH OF CONNECTICUT, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH OF FLORIDA, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH OF MARYLAND, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH OF MICHIGAN, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH OF NEBRASKA, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH OF NEW JERSEY, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH OF NEW YORK, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH OF VIRGINIA, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- AVATECH SOLUTIONS OF COLORADO, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- TECHNICAL LEARNINGWARE COMPANY, INC. BY: /s/ Henry D. Felton ----------------------------- TITLE: PRES -------------------------- THE CIT GROUP/BUSINESS CREDIT, INC. BY: ----------------------------- TITLE: -------------------------- 2 AVATECH OF NEW YORK, INC. BY: ----------------------------- TITLE: -------------------------- AVATECH OF VIRGINIA, INC. BY: ----------------------------- TITLE: -------------------------- AVATECH SOLUTIONS OF COLORADO, INC. BY: ----------------------------- TITLE: -------------------------- TECHNICAL LEARNINGWARE COMPANY, INC. BY: ----------------------------- TITLE: -------------------------- THE CIT GROUP/BUSINESS CREDIT, INC. BY: /s/ [ILLEGIBLE] ----------------------------- TITLE: ASSISTANT VICE PRESIDENT -------------------------- 2 SCHEDULE 1 - COLLATERAL INFORMATION EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH SOLUTIONS, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 52-2023997 CHIEF EXECUTIVE OFFICE: 11403A CRONHILL DRIVE OWINGS MILLS, MD 21117 COLLATERAL LOCATION: 11403A CRONHILL DRIVE OWINGS MILLS, MD 21117 4322 NORTH BELTLINE ROAD SUITE B-110 IRVING, TX 75038 8015 SHOAL CREEK BOULEVARD SUITE 211 AUSTIN, TX 78757 THE ATRIUM AT COULTER RIDGE 6900 I-40 WEST SUITE 100-06 AMARILLO, TX 79106 TRADEMARK(S): TRADEMARK SERIAL OR REGISTRATION NUMBER AVATECH SOLUTIONS 2,191,518 (INT'L. CLASS 42) AVATECH SOLUTIONS 75/269,510 (INT'L. CLASS 9) AVANEWS 2,285,467 TRADENAME(S): CADWORKS SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH OF CALIFORNIA, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 68-0411969 CHIEF EXECUTIVE OFFICE: 2130 PROFESSIONAL DRIVE SUITE 120 SACREMENTO, CA 95661 COLLATERAL LOCATION: 2130 PROFESSIONAL DRIVE SUITE 120 SACREMENTO, CA 95661 TRADENAME(S): NONE SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH SOLUTIONS OF COLORADO, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 84-1433318 CHIEF EXECUTIVE OFFICE: 8101 EAST PRENTICE DRIVE SUITE 300 ENGLEWOOD, CO 80111 COLLATERAL LOCATION: 8101 EAST PRENTICE DRIVE SUITE 300 ENGLEWOOD, CO 80111 TRADENAME(S): CAD-PRO AVATECH SOLUTIONS SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH OF CONNECTICUT, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 06-1524687 CHIEF EXECUTIVE OFFICE: 60 COMMERCE PARK LANE MILFORD, CT 06460 COLLATERAL LOCATION: 60 COMMERCE PARK LANE MILFORD, CT 06460 TRADENAME(S): NONE SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH FLORIDA, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 65-0830517 CHIEF EXECUTIVE OFFICE: 536 INTERSTATE COURT SARASOTA, FL 34240 COLLATERAL LOCATION: 536 INTERSTATE COURT SARASOTA, FL 34240 550 NORTH REO STREET SUITE 300, OFFICE NO. 02-A TAMPA, FL 33609 TRADENAME(S): NONE SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH OF MARYLAND, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 52-2055112 CHIEF EXECUTIVE OFFICE: 11400-A CRONHILL DRIVE OWINGS MILLS, MD 21117 COLLATERAL LOCATION: 11400-A CRONHILL DRIVE OWINGS MILLS, MD 21117 1355 PICCARD DRIVE SUITE 135 ROCKVILLE, MD 20850 TRADENAME(S): NONE SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH OF MICHIGAN, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 38-3408823 CHIEF EXECUTIVE OFFICE: 5864 INTERFACE DRIVE ANN ARBOR, MI 48103 COLLATERAL LOCATION: 5864 INTERFACE DRIVE ANN ARBOR, MI 48103 904 SENATE DRIVE DAYTON, OH 45459 TRADENAME(S): NONE SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH OF NEBRASKA, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 91-1859964 CHIEF EXECUTIVE OFFICE: 8319 N. 30TH STREET OMAHA, NE 68112 COLLATERAL LOCATION: 8319 N. 30TH STREET OMAHA, NE 68112 425 2ND STREET SE SUITE 670 CEDAR RAPIDS, IA 52401 1370 NW 114TH STREET SUITE 200 CLIVE, IA 50325 TRADENAME(S): NONE SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH OF NEW JERSEY, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 22-3601819 CHIEF EXECUTIVE OFFICE: 180 TICES LANE EAST BRUNSWICK, NJ 08816 COLLATERAL LOCATION: 180 TICES LANE EAST BRUNSWICK, NJ 08816 TRADENAME(S): AVATECH SCHEDULE 1 - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH OF NEW YORK, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 16-1551345 CHIEF EXECUTIVE OFFICE: 890 7TH NORTH STREET SUITE 110 LIVERPOOL, NY 13088 COLLATERAL LOCATION: 890 7TH NORTH STREET SUITE 110 LIVERPOOL, NY 13088 TRADENAME(S): NONE SCHEDULE I - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: AVATECH OF VIRGINIA, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 54-1900707 CHIEF EXECUTIVE OFFICE: 5656 SHELL ROAD VIRGINIA BEACH, VA 23455 COLLATERAL LOCATION: 5656 SHELL ROAD VIRGINIA BEACH, VA 23455 2246 DABNEY ROAD SUITE L RICHMOND, VA 23230 TRADENAME(S): AVATECH SCHEDULE I - COLLATERAL INFORMATION (CONT'D) EXACT COMPANY NAME IN STATE ORGANIZATION: TECHNICAL LEARNINGWARE COMPANY, INC. STATE OF INCORPORATION OR FORMATION: DELAWARE FEDERAL TAX I.D. NO. 06-1529325 CHIEF EXECUTIVE OFFICE: 60 COMMERCE PARK LANE MILFORD, CT 06460 COLLATERAL LOCATION: 60 COMMERCE PARK LANE MILFORD, CT 06460 TRADENAME(S): NONE SCHEDULE 2 - INVESTOR DEBT
NAME OF INVESTOR AMOUNT OF INVESTOR DEBT ---------------- ----------------------- Dixie Hindman $ 65,000 Dixie Hindman $ 15,000 Dixie Hindman $ 20,000 Pamela Felton $125,000 Paulinee Ney $100,000 Carol Diegelman $ 25,000 Thomas Hogg $100,000 Timothy Hindman $100,000 W.J. Hindman $125,000 Joan S. Sephens $ 25,000 John W. Sasser $ 25,000 J.E. Oates Profit Sharing $100,000 Eugene E. Leimkuhler $ 50,000 Victor Frenkil Jr. $100,000 Gerard E. Holthaus $ 50,000 Donald R. Wright $ 25,000 H. David Shumport $ 25,000 Frank Voyticky $100,000 Herbert S. Braun $ 50,000 John F. Ripley $ 25,000 Ruth L. Frank Transfer from Ripley Charlene S. McClure $ 12,500 Donald McClure $ 12,500 Raloid Corporation $ 25,000 Pamela Felton $ 50,000 Hank Felton $125,000 J. Moss $ 25,000 J. Schaeffer $100,000
EX-10.04 6 a2080957zex-10_04.txt EXHIBIT 10.04 EXHIBIT 10.04 THIS WARRANT AND THE SHARES OF VOTING COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OFFERED FOR SALE UNLESS REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS WARRANT AND THE SHARES OF VOTING COMMON STOCK PURCHASABLE HEREUNDER ARE SUBJECT TO AND HAVE THE BENEFIT OF A WARRANTHOLDERS RIGHTS AGREEMENT DATED AS OF OCTOBER 25, 2000 AMONG AVATECH SOLUTIONS, INC. AND THE WARRANTHOLDERS LISTED ON THE SIGNATURE PAGES THEREOF, A COPY OF WHICH IS ON FILE WITH AVATECH SOLUTIONS, INC. Dated: October 25, 2000 WARRANT To Purchase 16,213 Shares of Voting Common Stock of AVATECH SOLUTIONS, INC. Expiring November 25, 2003 THIS IS TO CERTIFY THAT, for value received, THE CIT GROUP/BUSINESS CREDIT, INC. or registered assigns ("Holder") is entitled to purchase from AVATECH SOLUTIONS, INC., a Delaware corporation ("Avatech"), at any time or from time to time after 9.00 a.m., Charlotte, North Carolina time, on the date hereof and prior to 5:00 p.m., Charlotte, North Carolina time, on the earlier of November 25, 2003 and the Business Day preceding the date of redemption of this Warrant (the "Exercise Period"), at the place where the Warrant Agency is located, at the Exercise Price, the number of shares of Common Stock, par value $0.01 per share (the "Voting Common Stock") of Avatech shown above, all subject to adjustment and upon the terms and conditions hereinafter provided, and is entitled also to exercise the other appurtenant rights, powers and privileges hereinafter described. This Warrant is one of one or more warrants (the "Warrants") of the same form and having the same terms as this Warrant, entitling the holders initially to purchase up to an aggregate of 16,213 shares of Voting Common Stock. The Warrant Shares following the closing of the transactions contemplated by the Financing Agreement will constitute 0.25% of the capital stock (Common or Preferred) of Avatech on a Fully Diluted Basis. The Warrants have been issued pursuant to the Financing Agreement dated as of October 25, 2000 (as amended from time to time, the "Financing Agreement") between Avatech and The CIT Group/Business Credit, Inc. ("CIT"), as lender, and the Holder is entitled to certain benefits as set forth therein and to certain benefits described in the Warrantholders Rights Agreement. Avatech shall keep a copy of the Financing Agreement and the Warrantholders Rights Agreement, and any amendments thereto, at the Warrant Agency and shall furnish, without charge, copies thereof to the Holder upon request. Certain terms used in this Warrant are defined in Article VI. ARTICLE I EXERCISE OF WARRANTS SECTION 1.1. METHOD OF EXERCISE. To exercise this Warrant in whole on in part, the Holder shall deliver on any Business Day to Avatech, at the Warrant Agency, (a) this Warrant, (b) a written notice of such Holder's election to exercise this Warrant, which notice shall specify the number of shares of Voting Common Stock to be purchased (which shall be a whole number of shares if for less than all the shares then issuable hereunder), the denominations of the share certificate or certificates desired and the name or names in which such certificates are to be registered, and (c) payment of the Exercise Price with respect to such shares. Such payment may be made, at the option of the Holder, either (a) by cash, certified or bank cashier's check or wire transfer in an amount equal to the product of (i) the Exercise Price times (ii) the number of Warrant Shares as to which this Warrant is being exercised or (b) by receiving from Avatech the number of Warrant Shares equal to (i) the number of Warrant Shares as to which this Warrant is being exercised minus (ii) the number of Warrant Shares having a value, based on the Closing Price on the trading day immediately prior to the date of such exercise, equal to the product of (x) the Exercise Price times (y) the number of Warrant Shares as to which this Warrant is being exercised. Avatech shall, as promptly as practicable and in any event within seven days after receipt of such notice and payment, execute and deliver or cause to be executed and delivered, in accordance with such notice, a certificate or certificates representing the aggregate number of shares of Voting Common Stock specified in said notice together with cash in lieu of any fractions of a share as provided in Section 1.3. The share certificate or certificates so delivered shall be in such denominations as may be specified in such notice, and shall be issued in the name of the Holder or such other name or names as shall be designated in such notice. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and such Holder or any other Person so designated to be named therein shall be deemed for all purposes to have become a holder of record of shares, as of the date the aforementioned notice and payment is received by Avatech. If this Warrant shall have been exercised only in part, Avatech shall, at the time of delivery of such certificate or certificates, deliver to the Holder a new Warrant evidencing the rights to purchase the remaining shares of Voting Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of the Holder, appropriate notation may be made on this Warrant which shall then be returned to the Holder. Avatech shall pay all expenses, taxes and other charges payable in connection with the preparation, issuance and delivery of share certificates and new Warrants, except that, if share certificates or new Warrants shall be registered in a name or names other than the name of the Holder, funds sufficient to pay all transfer taxes payable as a result of such transfer shall be paid by the Holder at the time of delivery of the aforementioned notice of exercise or promptly upon receipt of a written request of Avatech for payment. SECTION 1.2. SHARES TO BE FULLY PAID AND NONASSESSABLE. All shares of Voting Common Stock issued upon the exercise of this Warrant and all shares of Voting Common Stock issued upon the conversion of such Voting Common Stock shall be validly issued, fully paid and nonassessable and, if such class of Common Stock is then listed on any national securities exchange (as defined in the Exchange Act) or quoted on NASDAQ, shall be duly listed or quoted thereon, as the case may be. SECTION 1.3. NO FRACTIONAL SHARES REQUIRED TO BE ISSUED. 2 Avatech shall not be required to issue fractions of shares of Voting Common Stock upon exercise of this Warrant. If any fraction of a share would, but for this Section, be issuable upon final exercise of this Warrant, in lieu of such fractional share Avatech shall pay to the Holder, in cash, an amount equal to the same fraction of the Fair Market Value of Avatech per share of outstanding Common Stock on the Business Day immediately prior to the date of such exercise. SECTION 1.4. SHARE LEGEND. Each certificate for shares of Voting Common Stock issued upon exercise of this Warrant, unless at the time of exercise such shares are registered under the Securities Act, shall bear the following legend: "This security has not been registered under the Securities Act of 1933 and may not be sold or offered for sale unless registered under said Act and any applicable state securities laws or unless an exemption from such registration is available. This security is also subject to and has the benefit of a Warrantholders Rights Agreement dated as of October 25, 2000 among Avatech Solutions, Inc. and the Warrantholders listed on the signature pages thereof, copies of which are on file with Avatech Solutions, Inc." Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon completion of a public offering pursuant to a registration statement under the Securities Act) shall also bear such legend unless, in the opinion of counsel selected by the holder of such certificate (who may be an employee of such holder) and reasonably acceptable to Avatech, the securities represented thereby need no longer be subject to restrictions on resale under the Securities Act. SECTION 1.5. RESERVATION. Avatech has duly reserved and will keep available for issuance upon exercise of the Warrants the total number of Warrant Shares deliverable from time to time upon exercise of all Warrants from time to time outstanding and the total number of shares of Voting Common Stock deliverable upon conversion of such Warrant Shares to Voting Common Stock. Avatech will not change the Voting Common Stock from par value $0.01 per share to any higher par value which exceeds the Exercise Price then in effect, and will reduce the par value of the Voting Common Stock upon any event described in Article IV that provides for an increase in the number of shares of Voting Common Stock subject to purchase upon exercise of this Warrant, in inverse proportion to and effective at the same time as such number of shares is increased, but only to the extent that such increase in the number of shares, together with all other such increases after the date hereof, causes the aggregate Exercise Price of all Warrants (without giving effect to any exercise or redemption thereof) to be greater than $1,000. ARTICLE II WARRANT AGENCY; TRANSFER, EXCHANGE AND REPLACEMENT OF WARRANTS SECTION 2.1. WARRANT AGENCY. As long as any of the Warrants remain outstanding, Avatech shall perform the obligations of and be the warrant agency with respect to the Warrants (the "Warrant Agency") at its address set forth in the Financing Agreement or at such other address as Avatech shall specify by notice to all Warrantholders. 3 SECTION 2.2. OWNERSHIP OF WARRANT. Avatech may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by any person other than Avatech) for all purposes and shall not be affected by any notice to the contrary, until due presentment of this Warrant for registration of transfer as provided in this Article II. SECTION 2.3. TRANSFER OF WARRANT. Avatech agrees to maintain at the Warrant Agency books for the registration of transfers of the Warrants, and transfer of this Warrant and all rights hereunder shall be registered, in whole or in part, on such books, upon surrender of this Warrant at the Warrant Agency, together with a written assignment of this Warrant duly executed by the Holder or its duly authorized agent or attorney, with (if the Holder is a natural person) signatures guaranteed by a bank or trust company or a broker or dealer registered with the NASD, and funds sufficient to pay any transfer taxes payable upon such transfer. Upon surrender and, if required, such payment, Avatech shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denominations specified in the instrument of assignment (which shall be whole numbers of shares only) and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be canceled. SECTION 2.4. DIVISION OF COMBINATION OF WARRANTS. This Warrant may be divided or combined with other Warrants upon presentment hereof and of any Warrant or Warrants with which this Warrant is to be combined at the Warrant Agency, together with a written notice specifying the names and denominations (which shall be whole numbers of shares only) in which the new Warrant or Warrants are to be issued, signed by the holders hereof and thereof or their respective duly authorized agents or attorneys. Subject to compliance with Section 2.3 as to any transfer or assignment which may be involved in the division or combination, Avatech shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. SECTION 2.5. LOSS, THEFT, DESTRUCTION OF WARRANT CERTIFICATES. Upon receipt of evidence satisfactory to Avatech of the ownership of and the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security satisfactory to Avatech (it being understood and agreed that if the holder of such Warrant is CIT, then a written agreement of indemnity given by CIT alone shall be satisfactory to Avatech and no further security shall be required) or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, Avatech will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of shares of Voting Common Stock. SECTION 2.6. EXPENSES OF DELIVERY OF WARRANTS. Avatech shall pay all expenses, taxes (other than transfer taxes) and other charges payable in connection with the preparation, issuance and delivery of Warrants hereunder. ARTICLE III 4 CERTAIN RIGHTS SECTION 3.1. RIGHTS AND OBLIGATIONS UNDER THE WARRANTHOLDERS RIGHTS AGREEMENT. This Warrant is entitled to the benefits and subject to the terms of the Warrantholders Rights Agreement dated as of October 25, 2000 among Avatech and the Warrantholders listed on the signature pages thereof (as amended from time to time, the "Warrantholders Rights Agreement"). Avatech shall keep or cause to be kept a copy of the Warrantholders Rights Agreement, and any amendments thereto, at the Warrant Agency and shall furnish, without charge, copies thereof to the Holder upon request. SECTION 3.2. DETERMINATION OF FAIR MARKET VALUE. Each determination of Fair Market Value hereunder shall be made in good faith by Avatech. Upon each determination of Fair Market Value by Avatech hereunder, Avatech shall promptly give notice thereof to all Warrantholders, setting forth in reasonable detail the calculation of such Fair Market Value and the method and basis of determination thereof (the "Avatech Determination"). ARTICLE IV ANTIDILUTION PROVISIONS SECTION 4.1. ADJUSTMENT GENERALLY. The Exercise Price and the number of shares of Voting Common Stock (or other securities or property) issuable upon exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events as provided in this Article IV; PROVIDED that notwithstanding anything to the contrary contained herein, the Exercise Price shall not be less than the par value of the Voting Common Stock, as such par value is reduced from time to time in accordance with Section 1.5. SECTION 4.2. COMMON STOCK REORGANIZATION. If Avatech shall subdivide its outstanding shares of Common Stock (or any class thereof) into a greater number of shares or consolidate its outstanding shares of Common Stock (or any class thereof) into a smaller number of shares (any such event being called a "Common Stock Reorganization"), then (a) the Exercise Price shall be adjusted, effective immediately after the effective date of such Common Stock Reorganization, to a price determined by multiplying the Exercise Price in effect immediately prior to such effective date by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding on such effective date before giving effect to such Common Stock Reorganization and the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such Common Stock Reorganization, and (b) the number of shares of Voting Common Stock subject to purchase upon exercise of this Warrant shall be adjusted, effective at such time, to a number determined by multiplying the number of shares of Voting Common Stock subject to purchase immediately before such Common Stock Reorganization by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding after giving effect to such Common Stock Reorganization and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such Common Stock Reorganization. 5 SECTION 4.3. COMMON STOCK DISTRIBUTION. (a) If Avatech shall issue, sell or otherwise distribute any shares of Common Stock, other than pursuant to a Common Stock Reorganization (which is governed by Section 4.2 hereof) (any such event, including any event described in paragraphs (b) and (c) below, being herein called a "Common Stock Distribution"), for a consideration per share less than the Exercise Price then in effect or less than the Fair Market Value of Avatech per share of outstanding Common Stock on a Fully Diluted Basis on the date of such Common Stock Distribution (before giving effect to such Common Stock Distribution), then, effective upon such Common Stock Distribution, the Exercise Price shall be reduced, if such consideration per share shall be less than the Exercise Price then in effect but not less than such Fair Market Value per share, to the lower of the prices (calculated to the nearest one-thousandth of one cent) determined as provided in clauses (i) and (ii) below or, if such consideration per share shall be less than such Fair Market Value per share, to the lowest of the prices (calculated to the nearest one-thousandth of one cent) determined as provided in clauses (i) and (ii) below: (i) by dividing (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such Common Stock Distribution multiplied by the then existing Exercise Price, plus (2) the consideration, if any, received by Avatech upon such Common Stock Distribution by (B) the total number of shares of Common Stock outstanding immediately after such Common Stock Distribution; and (ii) by multiplying the Exercise Price in effect immediately prior to such Common Stock Distribution by a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding immediately prior to such Common Stock Distribution multiplied by such Fair Market Value per share on the date of such Common Stock Distribution, plus (B) the consideration, if any, received by Avatech upon such Common Stock Distribution, and the denominator of which shall be the product of (1) the total number of shares of Common Stock outstanding immediately after such Common Stock Distribution multiplied by (2) such Fair Market Value per share on the date of such Common Stock Distribution. If any Common Stock Distribution shall require an adjustment to the Exercise Price pursuant to the foregoing provisions of this paragraph (a), including by operation of paragraph (b) or (c) below, then, effective at the time such adjustment is made, the number of shares of Voting Common Stock subject to purchase upon exercise of this Warrant shall be increased to a number determined by multiplying the number of shares of Voting Common Stock subject to purchase immediately before such Common Stock Distribution by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately after giving effect to such Common Stock Distribution and the denominator of which shall be the sum of the number of shares outstanding immediately before giving effect to such Common Stock Distribution (both calculated on a Fully Diluted Basis) plus the number of shares of Common Stock which the aggregate consideration received by Avatech with respect to such Common Stock Distribution would purchase at the Fair Market Value of Avatech per share of outstanding Common Stock on a Fully Diluted Basis on the date of such Common Stock Distribution (before giving effect to such Common Stock Distribution). In computing adjustments under this paragraph, fractional interests in Common Stock shall be taken into account to the nearest one-thousandth of a share. The provisions of this paragraph (a), including by operation of paragraph (b) or (c) below, shall not operate to increase the Exercise Price or reduce the number of shares of Voting Common Stock subject to purchase upon exercise of this Warrant. (b) If Avatech shall issue, sell, distribute or otherwise grant in any manner (including by assumption) any rights to subscribe for or to purchase, or any warrants or options for the purchase of 6 Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such rights, warrants or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the rights to convert or exchange any such Convertible Securities in respect of such Options are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities in respect of such Options (determined by dividing (i) the aggregate amount, if any, received or receivable by Avatech as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to Avatech upon the exercise of all such Options, plus, in the case of Options to acquire Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issuance or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the Exercise Price then in effect or less than the Fair Market Value of Avatech per share of outstanding Common Stock on a Fully Diluted Basis on the date of granting such Options (before giving effect to such grant), then, for purposes of paragraph (a) above, the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued as of the date of granting of such Options and thereafter shall be deemed to be outstanding and Avatech shall be deemed to have received as consideration such price per share, determined as provided above, therefor. Except as otherwise provided in paragraph (d) below, no additional adjustment of the Exercise Price shall be made upon the actual exercise of such Options or upon conversion or exchange of such Convertible Securities. (c) If Avatech shall issue, sell or otherwise distribute (including by assumption) any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the aggregate amount received or receivable by Avatech as consideration for the issuance, sale or distribution of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to Avatech upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Exercise Price then in effect or less than the Fair Market Value of Avatech per share of outstanding Common Stock on a Fully Diluted Basis on the date of such issuance, sale or distribution (before giving effect to such issuance, sale or distribution), then, for purposes of paragraph (a) above, the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date of the issuance, sale or distribution of such Convertible Securities and thereafter shall be deemed to be outstanding and Avatech shall be deemed to have received as consideration such price per share, determined as provided above, therefor. Except as otherwise provided in paragraph (d) below, no additional adjustment of the Exercise Price shall be made upon the actual conversion or exchange of such Convertible Securities. (d) If (i) the purchase price provided for in any Option referred to in paragraph (d) above or the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph (b) or (c) above or the rate at which any Convertible Securities referred to in paragraph (b) or (c) above are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution upon an event which results in a related adjustment pursuant to this Article IV), or (ii) any of such Options or Convertible Securities shall have terminated, lapsed or expired, the Exercise Price then in effect shall forthwith be readjusted (effective only with respect to any exercise of this Warrant after such readjustment) to the Exercise Price which would then be in effect had the adjustment made upon the 7 issuance, sale, distribution or grant of such Options or Convertible Securities been made based upon such changed purchase price, additional consideration or conversion rate, as the case may be (in the case of any event referred to in clause (i) of this paragraph (d)) or had such adjustment not been made (in the case of any event referred to in clause (ii) of this paragraph (d)). (e) If Avatech shall pay a dividend or make any other distribution upon any capital stock of Avatech payable in Common Stock, Options or Convertible Securities, then, for purposes of paragraph (a) above, such Common Stock, Options or Convertible Securities shall be deemed to have been issued or sold without consideration. (f) If any shares of Common Stock, Options or Convertible Securities shall be issued, sold or distributed for cash, the consideration received therefor shall be deemed to be the amount received by Avatech therefor, after deduction therefrom of any expenses incurred in connection therewith. If any shares of Common Stock, Options or Convertible Securities shall be issued sold or distributed for a consideration other than cash, the amount of the consideration other than cash received by Avatech shall be deemed to be the Fair Market Value of such consideration, after deduction of any expenses incurred in connection therewith. If any shares of Common Stock, Options or Convertible Securities shall be issued in connection with any merger in which Avatech is the surviving corporation, the amount of consideration therefor shall be deemed to be the Fair Market Value of such portion of the assets and business of the non-surviving corporation as shall be attributable to such Common Stock, Options or Convertible Securities, as the case may be. If any Options shall be issued in connection with the issuance and sale of other securities of Avatech, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. SECTION 4.4. SPECIAL DIVIDENDS. If Avatech shall issue or distribute to any holder or holders of shares of Common Stock evidences of indebtedness, any other securities of Avatech or any cash, property or other assets (excluding a Common Stock Reorganization or a Common Stock Distribution), whether or not accompanied by a purchase, redemption or other acquisition of shares of Common Stock (any such nonexcluded event being herein called a "Special Dividend"), (a) the Exercise Price shall be decreased, effective immediately after the effective date of such Special Dividend, to a price determined by multiplying the Exercise Price then in effect by a fraction, the numerator of which shall be the Fair Market Value of Avatech per share of outstanding Common Stock as of such effective date less any cash and the then Fair Market Value of any evidences of indebtedness, securities or property or other assets issued or distributed in such Special Dividend with respect to one share of Common Stock, and the denominator of which shall be such Fair Market Value per share and (b) the number of shares of Voting Common Stock subject to purchase upon exercise of this Warrant shall be increased to a number determined by multiplying the number of shares of Voting Common Stock subject to purchase immediately before such Special Dividend by a fraction, the numerator of which shall be the Exercise Price in effect immediately before such Special Dividend and the denominator of which shall be the Exercise Price in effect immediately after such Special Dividend. A reclassification of Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by Avatech to the holders of such Common stock of such shares of such other class of stock and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as part of such reclassification, a Common Stock Reorganization. 8 SECTION 4.5. CAPITAL REORGANIZATIONS. If there shall be (i) any consolidation or merger to which Avatech is a party, other than a consolidation or a merger of which Avatech is the continuing corporation and which does not result in any reclassification of, or change (other than a Common Stock Reorganization) in, outstanding shares of Common Stock, or (ii) any sale or conveyance of the property of Avatech as an entirety or substantially as an entirety, or (iii) any recapitalization of Avatech (any such event being called a "Capital Reorganization"), then, effective upon the effective date of such Capital Reorganization, the Holder shall no longer have the right to purchase Voting Common Stock, but shall have instead the right to purchase, upon exercise of this Warrant, the kind and amount of shares of stock and other securities and property (including cash) which the Holder would have owned or have been entitled to receive pursuant to such Capital Reorganization if this Warrant had been exercised immediately prior to the effective date of such Capital Reorganization. As a condition to effecting any Capital Reorganization, Avatech or the successor or surviving corporation, as the case may be, shall (a) execute and deliver to each Warrantholder and to the Warrant Agency an agreement as to the Warrrantholders' rights in accordance with this Section 4.5, providing, to the extent of any right to purchase equity securities hereunder, for subsequent adjustments as nearly equivalent as may be practicable to the adjustments provided for in this Article IV and (b) provide each Regulated Holder with an opinion of counsel reasonably satisfactory to such Regulated Holder and such other assurances as any Regulated Holder may reasonably request to the effect that the ownership and exercise by any Regulated Holder of this Warrant after giving effect to such Capital Reorganization shall not be prohibited by the BHC Act or the regulations thereunder. The provisions of this Section 4.5 shall similarly apply to successive Capital Reorganizations. SECTION 4.6. ADJUSTMENT RULES. Any adjustments pursuant to this Article IV shall be made successively whenever an event referred to herein shall occur, except that, notwithstanding any other provision of this Article IV, no adjustment shall be made to the number of shares of Voting Common Stock to be delivered to each Holder (or to the Exercise Price) if such adjustment represents less than 1% of the number of shares previously required to be so delivered, but any lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amounts to 1% or more of the number of shares to be so delivered. No adjustment shall be made pursuant to this Article IV in respect of (x) the issuance of stock options or Common Stock to employees of Avatech pursuant to employee stock ownership plans or otherwise, or the exercise of any such options, PROVIDED that the aggregate amount of all such Common Stock and Common Stock for which such options are exercisable does not exceed 15% of the Common Stock on a Fully Diluted Basis on the date hereof and (y) the issuance from time to time of shares of Common Stock upon the exercise of any of the Warrants. If Avatech shall take a record of the holders of its Common Stock for any purpose referred to in this Article IV, then (i) such record date shall be deemed to be the date of the issuance, sale, distribution or grant in question and (ii) if Avatech shall legally abandon such action prior to effecting such action, no adjustment shall be made pursuant to this Article IV in respect of such action. SECTION 4.7. PROCEEDINGS PRIOR TO ANY ACTION REQUIRING ADJUSTMENT. As a condition precedent to the taking of any action which would require an adjustment pursuant to this Article IV, Avatech shall take any action which may be necessary, including obtaining regulatory approvals or exemptions, in order that (a) Avatech may thereafter validly and legally issue as fully paid and nonassessable all shares of Voting Common Stock which the holders of Warrants are entitled to receive upon exercise thereof and (b) the ownership and exercise of any Warrant by any Regulated Holder shall not be prohibited by any Regulatory Requirement. 9 SECTION 4.8. NOTICE OF ADJUSTMENT. Not less than 10 nor more than 30 days prior to the record date or effective date, as the case may be, of any action which requires or might require an adjustment or readjustment pursuant to this Article IV, Avatech shall give notice to each Warrantholder of such event, describing such event in reasonable detail and specifying the record date or effective date, as the case may be, and, if determinable, the required adjustment and the computation thereof. If the required adjustment is not determinable at the time of such notice, Avatech shall give notice to each Warrantholder of such adjustment and computation promptly after such adjustment becomes determinable. ARTICLE V PURCHASE, REDEMPTION AND CANCELLATION OF WARRANTS SECTION 5.1. PURCHASE OF WARRANTS BY AVATECH. Avatech shall have the right or obligation to purchase or otherwise acquire Warrants at such times, in such manner and for such consideration as set forth below. SECTION 5.2. MANDATORY REDEMPTION OF WARRANTS. The Holder may at the earlier to occur of (a) on or within 30 days after the repayment in full of all principal of and premium and interest on the Notes (as defined in the Financing Agreement) and the termination of the Commitments under the Financing Agreement, (b) on or within 30 days after the date on which Avatech shall have delivered a Refinancing Notice, by notice to Avatech (any such redemption pursuant to this clause (b), a "Refinancing Redemption"), or (c) on or within 30 days after the third (3rd) anniversary of the date hereof, demand a determination of the Redemption Price (a "Determination Notice") for purposes of this Section 5.2. Within 30 days (or, in the case of a Refinancing Redemption, 5 days) after the receipt of any Determination Notice from the Holder, Avatech shall give to the Holder notice of the Redemption Price, including a reasonably detailed description of the method of calculation thereof, determined as of the day preceding such notice of the Redemption Price. At any time within 30 days (or, in the case of a Refinancing Redemption, 15 days) after receipt of notice of the Redemption Price the Holder may demand redemption of this Warrant, in whole or in part, at the Redemption Price by notice to Avatech, payable on the third Business Day after receipt of notice of such demand (or, in the case of a Refinancing Redemption, on the closing date of such refinancing) (any such date, the "Redemption Due Date") in immediately available funds to the Holder upon surrender of this Warrant at the Warrant Agency or, if requested by the Holder, without surrender of this Warrant, by wire transfer to any account in Charlotte, North Carolina, specified by notice to Avatech. Thereupon, the right to purchase shares of Voting Common Stock theretofore represented by this Warrant as to which the Holder has demanded (and Avatech may effect) redemption shall terminate, and this Warrant shall represent the right of the Holder to receive the full Redemption Price from Avatech in accordance with this Section. The Holder's right to demand redemption of this Warrant pursuant to this Section 5.2 shall be referred to hereinafter as the Holder's "Mandatory Redemption Right". SECTION 5.3. OPTIONAL REDEMPTION. At any time and from time to time prior to the completion of a Qualified IPO but after the later to occur of (a) the fourth (4th) anniversary of the Closing Date (as defined in the Financing Agreement) and (b) the date on which all amounts outstanding under the Financing Agreement have been paid in full and the Commitments thereunder have been terminated, Avatech shall have the right to redeem up to one- 10 hundred percent (100%) of the outstanding Warrants at the Optional Redemption Price, determined as of the day preceding the notice of redemption. Irrevocable notice of such right of redemption shall be given by Avatech to all Warrantholders not more than 30 days nor less than 15 days prior to the date scheduled for redemption, stating the date and price, including a reasonably detailed description of the method of calculation thereof, of redemption. Warrantholders may exercise Warrants until 5:00 p.m., Charlotte, North Carolina time, on the Business Day preceding the date of redemption set forth in a valid notice of redemption, at which time the right to purchase shares of Voting Common Stock theretofore represented by this Warrant shall terminate, and this Warrant shall represent the right of the Holder to receive the Optional Redemption Price from Avatech in immediately available funds upon surrender of this Warrant at the Warrant Agency. SECTION 5.4. CANCELLATION OF WARRANTS. All Warrants purchased, redeemed or otherwise acquired by Avatech shall thereupon be canceled and retired. The Warrant Agency shall cancel any Warrant surrendered for exercise or registration of transfer or exchange and deliver such canceled Warrants to Avatech. SECTION 5.5. NOTICE OF REFINANCING. Avatech shall give notice to each of the Warrantholders of any intent by Avatech to refinance in their entirety the Notes (as defined in the Financing Agreement) not less than 60 days prior to the proposed closing date of such refinancing, setting forth such proposed closing date and notifying each Warrantholder of its rights under Section 5.2 (such notice, the "Refinancing Notice"). ARTICLE VI DEFINITIONS The following terms, as used in this Warrant, have the following meanings: "Avatech" has the meaning set forth in the first paragraph of this Warrant. "Avatech Determination" has the meaning set forth in Section 3.2. "BHC Act" means the Bank Holding Company Act of 1956, as amended. "Business Day" means any day excluding Saturday, Sunday and any day on which banking institutions located in Charlotte, North Carolina or New York City are authorized by law or other governmental action to be closed, unless there shall have been an offering of Common Stock registered under the Securities Act, in which case "Business Day" means (a) if Common Stock is listed or admitted to trading on a national securities exchange, a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for business or (b) if Common Stock is not so listed or admitted to trading, a day on which the New York Stock Exchange is open for business. "Capital Reorganization" has the meaning set forth in Section 4.5. "CIT" has the meaning set forth in the second paragraph of this Warrant. 11 "Closing Price" on any day means (a) if Common Stock is listed or admitted for trading on a national securities exchange, the reported last sales price regular way or, if no such reported sale occurs on such day, the average of the closing bid and asked prices regular way on such day, in each case on the principal national securities exchange on which Common Stock is listed or admitted to trading, or (b) if Common Stock is not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices in the over-the-counter market on such day as reported by NASDAQ or any comparable system or, if not so reported, as reported by any New York Stock Exchange member firm selected by Avatech for such purpose. "Common Stock" means the Voting Common Stock. "Common Stock Distribution" has the meaning set forth in Section 4.3(a). "Common Stock Reorganization" has the meaning set forth in Section 4.2. "Consolidated Total Debt" has the meaning specified in the Financing Agreement. "Convertible Securities" has the meaning set forth in Section 4.3(b). "Determination Notice" has the meaning set forth in Section 5.2. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission (or its successor) thereunder, all as the small shall be in effect at the time. "Exercise Period" has the meaning specified in the first paragraph of this Warrant. "Exercise Price" means $.01 per share of the Voting Common Stock, subject to adjustment pursuant to Article IV. "Financing Agreement" has the meaning set forth in the second paragraph of this Warrant. "Fair Market Value" as at any date of determination means the fair market value of the business or property or services in question as of such date, as determined in good faith by the Board of Directors of Avatech. The Fair Market Value of Avatech as at any date of determination shall be the greatest of (i) the Fair Market Value at such date of Avatech and its Subsidiaries as a going concern, (ii) the liquidation value at such date of Avatech and its Subsidiaries, and (iii) the consolidated net worth of Avatech and its Subsidiaries as shown on its latest available consolidated balance sheet. Notwithstanding the foregoing, if, at any date of determination of the Fair Market Value of Avatech, the Common Stock shall then be publicly traded, the Fair Market Value of Avatech on such date shall be the greater of (a) the amount determined in accordance with the immediately preceding sentence and (b) the Market Price on such date multiplied by the number of shares of Common Stock then outstanding. Determination of the Fair Market Value of Avatech per share of Common Stock shall be made without giving effect to any discount for (i) minority interest or (ii) any lack of liquidity of the Common Stock due to the fact that there may be no public market for the Common Stock. "Fully Diluted Basis" means, with respect to any determination or calculation, that such determination or calculation is performed on a fully diluted basis determined in accordance with generally accepted accounting principles as in effect from time to time. "Holder" has the meaning set forth in the first paragraph of this Warrant. 12 "Mandatory Redemption Right" has the meaning set forth in Section 5.2. "Market price" as at any date of determination means the average of the daily Closing Prices of a share of Common Stock for the shorter of (i) the 20 consecutive Business Days ending on the most recent Business Day prior to the Time of Determination and (ii) the period commencing on the date next succeeding the first public announcement of the issuance, sale, distribution, grant or exercise in question through such most recent Business Day prior to the Time of Determination. "Time of Determination" means the time and date of the earliest of (x) the determination of the stockholders entitled to receive such issuance, sale, distribution or grant, (y) the determination of the Holders or Avatech to exercise their respective rights set forth in Sections 5.2 or 5.3 hereof and (z) the commencement of "ex-dividend" trading in respect thereof. "NASD" means The National Association of Securities Dealers, Inc. "NASDAQ" means The National Association of Securities Dealers, Inc. Automated Quotation System. "Optional Redemption Price" means, as of any date of determination, a price for each share of Voting Common Stock issuable upon exercise of the Warrants equal to 110% of the Redemption Price, determined as of such date. "Options" has the meaning set forth in Section 4.3(b). "Person" means any natural person, corporation, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, and any government agency or political subdivision thereof. "Qualified IPO" means any sale of shares of Common Stock by and for the account of Avatech pursuant to an underwritten initial public offering registered under the Securities Act; PROVIDED that the proceeds to Avatech (net of underwriters' discount, fees and other expenses incurred by Avatech in connection therewith) from such sale of shares exceeds $3,000,000. "Redemption Due Date" has the meaning set forth in Section 5.2 hereof. "Redemption Price" means, as of any date of determination, a price for each share of Voting Common Stock issuable upon exercise of the Warrants equal to the excess of (a) (i) the Fair Market Value of Avatech plus the aggregate Exercise Price of all Warrants either being redeemed or then outstanding and not being redeemed divided by (ii) the number of shares of Common Stock outstanding on a Fully Diluted Basis over (b) the Exercise Price then in effect. "Refinancing Notice" has the meaning set forth in Section 5.5 hereof. "Regulated Holder" means the Holder or a holder of Warrant Shares, if such Holder or holder of Warrant Shares is effectively restricted or prohibited from holding, exercising or transferring, in whole or in part, this Warrant or Warrant Shares by reason of any Regulatory Requirement, including without limitation if such Holder or holder of Warrant Shares is a bank holding company within the meaning of the BHC Act or a subsidiary thereof subject to Regulation Y under the BHC Act. 13 "Regulatory Requirement" means any existing or future Federal or state statute, rule, regulation, guideline, order, request or directive (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), including without limitation, the BHC Act and the regulations thereunder. "Securities Act" means the Securities Act of 1933, as amended, and rules and regulations of the Securities and Exchange Commission thereunder. "Special Dividend" has the meaning set forth in Section 4.4. "Subsidiary" of any Person means any corporation, partnership, joint venture, association, limited liability company or other business entity of which more than 50% of the total voting power of shares of stock or other interests therein entitled to vote in the election of members of the board of directors, partnership committee, board of managers or trustees or other managerial body thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person or a combination thereof. Unless otherwise specified, "Subsidiary" means a Subsidiary of Avatech and "Subsidiaries" means all Subsidiaries of Avatech. "Voting Common Stock" has the meaning set forth in the first paragraph of this Warrant, subject to change pursuant to Article IV. "Warrant Agency" has the meaning set forth in Section 2.1. "Warrant Shares" means the shares of Voting Common Stock issuable upon the exercise of the Warrants. "Warrantholder" means a holder of a Warrant. "Warrantholders Rights Agreement" has the meaning set forth in Section 3.1. "Warrants" has the meaning set forth in the second paragraph of this Warrant. All references herein to "days" shall mean calendar days unless otherwise specified. ARTICLE VII MISCELLANEOUS SECTION 7.1. NOTICES. Notices and other communications provided for herein shall be in writing and may be given by mail, courier, confirmed telex or facsimile transmission and shall, unless otherwise expressly required, be deemed given when received or, if mailed, four Business Days after being deposited in the United States mail with postage prepaid and properly addressed. In the case of the Holder, such notices and communications shall be addressed to its address as shown on the books maintained by the Warrant Agency, unless the Holder shall notify the Warrant Agency that notices and communications should be sent to a different address (or telex or facsimile number), in which case such notices and communications shall be sent to the address (or telex or facsimile number) specified by the Holder. 14 SECTION 7.2. WAIVERS; AMENDMENTS. No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No notice or demand on Avatech in any case shall entitle Avatech to any other or future notice or demand in similar or other circumstances. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it would otherwise have. The provisions of this Warrant may be amended, modified, or waived with (and only with) the written consent of Avatech and the Warrantholders. The provisions of the Financing Agreement and the Warrantholders Rights Agreement may be amended, modified or waived only in accordance with the respective provisions thereof. Any such amendment, modifications or waiver effected pursuant to and in accordance with the provisions of this Section or the applicable provisions of the Financing Agreement or the Warrantholders Rights Agreement shall be binding upon the holders of all Warrants and Warrant Shares, upon each future holder thereof and upon Avatech. In the event of any such amendment, modifications or waiver Avatech shall give prompt notice thereof to all holders of Warrants and Warrant shares and, if appropriate, notation thereof shall be made on all Warrants thereafter surrendered for registration of transfer or exchange. SECTION 7.3. GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH CAROLINA. SECTION 7.4. TRANSFER; COVENANTS TO BIND SUCCESSOR AND ASSIGNS. All covenants, stipulations, promises and agreements in this Warrant contained by or on behalf of Avatech or the Holder shall bind its successors and assigns, whether so expressed or not. This Warrant shall be transferable and assignable by the Holder hereof in whole or from time to time in part of any other Person and the provisions of this Warrant shall be binding upon and inure to the benefit of the Holder hereof and its successors and assigns. SECTION 7.5. SEVERABILITY. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 7.6. SECTION HEADINGS. The section headings used herein are for convenience of reference only, are not part of this Warrant and are not to affect the construction of or be taken into consideration in interpreting this Warrant. 15 SECTION 7.7. TAX BASIS. Avatech and the Holder agree pursuant to Proposed Treasury Regulation Section 1.1273-2 that, for Federal income tax purposes, the aggregate issue price of the Loans (as defined in the Financing Agreement) is $3,987,500 and the aggregate purchase price for the Warrants is $12,500. Neither Avatech nor the Holder hereof shall voluntarily take any action inconsistent with the agreement set forth in this Section 7.7. [rest of page intentionally left blank] 16 IN WITNESS WHEREOF, Avatech has caused this Warrant to be executed in its corporate name by one of its officers thereunto duly authorized, and its corporate seal to be hereunto affixed, attested by its Secretary or an Assistant Secretary, all as of the day and year first above written. AVATECH SOLUTIONS, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ------------------------------- Title: Chairman & Chief Executive Officer ------------------------------------- [Corporate Seal] ATTEST: /s/ Gary Rever - --------------------------- Name: Gary Rever Title: Assistant Secretary. EX-10.05 7 a2080957zex-10_05.txt EXHIBIT 10.05 EXHIBIT 10.05 WARRANTHOLDERS RIGHTS AGREEMENT WARRANTHOLDERS RIGHTS AGREEMENT dated as of October 25, 2000 among AVATECH SOLUTIONS, INC., a Delaware corporation (together with its successors, "Avatech"), and THE CIT GROUP/BUSINESS CREDIT, INC. ("CIT") (CIT and such other warrantholders of Avatech as may, from time to time, become parties to this Agreement in accordance with the provisions hereof, the "Warrantholders"). WHEREAS on the date hereof, the Stockholders (as defined herein) are the beneficial owners of 6,020,877 shares of Voting Common Stock (as defined herein), there are outstanding options to purchase 400,255 shares of Voting Common Stock, and there are outstanding warrants to purchase 64,000 shares of Voting Common Stock, and CIT purchased and is the beneficial owner of the Warrants (as defined herein) to purchase 16,213 shares of Voting Common Stock; and WHEREAS Avatech wishes to provide to the Warrantholders and the holders of the Conversion Shares the rights described herein; NOW THEREFORE the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.1. DEFINITIONS. Unless otherwise defined herein, the following terms used in this Agreement shall have the meanings specified below. "Affiliate" means, with respect to any Person, any of (i) a director or executive officer of such Person, (ii) a spouse, parent, sibling or descendant of such Person (or a spouse, parent, sibling or descendant of any director or executive officer of such Person) and (iii) any other Person that, directly or indirectly, controls, or is controlled by or is under common control with such Person. For the purpose of this definition, "control" (including the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities or by contract or agency or otherwise. "BHC Act" means the Bank Holding company Act of 1956, as amended. "Commission" means the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. "Common stock" means the Voting Common Stock. "Conversion Shares" means (i) any shares of Voting Common Stock or other securities issued upon the exercise of any Warrants and (ii) any securities issued with respect to any of such shares or other securities referred to in clause (i) upon the conversion thereof into other securities or by way of stock dividend or stock split or in connection with a combination of shares, recapitalizaiton, merger, consolidation or other reorganization or otherwise; PROVIDED that any of such securities shall cease to be Conversion Shares when such securities shall have (x) been disposed of pursuant to a Public Sale or (y) ceased to be outstanding. "Debt" of a Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all Capital Leases of such Person, (v) all obligations of such Person to purchase securities (or other property) which arise out of or in connection with the sale of the same or substantially similar securities (or property), (vi) all non-contingent obligations of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vii) all equity securities of such Person (other than the Warrants) subject to repurchase or redemption otherwise than at the sole option of such Person, (viii) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (ix) all Debt of others Guaranteed by such Person. "Exchange Act" means the Securities Exchange Act of 1934, or any successor Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Exchange Act of 1934 shall include a reference to the comparable section, if any, of any such successor Federal statute. "Financing Agreement" means the Financing Agreement dated as of October 25, 2000 between Avatech and CIT, as amended from time to time. "Initial Public Offering" means the first registration of an offering of shares of Common Stock under the Securities Act which becomes effective (other than by a registration on Form S-4 or S-8 or any successor or similar forms). "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "Other Shares" has the meaning set forth in Section 3.2. "Person" means a corporation, an association, a partnership, a trust, a limited liability company, an organization, a business, an individual, a government or a subdivision thereof or a governmental agency. "Public Sale" means any sale of Common Stock to the public pursuant to an offering registered under the Securities Act or to the public through a broker, dealer or market maker pursuant to the provisions of Rule 144 (or any successor provision then in effect) adopted under the Securities Act. "Registrable Securities" means any Conversion Shares until the date (if any) on which such Conversion Shares shall have been transferred or exchanged and new certificates for them not bearing a legend restricting further transfer shall have been delivered by Avatech and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force. "Registration Expenses" means all expenses incident to Avatech' performance of or compliance with Sections 3.2 through 3.5 hereof, including (i) all registration, filing and NASD fees, (ii) all fees and expenses of complying with securities or blue sky laws, (iii) all word processing, duplicating and printing 2 expenses, (iv) all messenger and delivery expenses, (v) the fees and disbursements of counsel for Avatech and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, (vi) the fees and disbursements of any one counsel and any one accountant retained by the holder or holders of more than 50% of the Registrable Securities being registered, (vii) premiums and other costs of policies of insurance (if any) against liabilities arising out of the public offering of the Registrable Securities being registered if Avatech desires such insurance and (viii) any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but not including underwriting discounts and commissions and transfer taxes, if any, PROVIDED that, in any case where Registration Expenses are not to be borne by Avatech, such expenses shall not include (i) salaries of Avatech personnel or general overhead expenses of Avatech, (ii) auditing fees, (iii) premiums or other expenses relating to liability insurance required by underwriters of Avatech or (iv) other expenses for the preparation of financial statements or other data, to the extent that any of the foregoing either is normally prepared by Avatech in the ordinary course of its business or would have been incurred by Avatech had no public offering taken place. "Regulated Holder" means any holder of Warrants or Conversion Shares, if such holder is effectively restricted or prohibited from holding, exercising or transferring, in whole or in part, the Warrants or Conversion Shares by reason of any Regulatory Requirement, including without limitation if such holder is a bank holding company within the meaning of the BHC Act or a subsidiary thereof subject to Regulation Y under the BHC Act. "Regulatory Change" means, with respect to any Regulated Holder, (i) any change on or after the date hereof in United States federal or state or foreign laws or regulations (including the BHC Act and Regulation Y thereunder); (ii) the adoption on or after the date hereof of any interpretation or ruling applying to such Regulated Holder, individually or as a member of a class, under any United States federal or state or foreign laws or regulations by any court or governmental or regulatory authority charged with the interpretation or administration thereof; or (iii) the modification on or after the date hereof of any agreement or commitment with any such governmental or regulatory authority that is applicable to or binding upon such Regulated Holder. "Regulatory Requirement" means any existing or future Federal or state statute, rule, regulation, guideline, order, request or directive (whether or not having the force of law and whether or not failure to comply therewith would be unlawful), including without limitation, the BHC Act and the regulations thereunder. "Restricted Payment" means (i) any dividend or other distribution on any shares of Avatech' capital stock (except dividends payable solely in shares of its capital stock of the same class) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of Avatech' capital stock or (b) any warrant or other right to acquire shares of Avatech' capital stock. "Restricted Securities" means the Warrants, the Conversion Shares and any securities obtained upon exchange for or upon conversion or transfer of or as a distribution on Warrants, the Conversion Shares or any such securities; PROVIDED that particular securities shall cease to be Restricted Securities when such securities shall have (x) been disposed of pursuant to a Public Sale, (y) been otherwise transferred or exchanged and new certificates for them not bearing a legend restricting further transfer shall have been delivered by Avatech and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force (z) ceased to be outstanding. Whenever any particular securities cease to be Restricted Securities, the holder thereof shall be entitled to receive from the issuer thereof or its transfer agent, without expense (other than transfer taxes, if any), new securities of like tenor not bearing a legend of the character set forth in Section 2.2. 3 "Securities Act" means the Securities Act of 1933, or any similar Federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act of 1933 shall include a reference to the comparable section, if any, of any such similar Federal statute. "Significant Stockholder Group" means one or more Stockholders holding 25% or more, individually or in the aggregate, of the Common Stock of Avatech. "Stockholders" means the holders of the Common Stock of Avatech. "Subsidiary" means any partnership or corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by Avatech. "Voting Common Stock" means the common stock, par value $0.1 per share, of Avatech. "Warrant Securityholder" means at any time any Warrantholder or any holder of Conversion Shares (and for purposes of Section 2.8 shall include any Person that held Warrants that were redeemed pursuant to Section 5.3 of the Warrants). "Warrantholders" has the meaning set forth in the introductory paragraph. "Warrants" means the Warrant or Warrants originally issued to CIT, as such Warrants may be transferred or otherwise assigned, but only to the extent not theretofore exercised, redeemed or expired in accordance with their respective terms. All references herein to "days" shall mean calendar days unless otherwise specified. ARTICLE II TRANSFER OF SHARES; PAYMENTS TO WARRANT SECURITYHOLDERS SECTION 2.1. GENERAL. Except as otherwise provided in this Agreement or by law, each Stockholder may transfer its shares of Common Stock at any time to any Person. SECTION 2.2. RESTRICTIONS ON TRANSFER; LEGEND ON CERTIFICATES. (a) Except as otherwise provided in this Agreement, Restricted Securities shall not be transferable except (i) pursuant to an effective registration statement under the Securities Act, (iii) pursuant to Rule 144 or 144A (or any successor provisions) under the Securities Act or (ii) pursuant to a transaction that is otherwise exempt from the registration requirements of the Securities Act. (b) Unless otherwise expressly provided herein, each certificate for Restricted Securities and each certificate issued in exchange for or upon transfer of any thereof shall be stamped or otherwise imprinted with a legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR 4 OFFERED FOR SALE UNLESS REGISTERED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO AND HAVE THE BENEFIT OF A WARRANTHOLDERS RIGHTS AGREEMENT DATED AS OF OCTOBER 25, 2000 AMONG AVATECH SOLUTIONS, INC. AND THE WARRANTHOLDERS PARTIES THERETO, COPIES OF WHICH ARE ON FILE WITH AVATECH SOLUTIONS, INC." (c) Any other provision of this Agreement to the contrary notwithstanding, no transfer of any Restricted Securities other than pursuant to a Public Sale may be made to any Person unless such Person shall have agreed in writing that such Person, as a holder of Restricted Securities, and the Restricted Securities it acquires shall be bound by and be entitled to the benefits of all the provisions of this Agreement applicable to such Restricted Securities (and upon such agreement such Person shall be entitled to such benefits). Any purported transfer of Restricted Securities without compliance with the applicable provisions of this Agreement shall be void and of no effect, and the purported transferee shall have no rights as a Warrantholder or Shareholder (as applicable) or under this Agreement. In the event of such non-complying transfer, Avatech shall not transfer any such Restricted Securities on its books or recognize the purported transferee as a shareholder or warrantholder, as the case may be, for any purpose, until all applicable provisions of this Agreement have been complied with. SECTION 2.3. PERMITTED TRANSFERS. The restrictions on transfer provided in Section 2.2 (a) shall not be applicable to (i) any transfer in compliance with federal and all applicable state securities laws to an Affiliate of the holder of Restricted Securities, from an Affiliate of such holder to such holder or between Affiliates of such holder (if any such Affiliate to whom shares of Restricted Securities have been transferred by a holder thereof ceases to be an Affiliate of such holder of Restricted Securities, such Restricted Securities shall immediately be transferred back to the transferor thereof), (ii) any transfer upon the death of any holder of Restricted Securities to such holder's executors, administrators or testamentary trustees or (iii) any transfer to a trust the beneficiaries of which include only the holder of such Restricted Securities or such holder's spouse, parents, siblings or descendants (any transferee referred to in (i), (ii) or (iii) above being referred to herein as a "Permitted Transferee"); PROVIDED that no such transfer shall be made to any Permitted Transferee unless such Permitted Transferee shall have agreed in writing that such Permitted Transferee, as a Stockholder or Warrantholder (as the case may be), and the shares of Common Stock or Warrants it acquires shall be bound by and be entitled to the benefits of all the provisions of this Agreements applicable to Common Stock or Warrants (as the case may be), and upon such agreement such Permitted Transferee shall be entitled to such benefits. SECTION 2.4. TAG-ALONG RIGHTS. If a Significant Stockholder Group (any such Person or group of such Persons for purposes of Section 2.4, the "Transferor") wishes to transfer its shares of Common Stock or any portion thereof to any Person (the "Transferee"), the Transferor shall first give to Avatech and each Warrant Securityholder (pursuant to a list provided by Avatech) a written notice (a "Transfer Notice"), executed by it and the Transferee and containing (i) the number of shares of Common Stock that the Transferee proposes to acquire from the Transferor, (ii) the name and address of the Transferee, (iii) the proposed purchase price, terms of payment and other material terms and conditions of such proposed transfer, (iv) an estimate, in the Transferor's reasonable judgment, of the fair market value of any non-cash consideration offered by the Transferee and (v) an offer by the Transferee or Transferor to purchase, upon the purchase by the Transferee of any shares of Common Stock owned by the Transferor and for the same per share consideration, that number of Conversion Shares (or if such number is not an integral number, the next 5 integral number which is greater that such number) of each Warrant Securityholder which shall be the product of (x) the aggregate number of Conversion Shares either then owned, or issuable upon exercise of Warrants then owned, by such Warrant Securityholder and (y) a fraction, the numerator of which shall be the number of shares of Common Stock indicated in the Transfer Notice as subject to purchase by the Transferee and the denominator of which shall be the sum of (A) the total number of shares of Common Stock then owned by the Transferor and its Affiliates plus (B) the total number of Conversion Shares either then owned, or issuable upon exercise of Warrants then owned, by each Warrant Securityholder. Each Warrant Securityholder shall have the right, for a period of 20 days after the Transfer Notice is given, to accept such offer in whole or in part, exercisable by delivering a written notice to the Transferor and Avatech within such 20-day period, stating therein the number of shares of Common Stock (which may be the number of shares set forth in the offer by the Transferor or Transferee, as the case may be, or may be. Prior to the earlier of (x) the end of such 20-day period or (y) the acceptance or rejection by each Warrant Securityholder of the Transferee's or Transferor's offer, as the case may be, neither the Transferor nor its Affiliates will complete any sale of shares of Common Stock to the Transferee. Thereafter, for a period of 60 days after the prohibition under the proceeding sentence shall have terminated, the Transferor may sell to the Transferee for the consideration stated and on the terms set forth in the Transfer Notice the shares of Common Stock stated in the Transfer Notice as subject to purchase by the Transferee, PROVIDED that the Transferor or Transferee, as the case may be, shall simultaneously purchase the number of shares of Common Stock as calculated above from those Warrant Securityholders who have accepted the Transferor's or Transferee's offer, as the case may be. The provisions of this Section 2.4 shall not apply to transfers between the Transferor and any of its Affiliates or between Affiliates of the Transferor. SECTION 2.5. DRAG-ALONG RIGHTS. If at any time prior to an Initial Public Offering, a Significant Stockholder Group with drag-along rights (any such Person or group of such Persons for purposes of this Section 2.5, the "Transferor") wishes to transfer all of the shares of Common Stock owned by it and its Affiliates (PROVIDED that such shares of Common Stock constitute more than 50% of all shares of Common Stock on a Fully Diluted Basis (as defined in the Warrants) at such time) in a bona fide sale to any Person (the "Proposed Transferee") pursuant to which the consideration to be paid by the Proposed Transferee consists solely of cash and freely tradeable securities with an active public market and the Transferor and its Affiliates will not receive, in connection with the transactions contemplated at the time of such transfer, any other securities or options to acquire securities of Avatech, then the Transferor shall have the right (the "Drag-Along Right") to require each Warrant Securityholder to sell to the Proposed Transferee for the same per share consideration received by the Transferor all of the Conversion Shares and Warrants (calculated, in the case of any Warrants, on the number of Conversion Shares for which such Warrant is exercisable at such time) held by such Warrant Securityholder; PROVIDED that (a) such price per share is not less than the Fair Market Value (as defined in the Warrants) of Avatech per share of outstanding Common Stock on a Fully Diluted Basis and (b) each Warrant Securityholder shall not be obligated to make any representation or warranty, or incur any liability in connection with any such transfer, other than as to its ownership of the Conversion Shares or Warrants being transferred by it. To exercise the Drag-Along Right, the Transferor shall first give to Avatech and each other Warrant Securityholder (pursuant to a list provided by Avatech) a written notice (a "Drag-Along Notice") executed by the Transferor and the Proposed Transferee and containing (a) the number of shares of Common Stock that the Proposed Transferee proposes to acquire from the Transferor and its Affiliates, and certifying that such shares constitute all of the shares of Common Stock owned by the Transferor and its Affiliates and more than 50% of the shares of Common Stock on a Fully Diluted Basis at such time, (b) the name and address of the Proposed Transferee, (c) the proposed purchase price (certifying that such price per share is not less than the Fair Market Value of outstanding Common Stock on a Fully Diluted Basis), terms of 6 payment and other material terms and conditions of the Proposal Transferee's offer, (d) a statement by the Proposed Transferee that the Proposed Transferee (i) has been informed of the Drag-Along Right provided for in this Section 2.5 and (ii) has agreed to purchase the Conversion Shares in accordance with the terms of this Section 2.5 and (e) the aggregate number of Conversion Shares or Warrants owned by each Warrant Securityholder with respect to which the Transferor wishes to exercise its Drag-Along Right pursuant to this Section 2.5. Each Warrant Securityholder shall thereafter be obligated to sell to the Proposed Transferee the Warrants and Conversion Shares subject to such Drag-Along Notice, PROVIDED that the sale to the Proposed Transferee is consummated within 60 days of delivery of the Drag-Along Notice. If the sale is not consummated within such 60-day period, then each affected Warrant Securityholder may sell, but shall no longer be obligated to sell, such Warrant Securityholder's Warrants or Conversion Shares pursuant to such Drag-Along Notice. The provisions of this Section 2.5 shall not apply to transfers between the Transferor and any of its Affiliates or between any of its Affiliates. SECTION 2.6. [RESERVED] SECTION 2.7. RESTRICTIONS ON TRANSFER BY REGULATED HOLDERS. (a) Notwithstanding anything else set forth herein to the contrary, in the event of any reasonable determination in good faith by any Regulated Holder that, by reason of any Regulatory Requirement, such Regulated Holder is effectively restricted or prohibited from holding, exercising or transferring (as the case may be) any Warrant or Conversion Shares (or any portion thereof), Avatech shall use reasonable good faith efforts to take such action as it may determine is reasonably necessary and appropriate to permit such Regulated Holder to hold, exercise or transfer (as the case may be) such Warrant or Conversion Shares (or any portion thereof) in such manner as is necessary to comply with such Regulatory Requirement. All such actions shall be taken at the expense of Regulated Holder. Regulated Holder shall give written notice to Avatech of any reasonable determination by it hereunder and the transfer or other action it believes may be necessary or appropriate to permit it to comply with such Regulatory Requirement. In the event of a Regulatory Change, the effect of which is to permit such Regulation Holder to hold, exercise or transfer such Warrant or Conversion Shares in any other manner, the foregoing proviso shall be deemed modified to permit the holding, exercise or transfer of such Warrant or Conversion Shares in such other manner. (b) Nothing in this Agreement (including without limitation Sections 2.4 and 2.5) shall require any Regulated Holder to make a transfer of Warrants or Conversion Shares in a manner not permitted by Section 2.6(a) (an "Impermissible Transfer"). If any provision of this Agreement (including without limitation Sections 2.4 and 2.5) would otherwise require any Regulated Holder to make an Impermissible Transfer as a condition precedent to making a transfer of Warrants or Conversion Shares in a manner permitted by Section 2.6(a) (a "Permissible Transfer"), then such Regulated Holder shall not be required to make such Impermissible Transfer as a condition precedent to making such Permissible Transfer. SECTION 2.8. ADJUSTMENT EVENT FEE. If (a) any Adjustment Event shall occur within 90 days after the Optional Redemption Date and (b) the Consideration Per Share for such Adjustment Event is greater than the Redemption Price Per Share then, immediately upon the occurrence of such Adjustment Event, Avatech shall pay to each Warrant Securityholder an amount equal to the product of (x) the number of shares of Voting Common Stock issuable upon exercise of the Warrants of such Warrant Securityholder that were redeemed and (y) the difference between the Consideration Per Share for such Adjustment Event and the Redemption Price Per Share paid to such Warrant Securityholder. 7 "Adjustment Event" means: (a) the completion of an Initial Public Offering by Avatech; or (b) 25% or more of the: (i) Common Stock on a Fully Diluted Basis (as defined in the Warrants) on an aggregate basis is sold, exchanged, transferred or otherwise disposed of by Avatech or any stockholder of Avatech (as part of a single sale or a series of sales); or (ii) assets of Avatech and its Subsidiaries on a consolidated basis are, directly or indirectly, sold, exchanged, leased, transferred or otherwise disposed of as an entirety or substantially as an entirety (in one transaction or a series of transactions) to any Person or related group of Persons; or (c) the stockholders or directors of Avatech consummate a definitive agreement or plan for any merger, consolidation, recapitalization, reorganization, restructuring or other business combination of Avatech and, after giving effect to such transaction, the stockholders of Avatech on the Optional Redemption Date will no longer hold, directly or indirectly, securities representing in the aggregate a percentage of the total voting power entitled to vote in the election of directors, managers or trustees of the corporation surviving or resulting from such transaction greater than 75% of the percentage of such total voting power with respect to Avatech represented by the Common Stock held by such stockholders on the Optional Redemption Date; or (d) the stockholders or directors of Avatech consummate a definitive agreement or plan for the liquidation or dissolution of Avatech. "Consideration Per Share" means: (i) in the case of any Adjustment Event described in clause (a) or (b)(i) of the definition of Adjustment Event, the highest consideration per share (if any) received by Avatech or any stockholder of Avatech from the sale, exchange, transfer or other disposition by it of Common Stock in connection with such Adjustment Event; and (ii) in the case of any other Adjustment Event, the highest consideration per share of Common Stock that would be received by any stockholder of Avatech upon the disposition of all or substantially all of the Common Stock or of the assets of Avatech (determined by reference to all of the consideration received by the stockholders of Avatech (as stockholders) for that portion actually disposed of in connection with such Adjustment Event, or which would be received by such shareholders if Avatech were liquidated immediately following receipt of the consideration received by Avatech in connection with such Adjustment Event). "Optional Redemption Date" means the date of any redemption of the Warrants pursuant to Section 5.3 of the Warrants. "Redemption Price Per Share" means the Optional Redemption Price (as defined in the Warrants) which was paid to the Warrant Securityholders pursuant to Section 5.3 of the Warrants (determined on a per share basis by reference to the number of shares of Voting Common Stock issuable upon exercise of the Warrants that were redeemed). 8 SECTION 2.9. NO RESTRICTIVE AGREEMENTS. Avatech has not entered into and will not enter into any stockholders rights agreement, registration rights agreement or similar arrangements the performance by Avatech of the terms of which would in any manner restrict or limit, or materially conflict with, the performance by Avatech of its obligations under this Agreement. ARTICLE III REGISTRATION RIGHTS SECTION 3.1. [RESERVED]. SECTION 3.2. INCIDENTAL REGISTRATION. (a) If Avatech at any time proposes to register any of its securities under the Securities Act (other than by a registration on Form S-4 or S-8 or any successor or similar forms) whether for its own account or for the account of the holder or holders of shares other than Registrable Shares (any such shares with respect to any registration, "Other Shares") requested to be included in such registration by the holder or holders thereof, it will each such time give prompt written notice to all Warrant Securityholders of its intention to do so and of such holders' rights under the Section 3.2. Upon the written request of any such holder made within 20 days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such holder and the intended method of disposition thereof), Avatech will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which Avatech has been so requested to register by the holders thereof, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered, by inclusion of such Registrable Securities in the registration statement which covers the securities which Avatech proposes to register; PROVIDED that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, Avatech shall determine for any reason either not to register to delay registration of such securities, Avatech may, at its election, give written notice of such determination to each holder of Registrable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registration Expenses in connection therewith), and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. Avatech will pay all Registration Expenses in connection with each registration of Registrable Securities pursuant to this Section 3.2. (b) If Avatech at any time proposes to register any of its securities under the Securities Act as contemplated by Section 3.2 and such securities are to be distributed by or through one or more underwriters, Avatech will, if requested by any holder of Registrable Securities as provided in this Section 3.2, use its best efforts to arrange for such underwriters to include all the Registrable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters, PROVIDED that if the managing underwriter of such underwritten offering shall inform Avatech and holders of the Registrable Securities requesting such registration and all other holders of any other shares of Common Stock which shall have exercised, in respect of such underwritten offering, registration rights comparable to the rights under this Section 3.2 by letter of its belief that inclusion in such distribution of all or a specified number of such securities proposed to be distributed by such underwriters would interfere with the successful marketing of the securities being distributed by such underwriters (such letter to state the 9 basis of such belief and the approximate number of such Registrable Securities and such Other Shares proposed so to be registered which may be distributed without such effect), then Avatech may, upon written notice to all holders of such Registrable Securities and holders of such Other Shares, reduce PRO RATA (if and to be extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such Registrable Securities and Other Shares the registration of which shall have been requested by each holder thereof so that the resultant aggregate number of such Registrable Securities and Other Shares so included in such registration, together with the number of securities to be included in such registration for the account of Avatech, shall be equal to the number of shares stated in such managing underwriter's letter. SECTION 3.3. REGISTRATION PROCEDURES. (a) If and whenever Avatech is required to effect the registration of any Registrable Securities under the Securities Act as provided in Section 3.2., Avatech shall, as expeditiously as possible: (i) prepare and (within 60 days after the end of the period within which requests for registration may be given to Avatech or in any event as soon thereafter as possible) file with the Commission the requisite registration statement to effect such registration (including such audited financial statements as may be required by the Securities Act) and thereafter use its best efforts to cause such registration statement to become and remain effective; PROVIDED that Avatech may discontinue any registration of its securities which are not Registrable Securities at any time prior to the effective date of the registration statement relating thereto; PROVIDED FURTHER that before filing such registration statement or any amendments thereto, Avatech will furnish to the counsel selected by the holders of Registrable Securities which are to be included in such registration copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until the expiration of 90 days after such registration statement becomes effective; (iii) furnish to each seller of Registrable Securities covered by such registration statement and each underwriter, if any, of the securities being sold by such seller such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller and underwriter, if any, may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such seller; (iv) use its best efforts to register or qualify all Registrable Securities and other securities covered by such registration statements under blue sky or similar laws of such jurisdictions as any seller thereof and any underwriter of the securities being sold by such seller shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller and underwriter to consummate the disposition in such jurisdictions of the securities owned by such seller, except that Avatech shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any 10 jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified, to subject itself to taxation in any such jurisdiction or to consent to general service of process in any such jurisdiction; (v) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities; (vi) notify the holders of Registrable Securities and the managing underwriter or underwriters, if any, promptly and confirm such advice in writing promptly thereafter: (A) when the registration statement, the prospectus or any prospectus supplement related thereto or post-effective amendment to the registration statement has been filed, and, with respect to the registration statement or any post-effective amendment thereto, when the same has become effective; (B) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information; (C) of the issuance by the Commission of any stop order suspending the effectiveness of the registration or the initiation of any proceedings by any Person for that purpose; and (D) of the receipt by Avatech of any notification with respect to the suspension of the qualification of any Registrable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation or threat of any proceeding for such purpose; (vii) notify each seller of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon Avatech' discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes as untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of any such seller promptly prepare and furnish to such seller and each underwriter, if any, a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (viii) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible moment; (ix) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar quarter after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; 11 (x) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such Registration Statement; (xi) use its best efforts to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the Common Stock is then listed and, if not so listed, to be listed on the NASD automated quotation system and, if listed on the NASD automated quotation system, use its best efforts to secure designation of all such Registrable Securities covered by such registration statement as a NASDAQ "national market system security" within the meaning of Rule 11Aa2-1 of the Securities and Exchange Commission or, failing that, to secure NASDAQ authorization for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with the NASD; and (xii) use its best efforts to provide a CUSIP number for the Registrable Securities, not later than the effective date of the registration. Avatech may require each seller of Registrable Securities as to which any registration is being effected to furnish Avatech such information regarding such seller and the distribution of such securities as Avatech may from time to time reasonably request in writing for purposes of preparing the relevant registration statement and amendments and supplements thereto. (b) Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from Avatech of the occurrence of any event of the kind described in subdivision (vii) of Section 3.3(a), such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (vii) of Section 3.3(a). In the event Avatech shall give any such notice, the periods specified in subdivision (ii) of Section 3.3(a) shall be extended by the length of the period from and including the date when each seller of any Registrable Securities covered by such registration statement shall have received such notice to the date on which each such seller has received the copies of the supplemented or amended prospectus contemplated by subdivision (vii) of Section 3.3(a). (c) If any such registration or comparable statement to any holder of Registrable Securities by name or otherwise as the holder of any securities of Avatech, then such holder shall have the right to require, in the event that such reference to such holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force, the deletion of the reference to such holder. SECTION 3.4. UNDERWRITTEN OFFERINGS. (a) [reserved]; (b) Each holder of Registrable Securities agrees by acquisition of such Registrable Securities not to sell, make any short sale of, loan, grant any option for the purchase of, effect any public sale or distribution of or otherwise dispose of any equity securities of Avatech, during the ten days prior to and the 90 days after the effective date of any underwritten registration pursuant to Section 3.2 has become effective, except as part of such underwritten registration, whether or not such holder participates in such registration, and except as otherwise permitted by the managing underwriter of such underwriting (if any). Each holder of Registrable Securities agrees that Avatech may instruct its transfer agent to place stop transfer notations in its records to enforce this Section 3.4(b). 12 (c) [reserved]; (d) No Person may participate in any underwritten offering hereunder unless such Person (i) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved, subject to the terms and conditions hereof, by the Person or a majority of the Persons entitled to approve such arrangements and (ii) completes and executes all agreements, questionnaires, indemnities and other documents (other than powers of attorney) required under the terms of such underwriting arrangements. SECTION 3.5. INDEMNIFICATION. (a) Avatech agrees to indemnify and hold harmless each holder of Registrable Securities whose Registrable Securities are covered by any registration statement, its directors and officers and each other Person, if any, who controls such holder within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which any such indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and Avatech will reimburse each such indemnified party for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding; PROVIDED that Avatech shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to Avatech by or on behalf of such holder specifically for use in the preparation thereof. In addition, Avatech shall indemnify any underwriter of such offering and each other Person, if any, who controls any such underwriter within the meaning of the Securities Act in substantially the same manner and to substantially the same extent as the indemnity herein provided to each Indemnified Party. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such holder. (b) Each prospective seller of Registrable Securities hereunder shall indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this Section 3.5) Avatech, each director of Avatech, each officer of Avatech and each other person, if any, who controls Avatech within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereof, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to Avatech by or on behalf of such seller specifically for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of Avatech or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. The amount payable by any prospective seller of Registrable Security with respect to the Indemnification set forth in this subsection (b) in connection with any offering of securities will not exceed the amount of net proceeds received by such prospective seller pursuant to such offering. 13 (c) Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this Section 3.5, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; PROVIDED that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this Section 3.5, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any such action the defense of which has been assumed by an indemnifying party without the consent of such indemnifying party. (d) If the indemnification provided for in the preceding subdivisions of this Section 3.5 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability (i) in such proportion as is appropriate to reflect the relative benefits received by Avatech on the one hand and the holder or underwriter, as the case may be, on the other from the distribution of the Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of Avatech on the one hand and of the holder or underwriter, as the case may be, on the other in connection with the statements or omissions which resulted in such expense, loss, damage or liability, as well as any other relevant equitable considerations. The relative benefits received by Avatech on the one hand and the holder or underwriter, as the case may be, on the other in connection with the distribution of the Registrable Securities shall be deemed to be in the same proportion as the total net proceeds received by Avatech from the initial sale of the Registrable Securities by Avatech to the purchaser bear to the gain realized by the selling holder or the underwriting discounts and commissions received by the underwriter, as the case may be. The relative fault of Avatech on the one hand and of the holder or underwriter, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by Avatech, by the holder or by the underwriter and parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; PROVIDED that the foregoing contribution agreement shall not inure to the benefit of any indemnified party if indemnification would be unavailable to such indemnified party by reason of the proviso contained in the first sentence of subdivision (a) of this Section 3.5, and in no event shall the obligation of any indemnifying party to contribute under this subdivision (d) exceed the amount that such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under subdivisions (a) or (b) of this Section 3.5 had been available under the circumstances. Avatech and the holders of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this subdivision (d) were determined by PRO RATA allocation (even if the holders 14 and any underwriters were treated as one entity for such purpose) or any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph and subdivision (c) of this Section 3.5 The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subdivision (d), no holder of Registrable Securities or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any such holder, the net proceeds received by such holder from the sale of Registrable Securities or (ii) in the case of an underwriter, the total price at which the Registrable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. ARTICLE IV MISCELLANEOUS SECTION 4.1. NOTICES. All notices and other communications provided for hereunder shall be dated and in writing and shall be deemed to have been given (i) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and telephonic confirmation of receipt thereof is obtained or (ii) if given by mail, prepaid overnight courier or any other means, when received at the address specified in this Section or when delivery at such address is refused. Such notices shall be addressed to the appropriate party to the attention of the person who executed this Agreement at the address or telecopy number set forth under such party's signature below (or to the attention of such other person or to such other address or telecopy number as such party shall have furnished to each other party in accordance with this Section 4.1). SECTION 4.2. BINDING NATURE OF AGREEMENT. This Agreement shall be binding upon the inure to the benefit of and be enforceable by the parties hereto or their successors in interest, except as expressly otherwise provided herein. SECTION 4.3. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. SECTION 4.4. SPECIFIC PERFORMANCE. Without limiting the rights of each party hereto to pursue all other legal and equitable rights available to such party for the other parties' failure to perform their obligations under this Agreement, the parties hereto acknowledge and agree that the remedy at law for any failure to perform their obligations 15 hereunder would be inadequate and that each of them, respectively, shall be entitled to specific performance, injunctive relief or other equitable remedies in the event of any such failure. SECTION 4.5. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NORTH CAROLINA. EACH OF THE PARTIES HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA AND OF ANY NORTH CAROLINA STATE COURT SITTING IN MECKLENBURG COUNTY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH SUCH PARTY MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE PARTIES HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 4.1. NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY TO THIS AGREEMENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. SECTION 4.6. COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. SECTION 4.7. SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in each other respect and of the remaining provisions contained herein shall not be in any impaired hereby. It being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. SECTION 4.8. ENTIRE AGREEMENT. This Agreement is intended by the parties hereto as a final and complete expression of their agreement and undertaking in respect to the subject matter contained herein. This Agreement supersedes all prior agreement and understandings, written or oral, between the parties with respect to such subject matter. SECTION 4.9. AMENDMENT TO WAIVER. Any provision of this Agreement may be amended if, but only if, such amendment is in writing and is signed by Avatech and the Warrantholders. Any provision may be waived if, but only if, such waiver is in writing and is signed by the party or parties waiving such provision and for whose benefit such provision is intended. 16 SECTION 4.10. NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement shall convey any rights upon any person or entity which is not a party or an assignee of a party to this Agreement. 17 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. AVATECH SOLUTIONS, INC. By: /s/ Henry D. Felton ------------------------------------ Name: Henry D. Felton ---------------------------------- Title: Chairman & Chief Executive Off. --------------------------------- Address: 11403 CRONHILL DR., Suite A ----------------------------- Owings Mills, MD. 21117 ----------------------------- Telecopy: 410-902-8324 ----------------------------- [STOCKHOLDERS IDENTIFIED IN 2.4, 2.5, AND, IF DRAG RIGHTS OPTION USED, 2.6] By: - NONE - ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Address: ----------------------------- ----------------------------- Telecopy: ----------------------------- THE CIT GROUP/BUSINESS CREDIT, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Address: The CIT Group/Business Credit, Inc. Two First Union Center Charlotte, North Carolina 28230-0337 Attn: Regional Credit Manager Telecopy: (704) 339-2208 Telephone: IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the date first above written. AVATECH SOLUTIONS, INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- Address: Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, Maryland 21117 Attn: Henry Felton Fax No. 410-902-8324 THE CIT GROUP/BUSINESS CREDIT, INC. By: Dominick A. Varipapa ------------------------------------- Name: DOMINICK A. VARIPAPA ----------------------------------- Title: ASSISTANT VICE PRESIDENT ---------------------------------- Address: The CIT Group/Business Credit, Inc. Two First Union Center Charlotte, North Carolina 28230-337 Attn: Regional Credit Manager Telecopy: (704) 339-2208 Telephone: (704) 339-2217 EX-10.06 8 a2080957zex-10_06.txt EXHIBIT 10.06 EXHIBIT 10.06 LOAN AGREEMENT This Loan Agreement (the "Agreement") is entered into as of this 25th day of January 1999 between Autodesk, Inc. (the "Holder"), a Delaware corporation, with its principal offices located at 111 McInnis Parkway, San Rafael, California 94903 and Avatech Solutions, Inc., with its principal offices located at Owings Mills, Maryland, Avatech of California, Inc., Avatech of Connecticut, Inc., Avatech Solutions of Colorado, Inc., Avatech of Florida, Inc., Avatech of Maryland, Inc., Avatech of Michigan, Inc., Avatech of Nebraska, Inc., Avatech of New Jersey, Inc., Avatech of New York, Inc., Avatech of Virginia, Inc., and Technical Learningware Company, Inc. (hereinafter collectively the "Borrower"). RECITALS A. Holder wishes to lend to Borrower and Borrower wishes to borrow from Holder up to Three Million Dollars ($3,000,000.00) on the terms and conditions set forth in the Secured Promissory Notes attached hereto as Exhibit A (the "Note") B. Holder and Borrower agree that such loan and any and all other amounts due Holder from Borrower at any time shall be secured by the assets of Borrower (the "Collateral") on the terms and conditions set forth in the Security Agreement between Holder and Borrower attached hereto as Exhibit B (the "Security Agreement"). C. In connection with making such loan, Holder requires that Borrower makes certain representations, warranties and covenants, all as set forth hereinafter, upon which Holder relies in making such loan. NOW, THEREFORE, IN CONSIDERATION FOR THE MUTUAL COVENANTS AND REPRESENTATIONS SET FORTH HEREIN, THE PARTIES AGREE AS FOLLOWS: 1. LOAN. 1.1 Subject to the terms and conditions of this Agreement, Holder agrees to lend to Borrower and Borrower agrees to borrow from Holder up to Three Million Dollars ($3,000,000.00) pursuant to the terms and conditions of the Note. 1.2 The loan shall be made at a closing (the "Closing") to be held at the principal officers of Holder, as set forth above, on the date of this Agreement or such later date as shall be mutually agreeable to Holder and Borrower (the "Closing Date"), at which time Holder shall (i) deliver to Borrower a wire transfer of Three Million Dollars ($3,000,000.00); and (ii) Borrower shall execute and deliver to Holder the Note and Borrower and Holder shall execute the Security Agreement. 1.3 Borrower understands that Holder makes no promises of any further 1 support. Accordingly, Holder shall have no obligation to provide any further financial support beyond that contemplated under the terms of this Agreement, nor shall Holder have any obligation to provide any technical, marketing or other advice, or opportunities to Borrower. Holder reserves the right to provide or refuse to provide any assistance in Holder's sole discretion. 2. SECURITY. All obligations of Borrower under this Agreement and the Note shall be secured by the Collateral pursuant to the terms and conditions set forth in the Security Agreement, executed by Borrower as debtor in favor of Holder as secured party, granting Holder a security interest in the Collateral (subject only to the security interest held by First Union National Bank, or such financial institution replacing it as a secured party, under various loan documents for an amount not exceeding Three Million Dollars ($3,000,000.00) in principal, plus interest, attorneys' fees, late charges, and other costs and expenses due and owing under the agreements between Borrower and First Union National Bank (the "Credit Limit")). Borrower covenants and agrees to execute and deliver the Security Agreement and such other documents as may be necessary for the perfection and preservation of Holder's security interest in the Collateral. 3. CONDITIONS PRECEDENT. The obligation of Holder to disburse the loan to Borrower at Closing is subject to the condition precedent that, on the Closing Date, there shall have been delivered to Holder the following documents executed by Borrower: 3.1 This Agreement; 3.2 The Note; 3.3 The Security Agreement; and 3.4 Appropriate Financing Statements on Form UCC-1 relating to the Collateral subject to the Security Agreement. 4. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and warrants that: 4.1 Each company listed as Borrower is a corporation duly organized and existing under the laws of a state, and is properly licensed and in good standing in every jurisdiction in which it is doing business, except where failure to be so qualified would not have a material adverse effect on Borrower's business. 2 4.2 The execution, delivery and performance of this Agreement and any instrument or agreement required of Borrower hereunder are within Borrower's powers, have been duly authorized and are not in conflict with the terms of the articles of incorporation or bylaws of Borrower, or any instrument or agreement to which Borrower is a party or by which Borrower is bound or affected. 4.3 No approval, consent, exemption or other action by, or notice to or filing with, any governmental authority is necessary in connection with the execution, delivery, performance, or enforcement of this Agreement or any instrument or agreement required hereunder, except as may have been obtained and certified copies of which have been delivered to Holder. 4.4 There is no law, rule or regulation, nor is there any judgment, decree or order of any court or governmental authority binding on Borrower, which would be contravened by the execution, delivery, performance or enforcement of this Agreement or any instrument or agreement required of Borrower hereunder. 4.5 This Agreement is a legal, valid and binding agreement of Borrower, enforceable against Borrower in accordance with its terms, and any instrument or agreement required to Borrower hereunder, when executed and delivered, and will be similarly legal, valid, binding and enforceable, except as enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally, and subject to rules of law governing specific performance, injunctive relief and other equitable remedies. 4.6 Borrower has good and marketable title to the Collateral which is subject to the Security Agreement, free and clear of all clouds to title and of all security interests, liens, encumbrances or rights of others, other than those in favor of First Union National Bank and those listed on Schedule A attached hereto. 4.7 Borrower represent that as of the Closing that the loan by Holder hereunder shall be prior and superior to any other indebtedness of Borrower other than the security interest held by First Union National Bank ("Bank"). Except for the due filing or recording of financing statements on Form UCC-1 pursuant to the Security Agreement, no further action is necessary in order to establish and perfect Holder's security interest in or lien on all Collateral subject only to the security interest of the Bank. 4.8 There are no suits, proceedings, claim or disputes pending or, to the knowledge of Borrower, threatened against or affecting Borrower or its property, the adverse determination of which might affect Borrower's financial condition or operations or impair Borrower's ability to perform their obligations hereunder or under any instrument or agreement required hereunder. 4.9 Borrower has provided to Holder preliminary drafts of financial statements of Borrower for fiscal year end 1997 and 1998 (June 1997 and June 1998), and financial 3 statement and balance sheet, and unaudited financial statements for the period of July through September 1998 (collectively the "Financial Statements"). Borrower represents that the Financial Statements were prepared in accordance with generally accepted accounting principles and fairly represents Borrower's financial condition and results of operations as of the date thereof. 5. COVENANTS. Borrower covenants and agrees that so long as any amount is due Holder from Borrower upon the Note or otherwise: 5.1 Borrower will promptly notify Holder of any "Event of Default" (the term "Events of Default" being as defined in the form of Security Agreement attached hereto as Exhibit B) or any event which, upon a lapse of time or notice or both, would become an Event of Default. 5.2 Borrower will deliver to Holder as soon as available, but no later than one hundred twenty (120) days after the close of each fiscal year, Borrower's financial statements for the fiscal year, prepared in accordance with generally accepted accounting principles and certified by independent certified public accountants reasonably acceptable to Holder. 5.3 Borrower will deliver to Holder as soon as available, but no later than forty-five (45) days after the close of each quarter, Borrower's unaudited financial statements as of the close of such quarter, certified by a responsible officer of Borrower as being complete and correct and fairly representing Borrower's financial condition and results of operations. 5.4 Borrower will deliver to Holder at the Closing a written budget for each fiscal year occurring during the term of this Agreement and, when available but in no event later than ninety (90) days after each fiscal year end occurring during the term of this Agreement, a budget for each succeeding fiscal year, together with any written revisions to such budgets. 5.5 Borrower will deliver to Holder such additional information relating to Borrower's financial condition and results of operations as Holder may reasonably request from time to time. 5.6 Borrower agrees that proceeds from the loan made hereunder shall be used for the purpose of opening new offices, hiring new employees, producing training materials, purchasing and selling Holder's products, and repayment of any debt due and owed by Borrower to Holder or to First Union National Bank. In no event shall proceeds from the loan be used for any of the following purposes without prior written consent of Holder: (a) Acquisition of securities or assets of another business; (b) Acquisition of property, plant or equipment except (i) acquisitions in the ordinary course of business each in the amount of less than Fifty Thousand Dollars 4 ($50,000.00); and (ii) such equipment or Holder's products as are directly related to the primary purpose of the loan. (c) Repayment of any debt, including shareholder notes, other than as explicitly allowed in this section; (d) Bonuses, extraordinary salary increases or deferred compensation for officers or directors of Borrower; or (e) Trade shows, advertising, production of marketing materials or brochures. 5.7 Borrower will promptly notify Holder of any material claim, action, suit or proceeding against Borrower or its assets. 5.8 Borrower will maintain current capital, including subordinated debt, of at least One Million Five Hundred Thousand Dollars ($1,500,000.00), plus equity existing as of the date of this Agreement. 5.9 Borrower will maintain a ratio of current assets to current liabilities (excluding the current portion of any subordinated indebtedness), in each case determined in accordance with generally accepted accounting principles of at least 1.0 to 1.0. 5.10 Borrower will maintain a ratio of total liabilities to permanent capital of no greater than 10 to 1.0 5.11 Borrower will not borrow, from First Union National Bank or otherwise, additional funds such that at any time there is due and owing from Borrower to First Union National Bank an amount in excess of the Credit Limit or further encumber any of the assets constituting Collateral under the Security Agreement without the prior written consent of Holder. 6. EVENTS OF DEFAULT. The occurrence of any of the "Events of Default" as defined in the Security Agreement, at the option of Holder, shall make the remaining unpaid balance of the Note immediately due and payable. 7. CONFIDENTIAL INFORMATION. Each of Holder and Borrower agrees not to use any Confidential Information of the other party disclosed to it, for its own use or use by any other person or for any purposes except to carry out, perform and enforce its obligations under agreements between Holder and Borrower, and not to disclose any such Confidential Information except to employees (or 5 consultants subject to confidentiality provisions similar to this Section 7) who are required to have such information in order to carry out, perform or enforce such obligations. Borrower and Holder will take all reasonable measures to protect the secrecy and avoid disclosure or use of Confidential Information in order to prevent it from entering the public domain or possession of persons other than those persons authorized hereunder to have any such information, which measures shall include, without limitation, the highest degree of care that each utilizes to protect its own confidential information of a similar nature. Either party shall notify the affected party promptly in writing of any misuse or misappropriation of Confidential Information which may come to such party's attention. For purposes of this section, "Confidential Information" means (i) the terms of this Agreement, the Secured Promissory Note and Security Agreement and accompanying transactions (provided, however, that said Agreement, Secured Promissory Note and Security Agreement may be disclosed to a party having a secured position with Borrower prior to that of Holder), as well as (ii) any proprietary information, technical data, trade secrets or know-how, including, without limitation, research, product plans, products, services, customers, markets, software, developments, inventions, processes, formulae, technology, designs, drawings, engineering, hardware configuration information, marketing, finances or other business or technological information disclosed by either party to the other either directly or indirectly. "Confidential Information" of a disclosing party does not include any information which: (i) is known to the receiving party at the time of disclosure; (ii) has become publicly known through no wrongful act of the receiving party; (iii) has been rightfully received by the receiving party from a third party without restriction on disclosure and without breach of any agreement with the disclosing party; (iv) has been independently developed by the receiving party as evidenced by appropriate documentation; (v) has been approved for release by written authorization executed by an authorized officer of the disclosing party; (vi) is required to be disclosed by the receiving party pursuant to a requirement of law; or (vii) (A) is not provided in writing or on magnetic media, or (B) if provided orally, is not confirmed in writing to be confidential within fifteen (15) days after disclosure. Should Borrower wish to disclose the specific terms of this Agreement or the other Loan Documents to a potential investor or investors, it shall first obtain written consent to such disclosure from Holder, which consent shall not be unreasonably withheld with respect to bona fide potential investors. Each party acknowledges that the other's Confidential Information is unique property of extreme value to the other party, and that unauthorized use or disclosure thereof would cause the other party irreparable harm that could not be compensated by monetary damages. Accordingly, each party agrees that the other will be entitle to injunctive and preliminary relief to remedy any actual or threatened unauthorized use or disclosure of the other party's Confidential Information. Nothing in this Section 7 is intended to supersede any existing agreement between the parties under which confidential technical or market information has or may be given by one party to the other. As to matters not covered by such existing agreements, this Section 7 shall 6 control in the absence of any specific agreement to the contrary. 8. MISCELLANEOUS. 8.1 Any communications between the parties hereto or notices or requests provided herein to be given may be given by mailing the same, postage prepaid, to the other party as follows: BORROWER: Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, MD 21117 Attention: Charles Cullen and a courtesy copy to: Richard M. Goldberg, Esq. Shapiro and Olander 20th Floor, Charles Center South 36 South Charles Street Baltimore, MD 21201-3147 HOLDER: Autodesk, Inc. 111 McInnis Parkway San Rafael, California 94903 Attention: Treasurer 8.2 This Agreement, together with the covenants and warranties contained in it, shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that Borrower may not assign this Agreement or any of the rights of Borrower hereunder without the prior written consent of Holder. 8.3 No delay or omission by Holder to exercise any right under this Agreement shall impair any such right, nor shall it be construed as a waiver thereof. No waiver of any single breach or default under this Agreement shall be deemed a waiver of any other breach or default. Any waiver, consent or approval under this Agreement must be in writing to be effective. 8.4 Borrower and Holder each shall bear its own costs and expenses incurred in connection with the preparation and administration of this Agreement and any instrument or agreement required hereunder. Borrower agrees to pay all costs, expenses and 7 attorneys' fees reasonably incurred by Holder in connection with the enforcement of this Agreement. 8.5 This Agreement, and any agreement, document or instrument attached hereto or referred to herein, integrate all the terms and conditions mentioned herein or incidental hereto, and supersede all oral negotiations and prior writings in respect to the subject matter hereof. In the event of any conflict between the terms, conditions and provisions of this Agreement and any such agreement, document or instrument, the terms, conditions and provisions of this Agreement shall prevail. This Agreement may be executed in counterparts, and each counterpart shall be deemed an original instrument, but together shall constitute one and the same instrument. Additionally, any signatures sent by facsimile shall be deemed to be originals and shall have all of the same force and effect and import as an original signature, regardless of whether or not the parties shall or shall not later receive one or more such original signature. 8 8.6 This Agreement shall be construed in accordance with the laws of the State of California (excluding rules regarding conflicts of law). The parties hereby submit to the personal jurisdiction of and venue in the Superior Court of the State of California, County of Marin, and the United States District Court for the Northern District of California in San Francisco. 8.7 The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 8.8 In addition to any rights and remedies of Holder provided by law, Holder shall have the right, without prior notice to Borrower, any such notice being expressly waived by Borrower to the extent permitted by applicable law, upon the occurrence and during the continuance of an Event of Default, to set-off and apply against any indebtedness, whether matured or unmatured, of Borrower to Holder, any amount owing from Holder to Borrower. The aforesaid right of set-off may be exercised by Holder against Borrower or against any trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, receiver or execution, judgment or attachment creditor of Borrower or against anyone else claiming through or against Borrower or such trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by Holder prior to the occurrence of an Event of Default. Holder agrees promptly to notify Borrower after any such set-off and application by Holder, PROVIDED that the failure to give such notice shall not affect the validity of such set-off and application. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized officers as of the day and year first above written. "Holder" "Borrower" AUTODESK, INC. AVATECH SOLUTIONS, INC. By: /s/ [ILLEGIBLE] By: /s/ Henry D. Felton ------------------------------- Name: [ILLEGIBLE] Name: HENRY D. FELTON ----------------------------- Title: [ILLEGIBLE] Title: CHAIRMAN & CEO ---------------------------- 9 AVATECH OF CALIFORNIA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF CONNECTICUT, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH SOLUTIONS OF COLORADO, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF FLORIDA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF MARYLAND, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF MICHIGAN, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEBRASKA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEW JERSEY, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEW YORK, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF VIRGINIA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- TECHNICAL LEARNINGWARE COMPANY, INC. By: /s/ Ronald C. Diegelman -------------------------------- Name: Ronald C. Diegelman ---------------------------- Title: Chairman ---------------------------- EXHIBIT A SECURED PROMISSORY NOTE $3,000,000.00 January 25, 1999 San Rafael, California FOR VALUE RECEIVED, Avatech Solutions, Inc., a corporation organized under the laws of the State of Delaware, Avatech of California, Inc., Avatech of Connecticut, Inc., Avatech Solutions of Colorado, Inc., Avatech of Florida, Inc., Avatech of Maryland, Inc., Avatech of Michigan, Inc., Avatech of Nebraska, Inc., Avatech of New Jersey, Inc., Avatech of New York, Inc., Avatech of Virginia, Inc., and Technical Learningware Company, Inc. (hereinafter collectively referred to as the "Borrower"), hereby promises to pay to Autodesk, Inc., a corporation organized under the laws of the State of Delaware, or its assigns ("Holder"), at the principal offices of the Holder presently located at 111 McInnis Parkway, San Rafael, California 94903, the principal sum of Three Million Dollars ($3,000,000.00), together with accrued interest at the rate specified hereinafter. This Note is issued subject to the terms and conditions of a Loan Agreement between the Borrower and the Holder of even date herewith (the "Loan Agreement"), as well as the following additional terms and conditions: 1. TERMS OF PAYMENT. Principal and interest on this Note shall be due and payable in eleven (11) quarterly equal installments (adjusted, however, for any prepayments of principal) commencing with the payment of all accrued interest and amortized principal on the first day of the month following six months from the execution date (e.g., if the execution date is January 25, the first payment shall be due August 1), and continuing thereafter on the same day of each succeeding three month interval until maturity (e.g., if the execution date is January 25, the second payment shall be due November 1). A copy of the payment schedule is attached as Schedule 1. 2. RATE OF INTEREST. The unpaid principal on this Note shall bear interest from the date hereof until maturity at a rate of nine and three quarters percent (9-3/4%) per annum. 3. SECURITY AGREEMENT. Repayment of this Note is secured by certain assets of the Borrower pursuant to a Security Agreement between the Borrower and the Holder of even date herewith 12 (the "Security Agreement") 4. PREPAYMENT. This Note may be prepaid, at the Borrower's election, at any time prior to maturity without premium or penalty. Prepayments shall be applied first to interest accrued and then to principal due under this Note. 5. EVENTS OF DEFAULT. If any Event of Default (as hereinafter defined) shall occur, the Borrower hereby promises to give Holder immediate (other than as provided in this Section 5) oral and written notice of such occurrence, the principal and accrued interest on this Note may be accelerated and declared due and payable at the option of Holder. For the purposes of this Section 5, "Event of Default" shall mean any of the following. (a) NONPAYMENT. Failure by the Borrower to pay the principal or interest hereunder within ten (10) days after the date when due; (b) ACT OF INSOLVENCY. Any affirmative act of bankruptcy or insolvency by the Borrower, or the filing by the Borrower of any petition or action under or the commencement of any proceedings (not subject to subsection (c) below) relating to the Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency or moratorium law, or any other law or laws for the relief of or relating to debtors, of any jurisdiction, or the appointment of a receiver, liquidator, assignee, trustee, or sequestrator (or other similar official) for the Borrower, or any substantial part of the properties or assets of the Borrower, or the making by the Borrower of an assignment for the benefit of creditors, or the admission by the borrower in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Borrower in furtherance of any such action; (c) INVOLUNTARY BANKRUPTCY. The filing against the Borrower of any involuntary petition under any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, moratorium, dissolution or liquidation law, or any other law or laws for the relief of or relating to debtors, of any jurisdiction, or the entry or rendering of any order, judgment or decree approving the filing of the petition in any such proceedings, or the appointment of any receiver, liquidator, 13 assignee, trustee, sequestrator (or other similar official) for the Borrower or any substantial part of the properties or assets of the Borrower, unless such petition, order, judgment, decree or appointment is set aside or withdrawn or ceases to be effective within thirty (30) days after the date of such filing, rendering, entry or appointment, or the entry or rendering of an order, judgment or decree adjudicating the Borrower bankrupt for insolvent; (d) MISREPRESENTATION. Any misrepresentation or omission of a material fact in this Note, the Loan Agreement or the Security Agreement; or (e) MATERIAL ADVERSE CHANGE. Any Material Adverse Change in the condition of the Borrower, which shall mean a material adverse change in (a) the business, assets, operations, prospects or financial or other condition of Borrower; (b) the ability of Borrower to pay or perform the Borrower's obligations in accordance with the terms of this Note and the other transaction documents and to avoid an Event of Default under any transaction document; or (c) the rights and remedies of Holder under this Note, the other transaction documents or any related document, instrument or agreement. if the Borrower fails to remedy the Material Adverse Change within thirty (30) days of written notice thereof. (f) CHANGE OF CONTROL. A Change of Control of the Borrower, which shall mean a merger, sale of securities or sale of all or substantially all of Borrower's assets that results in a change of ownership of at least 50%, except such changes of control which are entirely between the Borrower provided that written notice of such change of control between Borrower is provided to Holder within 30 days of consummation of such change. (g) OTHER BREACH OR DEFAULT. A breach or default by the Borrower in the performance or observance of any other term, covenant, representation, warranty or agreement contained in this Note, the Loan Agreement or the Security Agreement to be performed or observed by the Borrower, if the Borrower fails to cure within (30) days of written notice of such breach or default to the Holder. 6. REPLACEMENT. Upon receipt by the Borrower of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note (provided that an affidavit of Holder will be satisfactory for such purpose), and of indemnity satisfactory to it (provided that if the Holder is 14 the original Holder hereof, its own indemnification agreement shall under all circumstances be satisfactory, and no bond shall be required), and upon surrender and cancellation of this Note, if mutilated, the Borrower will make and deliver a new Note of the same terms in a principal amount equal to the outstanding balance of this Note, dated as of the last date at which principal or interest has been paid upon this Note. 7. ATTORNEYS' FEES. The Borrower covenants that upon the occurrence of any Event of Default it will pay to Holder all costs and expenses of collection and enforcement of this Note, including reasonable attorneys' fees. 8. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of California (excluding rules regarding conflicts of law). The parties hereby submit to the personal jurisdiction of and venue in the Superior Court of the State of California, County of Marin, and the United States District Court for the Northern District of California in San Francisco. 9. MISCELLANEOUS. This Agreement may be executed in counterparts, and each counterpart shall be deemed an original instrument, but together shall constitute one and the same instrument. Additionally, any signatures sent by facsimile shall be deemed to be originals and shall have all of the same force and effect and import as an original signature, regardless of whether or not the parties shall or shall not later receive one or more such original signature. IN WITNESS WHEREOF, the Borrower has caused this Note to be executed in its corporate name by its duly authorized officer. "Holder" "Borrower" AUTODESK, INC. AVATECH SOLUTIONS, INC. By: By: /s/ Henry D. Felton -------------------------------- Name: Name: HENRY D. FELTON ----------------------------- Title: Title: CHAIRMAN & CEO ----------------------------- 15 AVATECH OF CALIFORNIA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF CONNECTICUT, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH SOLUTIONS OF COLORADO, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF FLORIDA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF MARYLAND, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF MICHIGAN, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEBRASKA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEW JERSEY, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEW YORK, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF VIRGINIA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- TECHNICAL LEARNINGWARE COMPANY, INC. By: /s/ Ronald C. Diegelman -------------------------------- Name: Ronald C. Diegelman ----------------------------- Title: Chairman ---------------------------- SCHEDULE 1 Note payment schedule. SCHEDULE 1 AUTODESK, INC. LOAN PAYMENT CALCULATION AVATECH SOLUTIONS, INC. REVISED DRAFT AMORTIZATION SCHEDULE (JULY, 2000) SIMPLE INTEREST RATE 6.50% PRINCIPAL AMOUNT: $(2,960,645.77)
PRINCIPAL INTEREST PAYMENTS INTEREST PRINCIPAL --------- -------- -------- -------- --------- 06/30/00 0 (2,960,645.77) 07/31/00 1 (2,960,645.77) (16,344.39) 08/31/00 2 (2,960,645.77) (16,344.39) 09/30/00 3 (2,960,645.77) (15,817.15) (48,505.92) (48,505.92) -- 10/31/00 4 (2,960,645.77) (16,344.39) 11/30/00 5 (2,960,645.77) (15,817.15) 12/31/00 6 (2,960,645.77) (16,344.39) (48,505.92) (48,505.92) -- 01/31/01 7 (2,960,645.77) (16,344.39) 02/28/01 8 (2,960,645.77) (14,762.67) 03/31/01 9 (2,960,645.77) (16,344.39) (47,451.45) (47,451.45) -- 04/30/01 10 (2,960,645.77) (15,817.15) 05/31/01 11 (2,960,645.77) (16,344.39) 06/30/01 12 (2,960,645.77) (15,817.15) (47,978.68) (47,978.68) -- 07/31/01 13 (2,960,645.77) (16,344.39) 08/31/01 14 (2,960,645.77) (16,344.39) 09/30/01 15 (2,960,645.77) (15,817.15) (48,505.92) (48,505.92) -- 10/31/01 16 (2,960,645.77) (16,344.39) 11/30/01 17 (2,960,645.77) (15,817.15) 12/31/01 18 (2,387,840.83) (16,344.39) (621,310.86) (48,505.92) (572,804.94) 01/31/02 19 (2,387,840.83) (13,182.19) 02/28/02 20 (2,387,840.83) (11,906.49) 03/31/02 21 (1,804,800.84) (13,182.19) (621,310.86) (38,270.87) (583,039.99) 04/30/02 22 (1,804,800.84) (9,642.09) 05/31/02 23 (1,804,800.84) (9,963.49) 06/30/02 24 (1,212,737.65) (9,642.09) (621,310.86) (29,247.66) (592,063.20) 07/31/02 25 (1,212,737.65) (6,694.98) 08/31/02 26 (1,212,737.65) (6,694.98) 09/30/02 27 (611,295.75) (6,479.01) (621,310.86) (19,868.96) (601,441.90) 10/31/02 28 (611,295.75) (3,374.69) 11/30/02 29 (611,295.75) (3,265.83) 12/31/02 30 (0.00) (3,374.69) (621,310.86) (10,015.20) (611,295.75) ============ =========== ============= 3,347,502.20 (386,856.52) (2,960,645.77)
EXHIBIT B SECURITY AGREEMENT THIS AGREEMENT (the "Security Agreement") is entered into as of this 25th day of January 1999 between Autodesk, Inc. (the "Holder"), a Delaware corporation, with its principal offices located at 111 McInnis Parkway, San Rafael, California 94903 and Avatech Solutions, Inc. with its principal offices located at Owings Mills, Maryland, Avatech of California, Inc., Avatech of Connecticut, Inc., Avatech Solutions of Colorado, Inc., Avatech of Florida, Inc., Avatech of Maryland, Inc., Avatech of Michigan, Inc., Avatech of Nebraska, Inc., Avatech of New Jersey, Inc., Avatech of New York, Inc., Avatech of Virginia, Inc., and Technical Learningware Company, Inc. (hereinafter collectively the "Borrower"). RECITALS: A. Borrower and Holder have entered into a Loan Agreement of even date herewith (the "Loan Agreement") pursuant to which the Holder has agreed to lend up to Three Million Dollars ($3,000,000.00) to Borrower. B. Holder has made such loan to Borrower pursuant to a secured promissory note of even date herewith (the "Note"). C. In consideration of the loan pursuant to the Note, Borrower wishes to grant to Holder a security interest in certain collateral to ensure repayment of the loan and any and all other amounts now or hereafter due to Holder from Borrower. THE PARTIES THEREFORE, IN CONSIDERATION FOR THE MUTUAL COVENANTS SET FORTH HEREIN, IN THE LOAN AGREEMENT AND IN THE NOTE, AGREE AS FOLLOWS: 1. GRANT OF SECURITY INTEREST. Borrower hereby pledges and assigns to Holder and grants to Holder a security interest in the Collateral (as defined in Section 2) to secure the performance of Borrower's obligations to Holder: (a) under the Loan Agreement, (b) under the Note, and (c) to pay any and all amounts due to Holder from Borrower. All obligations of Borrower to Holder are collectively "Borrower's Obligations". 2. COLLATERAL. The collateral covered by this Security Agreement consists of the following (the "Collateral"): 19 All right, title and interest of Borrower now owned or hereafter acquired in and to the following: (a) All equipment and fixtures (including, without limitation, furniture, vehicles and other machinery and office equipment), together with all additions and accessions thereto and replacements therefor (collectively, the "Equipment"); (b) All inventory (including, without limitation, (i) all raw materials, work in process and finished goods and (ii) all such goods which are returned to or repossessed by Borrower), together with all additions and accessions thereto, replacements therefor, products thereof and documents therefor (collectively, the "Inventory"); (c) All accounts, chattel paper, contract rights and rights to the payment of money (collectively, the "Receivables"); (d) All assets and general intangibles, including, without limitation, (i) customer and supplier lists and contracts, books and records, insurance policies, tax refunds, contracts for the purchase of real or personal property; (ii) all patents, copyrights, trademarks, trade names, service marks and other intellectual property rights, (iii) all licenses to use, applications for, and other rights to, such patents, copyrights, trademarks, trade names and service marks, and (iv) all goodwill of Borrower; (e) All deposit accounts, money, certificated securities, uncertificated securities, instruments and documents; and (f) All proceeds of the foregoing (including, without limitation, whatever is receivable or received when Collateral or proceeds is sold, collected, exchanged, returned, substituted or otherwise disposed of, whether such disposition is voluntary or involuntary, including rights to payment and return premiums and insurance proceeds under insurance with respect to any Collateral, and all rights to payment with respect to any cause of actions affecting or relating to the Collateral). 3. BORROWER'S OBLIGATIONS SECURED HEREBY. Borrower's Obligations to Holder secured hereby are the following: 3.1 NOTE. Payment of the principal and interest evidenced by the Note, together with any future advances thereunder and amendments thereof; 20 3.2 ACCOUNT BALANCES. Payment of any and all amounts due to Holder from Borrower including, but not limited to, amounts due for purchases by Borrower of products from Holder. 3.3 PERFORMANCE. Performance and discharge of each and every obligation of Borrower under this Security Agreement, the Loan Agreement and the Note. 4. BORROWER'S COVENANTS. Borrower agrees and covenants that: 4.1 FURTHER ENCUMBRANCES. Except to the extent of the Credit Limit (as that term is defined in the Loan Agreement) provided to Borrower by First Union National Bank which holds a security interest with Borrower as of the date of this Security Agreement, Borrower shall not, without Holder's consent (which consent shall not be unreasonably withheld) grant a security interest in any of the Collateral or execute any financing statements covering any of the Collateral in favor of any person until Borrower's Obligations secured under this Security Agreement shall have been repaid and performed in full. Notwithstanding the foregoing, Borrower may allow a financial institution to replace First Union National Bank and obtain, in place of said bank, the secured position held by First Union National Bank as of the date of this Agreement to the extent of the Credit Limit. 4.2 USE OF COLLATERAL. The Collateral will not be used for any unlawful purpose. Excepting the existing security interest of First Union National Bank, borrower will keep the Collateral free and clear of liens and adverse claims. 4.3 INDEMNIFICATION. Borrower shall indemnify Holder against all losses, claims, demands and liabilities of every kind caused by or respecting the Collateral. 4.4 PERFECTION OF SECURITY INTEREST. Immediately upon execution of this Security Agreement, Borrower and Holder shall execute and file Financing Statements on Form UCC-1 with respect to 21 the Collateral and shall execute and deliver such other documents as Holder deems necessary to create, perfect and continue the security interest in the Collateral contemplated hereby, including, but not limited, to the forms and documents attached hereto as Attachment A. 4.5 COLLECTION OF ACCOUNTS. Borrower shall collect with diligence all of its Receivables and proceeds of Inventory, Equipment and other personal property. 4.6 RECORDS. Borrower shall prepare and keep in accordance with generally accepted accounting principles consistently applied, complete and accurate records regarding all Accounts, Inventory, Equipment, Fixtures and Other Personal Property, and proceeds thereof, and if and when requested by Holder, shall, from time to time, prepare and deliver a complete and accurate schedule of all the Collateral, in such detail as Holder may reasonably request. 4.7 INSPECTION OF BORROWER'S BOOKS. Borrower shall permit Holder and its designees at reasonable times and from time to time to inspect Borrower's books, records and properties and to audit and to make copies of extracts from such books and records. 4.8 FEES AND COSTS. Upon any Event of Default, Borrower shall pay all expenses, including attorneys' fees, incurred by Holder in the preservation, realization, enforcement or exercise of any of Holder's rights under this Security Agreement. 5. EVENTS OF DEFAULT. The following are an Event of Default under this Security Agreement. 5.1 The occurrence of any Event of Default, as defined in the Note; 5.2 The failure to pay an amount due Holder when and as due, provided however, that, to the extent amounts are past due from Borrower to Holder for more than thirty (30) days as of the date of this Security Agreement, then as to that amount such failure to pay when due shall not constitute a default under this Section 5.2 until March 5, 1999. 22 5.3 To the extent not otherwise deemed a default under Sections 5.1 or 5.2 herein, the breach or default by Borrower of any agreement Borrower has with any party holding a security interest in any property of Borrower, provided, however, that, to the extent Borrower is in breach or default of any agreement with First Union National Bank as of the date of this Agreement, this Section 5.3 shall not apply to the limited extent of that specific breach or default with said bank until March 5, 1999. 6. REMEDIES ON DEFAULT. Upon the occurrence of an Event of Default, provided that payment in full has not been made, the Holder shall have all rights, privileges, powers and remedies provided by law, which rights, privileges, powers, and remedies shall be cumulative, and no single or partial exercise of any of them shall preclude the further or other exercise of the same or any of them. By way of example and not by way of limitation, Holder may, pursuant to this Section 6, exercise any one or all of the remedies hereinafter set forth: 6.1 PAYMENT UNDER NOTE; ACCOUNT BALANCE. The Holder may by notice under Section 12 declare the aggregate unpaid principal balance of the Note and all other amounts owing to Holder from Borrower, together with all unpaid accrued interest thereon, to be immediately due and payable to the Holder. 6.2 POSSESSION OF COLLATERAL. (a) The Holder may take possession of all Collateral covered hereby (which Collateral Borrower will assemble and make available to Holder) using the employees, facilities, equipment and other property of Borrower to do so, all at Borrower's expense and without compensation to Borrower. (b) If and when requested by Holder, Borrower shall upon any Event of Default prepare and deliver to Holder assignments in writing of all Collateral and related accounts, instruments, documents and other evidences thereof. 6.3 USE, OPERATION AND SALE OF COLLATERAL BY HOLDER. The Holder may use, operate, consume and sell the Collateral in its possession as appropriate for the purpose of performing Borrower's obligations with respect thereto. Borrower and Holder agree that public or private sales, for cash or on credit, to a wholesaler or retailer or use of Collateral of the types subject to this Security Agreement, or at public auction, are all commercially reasonable since differences in the sales prices generally realized in the different kinds of sale are ordinarily offset by the differences in the costs and credit risks of such sales. 23 7. PAYMENTS AFTER AN EVENT OF DEFAULT. All payments received and amounts realized by the Holder pursuant to Section 6, including all such payments and amounts received after the Holder has declared pursuant to Section 6.1 the entire unpaid principal and interest amount of the Note to be due and payable, as well as all payments or amounts then held or thereafter received by the Holder as part of the Collateral while an Event of Default shall be continuing, shall be promptly applied and distributed by the Holder in the following order of priority: (a) First, to the payment of all amounts claimed due by a person holding a secured interest in the Collateral prior to the interest of Holder, and all reasonable costs and expenses, including legal expenses and attorneys fees, incurred or made hereunder by the Holder, including any such costs and expenses of foreclosure or suit, if any, and of any sale or the exercise of any other remedy under Section 6, and of all taxes, assessments or liens superior to the lien granted under this Security Agreement, except any taxes, assessments or other superior lien subject to which any said sale under Section 6 hereof may have been made; (b) Second, to the payment of all amounts then owned by Borrower to Holder, excepting the amount then owing or unpaid on the Note; (c) Third, to the payment of the amount then owing or unpaid on the Note, with application to be made first to the unpaid interest thereon and second, to the unpaid principal thereof, such application to be made upon presentation of the Note and the notation thereon of the payment, if partially paid, or the surrender and cancellation thereof, if fully paid; and (d) Fourth, to the payment of the balance or surplus, if any, to Borrower, its successors and assigns, or to any other party who may be lawfully entitled to receive the same. 8. POWER OF ATTORNEY. Borrower hereby appoints Holder the attorney-in-fact of Borrower to prepare, sign and file or record, for Borrower in Borrower's names, any financing statements, applications for registration and like papers and to take any other action deemed by Holder necessary or desirable in order to perfect the security interest of Holder hereunder, and to perform any obligation of Holder hereunder at Borrower's expense, but without obligation to do so. Holder agrees to provide prior written notice to Borrower of any such action taken as attorney-in-fact of Borrower, together with copies of any financing statements, applications or other papers executed in such capacity by Holder. 24 9. HOLDER'S RIGHT TO CURE: REIMBURSEMENT. In the event Borrower should fail to do any act as herein provided, Holder may, but without obligation to do so, without notice or release of Borrower from any obligation hereof, make or do the same in such manner and to such extent as Holder may deem necessary to protect the Collateral, including, without limitation, the defense of any action purporting to affect the Collateral or the rights or powers of Holder hereunder, at Borrower's expense. 10. ASSIGNS AND SUCCESSORS. This Security Agreement, together with the covenants and warranties contained in it, shall inure to the benefit of Holder, its successors and assigns, and shall be binding upon Borrower, its successors and assigns; provided, however that Borrower may not assign this Agreement or any of the rights or obligations of Borrower hereunder without the prior written consent of Holder. 11. PRESENTMENT: APPLICATION. Presentment, protest, notice of protest, notice of dishonor and notice of nonpayment are waived with respect to any proceeds to which Holder is entitled hereunder and any rights to direct the application of payments for security for indebtedness of Borrower hereunder, or indebtedness of customers of Borrower, and any right to require proceedings against others or to require exhaustion of security, are waived. 12. NOTICES. All notices, payments, and other communications called for or required by this Security Agreement shall be in writing and shall be deemed to have been validly given on the date of service if served personally on any party to whom notice is to be given, or on the third day after mailing if mailed to any party to whom notice is to be given by first class mail, registered or certified, postage prepaid, and properly addressed as follows: TO BORROWER AT: Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, MD 21117 Attention: Charles Cullen and a courtesy copy to: Richard M. Goldberg, Esq. Shapiro and Olander 20th Floor, Charles Center South 36 South Charles Street Baltimore, MD 21201-3147 25 TO HOLDER AT: Autodesk, Inc. 111 McInnis Parkway San Rafael, California 94903 Attention: Treasurer 13. GOVERNING LAW: JURISDICTION. This Agreement shall be construed in accordance with the laws of the State of California (excluding rules regarding conflicts of law). The parties hereby submit to the personal jurisdiction of and venue in the Superior Court of the State of California, County of Marin and the United States District Court for the Northern District of California in San Francisco. 14. ENFORCEMENT. If any portion of this Security Agreement be determined to be invalid or unenforceable, the remainder shall be valid and enforceable to the maximum extent possible. 15. MISCELLANEOUS. The headings set forth in this Security Agreement are for the convenience of the parties and shall not by themselves determine the interpretation or construction of this Security Agreement. This Agreement may be executed in counterparts, and each counterpart shall be deemed an original instrument, but together shall constitute one and the same instrument. Additionally, any signatures sent by facsimile shall be deemed to be originals and shall have all of the same force and effect and import as an original signature, regardless of whether or not the parties shall or shall not later receive one or more such original signature. IN WITNESS WHEREOF, the parties have executed this Security Agreement on the date set forth above. "Holder" "Borrower" AUTODESK, INC. AVATECH SOLUTIONS, INC. By: /s/ [ILLEGIBLE] By: /s/ Henry D. Felton ------------------------------- Name: [ILLEGIBLE] Name: HENRY D. FELTON ---------------------------- Title: [ILLEGIBLE] Title: CHAIRMAN, CEO --------------------------- 26 AVATECH OF CALIFORNIA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF CONNECTICUT, INC By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH SOLUTIONS OF COLORADO, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF FLORIDA, INC By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF MARYLAND, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF MICHIGAN, INC By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEBRASKA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEW JERSEY, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF NEW YORK, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- AVATECH OF VIRGINIA, INC. By: /s/ Henry D. Felton -------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- TECHNICAL LEARNINGWARE COMPANY, INC. By: /s/ Ronald C. Diegelman -------------------------------- Name: Ronald C. Diegelman ----------------------------- Title: Chairman ---------------------------- SECOND AMENDMENT TO LOAN AGREEMENT This Second Amendment to the Loan Agreement (the "Second Amendment"), effective as of December 17, 1999 ("Effective Date"), supplements and amends the terms of the Loan Agreement entered into between Autodesk, Inc. ("Holder") and Avatech Solutions, Inc, a corporation organized under the laws of the State of Delaware, Avatech of California, Inc., Avatech of Connecticut, Inc., Avatech Solutions of Colorado, Inc., Avatech of Florida, Inc., Avatech of Maryland, Inc., Avatech of Michigan, Inc., Avatech of Nebraska, Inc., Avatech of New Jersey, Inc., Avatech of New York, Inc., Avatech of Virginia, Inc., and Technical Learningware Company, Inc., (hereinafter collectively referred to as the "Borrower") with the effective date of January 25, 1999 (the "Agreement") and the Amendment with the Effective Date of October 18, 1999 ("First Amendment"). Capitalized terms not otherwise defined shall have the meaning set forth in the Agreement. RECITALS WHEREAS, the parties wish to modify the schedule for payments and modify certain covenants under the terms of the Agreement. NOWTHEREFORE, in consideration of the mutual covenants herein the parties agree as follows: TERMS 1. ACKNOWLEDGEMENT OF DEFAULT AND WAIVER. Borrower hereby acknowledges that Borrower has not met the terms of the covenants as set forth in Section 5.8 (minimum current capital) and Section 5.9 (minimum current ratio). These violations constitute an "Event of Default" as defined in the Agreement. Holder hereby agrees to waive the violations and are considering the Borrower to be in compliance with the aforementioned through September 30, 1999. Subsequent to September 30, 1999, the original provisions of these sections are hereby modified to be as follows: Section 5.8: Borrower will maintain tangible net worth, including subordinated debt, of at least One Million Dollars ($1,000,000.00) through June 29, 2000 and One Million Four Hundred Thousand Dollars ($1,400,000.00) from June 30, 2000 forward. Section 5.9: Borrower will maintain a ratio of current assets to current liabilities (excluding the current portion of any subordinated indebtedness), in each case determined in accordance with generally accepted accounting principles of at least .90 through June 29, 2000 and .95 through June 30, 2000. 2. Exhibit A "Secured Promissory Note", Section 1 "Terms of Payment" shall be amended to include the following: 1 "Borrower shall be required to pay Holder for interest only for the period from October 31, 1999 through September 30, 2000 as set forth in the amended Schedule 1. 3. Exhibit A, Schedule 1 shall be amended and replaced with the Schedule 1 attached hereto. 4. Except as modified herein, all other terms and conditions in the Agreement shall remain in full force and effect. "Holder" "Borrower" AUTODESK, INC. AVATECH SOLUTIONS, INC. By: /s/ Marcia K. Sterling By: /s/ Ronald C. Diegelman ------------------------------- -------------------------------- Name: Marcia K. Sterling Name: RONALD C. DIEGELMAN ----------------------------- ------------------------------ Title: [ILLEGIBLE] Title: President ---------------------------- ----------------------------- Date: 12/17/99 Date: 12/20/99 ----------------------------- ------------------------------ 2 AVATECH OF CALIFORNIA, INC. AVATECH OF CONNECTICUT, INC By: /s/ Ronald C. Diegelman By: /s/ Ronald C. Diegelman ------------------------------ ------------------------------- Name: RONALD C. DIEGELMAN Name: ----------------------------- ------------------------------ Title: Treasurer Title: Treasurer ---------------------------- ----------------------------- Date: 12/20/99 Date: 12/20/99 ----------------------------- ------------------------------ AVATECH SOLUTIONS OF COLORADO, INC. AVATECH OF FLORIDA, INC. By: /s/ Ronald C. Diegelman By: /s/ Ronald C. Diegelman ------------------------------ ------------------------------- Name: Name: ----------------------------- ------------------------------ Title: Treasurer Title: Treasurer ---------------------------- ----------------------------- Date: 12/20/99 Date: 12/20/99 ---------------------------- ------------------------------ AVATECH OF MARYLAND, INC AVATECH OF MICHIGAN, INC. By: /s/ Ronald C. Diegelman By: /s/ Ronald C. Diegelman ------------------------------ ------------------------------- Name: Name: ----------------------------- ------------------------------ Title: Treasurer Title: Treasurer ---------------------------- ----------------------------- Date: 12/20/99 Date: 12/20/99 ----------------------------- ------------------------------ AVATECH OF NEBRASKA, INC AVATECH OF NEW JERSEY, INC. By: /s/ Ronald C. Diegelman By: /s/ Ronald C. Diegelman ------------------------------ ------------------------------- Name: Name: ----------------------------- ------------------------------ Title: Treasurer Title: Treasurer ---------------------------- ----------------------------- Date: 12/20/99 Date: 12/20/99 ----------------------------- ------------------------------ AVATECH OF NEW YORK, INC. AVATECH OF VIRGINIA, INC. By: /s/ Ronald C. Diegelman By: /s/ Ronald C. Diegelman ------------------------------ ------------------------------- Name: Name: ----------------------------- ------------------------------ Title: Treasurer Title: Treasurer ---------------------------- ----------------------------- Date: 12/20/99 Date: 12/20/99 ----------------------------- ------------------------------ TECHNICAL LEARNINGWARE COMPANY, INC. By: /s/ Ronald C. Diegelman ------------------------------- Name: ----------------------------- Title: Chief Operating Officer ---------------------------- Date: 12/20/99 ----------------------------- 3 THIRD AMENDMENT TO LOAN AGREEMENT This Third Amendment, effective as of July 27, 2000 ("Effective Date"), amends the terms of the Loan Agreement entered into between Autodesk, Inc. ("Holder") and Avatech Solutions, Inc, a corporation organized under the laws of the State of Delaware, Avatech of California, Inc., Avatech of Connecticut, Inc., Avatech Solutions of Colorado, Inc., Avatech of Florida, Inc., Avatech of Maryland, Inc., Avatech of Michigan, Inc., Avatech of Nebraska, Inc., Avatech of New Jersey, Inc., Avatech of New York, Inc., Avatech of Virginia, Inc., and Technical Learningware Company, Inc., (hereinafter collectively referred to as the "Borrower") with the effective date of January 25, 1999, as amended by the First Amendment with the Effective Date of October 18, 1999 and the Second Amendment with the Effective Date of December 17, 1999 (collectively the "Agreement"). Capitalized terms not otherwise defined shall have the meaning set forth in the Agreement. RECITALS WHEREAS, the parties wish to modify the schedule for payments and the terms of the Secured Promissory Note set forth in Exhibit A and temporarily waive Borrower's obligation to comply with certain covenants under the terms of the Agreement. NOW THEREFORE, in consideration of the mutual covenants herein the parties agree as follows: TERMS 1. ACKNOWLEDGMENT OF DEFAULT AND WAIVER. Borrower hereby acknowledges that Borrower has failed to comply with the terms of the covenants as set forth in Section 5.8 (minimum current capital) and Section 5.9 (minimum current ratio) and that this failure constitutes an "Event of Default" as defined in the Agreement. Holder hereby agrees to waive the violations and to consider the Borrower to be in compliance with the aforementioned covenants through September 30, 2000. On or before, September 30, 2000, the parties shall amend the above covenants and all other covenants set forth in the Agreement to conform to those agreed by Borrower and Borrower's then-current financial institution, and Borrower shall thenceforth comply with such amended covenants. 2. AMENDMENT OF SECURED PROMISSORY NOTE. Exhibit A ("Secured Promissory Note") to the Agreement is hereby deleted in its entirely and replaced with Exhibit A to this Third Amendment. Concurrently with the execution of this Third Amendment, the parties shall execute the amended Secured Promissory Note, which upon its execution shall supersede the Secured Promissory Note dated January 25, 1999. 1 3. OTHER TERMS AND CONDITIONS. Except as modified herein, all other terms and conditions in the Agreement shall remain in full force and effect. "Holder" "Borrower" AUTODESK, INC. AVATECH SOLUTIONS, INC. By: /s/ [ILLEGIBLE] By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: [ILLEGIBLE] Name: Henry D. Felton ----------------------------- ------------------------------ Title: [ILLEGIBLE] Title: CHAIRMAN & CEO ---------------------------- ----------------------------- Date: July 28, 2000 Date: July 31st 2000 ----------------------------- ------------------------------ 2 AVATECH OF CALIFORNIA, INC. AVATECH OF CONNECTICUT, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: HENRY D. FELTON Name: HENRY D. FELTON ----------------------------- ------------------------------ Title: PRESIDENT Title: PRESIDENT ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ AVATECH SOLUTIONS OF COLORADO, INC. AVATECH OF FLORIDA, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ AVATECH OF MARYLAND, INC. AVATECH OF MICHIGAN, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ AVATECH OF NEBRASKA, INC AVATECH OF NEW JERSEY, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ AVATECH OF NEW YORK, INC. AVATECH OF VIRGINIA, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ TECHNICAL LEARNINGWARE COMPANY, INC. By: /s/ Henry D. Felton ------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- Date: July 31st 2000 ----------------------------- 3 SECURED PROMISSORY NOTE $2,960,645.77 July 27, 2000 San Rafael, California For Value Received, Avatech Solutions, Inc., a corporation organized under the laws of the State of Delaware, Avatech of California, Inc., Avatech of Connecticut, Inc., Avatech Solutions of Colorado, Inc., Avatech of Florida, Inc., Avatech of Maryland, Inc., Avatech of Michigan, Inc., Avatech of Nebraska, Inc., Avatech of New Jersey, Inc., Avatech of New York, Inc., Avatech of Virginia, Inc., and Technical Learningware Company, Inc. (hereinafter collectively referred to as the "Borrower"), hereby promises to pay to Autodesk, Inc., a corporation organized under the laws of the State of Delaware, or its assigns ("Holder"), at the principal offices of the Holder presently located a 111 McInnis Parkway, San Rafael, California 94903, the principal sum of Two Million Nine Hundred Sixty Thousand Six Hundred Forty Five Dollars and Seventy Seven Cents ($2,960,645.77), together with accrued interest at the rate specified hereinafter. This Note is issued subject to the terms and conditions of a Loan Agreement between the Borrower and the Holder of even date herewith (the "Loan Agreement"), as well as the following additional terms and conditions: 1. TERMS OF PAYMENT. Principal and interest on this Note shall be due and payable on the dates and in the amounts set forth in Schedule 1 hereto. 2. RATE OF INTEREST. The unpaid principal on this Note shall bear interest from the date hereof until maturity at a rate of six and fifty one-hundredths (6.50%) per annum. 3. SECURITY AGREEMENT. Repayment of this Note is secured by certain assets of the Borrower pursuant to a Security Agreement between the Borrower and the Holder dated January 25, 1999 (the "Security Agreement"). 4. PREPAYMENT. This Note may be prepaid, at the Borrower's election, at any time prior to maturity without premium or penalty. Prepayments shall be applied first to interest accrued and then to principal due under this Note in order of maturity. 1 5. EVENTS OF DEFAULT. If any Event of Default (as hereinafter defined) shall occur, the Borrower hereby promises to give Holder immediate (other than as provided in this Section 5) oral or written notice of such occurrence, the principal and accrued interest on this Note may be accelerated and declared due and payable at the option of Holder. For the purposes of this Section 5, "Events of Default" shall mean any of the following: (a) NONPAYMENT. Failure by the Borrower to pay the principal or interest hereunder within thirty (30) days after the date when due; (b) ACT OF INSOLVENCY. Any affirmative act of bankruptcy or insolvency by the Borrower, or the filing by the Borrower of any petition or action under or the commencement of any proceedings (not subject to subsection (c) below) relating to the Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt, insolvency or moratorium law, or any other law or laws for the relief of or relating to debtors, of any jurisdiction, or the appointment of a receiver, liquidator, assignee, trustee, or sequestrator (or other similar official) for the Borrower, or any substantial part of the properties or assets of the Borrower, or the making by the Borrower of an assignment for the benefit of creditors, or the admission by the Borrower in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Borrower in furtherance of any such action; (c) INVOLUNTARY BANKRUPTCY. The filing against the Borrower of any involuntary petition under nay bankruptcy, reorganization, arrangement, readjustment of debt, insolvency, moratorium, dissolution or liquidation law, or any other law or laws for the relief of or relating to debtors, of any jurisdiction, or the entry or rendering of any order, judgement or decree approving the filing of the petition in any such proceedings, or the appointment of any receiver, liquidator, assignee, trustee, sequestrator (or other similar official) for the Borrower or any substantial part of the properties or assets of the Borrower, unless such petition, order, judgement, decree or appointment is set aside or withdrawn or ceases to be effective within sixty (60) days after the date of such filing, rendering, entry or appointment, or the entry or rendering of an order, judgement or decree adjudicating the Borrower bankrupt or insolvent; (d) MISREPRESENTATION. Any misrepresentation or omission of a material fact in this Note, the Loan Agreement or the Security Agreement; or 2 (e) MATERIAL ADVERSE CHANGE. Any Material Adverse Change in the condition of the Borrower, which shall mean a material adverse change in (a) the business, assets, operations, prospects or financial or other condition of Borrower; (b) the ability of Borrower to pay or perform the Borrower's obligations in accordance with the terms of this Note and the other transaction documents and to avoid an Event of Default under any transaction document; or (c) the rights and remedies of Holder under this Note, the other transaction documents or any related document, instrument or agreement, if the Borrower fails to remedy the Material Adverse Change within thirty (30) days of written notice thereof; (f) CHANGE OF CONTROL. A Change of Control of the Borrower, which shall mean a merger, sale of securities or sale of all or substantially all of Borrower's assets that results in a change of ownership of at least 50%, except such changes of control which are entirely between the Borrower provided that written notice of such change of control between Borrower is provided to Holder within thirty (30) days of consummation such change; (g) OTHER BREACH OR DEFAULT. A breach or default by the Borrower in the performance or observance of any other term, covenant, representation, warranty or agreement contained in this Note, the Loan Agreement or the Security Agreement to be performed or observed by the Borrower, if the Borrower fails to cure within thirty (30) days of written notice of such breach or default to the Holder. 6. REPLACEMENT. Upon receipt by the Borrower of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Note (provided that an affidavit of Holder will be satisfactory for such purpose), and of indemnity satisfactory to it (provided that if the Holder is the original Holder hereof, its own indemnification agreement shall under all circumstances be satisfactory, and no bond shall be required), and upon surrender and cancellation of this Note, if mutilated, the Borrower will make and deliver a new Note of the same terms in a principal amount equal to the outstanding balance of this Note, dated as of the last date at which principal or interest has been paid upon this Note. 7. ATTORNEYS' FEES. The Borrower covenants that upon the occurrence of any Event of Default it will pay to Holder all costs and expenses of collection and enforcement of this Note, including reasonable attorney's fees. 3 7. ATTORNEYS' FEES. The Borrower covenants that upon the occurrence of any Event of Default it will pay to Holder all costs and expenses of collection and enforcement of this Note, including reasonable attorneys' fees. 8. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of California (excluding rules regarding conflicts of law). The parties hereby submit to the personal jurisdiction of and venue in the Superior Court of the State of California, County of Marin, and the United States District Court for the Northern District of California in San Francisco. 9. MISCELLANEOUS. This Agreement may be executed in counterparts, and each counterpart shall be deemed an original instrument, but together shall constitute one and the same instrument. Additionally, any signatures sent by facsimile shall be deemed to be originals and shall have all of the same force and effect and import as an original signature, regardless of whether or not the parties shall or shall not later receive one or more such original signature. IN WITNESS WHEREOF, the Borrower has caused this Note to be executed in its corporate name by its duly authorized officer. "HOLDER" "BORROWER" AUTODESK, INC. AVATECH SOLUTIONS, INC. By: /s/ [ILLEGIBLE] By: /s/ Henry D. Felton ------------------------------- -------------------------------- [ILLEGIBLE] Henry D. Felton - ---------------------------------- ----------------------------------- (PRINTED) (PRINTED) [ILLEGIBLE] CHAIRMAN & CEO - ---------------------------------- ----------------------------------- (TITLE) (TITLE) July 28 2000 July 31st 2000 - ---------------------------------- ----------------------------------- (DATE) (DATE) 4 AVATECH OF CALIFORNIA, INC. AVATECH OF CONNECTICUT, INC By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ AVATECH SOLUTIONS OF COLORADO, INC. AVATECH OF FLORIDA, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ AVATECH OF MARYLAND, INC. AVATECH OF MICHIGAN, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ AVATECH OF NEBRASKA, INC AVATECH OF NEW JERSEY, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ AVATECH OF NEW YORK, INC. AVATECH OF VIRGINIA, INC. By: /s/ Henry D. Felton By: /s/ Henry D. Felton ------------------------------- -------------------------------- Name: Henry D. Felton Name: Henry D. Felton ----------------------------- ------------------------------ Title: President Title: President ---------------------------- ----------------------------- Date: July 31st 2000 Date: July 31st 2000 ----------------------------- ------------------------------ TECHNICAL LEARNINGWARE COMPANY, INC. By: /s/ Henry D. Felton ------------------------------- Name: Henry D. Felton ----------------------------- Title: President ---------------------------- Date: July 31st 2000 ----------------------------- 5 EX-10.07 9 a2080957zex-10_07.txt EXHIBIT 10.07 EXHIBIT 10.07 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement"), dated as of October 25, 2000, is by and among AUTODESK, INC. (the "Subordinated Creditor"), AVATECH SOLUTIONS, INC., AVATECH OF CALIFORNIA, INC., AVATECH OF CONNECTICUT, INC., AVATECH SOLUTIONS OF COLORADO, INC., AVATECH OF FLORIDA, INC., AVATECH OF MARYLAND, INC., AVATECH OF MICHIGAN, INC., AVATECH OF NEBRASKA, INC., AVATECH OF NEW JERSEY, INC., AVATECH OF NEW YORK, INC., AVATECH OF VIRGINIA, INC., and TECHNICAL LEARNINGWARE COMPANY, INC. (collectively the "Companies" or individually a "Company") and THE CIT GROUP/BUSINESS CREDIT, INC. (the "Lender"). RECITALS: A. The Lender has agreed to make loans to the Companies pursuant to the terms of and as evidenced by that certain Financing Agreement, dated as October 25, 2000, as amended (if amended), by and between the Companies and the Lender (hereinafter such Financing Agreement as amended, extended, renewed, modified and/or replaced from time to time shall be referred to as the "Senior Financing Agreement"). B. Because of the direct benefit to the Subordinated Creditor on account of the loans made pursuant to the Senior Financing Agreement, the Subordinated Creditor has agreed to enter into this Subordination Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.01 CERTAIN DEFINED TERMS. For the purposes hereof: (a) "Lender" has the meaning set forth in the preamble hereof, and any other person that is the holder of Senior Obligations at such time, including, without limitation, any person holding Senior Obligations by assignment or pledge. (b) "Senior Obligations" means (i) the principal amount of, and accrued interest (including, without limitation, any interest which accrues after or would accrue but for the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of any Company) payable on, the Senior Financing Agreement, (ii) all liabilities and obligations, whenever arising, owing from any Company to the Lender, or any affiliate of the Lender, arising under any interest rate protection agreement (including hedges, swaps, collars and caps) now or hereafter extended by the Lender or any of its affiliates to or for the benefit of any Company (the "Interest Rate Protection Agreements") and (iii) all other indebtedness, obligations and liabilities of the Companies to the Lender now existing or hereafter incurred or created, under or with respect to the Senior Financing Agreement or the Interest Rate Protection Agreements. (c) "Subordinated Creditor" has the meaning set forth in the preamble hereof. (d) "Subordinated Debt Instrument" means the promissory note in the amount of $2,960,645.77 issued by the Companies in favor of the Subordinated Creditor, as such promissory note is modified, amended or replaced from time to time. (e) "Subordinated Obligations" means any and all obligations of the Companies under the Subordinated Debt Instrument. 1.02 OTHER DEFINITIONAL PROVISIONS. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. ARTICLE II TERMS OF SUBORDINATION 2.01 SUBORDINATION. (a) The Subordinated Creditor agrees, for itself and each future holder of the Subordinated Obligations, that the Subordinated Obligations are expressly subordinated and junior in right and time of payment (as defined in subsection 2.01(b)) to all Senior Obligations. (b) "Subordinated and junior in right and time of payment" shall mean that: (i) Unless and until the Senior Obligations shall have been paid in full and satisfied, the Subordinated Creditor will not, without the express prior written consent of the Lender, take, demand or receive, and no Company will make, give or permit, directly or indirectly, by set-off, redemption, purchase or in any other manner, any payment or prepayment on or security or guaranty for the whole or any part of Subordinated Obligations, and without the express prior written consent of the Lender, the Subordinated Creditor will not accelerate the payment of the 2 Subordinated Obligations or accept any payments on account of any excess cash flow provisions set forth in the Subordinated Debt Instrument, or declare to be immediately due and payable, enforce or take any action to enforce or collect the Subordinated Obligations or any portion thereof or any security of guaranty therefor; PROVIDED, HOWEVER, the Subordinated Creditor shall be entitled to receive regularly scheduled current interest payments under the Subordinated Debt Instrument pursuant to, and in accordance with, the terms thereof so long as the Lender gives its written consent to the making of such payments. (ii) Until the Senior Obligations shall have been paid in full in cash and satisfied, the Subordinated Creditor shall not accelerate, declare to be immediately due and payable, enforce or take any action to enforce or collect, the Subordinated Obligations or any portion thereof or any security or guaranty therefor without the express prior written consent of the Lender except with respect to payments permitted by Section 2.01(b)(i) above. (iii) Except for payments permitted by Section 2.01(b)(i) above or Section 2.01(b)(iv) below, without the express written consent of the Lender, no payment, prepayment or distribution or any kind of character, whether in cash, property or securities (including without limitation, proceeds of collateral for the Subordinated Obligations), which, but for the subordination provisions contained herein, would otherwise be payable or deliverable to the Subordinated Creditor upon or in respect of the Subordinated Obligations shall be paid to the Subordinated Creditor, and, the Subordinated Creditor shall not receive or accept any such payment or distribution or any benefit therefrom unless and until the Senior Obligations shall have been fully paid and satisfied in cash. (iv) Without limiting the generality of the foregoing provisions of this Section 2.01, in the event of any liquidation, termination, revocation or other winding-up of any Company, or in the event of any receivership, insolvency, reorganization or bankruptcy proceedings, assignment for the benefit of creditors or any proceeding by or against any Company for any relief under any bankruptcy, reorganization or insolvency law or laws, federal or state, or any law, federal or state, relating to the relief of debtors, readjustment of indebtedness, reorganization, composition or extension of indebtedness, then, and in any such event, all Senior Obligations shall first be paid in full in cash, before any payment or distribution is made in respect of the Subordinated Obligations, and any payment or distribution of any kind or character, whether in cash, property or securities which, but for the subordination provisions contained herein, would otherwise be payable or deliverable to the Subordinated Creditor upon or in respect of the Subordinated Obligations, shall instead be paid over or delivered to the Lender if the 3 Senior Obligations have not been fully paid and satisfied in cash, and the Subordinated Creditor shall not receive any such payment or distribution or any benefit therefrom unless and until the Senior Obligations shall have been fully paid and satisfied in cash; PROVIDED, HOWEVER, that the Subordinated Creditor may receive payments permitted by Section 2.01(b)(i) above, and may retain securities that are subordinated to at least the same extent as the Subordinated Obligations to (A) the Senior Obligations and (B) any securities issued in exchange for the Senior Obligations. 2.02 PAYMENTS RECEIVED BY SUBORDINATED CREDITOR. Should any payment or distribution or security, or the proceeds of any thereof, be collected or received by the Subordinated Creditor in respect of the Subordinated Obligations, and such collection or receipt is not expressly permitted hereunder (it being understood that the Subordinated Creditor is expressly permitted hereunder to collect and receive payments and distributions made in respect of the Subordinated Obligations in accordance with the provisions of Section 2.01(b)(i)), the Subordinated Creditor will forthwith turn over the same to the Lender in the form received (except for endorsement or assignment by the Subordinated Creditor when necessary) and, until so turned over, the same shall be held in trust by the Subordinated Creditor as the property of the Lender. 2.03 SUBROGATION. After, but only after, the Lender shall have received, in satisfaction of the Senior Obligations, indefeasible payment in full in cash of the Senior Obligations, the Subordinated Creditor shall be subrogated to the rights of the Lender to receive payments on or distributions of assets with respect to the Senior Obligations. 2.04 NO COLLATERAL, SECURITY, GUARANTIES OR OFFSETS. Until the Lender shall have received, in satisfaction of the Senior Obligations, payment in full in cash of the Senior Obligations, the Subordinated Creditor shall not, directly or indirectly, (i) take any additional collateral or security to secure the repayment of the Subordinated Obligations, (ii) accept any guaranties to guarantee the repayment of the Subordinated Obligations, or (iii) offset any present and/or future amounts owing by the Subordinated Creditor to any Company against any present and/or future amounts owing by any Company to the Subordinated Creditor (including, without limitation, the Subordinated Obligations). ARTICLE III REPRESENTATIONS AND WARRANTIES 3.01 The Subordinated Creditor represents and warrants to the Lender that: (a) POWER AND AUTHORITY; AUTHORIZATION; NO VIOLATION. The Subordinated Creditor has full power, authority and legal right to execute, deliver and perform this Agreement and, to the best of its knowledge, the execution of this Agreement does not require any approval or consent of any holders of any indebtedness or obligations of the Subordinated Creditor and will not violate any provision of law, governmental regulation, order or decree or any provision of any 4 indenture, mortgage, contract or other agreement to which the Subordinated Creditor is party or by which it or its assets are bound. (b) CONSENTS. To the best of its knowledge, no consent, license, approval or authorization of, or registration or declaration with, any governmental instrumentality, domestic or foreign, is required in connection with the execution, delivery and performance by the Subordinated Creditor of this Agreement. (c) BINDING OBLIGATION. This Agreement constitutes the legal, valid and binding obligation of the Subordinated Creditor enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). ARTICLE IV MODIFICATION OF SENIOR OBLIGATION; RELIANCE 4.01 The Subordinated Creditor consents, without the necessity of any reservation of rights against it, and without notice to or further assent by it, to the following: (a) any demand for payment of any Senior Obligation may be continued, and the Senior Obligations or the liability of the Companies or any other party upon or for any part thereof, or any collateral security or guaranty therefor, or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, modified, accelerated, compromised, waived, surrendered, or released and (b) the Senior Financing Agreement, the Interest Rate Protection Agreements, or any document or instrument evidencing or governing the terms of any other Senior Obligations or any collateral security documents or guaranties or documents in connection with the Senior Financing Agreement, the Interest Rate Protection Agreements or the Senior Obligations may be amended, modified, supplemented or terminated, in whole or in part, as the Lender and the Companies may agree from time to time, and any collateral security at any time held by the Lender for payment under the Senior Financing Agreement or the Interest Rate Protection Agreements or otherwise of the Senior Obligations may be sold, exchanged, waived, surrendered or released, in each case all without notice to or further assent by the Subordinated Creditor, which will remain bound under this Agreement, and all without impairing, abridging, releasing or affecting the subordination provided for herein, notwithstanding any such renewal, extension, modification, acceleration, compromise, amendment, supplement, termination, sale, exchange, waiver, surrender or release. The Subordinated Creditor waives any and all notice of the creation, modification, renewal, extension or accrual of any of the Senior Obligations or any of the obligations under the Senior Financing Agreement or the Interest Rate Protection Agreements and notice of or proof of reliance by the Lender upon this Agreement, the Senior Financing Agreement, the Interest Rate Protection Agreements and the Senior Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Agreement, and all dealings between the Companies and the Lender shall be deemed to have been consummated in reliance upon this 5 Agreement, except that the foregoing provisions shall not constitute an agreement to waive the notice provisions of Section 2.01(b)(i). The Subordinated Creditor acknowledges and agrees that the Lender has relied upon the subordination provided for herein in making certain credit facilities available under the Senior Financing Agreement. The Subordinated Creditor waives notice of or proof of reliance on this Agreement and protest, demand for payment and notice of default. ARTICLE V MODIFICATION OF SUBORDINATED DEBT INSTRUMENT 5.01 Until the Senior Obligations have been paid in full, the Subordinated Creditor agrees that it will not, without the prior written consent of the Lender in each instance (i) amend, modify, waive or supplement the terms of the Subordinated Debt Instrument in a manner that increases or otherwise makes more onerous the obligations of the Companies thereunder with respect to the Subordinated Obligations, (ii) accept any security interest, lien or mortgage on any assets or property of any party to the Senior Financing Agreement as security for the Subordinated Obligations (except for liens subordinate to the liens in favor of the Lender) or (iii) accept any guaranty for purposes of guaranteeing the repayment of the Subordinated Obligations. ARTICLE VI TRANSFER OF SUBORDINATED DEBT INSTRUMENT 6.01 Until the Senior Obligations have been paid in full, the Subordinated Creditor agrees that it will not, without the prior written consent of the Lender in each instance, (a) sell, assign or otherwise transfer, in whole or in part, the Subordinated Debt Instrument or any interest in the foregoing to any other person or entity (PROVIDED, HOWEVER, that the Subordinated Creditor may so transfer the Subordinated Debt Instrument or any interest therein without the prior written consent of the Lender if the transferee agrees in writing to be bound by all of the terms of this Agreement as if it were a party to this Agreement) or (b) create, incur or suffer to exist any security interest, lien, charge or other encumbrance whatsoever upon the Subordinated Debt Instrument. ARTICLE VII MISCELLANEOUS 7.01 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise, and no delay in exercising on the part of the Lender, from time to time, any right, power or privilege under the Senior Obligations, or any right, power or privilege under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement and in any agreement relating to any 6 of the Senior Obligations and all other agreements, instruments and documents referred to in any of the foregoing are cumulative and shall not be exclusive of any rights or remedies provided by law. 7.02 FURTHER ASSURANCES. The Subordinated Creditor agrees to execute and deliver such further documents and to do such other acts and things as the Lender may reasonably request in order fully to effect the purposes of this Agreement. 7.03 NOTICES. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing and, unless otherwise expressly provided therein, shall be deemed to have been fully given or made when delivered by hand, or five days after having been given by certified mail, return receipt requested or, in the case of telegraphic notice, when delivered to the telegraph company, or in the case of telex notice, when sent, answerback received, addressed as set forth on the signature pages of this Agreement by the parties hereto or to such address or other address as may be hereafter notified by the respective parties hereto. 7.04 GOVERNING LAW; SUCCESSORS AND ASSIGNS. This Agreement and the rights and obligations of the parties under this Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of North Carolina applicable to contracts made and to be performed in such state, and shall be binding upon and inure to the benefit of the Lender, the Subordinated Creditor, the Companies and their respective successors, transferees and assigns, except that the Subordinated Creditor may not assign or transfer any of its obligations hereunder without the prior written consent of the Lender. 7.05 COUNTERPARTS. This Agreement may be executed by the parties hereto in any number of separate counterparts all of which taken together shall constitute one and the same instrument. 7.06 WAIVERS, AMENDMENTS, ETC.. The subordination provisions contained herein are for the benefit of the Lender and its successors and assigns as holders from time to time of Senior Obligations and may not be rescinded or canceled or modified in any way, nor, unless otherwise expressly provided for herein, may any provision of this Agreement be waived or changed without the express prior written consent thereto of the Lender. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal as of the day and year first above written. AUTODESK, INC. ATTEST: By /s/ [ILLEGIBLE] By /s/ [ILLEGIBLE] ------------------------- ----------------------- Title Assistant Secretary Title V.P. Finance ---------------------- -------------------- (Corporate Seal) Address for Notices: ------------------------- ------------------------- Attn: -------------------- Fax No. ----------------- The undersigned agrees to comply with the provisions of this Subordination Agreement applicable to it and to make payment to the Subordinated Creditor only in strict accordance with the terms hereof. AVATECH SOLUTIONS, INC. By: /s/ A. Gary Rever, CFO --------------------------- Name: A. Gary Rever ------------------------- Title: Chief Financial Officer ------------------------ AVATECH OF CONNECTICUT, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- AVATECH SOLUTIONS OF COLORADO, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- AVATECH OF FLORIDA, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- AVATECH OF MARYLAND, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- AVATECH OF MICHIGAN, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- AVATECH OF NEBRASKA, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- AVATECH OF NEW JERSEY, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- AVATECH OF NEW YORK, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- AVATECH OF VIRGINIA, INC By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- TECHNICAL LEARNINGWARE COMPANY, INC. By /s/ A. Gary Rever ---------------------------- Name: A. Gary Rever ------------------------- Title Assistant Secretary ------------------------- Accepted and agreed to: THE CIT GROUP/BUSINESS CREDIT, INC. By: /s/ [ILLEGIBLE] ------------------------------ Name: [ILLEGIBLE] ---------------------------- Title: ASSISTANT VICE PRESIDENT --------------------------- [AUTODESK(R) LOGO] October 25, 2000 Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, MD 21117 The CIT Group/Business Credit, Inc. Two First Union Center Charlotte, NC 28203-0337 Gentlemen: Autodesk, Inc. ("Autodesk") has been informed by Avatech Solutions, Inc., Avatech of California, Inc., Avatech of Connecticut, Inc., Avatech Solutions of Colorado, Inc., Avatech of Florida, Inc., Avatech of Maryland, Inc., Avatech of Michigan, Inc., Avatech of Nebraska, Inc., Avatech of New Jersey, Inc., Avatech of New York, Inc., Avatech of Virginia, Inc., and Technical Learningware Company, Inc. (collectively, the "Borrowers" or individually a "Borrower") that The CIT Group/Business Credit, Inc. ("CIT") intends to make loans to the Borrowers (the "CIT Loans") to be secured by a first priority lien and security interest in all present and future Accounts, Documents of Title, General Intangibles, Pledged Stock and Other Collateral (as each of such terms is defined below) of each Borrower (hereinafter all such present and future Accounts, Documents of Title, General Intangibles, Pledged Stock and Other Collateral shall be referred to as the "CIT Collateral"). The security interest of CIT in Accounts will include a security interest in all proceeds of Inventory (as defined below) excluding any proceeds of Inventory generated on a liquidation or foreclosure sale of the Inventory by Autodesk after the occurrence of a default by the Borrowers in the performance of their obligations to Autodesk. Autodesk hereby releases its liens and security interests in the CIT Collateral and agrees to execute any and all release documents (including all UCC-3 release financing statements) upon the making of the initial CIT Loan. Autodesk also agrees that it will not obtain any liens and/or security interests in the CIT Collateral for so long as any of the CIT Loans remain outstanding or CIT is obligated to make the CIT Loans. Autodesk, Inc. 111 McInnis Parkway main 415 507 5000 San Rafael, California 94903 Page 2 For purposes of the foregoing, the following terms shall have the following meanings: ACCOUNTS shall mean all of each Borrower's now existing and future: (a) accounts (as defined in the UCC), and any and all other receivables (whether or not specifically listed on schedules furnished to CIT), including, without limitation, all accounts created by, or arising from, all of each Borrower's sales, leases, rentals of goods or renditions of services to its customers, including but not limited to, those accounts arising under any of any Borrower's trade names or styles, or through any of any Borrower's divisions; (b) any and all instruments, documents, chattel paper (including electronic chattel paper) (all as defined in the UCC); (c) unpaid seller's or lessor's rights (including rescission, replevin, reclamation, repossession and stoppage in transit) relating to the foregoing or arising therefrom; (d) rights to any goods represented by any of the foregoing, including rights to returned, reclaimed or repossessed goods; (e) reserves and credit balances arising in connection with or pursuant hereto; (f) guarantees, supporting obligations, payment intangibles and letter of credit rights (all as defined in the UCC); (g) insurance policies or rights relating to any of the foregoing; (h) general intangibles pertaining to any and all of the foregoing (including all rights to payment, including those arising in connection with bank and non-bank credit cards), and including books and records and any electronic media and software thereto; (i) notes, deposits or property of account debtors securing the obligations of any such account debtors to any Borrower; and (j) cash and non-cash proceeds (as defined in the UCC) of any and all of the foregoing. Notwithstanding the foregoing, the term "Accounts" shall exclude any proceeds of Inventory generated on liquidation or foreclosure sale of the Inventory by Autodesk after the occurrence of a default by any Borrower in the performance of its obligations to Autodesk. COPYRIGHTS shall mean all of each Borrower's present and hereafter acquired copyrights, copyright registrations, recordings, applications, designs, styles, licenses, marks, prints and labels bearing any of the foregoing, goodwill, any and all general intangibles, intellectual property and rights pertaining thereto, and all cash and non-cash proceeds thereof. DOCUMENTS OF TITLE shall mean all of each Borrower's present and future documents (as defined in the UCC), and any and all warehouse receipts, bills of lading, shipping documents, chattel paper, instruments and similar documents, all whether negotiable or not and all goods and Inventory relating thereto and all cash and non-cash proceeds of the foregoing. Page 3 GENERAL INTANGIBLES shall mean all of each Borrower's present and hereafter acquired general intangibles (as defined in the UCC), and shall include, without limitation, all present and future right, title and interest in and to: (a) all Trademarks, tradenames, corporate names, business names, logos and any other designs or sources of business identities, (b) Patents, together with any improvements on said Patents, utility models, industrial models, and designs, (c) Copyrights, (d) trade secrets, (e) licenses, permits and franchises, (f) all applications with respect to the foregoing, (g) all right, title and interest in and to any and all extensions and renewals, (h) goodwill with respect to any of the foregoing, (i) any other forms of similar intellectual property, (j) all customer lists, contract rights, distribution agreements, supply agreements, blueprints, indemnification rights and tax refunds, together with all monies and claims for monies now or hereafter due and payable in connection with any of the foregoing or otherwise, and all cash and non-cash proceeds thereof, including, without limitation, the proceeds or royalties of any licensing agreements between any Borrower and any licensee of any of any Borrower's General Intangibles. INVENTORY shall mean all of each Borrower's present and hereafter acquired inventory (as defined in the UCC) and including, without limitation, all merchandise, inventory and goods, and all additions, substitutions and replacements thereof, wherever located, together with all goods and materials used or usable in manufacturing, processing, packaging or shipping same in all stages of production from raw materials through work-in-process to finished goods and all proceeds thereof of whatever sort. OTHER COLLATERAL shall mean all of each Borrower now owned and hereafter acquired lockbox, blocked account and any other deposit accounts maintained with any bank or financial institutions into which the proceeds of CIT Collateral are or may be deposited; all cash and other monies and property in the possession or control of CIT; all books, records, ledger cards, disks and related data processing software at any time evidencing or containing information relating to any of the CIT Collateral described herein or otherwise necessary or helpful in the collection thereof or realization thereon; and all cash and non-cash proceeds of the foregoing. PATENTS shall mean all of each Borrower's present and hereafter acquired patents, patent applications, registrations, any reissues or renewals thereof, licenses, any inventions and improvements claimed thereunder, and all general intangible, intellectual property and patent rights with respect thereto of each Borrower, and all income, royalties, cash and non-cash proceeds thereof. PLEDGED STOCK shall mean all present and future capital stock of each Borrower and each of its subsidiaries. Page 4 TRADEMARKS shall mean all of each Borrower's present and hereafter acquired trademarks, trademark registrations, recordings, applications, tradenames, trade styles, service marks, prints and labels (on which any of the foregoing may appear), licenses, reissues, renewals, and any other intellectual property and trademark rights pertaining to any of the foregoing, together with the goodwill associated therewith, and all cash and non-cash proceeds thereof. UCC shall mean the Uniform Commercial Code as in effect from time to time in the state of North Carolina. The agreements of Autodesk contained herein shall (i) be enforceable by each Borrower or CIT (or any successor to CIT or any person that acquires the CIT Loans), (ii) remain in full force and effect until the CIT Loans are paid in full and CIT is no longer obligated to make CIT Loans and (iii) not be affected by any changes to the terms regarding the CIT Loans or any documentation with respect thereto. The validity, interpretation and enforcement of this agreement shall be governed by the laws of the state of North Carolina. AUTODESK, INC. By /s/ [ILLEGIBLE] --------------------- Title V.P. Finance ------------------ Agreed to and accepted by the undersigned as of the 25th day of October, 2000. AVATECH SOLUTIONS, INC. By /s/ A. Gary Rever, CFO --------------------------- Title Chief Financial Officer ------------------------ AVATECH OF CALIFORNIA, INC. By /s/ A. Gary Rever --------------------------- Title Assistant Secretary ------------------------ Page 5 AVATECH OF CONNECTICUT, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- AVATECH SOLUTIONS OF COLORADO, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- AVATECH OF FLORIDA, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- AVATECH OF MARYLAND, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- AVATECH OF MICHIGAN, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- AVATECH OF NEBRASKA, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- AVATECH OF NEW JERSEY, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- Page 6 AVATECH OF NEW YORK, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- AVATECH OF VIRGINIA, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- TECHNICAL LEARNINGWARE COMPANY, INC. By /s/ A. Gary Rever ---------------------------- Title Assistant Secretary ------------------------- THE CIT GROUP/BUSINESS CREDIT, INC. By /s/ [ILLEGIBLE] ---------------------------- Title ASSISTANT VICE PRESIDENT ------------------------- EX-10.08 10 a2080957zex-10_08.txt EXHIBIT 10.08 EXHIBIT 10.08 ALLSTATE LEASING, INC. MASTER LEASE AGREEMENT Number: E-385 Date: July 17, 2001 This is a Master Lease Agreement between Allstate Leasing, Inc. ("Lessor") and, Avatech Solutions, Inc. ("Lessee"), a Delaware corporation. 1. LEASE. Subject to the terms hereof, Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the equipment and/or other property ("Equipment") described on Schedules to this Lease executed from time to time by Lessor and Lessee. Each Schedule shall incorporate all the terms of this Lease and shall constitute a separate agreement (each a "Lease") for the lease of the Equipment. Terms defined in a Schedule and not otherwise defined herein shall have the meanings ascribed to them in such Schedule. 2. TERM; AUTOMATIC EXTENSION. The term of this Lease ("the Lease Term") for all items of Equipment included on any Schedule shall begin on the date the first of such items is accepted by Lessee, or such other date as may be specified on such Schedule ("Acceptance Date") and, subject to the terms hereof, shall continue for the period of time set forth on said Schedule, plus any agreed renewal period. Upon acceptance of each Item of Equipment, Lessee shall execute and deliver to Lessor, Lessor's form of Schedule or Acceptance Certificate. Notwithstanding the expiration of the Basic Term as to any Equipment, the Lease Term for such Equipment will be automatically extended for 90 days after such expiration date unless Lessor or Lessee has given the other party at least 90 days prior written notice of termination, and shall continue after such initial 90 day period until either party gives the other at least 90 days prior written notice of termination, unless Lessee has exercised a purchase option or lease renewal option in accordance with its terms. During the extension period, all the terms of this Lease, including Base Rent, shall remain in effect. Lessee shall have no right to terminate this Lease as to any Equipment before the expiration of the Basic Term, except in accordance with a written agreement signed by Lessor. 3. (a) RENT. With respect to each Schedule, Lessee shall pay to Lessor as "Rent," all Interim Rent specified on any Schedule, plus as Base Rent an amount equal to the product of (i) the periodic Base Rent payments specified on such Schedule and (ii) the number of rental payments specified on such Schedule, plus all other amount due or to become due under this Lease or any Schedule to this Lease. All Rent shall be paid to Lessor at the address specified by Lessor. All Rent shall be paid without notice or demand, and Lessee's obligation to pay such Rent shall be absolute and unconditional and not subject to any abatement, reduction, set-off, defense, counterclaim or recoupment ("Abatements") for any reason whatsoever (including, without limitation, Abatements due to any present or future claims of Lessee against Lessor under this Lease or otherwise, or against the manufacturer or vendor of the Equipment), nor except as other expressly provided herein upon a Total Loss, shall this Lease terminate or the obligations of Lessee hereunder be affected by reason of any defect in or damage to, or any loss or destruction of, any Equipment from any cause whatsoever, or the interference with the use thereof by any private person, corporation or governmental authority, or the invalidity or unenforceability or lack of due authorization of this Lease or lack of right, power or authority to enter into the Lease, or for any other cause, whether similar or dissimilar to the foregoing, any present or future law or regulation to the contrary notwithstanding. (b) EXCESSIVE RENT. If a court determines that Lessor has received any payments which are determined to be interest and which result in interest charges to Lessee in excess of the highest rate permitted by applicable law, such payments, to the extent they result in such excess, shall be deemed to have been payments on account of Base Rent and shall be so credited. If such credit results in Lessee having paid to Lessor any sum in excess of Base Rent plus interest charges at the highest rate allowed by law, then such sum shall be refunded to Lessee and Lessee hereby waives any further remedy or claim against Lessor on account of Lessor having received such sum. 1 4. LATE PAYMENTS. If Lessee does not pay any Rent when the same is due and payable, then Lessor at its option may charge and Lessee agrees to pay, a late payment charge in an amount equal to Five Percent (5%) of the amount which is not paid, for each month or part of a month after the date the same is due until paid, as liquidated damages. This provision does not waive Lessor's rights to exercise any other remedy available to it hereunder upon a default in payment. 5. DISCLAIMER OF WARRANTIES. LESSOR LEASES THE EQUIPMENT "AS IS". LESSOR MAKES NO WARRANTIES WITH RESPECT TO THE EQUIPMENT, EITHER EXPRESS OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Lessor assumes no liability and makes no representations as to the treatment by Lessee of this Lease, the Equipment or the rental payments for financial statement or tax purposes. Lessee acknowledges that each unit of the Equipment has been selected by the Lessee and that Lessee is satisfied that the Equipment is suitable for Lessee's purposes. Subject to Lessor's right to do so, Lessor hereby assigns and agrees to use its best efforts to otherwise make available to Lessee for the term of this Lease any warranty which has been extended to Lessor by the manufacturer or vendor of the Equipment; however, Lessee's sole remedy in the event of the breach of any warranty shall be against the manufacturer or vendor and not against Lessor. Any amounts received by Lessee as payment under any such warranty shall be applied to restore the Equipment to the condition required by this Lease, with the balance of such amount, if any, to be paid over to Lessor. Lessee shall not take any action or fail to take any action, the effect of which would be to invalidate such warranty. 6. OWNERSHIP. The parties intend that this Lease is a true lease and in no event shall this agreement be construed as a sale of the Equipment. Title to the Equipment shall at all times remain in Lessor, and Lessee shall acquire no ownership, title, property, right, equity, or interest in the Equipment other than its leasehold interest solely as Lessee subject to all the terms and conditions hereof. Notwithstanding the express intent of the parties, if a court determines that this agreement is not a true lease, but rather one intended as security, then solely in that event and for the expressly limited purposes thereof, Lessee shall be deemed to have hereby granted Lessor a security Interest in the Equipment, and all accessions thereto, substitutions and replacements thereof, and cash and non-cash proceeds (including insurance proceeds) thereof (but without power of sale), to secure the prompt payment and performance as and when due of all obligations and indebtedness of Lessee to Lessor arising under this Lease. At Lessor's request, Lessee will place markings on the Equipment indicating that Lessor is the owner thereof and Lessee will not remove the same. The Equipment shall always remain and be deemed personal property even though attached to realty. 7. RETURN OF EQUIPMENT. Upon the expiration, earlier termination, or casualty loss to equipment subject to this Lease, Lessee shall, at its own expense, return the Equipment to Lessor within ten (10) days in the same condition as when delivered to Lessee, ordinary wear and tear resulting from proper use thereof alone excepted, and free and clear of all liens, encumbrances or rights of others whatsoever, by whichever of the following means Lessor may specify (after first storing the Equipment, at Lessor's request, at the place where the Equipment is to be located hereunder, free of charge for a period not to exceed 90 days, during which time Lessor or its agent will be allowed reasonable access to the Equipment); (a) the delivery of the Equipment at Lessee's premises; (b) the delivery of the Equipment at Lessee's expense to such place as Lessor shall specify; or (c) the loading of the Equipment on board such carrier as Lessor shall specify to such destination as Lessor may designate with freight charges prepaid by Lessee. In the event that the Equipment is shipped pursuant to clause (b) of the preceding sentence, Lessee shall obtain and pay for a policy of transit insurance in an amount equal to the replacement value of the Equipment and Lessor shall be named as the loss payee on all such policies of insurance. Lessor shall have the right to inspect the Equipment prior to or after its return, and Lessee shall pay the reasonable costs of such inspection if the Equipment is not in the condition required by this Lease. In addition, if repairs are necessary, in the reasonable opinion of Lessor, to place the Equipment in the condition required by this Lease, Lessee agrees to pay the cost of such repairs and further agrees to pay Lessor Rent for the period of time reasonably necessary to accomplish such repairs, based on a daily pro-rated amount of the previous Rent. Rent shall accrue at a daily pro-rated amount of the previous Rent, for each day the Lessee does not return the Equipment as required, but such payment of Rent does not extend the term of this Lease. Notwithstanding the foregoing, upon expiration of the term or upon earlier termination of this Lease, Lessee shall return the Equipment in good repair, condition and working order, ordinary wear and tear resulting from normal use accepted, together with a reinstallation fee of five percent (5%) of the original cost of said equipment. Lessor shall be reimbursed for expenses by Lessee within five (5) days of receipt of an invoice. Any outstanding balance shall be subject to a late fee of five percent (5%) per month on such delinquent payment from and including the due date to an including the date of receipt of such delinquent payment. 2 8. INDEMNITY. Lessee hereby assumes and agrees to indemnify, protect, save, and keep harmless Lessor, its agents and employees, from and against any and all losses, damages, injuries, claims, demands, expenses, including legal expenses, or liabilities, including negligence, tort and strict liability, of whatsoever kind and nature, arising on account of: the ordering, acquisition, delivery, installation or rejection of the Equipment; the possession, maintenance, use, condition (including without limitation, latent and other defects and whether or not discoverable by Lessor or Lessee, and any claim for patent, trademark or copyright infringement) or operation of any item of the Equipment, during the term of this Lease with respect to that item of the Equipment; or the loss, damage, destruction, removal, return, surrender, sale or other disposition of the Equipment, or any item thereof, during the term of this Lease. These indemnities shall remain in full force and effect despite the expiration, cancellation or earlier termination of this Lease. 9. USE AND MAINTENANCE. Lessee shall use the Equipment solely in the conduct of its business and in a careful and proper manner consistent with the requirements of all applicable insurance policies relating to the Equipment. Lessee will not change the location of any Equipment as specified in the Schedule without the prior written consent of Lessor, which consent shall not be unreasonably withheld. Lessee shall not attach or incorporate the Equipment to or in any other item of Equipment in such a manner that the Equipment becomes or may in Lessor's opinion be deemed to have become an accession to or a part of such other item of equipment. All Equipment shall be continually serviced, maintained, repaired, and improved in accordance with the requirements, guidelines and recommendations of its manufacturer and/or applicable regulatory bodies, and as Lessor may reasonably consider customary and in accordance with then current practices of users of similar equipment, and in any event sufficient to preserve any applicable warranty. Unless Lessor otherwise agrees in writing, Lessee shall, at its sole expense, enter into and maintain in force, a maintenance contract with the manufacturer of the Equipment or such other party as shall be acceptable to Lessor, and shall provide Lessor with a copy of such contract and all supplements thereto which are applicable to the Equipment. In addition, if any parts or accessories forming part of the Equipment shall from time to time become worn out, lost, destroyed, damaged beyond repair or otherwise permanently rendered unfit for use, Lessee, at its own expense, will within a reasonable time replace such parts or accessories, or cause the same to be replaced, by replacement parts or accessories which are free and clear of all liens, encumbrances or rights of others and have a value and utility at least equal to the parts or accessories replaced. All equipment, accessories, parts and replacements for or which are added to or become attached to the Equipment which are essential to the operation of the Equipment or which cannot be detached from the Equipment without materially interfering with the operation of the Equipment or adversely affecting the value and utility which the Equipment would have had without the addition thereof, shall immediately become the property of Lessor, and shall be deemed incorporated in the Equipment subject to the terms of this Lease as if originally leased thereunder. Lessee shall not make any material alterations to the Equipment without the prior written consent of Lessor. Lessor may inspect the Equipment and all related records at any time. 10. INSURANCE. Lessee shall maintain in force during the terms of this Lease public liability insurance in an amount satisfactory to Lessor covering the Equipment and insuring both Lessee and Lessor against any loss, damage, claim, suit, action or liability arising out of the ownership, possession, maintenance, use or operation of the Equipment. In addition, Lessee agrees to keep the Equipment insured against loss or damage from every cause whatsoever, with one or more insurance companies satisfactory to Lessor, such policies to contain loss payable clauses in favor of the Lessor as its interest may appear, in an amount not less than the greater of (i) the Casualty Loss Value and (ii) the full insurable value of said Equipment, said insurance policy or policies to contain not less than thirty (30) days notice of cancellation to the Lessor. Lessee shall provide Lessor with satisfactory evidence of insurance coverage as provided herein at least thirty (30) days prior to the expiration date of any current policy. In the event of any loss, damage, injury or accident involving any item of Equipment, Lessee shall promptly provide Lessor with written notice thereof and make available to Lessor all information and documentation relating thereto. Lessee hereby appoints Lessor as its attorney-in-fact to make claim for and to receive payments of and to execute and endorse all documents, checks or drafts for loss or damage to the Equipment. Lessee hereby directs any insurance company which insures the Equipment to make payment for all claims for physical damage to the Equipment solely to Lessor and not jointly to Lessee and Lessor, and hereby holds harmless such insurance company for making such payment. Lessee agrees to hold in trust for Lessor any payments received by it from the insurance company. Lessee will pay Lessor, on demand, the amount of any expenses (including legal fees) incurred by Lessor in adjusting or setting any insurance claim. 3 11. LOSS AND DAMAGE. Lessee hereby assumes and shall bear the entire risk of direct and consequential loss and damage to the Equipment from any and every cause whatsoever. Except as provided in this Section for discharge upon payment of Casualty Loss Value, no loss or damage to the Equipment or any part thereof shall release or impair any obligations of Lessee under this Lease, which shall continue in full force and effect and shall be absolute during the term hereof. Lessee agrees that Lessor shall not incur any liability to Lessee for any loss of business, loss of profits, expenses, or any other damages resulting to Lessee by reason of any delay in delivery or any delay caused by any non-performance, defective performance, or breakdown of the Equipment, nor shall Lessor at any time be responsible for personal injury or the loss or destruction of any other property resulting from the Equipment. In the event of loss or damage of any kind to any item of the Equipment, Lessee shall give prompt notice thereof to Lessor and then Lessee shall, at the option of Lessor, at Lessee's expense (less any insurance proceeds actually paid): (a) place the same in good repair, condition and working order; or (b) replace the same with like Equipment of the same or equivalent make and of the same or later model, and with equal or greater value and utility, and in good repair, condition and working order. The foregoing notwithstanding, in the event that any item of the Equipment shall become, in Lessor's judgment, worn out, lost, stolen, taken by any governmental authority, destroyed or irreparably damaged (any such occurrence being herein referred to as a "Total Loss") during the term of this Lease, then on the next date for the payment of Rent after Lessor makes such judgment, Lessee shall pay to Lessor the Rent due on that date plus the Casualty Loss Value of the item or items of the Equipment with respect to which the Total Loss has occurred and any other sums due hereunder with respect to that Equipment (less any insurance proceeds actually paid to Lessor). Upon making such payment in respect of any item of the Equipment, this Lease and the obligation to make future Rent payments shall terminate solely with respect to the items of Equipment paid for. As used in this Lease, "Casualty Loss Value" shall mean the product of the Acquisition Cost for the item of Equipment and the applicable percentage factor set forth on the Casualty Loss Schedule attached to such Schedule. Casualty Loss Value shall be determined as of the next date on which a payment of Rent is or would be due after a Total Loss or other termination of this Lease, after payment of any Rent due on such date, and the applicable percentage factor shall be that which is set forth with respect to such Rent payment date. If a Total Loss occurs after the last Rent payment date in the Basic Term, then the applicable percentage factor shall be the last percentage factor set forth on the Casualty Loss Schedule, and the Casualty Loss Value shall be payable on the first to occur of either the expiration date of the Lease Term, or the next date for the payment of Rent after the Total Loss, or thirty (30) days after the Total Loss occurs. 12. LIENS; TAXES. Lessee shall not create or suffer to exist any lien of any kind or security interest on the Equipment or this Lease or any of Lessor's interests hereunder, including those which are subordinate to Lessor's rights in the Equipment. Lessee shall pay all license fees, registration and recording fees, assessments, charges and taxes (municipal, state and federal), if any, which may now or hereafter be imposed upon the ownership, leasing, sale, possession or use of the Equipment which are payable for any period of time during which this Lease is in effect, whether payable by Lessor or Lessee under applicable law, including but not limited to (a) sales taxes imposed on the purchase of the Equipment by Lessor and the rental payments under this Lease, and (b) personal property taxes on the Equipment. Lessee will furnish to Lessor evidence of payment of such taxes as soon as Lessee has paid them, and will provide Lessor immediately upon receipt with a copy of all bills for such taxes. Lessee will pay all interest and penalties due upon its failure to pay any such taxes when due and otherwise in accordance with applicable laws. If Lessee fails to pay any said fees, assessments, charges or taxes, Lessor shall have the right, but shall not be obligated, to pay the same, in which event the cost thereof shall be repayable to Lessor on demand. Lessee's obligations hereunder shall continue after the expiration of the Lease Term as to those expenses incurred or accrued during such term. 13. TAX INDEMNITY. (a) Lessee agrees that Lessor is entitled to and shall have the right to claim the following tax benefits ("Tax Benefits") with respect to the Equipment or any item thereof; (i) depreciation deductions ("Depreciation Deductions") for Federal income tax purposes pursuant to Section 168 of the Internal Revenue Code of 1986 ("Code") and depreciation or cost recovery deductions for Maryland and other applicable state income tax purposes with respect to the Equipment based upon an unadjusted tax basis equal to the Acquisition Cost of the Equipment beginning in the taxable year in which Acceptance Date for such Equipment occurs, with deductions allowable based upon the Recovery Period which is specified on the Equipment Schedule for the Equipment leased under that Schedule (the "Recovery Period"): 4 (ii) Treatment of all items of income and deduction relating to this Lease as from sources wholly within the United States; and (iii) Lessor will not be required to include any amounts in its gross income as a result of this Lease other than the Rent payable hereunder at such times as such Rent is due hereunder, and any other payment with respect to which Lessor shall be entitled to a contemporaneous and offsetting deduction from, or reduction in, its net income. (b) If (1) on account of any act or failure to act by Lessee, the Lessor shall lose the right to claim, shall not claim (as the result of a good faith determination based upon the advice of independent tax counsel for Lessor that there is not reasonable basis in law or fact for the allowance of such claim), or shall not be allowed to claim any of the Tax Benefits, or shall be required to recapture all or any portion of the Depreciation Deductions, or shall be required to recognize gross income at times or in amounts other than as specified above or, (2) as a result of any amendment, modification, repeal or other change of or to applicable federal or Maryland law which is enacted or adopted after the date of the Equipment Lease there is an increase in the highest marginal statutory rate applicable to Lessor of the federal corporate income tax or the Maryland corporate income tax or in the alternative minimum tax rate applicable to Lessor or in the rate applicable to Lessor for federal or Maryland income tax purposes of any federal, state or local tax which is, directly or indirectly, imposed on, based on or measured by the income of Lessor (as determined for regular tax purposes or alternative minimum tax purposes or for any other purposes), at a time when gross rental income under the Lease exceeds all deductions allowable to Lessor under the Code with respect to the Lease or an item of Equipment (any such increase that results in the Lessor's income being taxed at such higher rate being herein called a "Tax Rate Increase"), (any such loss, failure to have or loss of the right to claim, disallowance, recapture, delay in claiming, treatment, or Tax Rate Increase referred to in any of the foregoing clauses is hereinafter called a "Tax Loss"), then, the Rent for such Equipment shall, on the Rent payment date next following the date of the Tax Loss and on each succeeding Rent Payment date, be increased by the amount which, after deduction of all taxed to be paid by Lessor with respect to the receipt of such amount, will maintain Lessor's Net Economic Return at a level which is equal to the level that would have been available if such Tax Loss had not occurred, plus an amount which after the deduction of any additional taxed required to be paid to Lessor in respect of Lessor's receipt of such amount, shall be equal to the amount of any interest, penalty or addition to tax which may be imposed by the taxing authority. However, if this Lease has terminated with respect to any item of Equipment prior to the time Lessee is obligated to make the increased Rent payments to Lessor with respect to such item of Equipment, Lessee shall pay Lessor, within 30 days from the date of written notice by Lessor to Lessee, such lump sum as, after deduction of all taxes required to be paid by Lessor with respect to the receipt of such amount, shall be necessary to maintain Lessor's Net Economic Return in respect to such Item of Equipment at a level which is equal to the level which would have been available if such Tax Loss had not occurred, plus an amount which after deduction of any additional taxes required to be paid to Lessor in respect of Lessor's receipt of such amount, shall be equal to the amount of any interest, penalty or addition to tax which may be imposed by a taxing authority having jurisdiction in connection with such Tax Loss. A Tax Loss shall conclusively be deemed to have occurred if either (a) deficiency shall have been proposed by the Internal Revenue Service or other taxing authority having jurisdiction, or (b) Lessor shall pay to the Internal Revenue Service or other taxing authority having jurisdiction, a tax increase resulting from such Tax Loss, or (c) Lessor's independent tax counsel shall have rendered its written opinion to Lessor to the effect that such Tax Loss has occurred. The Casualty Loss Values will be adjusted as necessary upon payment by Lessee of a Tax Loss. (c) All demands for amounts payable to the Lessor hereunder shall be accompanied by a written statement describing in reasonable detail the related Tax Loss and the amounts so payable. Lessee agrees it will have no right to inspect the tax returns of Lessor in order to verify the basis or the accuracy of the calculations so made or the amounts set forth in any such statement. Lessor hereby agrees to exercise in good faith its best efforts (determined in the sole discretion of Lessor's independent tax counsel to be reasonable, proper and consistent with the overall tax interest of Lessor) to avoid a Tax Loss; provided, however, the Lessor has the sole discretion to determine whether or not to undertake judicial or administrative proceedings beyond the level of a federal or state auditing agent; and provided, further, that Lessor shall not be required to take any action pursuant to this Section unless and until Lessee irrevocably acknowledges in writing its obligation to indemnify Lessor for the Tax Loss and any liability or loss which Lessor may incur as a result of contesting such Tax Loss and shall have paid Lessor on demand all costs and expenses which Lessor may incur in contesting such Tax Loss. (d) As used in this Section, the term "Lessor" includes the affiliated group of corporations making a consolidated income tax return of which Lessor is a member, and their respective successors and assigns. The term "Net Economic Return" means Lessor's after-tax economic yield and periodic recovery of after-tax cash flows on its investment, computed on the basis of the same assumptions as were used by Lessor in originally evaluating this transaction. 5 (e) The representations, warranties, indemnities and agreements of Lessee provided in this Section, and Lessee's obligations under any and all thereof, shall survive delivery of the Equipment, and the expiration or termination of this Lease. 14. ASSIGNMENT. (a) LESSOR MAY ASSIGN OR GRANT A SECURITY INTEREST IN ALL OR ANY PORTION OF ITS RIGHTS UNDER THIS LEASE, OR UNDER ONE OR MORE SCHEDULES (EACH OF WHICH SHALL BE CONSIDERED A SEPARATE LEASE) WITHOUT ANY NOTICE TO OR CONSENT OF LESSEE. Lessee agrees that any grant of a security interest or assignment or transfer by Lessor shall not materially change Lessee's duties or obligations under this Lease, nor materially increase the burdens or risks imposed on Lessee. After receiving due notice of any such assignment, Lessee will warrant to "Assignee" (which term means any secured party or any assignee, and their respective successors and assigns) such factual matters concerning this Lease as the Assignee may request, and will acknowledge in writing such assignment and promptly pay to Assignee, when due, the Rent and any other payments that thereafter will become due to the Lessor hereunder, despite any defense, setoff or counterclaim whatsoever, whether arising from any breach or default by Lessor under this Lease or otherwise, that Lessee may from time to time have against Lessor, but Lessee reserves its rights to have recourse directly against Lessor on account of any such defense, setoff or counterclaim. Any payments made by Lessee to Assignee pursuant hereto shall, to the extent thereof, discharge the obligations of Lessee to Lessor hereunder. Lessee agrees that any such transfer or assignment or grant of a security interest shall be permitted even if it could be deemed to materially affect the interests of Lessee. Lessee will not require Assignee to perform any obligations of Lessor hereunder, but Lessor shall not be relieved of any such obligations to Lessee by reason of any such assignment. Any Assignee will take such rights and interests subject to the rights of Lessee to the Equipment during the term of this Lease so long as Lessee is not in default hereunder. Any Assignee may reassign the rights and interests assigned to it with the same effect as the original assignment. (b) LESSEE SHALL NOT RELINQUISH ITS POSSESSION OF THE EQUIPMENT, NOR SHALL LESSEE ASSIGN, SUBLET, LEASE, SELL OR OTHERWISE DISPOSE OF THE EQUIPMENT OR ANY INTEREST THEREIN, WITHOUT LESSOR'S PRIOR WRITTEN CONSENT. No assignment or sublease, if permitted by Lessor, shall release Lessee of its obligations hereunder, and no consent to any one assignment or sublease, shall constitute consent to any other or further assignments or subleases. This Lease and any rights hereunder to the Equipment shall not inure to the benefit of any trustee in bankruptcy, receiver, creditor, or trustee of Lessee or its property whether by operation of law or otherwise without the written consent of Lessor, except as otherwise provided by law. 15. DEFAULT. Any of the following events or conditions shall constitute a "Default" hereunder: (a) Nonpayment of Rent or any other amount due hereunder after the same becomes due, or default by Lessee in the performance of any other obligation, term or condition of this Lease; (b) The entry of any material judgment against Lessee or the issuance of any garnishment, attachment, distraint, execution, tax lien, levy, charge or other writ of process against any property of Lessee; (c) Death or legal incompetency of any individual Lessee, or liquidation, dissolution, consolidation or termination of existence of any Lessee which is a corporation, partnership or other business association or entity; (d) The filing by or against Lessee of any petition under the Bankruptcy Act, or any chapter thereof or any other federal or state statute or rule providing for relief of debtors, arrangement, reorganizations, receiverships, or the like; (e) Any assignment for the benefit of creditors, agreement or composition with creditors or breach by Lessee of any of the terms of any loan or credit agreement or default thereunder; (f) Any statement, representation or warranty furnished by or on behalf of Lessee proving to have been false, erroneous or misleading in any material respect at the time such facts set forth were made; (g) A default occurs under any guaranty executed in connection with this Lease. If Lessee's obligations hereunder are guaranteed by any individual or entity, reference in this paragraph to "Lessee" shall also be deemed to include a separate reference to each such Guarantor, as if the same were expressly set forth this Lease. 16. REMEDIES. (a) Upon a Default, Lessor may, at its option, without notice of its election and without demand, take any one or more of the following, actions: (i) declare due and payable and recover from Lessee the Casualty Loss Value of the Equipment (determined as of the next date on which payment is or would have been due after the declaration of a Default), together with all other sums due hereunder with respect to such Equipment up to the date of such declaration (the parties agree that such amount best reflects the damages Lessor would sustain in the event of Lessee's bankruptcy or insolvency and this Lease were not assumed and is intended to constitute liquidated damages and not a penalty); (ii) declare due and payable, sue for and recover all Rent and other payments hereunder, then accrued or thereafter due, with respect to any or all of the Equipment, with Rent not yet due at the time of payment being discounted to present value at an annual rate equal to one percent plus the discount rate of the Federal Reserve Bank of Richmond in effect on the date of such Default; (iii) take possession of and render unusable any or all of the Equipment, wherever it may be located, without any court order or other process of law 6 and without liability for any damages occasioned by such taking of possession (any such taking of possession shall constitute an automatic termination of Lessee's rights under this Lease as it applies to those items taken without further notice, and such taking of possession shall not prohibit Lessor from exercising its other remedies hereunder); (iv) require Lessee to assemble any or all of the Equipment at the location to or from which the Equipment may have been moved by Lessee or such other location in reasonable proximity to either of the foregoing as Lessor shall designate, or to return promptly, at Lessee's expense, any or all of the Equipment to Lessor at a location designated by Lessor, in the condition required by the terms of this Lease; (v) sell, lease or otherwise dispose of any or all of the Equipment, whether or not in Lessor's possession, at public or private sale and with or without notice to Lessee, and apply the net proceeds of such sale, after deducting all costs of such sale (including but not limited to costs of transportation, possession, storage, refurbishing, advertising and brokers' fees), to the obligations of Lessee hereunder with Lessee remaining liable for any deficiency and with any excess being retained by Lessor; (vi) retain any repossessed Equipment and credit the Reasonable Value thereof to the obligations of Lessee hereunder with Lessee remaining liable for any deficiency and with Lessor having no obligation to reimburse Lessee on account of any excess of such Reasonable Value over such obligations; (viii) terminate or cancel this Lease as to any or all of the Equipment; or (viii) exercise any other right or remedy available to Lessor at law or in equity. As used herein, the term "Reasonable Value" means the fair market value of such Equipment at the time of Default, taking into account a reasonable estimate of all expenses necessary to effect a sale and the other expenses recoverable by Lessor hereunder. (b) If Lessee fails to pay any amounts which it has agreed to pay, Lessor may at its sole option pay such amounts, and Lessee shall repay such amounts to Lessor upon Lessor's demand. Lessee agrees to pay interest on any amount due under this Section 15 from the date the same become due until the date paid, at a rate equal to five percent (5%), per month on all sums remaining unpaid. (c) Unless otherwise provided above, a cancellation or termination hereunder shall occur only upon written notice by Lessor to Lessee and only with respect to such items of the Equipment as Lessor specifically elects to terminate or cancel in such notice. Except as to such items of the Equipment with respect to which there is a cancellation or termination, this Lease shall remain in full force and effect and Lessee shall be and remain liable for the full performance of all its obligations hereunder. Lessor may at its option exercise all rights and remedies hereunder independently with respect to each Equipment Schedule, and may declare a Default and exercise remedies with respect to any one or more of such Equipment Schedules. However, unless otherwise expressly agreed by Lessor, the occurrence of a Default with respect to any Equipment Schedule shall constitute a Default with respect to all Equipment Schedules. (d) Lessee shall pay for any and all legal fees and other costs and expenses incurred by Lessor in connection with the return of any Equipment in accordance with the terms of this Lease, or in placing such Equipment in the condition required by this Lease, or in collecting any amounts due under this Lease. In the event that any court determines that any provision of this Section is invalid or unenforceable in whole or in part, such determination shall not prohibit Lessor from establishing its damages sustained as a result of any breach of this Lease in any action or proceeding in which Lessor seeks to recover such damages. (e) CONFESSION OF JUDGMENT. Upon the happening of a Default, the Lessee hereby authorizes and empowers any attorney of any court within the United States to appear for each such person or any one or more of them in any court in any one or more proceedings, or before any clerk thereof, and confess judgment against such person, without prior notice or opportunity for a prior hearing, in favor of Lessor for all amounts due hereunder, hereby waiving and releasing to the extent permitted by law all errors and all rights of exemption, appeal, stay of execution, inquisition and extension upon any levy on real estate or personal property to which each such person may otherwise be entitled under the laws of the United States or in any state thereof, now in force or which may hereafter be passed. (f) The parties agree that any action or proceeding arising out of or relating to this Lease may be commenced in any state or Federal court of competent jurisdiction in the State of Maryland and each party waives any objection to venue. Each party agrees that a summons and complaint commencing an action or proceeding in any such court shall be properly served and shall confer personal jurisdiction if served personally or by certified mail to it at its address designated pursuant hereto, or as otherwise provided under the laws of the State of Maryland. (g) All of the rights and remedies given to Lessor herein or by law are cumulative and not alternative, may be exercised concurrently or separately, and Lessor's bringing or any action for Lessee's obligations hereunder or Lessor's exercise of any other remedy provided herein, shall not be considered as an election of remedies or a waiver of Lessor's right to possession of the Equipment. To the extent permitted by law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may obligate Lessor to sell, lease 7 or otherwise use the Equipment in mitigation of Lessor's damages or which may otherwise limit or modify any of Lessor's rights and remedies. (h) The omission by Lessor at any time to enforce any right reserved to it upon a default, or to require performance of any of the terms, covenants or provisions hereof by Lessee at any time, shall not be a waiver of any such default or right to which Lessor is entitled nor shall in any way affect the right of Lessor to enforce such provisions thereafter. The acceptance of Rent by Lessor shall not be deemed a waiver of any prior existing breach, and the acceptance by Lessor of a partial payment of Rent shall not be deemed to waive Lessor's right to payment in full. 17. LESSEE WARRANTIES. Lessee warrants that this Lease and all related documents are enforceable against the Lessee in accordance with their terms. Lessee represents that it is not in default under any material agreement by which it or any of its property is bound. Lessee agrees that the application, statements and financial reports submitted by it to Lessor are material inducements to the execution by Lessor of this Lease, and Lessee warrants that such applications, statements and reports are, and all information hereafter furnished by Lessee to Lessor will be, true and correct in all material respects as of the date submitted. Lessee warrants that this Lease has been duly authorized, and that no provision of this Lease is inconsistent with Lessee's charter, bylaws, or any loan or credit agreement or other instrument to which Lessee is a party or by which Lessee or its property may be bound or affected. Lessee warrants that it has leased the Equipment solely for use in its business. 18. FURTHER ASSURANCE; FINANCIAL INFORMATION. Lessee will promptly and duly execute and deliver to Lessor such further documents and assurances and take such further action as Lessor may from time to time reasonably request in order to carry out the intent and purpose of this Lease and to establish and protect the rights and remedies created or intended to be created in favor of Lessor hereunder, including but not limited to the obtaining of waivers of any interest in the Equipment from Lessee's landlord or secured creditors. Lessee also agrees to furnish Lessor: (a) An audit report prepared by independent certified public accountants, or other accountants acceptable to Lessor within one hundred twenty (120) days after the close of each fiscal year of Lessee occurring after the date of this Lease; (b) Balance sheets and statements of cash flows as of the end of each quarterly period of Lessee's fiscal years certified as accurate by an officer of Lessee within forty-five (45) days after the close of each such quarterly period, and (c) From time to time such other information as Lessor may reasonably request. 19. NOTICES. All notices required under this Lease shall be in writing, and any notice shall become effective when deposited in the United States mail, with proper postage for ordinary mail prepaid, addressed as indicated below or at such other address as such party shall from time to time designate for itself in writing to the other party. Any notice actually received by any Lessee shall be effective as to that Lessee and all other Lessees. 20. LESSEE'S WAIVERS; LIMITATIONS. To the extent permitted by applicable law, Lessee hereby waives any and all rights and remedies conferred upon a Lessee by sections 2A-508 through 2A-522 of the UCC, including but not limited to Lessee's rights to (i) cancel or repudiate this Lease; (ii) reject or revoke acceptance of the Equipment; (iii) recover damages from Lessor for any breaches of warranty or for any other reason; (iv) grant a security interest in the Equipment in Lessee's possession or control for any reason; (v) deduct all or any part of any claimed damages resulting from Lessor's default, if any, under this Lease; (vi) accept partial delivery of the Equipment; (vii) "cover" by making any purchase or lease of or contract to purchase or lease Equipment in substitution for those due from Lessor; (viii) recover any general, special, incidental or consequential damages, for any reason whatsoever, and (ix) specific performance, replevin, detinue, sequestration, claim and delivery or the like for any Equipment identified to this Lease. To the extent permitted by applicable law, Lessee also hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's damages as set forth in Paragraph 16 of this Lease or which may otherwise limit or modify any of Lessor's rights or remedies under Paragraph 16. Any action by Lessee against Lessor for any default by Lessor under this Lease shall be commenced within one year after any such cause of action accrues. 21. JURY TRIAL WAIVER. LESSEE AND LESSOR WAIVE ALL RIGHT TO TRIAL BY JURY OF ALL CLAIMS, DEFENSES, COUNTERCLAIMS AND SUITS OF ANY KIND ARISING FROM OR RELATING TO THIS LEASE. LESSEE AND LESSOR ACKNOWLEDGE THAT THIS IS A WAIVER OF A LEGAL RIGHT AND THAT EACH MAKES THIS WAVIER VOLUNTARILY AND KNOWINGLY. LESSEE AND LESSOR AGREE THAT ALL SUCH CLAIMS, DEFENSES, COUNTERCLAIMS AND SUITS SHALL BE TRIED BEFORE A JUDGE, NOT A JURY. 8 22. SECURITY DEPOSIT. Lessee agrees to make a security deposit in the amount, if any, set forth in the Lease Schedule prior to or concurrent with the date of delivery, which security deposit Lessor may commingle freely with other monies in its possession; however, at any time upon request of Lessee, Lessor shall provide Lessee a statement as to sums presently on deposit. Lessor may, at its election, use any portion of the security deposit to satisfy any of Lessee's obligations hereunder including but not limited to the payment of Rent when due, the reimbursement to Lessor of any sums paid by Lessor which under the terms of this Lease are the obligations of Lessee, and the repair of Equipment upon expiration of the term of said Lease. If, during the term of this Lease, it is necessary for Lessor to make payments on behalf of Lessee to satisfy any of Lessee's obligations hereunder, Lessee shall repay the amount of such payment plus a finance charge computed at the rate of eighteen percent (18%) per anum compounded monthly from the date of payment to the date of reimbursement (or other such maximum under applicable law) to the Security Deposit on demand but in no event later than the next Rent payment due date. Lessor shall credit that amount to the security deposit in Lessee's name. Upon termination of the Lease term, after Lessor or its agent has inspected the Equipment, Lessor will either make full payment to Lessee of the security deposit without interest or pay to the Lessee such sums as remain credited to said security deposit after Lessor has fulfilled Lessee's obligation to return the Equipment in the manner specified. A statement of the actual cost of such repairs or other necessary maintenance or parts shall accompany any such payment. 23. LIMITED POWER OF ATTORNEY. The undersigned officer, does hereby grant unto Lessor Power of attorney to sign and execute on Lessee's behalf, documents which may be necessary to title any and all equipment, referred to in this Master Lease Agreement, more fully described in the schedules executed by Lessee, in the name of Lessor, or to otherwise secure Lessor's interest in the equipment. 24. DUE ON SALE. The entire indebtedness under this agreement shall become due and payable and in full at the option of Lessor, without notice, upon a transfer, sale or conveyance of more than forty-nine percent (49%) of the common or other voting stock of Lessee. The non-payment of such shall constitute an additional event of default entitling Lessor to enforce the provisions of paragraph 16 of the Master Lease Agreement. 25. PERSONAL PROPERTY TAXES. (Applicable in Jurisdictions Permitting Lessee to List Equipment): Lessee agrees that it will (a) list all such Equipment leased from Lessor, (b) report all property taxes assessed against such Equipment and (c) pay all such taxes when due directly to the appropriate taxing authority until Lessor shall otherwise direct in writing. 26. MISCELLANEOUS. This instrument constitutes the entire agreement between the parties hereto. No representation or statement made by any representative of Lessor not set forth in writing and signed by Lessor shall be binding. Whenever the word "Lessor" is used herein, it shall include all assignees of Lessor. If there is more than one Lessee which signs below, their liability shall be joint and several. This Lease has been delivered and accepted by Lessor in Maryland and the rights and obligations of the parties hereto in the interpretation of this Lease shall be in accordance with the laws of the State of Maryland. WITNESS, the execution of this Master Lease Agreement, under seal, by Lessor and Lessee. LESSOR: LESSEE: ALLSTATE LEASING, INC. AVATECH SOLUTIONS, INC. By: /s/ [ILLEGIBLE] By: /s/ Gary Rever --------------------------- --------------------------- Title: [ILLEGIBLE] Title: CFO ------------------------ ------------------------ Address: 11403-A Cronhill Drive Owings Mills, MD. 21117 9 CASUALTY LOSS AND EARLY TERMINATION SCHEDULE TO MASTER LEASE AGREEMENT NO. E-385 LESSEE: AVATECH SOLUTIONS, INC. This Schedule is attached to and made a part of the Master Lease Agreement described above between Allstate Leasing, Inc. (Lessor) and Lessee and applies to the equipment subject to the Master Lease Agreement described above. The Casualty Value of any Unit shall be an amount equal to the product of the Acquisition Cost of such unit times the percentage below corresponding to the number of the last Rent payment received by Lessor, plus any unpaid Rent with respect to the Rent payment period during which the applicable Event of Loss or other termination occurred.
AFTER RENT AFTER RENT PAYMENT NO. PERCENT OF COST PAYMENT NO. PERCENT OF COST 1 103.44 19 69.60 2 101.79 20 67.48 3 100.12 21 65.33 4 98.41 22 63.14 5 96.68 23 60.94 6 94.93 24 58.71 7 93.14 25 57.10 8 91.34 26 55.20 9 89.50 27 52.67 10 87.63 28 49.10 11 85.74 29 47.54 12 83.82 30 10.00 13 81.87 14 79.90 15 77.89 16 75.86 17 73.79 18 71.71
LESSOR: LESSEE: Allstate Leasing, Inc. Avatech Solutions, Inc. By: /s/ [ILLEGIBLE] By: /s/ Gary Rever --------------------------- --------------------------- Title: [ILLEGIBLE] Title: CFO ------------------------ ------------------------ FAIR MARKET VALUE PURCHASE OPTION MASTER LEASE AGREEMENT NO. E-385 LESSEE: AVATECH SOLUTIONS, INC. This Addendum is attached to and made a part of the Master Lease Agreement described above between Allstate Leasing, Inc. ("Lessor") and Lessee. 1. Provided that no Default has occurred and is continuing, the Lessee shall have the right to purchase all but not less than all of the Equipment at the expiration of the Basic Term at a price equal to the "Fair Market Sales Value" (as defined below). Lessee shall give Lessor written notice one hundred eighty (180) days prior to the end of the Basic Term of its election to exercise or not to exercise the purchase option. If Lessee does not give Lessor such notice, then Lessee shall have no further option under this Addendum. If Lessee does give such notice, then it shall be bound to purchase the Equipment for its Fair Market Sales Value. If Lessor and Lessee have not agreed to the Fair Market Sales Value by the date which is one hundred twenty (120) days before the Basic Term expires, then the Fair Market Sales Value shall be determined by the Appraisal Procedure. 2. On the last day of the Basic Term, Lessee shall pay to Lessor the purchase price, plus all sales taxes, and any other amounts then due and unpaid under the Lease, upon delivery of a Bill of Sale transferring and assigning to Lessee the interest of Lessor in and to the Equipment which was originally conveyed to Lessor, and containing a warranty against claims of persons claiming by, through or under Lessor except claims which the Lessee assumed or is obligated to discharge under the Lease. Lessor shall expressly disclaim any representation or warranty as to the condition of the Equipment or any other matters. 3. "Fair Market Sales Value" of the Equipment as of the expiration of the Basic Term shall mean the open market cash purchase price that an informed and willing person (other than a lessee-user in possession) would pay for the Equipment in an arms-length transaction with a willing informed owner under no compulsion to sell, assuming the Lessee has fully observed and performed its obligation hereunder. 4. Appraisal Procedure" shall mean the following procedure for determining Fair Market Sales Value of the Equipment. If Fair Market Sales Value has not been agreed to by the date which is one hundred twenty (120) days before the Basic Term expires, or if Lessee requests the Appraisal Procedure, then each party shall select an appraiser within ten (10) business days of the giving of such notice. If one party shall fail to appoint an appraiser within the required time, the decision of the appraiser appointed by the other party shall be final. If two appraisers are appointed, they shall confer and agree upon Fair Market Sales Value. If they do not agree within twenty (20) business days after the latter of them is appointed, then such two appraisers shall within five (5) business days after such twentieth business day agree upon a third independent appraiser who shall independently determine Fair Market Sales Value within (20) business days of his acceptance of his appointment, and his determination shall be final. If such two appraisers do not agree upon such third appraiser within the time prescribed then either party may request the American Arbitration Association to appoint such a third appraiser within twenty (20) business days after such request is made, and both parties shall be bound by any appointment made within such period. If no such appraiser shall have been appointed within twenty (20) business days of such request to the American Arbitration Association, either party may apply to any court having jurisdiction to make such appointment. Any appraiser appointed pursuant to the foregoing procedure shall be instructed to determine, within twenty (20) business days after his appointment, Fair Market Sales Value of the Equipment then subject to this Equipment Lease and his determination thereof shall be final. All expenses and costs relating to the Appraisal Procedure shall be borne solely by the Lessee. Fair Market Sales Value will not exceed ten percent (10%) of the original acquisition cost. LESSOR: LESSEE: ALLSTATE LEASING, INC. AVATECH SOLUTIONS, INC. By: /s/ [ILLEGIBLE] By: /s/ A. Gary Rever CFO --------------------------- --------------------------- 1 OFFICER'S CERTIFICATE The undersigned, V. Joel Nicholson, of, Avatech Solutions, Inc., certifies that the following persons are duly qualified and acting officers or authorized agents of the Corporation, duly elected or appointed to the offices or positions set forth opposite their respective names, and are authorized to execute on behalf of the corporation, the Master Lease Agreement No. E-385, Equipment Schedules with Exhibits and Riders, and any and all related documents, between Allstate Leasing, Inc. and Avatech Solutions, Inc. NAME TITLE SIGNATURE Henry D. Felton CEO /s/ Henry D. Felton - --------------- ------------- -------------------- Allan Wulff President /s/ Allan Wulff - --------------- ------------- -------------------- Gary Rever CFO /s/ Gary Rever - --------------- ------------- -------------------- In WITNESS HEREOF, the undersigned officer has executed this Certificate as of July 17, 2001. By: /s/ V. Joel Nicholson ---------------------- Executive VP. EX-10.09 11 a2080957zex-10_09.txt EXHIBIT 10.09 EXHIBIT 10.09 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND APPLICABLE LAWS OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. Avatech Solutions, Inc. 10% SUBORDINATED NOTE $25,000 Owings Mills, Maryland ______________, 1998 Avatech Solutions, Inc., a Delaware corporation (the "Company"), the principal office of which is located at 11403A Cronhill Drive, Owings Mills, Maryland 21117, for value received, hereby promises to pay to _________________________________, or his registered assigns, the sum of Twenty-Five Thousand Dollars ($25,000), or such lesser amount as shall then equal the outstanding principal amount hereof. Any unpaid accrued interest hereon, as set forth below, shall be due and payable on the earlier to occur of (i) the maturity date, which is October ___, 2003, or (ii) when declared due and payable by the Holder upon the occurrence of an Event of Default (as defined below). Payment for all amounts due hereunder shall be made by mail to the registered address of the Holder. This Note is one of an issue of the Company's 10% Subordinated Notes in the aggregate principal amount of up to $1,600,000.00. The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees: 1. Definitions. As used in this Note, the following terms, unless the context otherwise requires, have the following meanings: (i) "Company" includes any corporation which shall succeed to or assume the obligations of the Company under this Note. (ii) "Holder," when the context refers to a holder of this Note, shall mean any person who shall at the time be the registered holder of this Note. 2. Interest. The Company shall pay simple interest at the rate of ten percent (10%) per annum on the principal of this Note outstanding during the period beginning on the date of issuance of this Note and ending on the date that the principal amount of this Note becomes due and payable. Interest shall be payable on the calendar quarter, commencing on January 1, 1999 until maturity or earlier prepayment. 3. Events of Default. If any of the events specified in this Section 3 shall occur (herein individually referred to as an "Event of Default"), the Holder of the Note may, so long as such condition exists, declare the entire principal and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company: (i) Default in the payment of the principal and unpaid accrued interest of this Note when due and payable if such default is not cured by the Company within ten (10) days after the Holder has given the Company written notice of such default; or (ii) The institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of the Company, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action; or (iii) If, within sixty (60) days after the commencement of an action against the Company (and service of process in connection therewith on the Company) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; or (iv) Any declared default of the Company under any Senior Indebtedness (as defined below) that gives the holder thereof the right to accelerate such Senior Indebtedness, and such Senior Indebtedness is in fact accelerated by the holder. 4. Subordination. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all of the Company's Senior Indebtedness, as hereinafter defined. 4.1 Senior Indebtedness. As used in this Note, the term "Senior Indebtedness" shall mean the principal of and unpaid accrued interest on: (i) all indebtedness of the Company to banks, commercial finance lenders, insurance companies or other financial institutions regularly engaged in the business of lending money, which is for money borrowed by the Company (whether or not secured), and (ii) any such indebtedness or any debentures, notes or other evidence of indebtedness issued in exchange for or to refinance such Senior Indebtedness, or any indebtedness arising from the satisfaction of such Senior Indebtedness by a guarantor. 4.2 Default on Senior Indebtedness. If there should occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation or any other marshalling of the assets and liabilities of the Company, or if this Note shall be declared due and payable upon the occurrence of an Event of Default with respect to any Senior Indebtedness, then (i) no amount shall be paid by the Company in respect of the principal of or interest on this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of the Holder of this Note that shall assert any right to receive any payments in respect of the principal of and interest on this Note, except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. If there occurs an event of default that has been declared in writing with respect to any Senior Indebtedness, or in the instrument under which any Senior Indebtedness is outstanding, permitting the holder of such Senior Indebtedness to accelerate the maturity thereof, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Note, unless within three (3) months after the happening of such event of default, the maturity of such Senior Indebtedness shall not have been accelerated. 4.3 Effect of Subordination. Subject to the rights, if any, of the holders of Senior Indebtedness under this Section 4 to receive cash, securities or other properties otherwise payable or deliverable to the Holder of this Note, nothing contained in this Section 4 shall impair, as between the Company and the Holder, the obligation of the Company, subject to the terms and conditions hereof, to pay to the Holder the principal hereof and interest hereon as and when the same become due and payable, or shall prevent the Holder of this Note, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law. 4.4 Subrogation. Subject to the payment in full of all Senior Indebtedness and until this Note shall be paid in full, the Holder shall be subrogated to the rights of the holders of Senior Indebtedness (to the extent of payments or distributions previously made to such holders of Senior Indebtedness pursuant to the provisions of Section 4.2 above) to receive payments or distributions of assets of the Company applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or on account of this Note; and for the purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which the Holder would be entitled except for the provisions of this Section 4 shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and the Holder, be deemed to be a payment by the Company to or on account of the Senior Indebtedness. 4.5 Undertaking. By its acceptance of this Note, the Holder agrees to execute and deliver such documents as may be reasonably requested from time to time by the Company or the lender of any Senior Indebtedness in order to implement the foregoing provisions of this Section 4. 5. Prepayment. Upon twenty (20) days' prior written notice to the Holder, the Company may at any time prepay in whole or in part the principal sum, plus accrued interest to date of payment, of this Note. 6. Assignment. Subject to the restrictions on transfer described in Section 8 below, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, personal and legal representatives, and transferees of the parties. 7. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and holders of all then outstanding Notes. 8. Transfer of this Note. With respect to any offer, sale or other disposition of this Note, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such Holder's counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such Holder that such Holder may sell or otherwise dispose of this Note or such securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 8 that the opinion of counsel for the Holder is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 9. Treatment of Note. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities. 10. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if telegraphed or mailed by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail or telegraphed in the manner set forth above and shall be deemed to have been received when delivered. 11. No Stockholder Rights. Nothing contained in this Note shall be construed as conferring upon the Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company; and no dividends or interest shall be payable or accrued in respect of this Note or the interest represented hereby. 12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, excluding that body of law relating to conflict of laws. 13. Heading; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. IN WITNESS WHEREOF, the Company has caused this Note to be issued this ____ day of _______________, 1998. AVATECH SOLUTIONS, INC. By:_____________________________________ Ronald C. Diegelman, President and Chief Operating Officer Name of Holder:_____________________ Address:____________________________ ____________________________________ Do not detach this warrant without consulting the Company. No. W- ______ 1,000 Shares Avatech Solutions, Inc. A Delaware Corporation Common Stock, Par Value $.01 per share Stock Purchase Warrant This warrant is issued to the registered holder of $25,000 principal amount of the 10% Subordinated Notes (individually, a "Note" and collectively, the "Notes"), of Avatech Solutions, Inc., a Delaware corporation (the "Company"), dated as of ___________________, 1998, bearing (except for the prefix letter "W") the same designating number as noted above and to which Note this warrant pertains or such registered holder's nominees. The Note is one of an issue of Notes of the Company with an aggregate principal amount of up to $1,600,000.00. The bearer of this warrant is entitled, upon presentation of the Note (if the Note is then outstanding) and upon surrender of this warrant at the offices of the Company, to subscribe for, purchase and receive one thousand (1,000) shares of the Company's Common Stock for a purchase price of Five Dollars and Seventy-five Cents ($5.75) per share provided, however, no fractional shares will be issued. Upon such payment, the Company agrees to cause to be issued in the name of the registered holder, or his or her nominees, a certificate or certificates duly representing the shares so purchased. In the event of the declaration and payment of share dividends by the Company on its Common Stock, or any split-up of the Common Stock, or recapitalization of the Company which changes the issued and outstanding shares of Common Stock, additional shares of the Company may be deliverable to the holder of this warrant upon the exercise of it without additional consideration, or the exercise price per share may be adjusted in the appropriate manner. The purchase privilege herein contained shall expire on _____________, 20___. If the Note to which this warrant is attached shall be prepaid, the purchase privilege shall nevertheless continue until said date. Nothing contained in this warrant shall affect or limit the Note to which it pertains. Dated as of ___________, 1998. Avatech Solutions, Inc. By:__________________________________ Ronald C. Diegelman, President and Chief Operating Officer EX-10.10 12 a2080957zex-10_10.txt EXHIBIT 10.10 EXHIBIT 10.10 AVATECH SOLUTIONS, INC. 1998 STOCK OPTION PLAN 1. PURPOSE. The purpose of this plan (the "Plan") is to secure for Avatech Solutions, Inc., a Delaware corporation (the "Company"), and its shareholders, the benefits arising from capital stock ownership by employees, officers, and directors of the Company, and its subsidiary corporations, who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include all present and future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). Those provisions of the Plan which make express reference to Section 422 shall apply only to Incentive Stock Options (as that term is defined in the Plan). 2 TYPES OF OPTIONS AND ADMINISTRATION. 2.1 TYPES OF OPTIONS. Options granted pursuant to the Plan may be either (a) incentive stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code; or (b) Non-Statutory Options which are not intended to meet the requirements of Section 422 of the Code ("Non-Statutory Options"). 2.2. ADMINISTRATION. 2.2.1. The Plan will be administered by the Board of Directors of the Company (or any committee thereof appointed pursuant to Section 2.2.2), whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. The Board of Directors may, in its sole discretion, grant options to purchase shares of the Company's Common Stock ("Common Stock"), establish a vesting schedule, and issue shares upon exercise of such options as provided in the Plan. The Board shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations which are, in the judgment of the Board of Directors, necessary or desirable for the administration of the Plan. The Board of Directors may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent that it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director or person acting pursuant to authority delegated by the Board of Directors shall be liable for any action or determination under the Plan made in good faith. 2.2.2. The Board of Directors may, to the full extent permitted by or consistent with applicable laws or regulations and Section 2.2.1 of this Plan delegate any or all of its powers under the Plan to a committee (the "Committee") appointed by the Board of Directors, and if the Committee is so appointed all references to the Board of Directors in the Plan shall mean and relate to such Committee. 3. ELIGIBILITY. Options may be granted to persons who are, at the time of grant, employees, officers, or directors of the Company; PROVIDED, HOWEVER, that the class of employees to whom Incentive Stock Options may be granted shall be limited to all employees of the Company. A person who has been granted an option may, if he or she is otherwise eligible, be granted additional options if the Board of Directors shall so determine. 4. STOCK SUBJECT TO PLAN. Subject to adjustment as provided in Section 14 and Section 15 below, the maximum number of shares of Common Stock which may be issued and sold under the Plan is Two Hundred Fifty Thousand (250,000) shares of Common Stock. If an option granted under the Plan shall expire or terminate for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. If shares issued upon exercise of an option under the Plan are tendered to the Company in payment of the exercise price of an option granted under the Plan, such tendered shares shall again be available for subsequent option grants under the Plan; PROVIDED, HOWEVER, that in no event shall such shares be made available for issuance to reporting persons or pursuant to exercise of Incentive Stock Options. 5. FORMS OF OPTION AGREEMENTS. As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients. 6. PURCHASE PRICE. 6.1. GENERAL. Subject to Section 2.2.1 of this Plan, the purchase price per share of stock deliverable upon the exercise of an option shall be determined by the Board of Directors; PROVIDED, HOWEVER, that in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the fair market value of such stock, as determined by the Board of Directors, at the time of grant of such option, or less than 110% of such fair market value in the case of options described in Section 11(b). 6.2. PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or, to the extent provided in the applicable option agreement: (a) by delivery to the Company of shares of Common Stock of the Company already owned by the optionee having a fair market value equal in amount to the exercise price of the options being exercised or (b) by any other means (including, without -2- limitation, by delivery of a promissory note of the optionee payable on such terms as are specified by the Board of Directors) which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Regulation T promulgated by the Federal Reserve Board). The fair market value of any shares of the Company's Common Stock or other non-cash consideration which may be delivered upon exercise of an option shall be determined by the Board of Directors. 7. OPTION PERIOD. Each option and all rights thereunder shall expire on such date as shall be set forth in the applicable option agreement, except that, in the case of an Incentive Stock Option, such date shall not be later than ten (10) years after the date on which the option is granted and, in all cases, options shall be subject to earlier termination as provided in the Plan. 8. EXERCISE OF OPTIONS. Each option granted under the Plan shall be exercisable in three (3) equal annual installments from the date of grant; provided, however, that the Board of Directors may, in individual cases, elect to grant an option that shall be exercisable in full or in installments at such time or times and during such period as shall be set forth in the agreement evidencing such option, subject to the provisions of the Plan. 9. NONTRANSFERABILITY OF OPTIONS. Options shall not be assignable or transferable by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the optionee, shall be exercisable only by the optionee. 10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP. Except as provided in Section 11(d) with respect to Incentive Stock Options, and subject to the provisions of the Plan, the Board of Directors shall determine the period of time during which an optionee may exercise an option following (a) the termination of the optionee's employment or other relationship with the Company (and such period may end on the day prior to such termination of employment) or (b) the death or disability of the optionee. Such periods shall be set forth in the agreement evidencing such option. 11. INCENTIVE STOCK OPTIONS. Options granted under the Plan that are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: (a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. (b) 10% SHAREHOLDER. If any employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the -3- Company (after taking into account the attribution of stock ownership rules of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: (i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the fair market value of one share of Common Stock at the time of grant; and (ii) The option exercise period shall not exceed five years from the date of grant. (c) DOLLAR LIMITATION. For so long as the Code shall so provide, options granted to any employee under the Plan (and any other incentive stock option plans of the Company) that are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate fair market value (determined as of the respective date or dates of grant) of more than $100,000. (d) TERMINATION OF EMPLOYMENT. DEATH OR DISABILITY. No Incentive Stock Option may be exercised unless, at the time of such exercise, the optionee is, and has been continuously since the date of grant of his or her option, employed by the Company, except that: (i) an Incentive Stock Option may be exercised within the period of three months after the date the optionee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable option agreement); PROVIDED, HOWEVER, that the agreement with respect to such option may designate a longer exercise period, PROVIDED FURTHER that the exercise after such three-month period shall be treated as the exercise of a non-statutory option under the Plan; (ii) if the optionee dies while in the employ of the Company, or within three months after the optionee ceases to be such an employee, the Incentive Stock Option may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of three months after the date of death (or within such lesser period as may be specified in the applicable option agreement); and (iii) if the optionee becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while in the employ of the Company, the Incentive Stock Option may be exercised within the period of one year after the date the optionee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable option agreement). -4- For all purposes of the Plan and any option granted hereunder, "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. 12. ADDITIONAL PROVISIONS. 12.1. INVESTMENT REPRESENTATIONS. The Company can require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any public offering of its Common Stock. 12.2. COMPLIANCE WITH SECURITIES LAWS. Each option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration, or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of or in connection with, the issuance or purchase of shares thereunder, such option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent, or approval, or satisfaction of such condition shall have been effected or obtained upon conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration, or qualification, or to satisfy such condition. 12.3. VIOLATIONS OF LAW. The Company shall not be required to sell or issue any shares of stock under any option if the sale or issuance of such shares would constitute a violation by the individual exercising the option or the Company of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. Specifically in connection with the Securities Act of 1933, as amended (the "Act") the Company shall not be required to sell or issue such shares unless the Company has received evidence satisfactory to it that the holder of such option may acquire such shares pursuant to an exemption from registration under such Act, and the shares of stock to be issued upon the exercise of all or any portion of any option granted under the Plan shall be issued on the condition that the optionee represents that the purchase of stock upon such exercise shall be for investment purposes and not with a view to resale, distribution, offering, transferring, mortgaging, pledging, hypothecating or otherwise disposing of any such stock under the circumstances which would constitute a public offering or distribution under the Act or the securities laws of any state. No -5- shares of stock shall be issued upon the exercise of any option unless the Company shall have received from the optionee a written statement satisfactory to legal counsel for the Company containing the above representations, stating that certificates representing such shares may bear a legend restricting their transfer and stating that the Company's transfer agent or agents may be given instructions to stop transfer of any certificate bearing such legend. Such representation and restrictions provided for herein shall not be required if (i) an effective registration statement for such shares under the Act and any applicable state laws has been filed with the Securities and Exchange Commission and with the appropriate agency or commission of any state whose laws apply to the transaction, or (ii) an opinion of counsel satisfactory to the Company has been delivered to the Company to the effect that registration is not required under the Act or under the applicable securities laws of any state. Any determination by the Committee regarding the foregoing shall be final, binding, and conclusive. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an option or the issuance of shares pursuant thereto to comply with any law or regulation or any governmental authority. 12.4 RESTRICTION ON TRANSFER OF STOCK The certificate or certificates for Common Stock issued upon the exercise of an option shall bear the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER CONTAINED IN THE COMPANY'S 1998 STOCK OPTION PLAN AND IN AN OPTION AGREEMENT, A COPY OF WHICH WILL BE FURNISHED UPON REQUEST BY THE ISSUER. UNDER THE PROVISIONS OF THE PLAN AND THE AGREEMENT, THE HOLDER OF THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAS NO RIGHT TO -6- REQUIRE THE COMPANY TO REGISTER THE SECURITIES REPRESENTED HEREBY. 13. RIGHTS AS A SHAREHOLDER. The holder of an option shall have no rights as a shareholder with respect to any shares covered by the option (including, without limitation any rights to receive dividends or non-cash distributions with respect to such shares) or to inspect books and records until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 14. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS AND RELATED TRANSACTIONS. 14.1. GENERAL. If, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar transaction, (a) the outstanding shares of Common Stock are increased, decreased, or exchanged for a different number or kind of shares or other securities of the Company or (b) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment may be made in (i) the maximum number and kinds of shares reserved for issuance under the Plan, (ii) the number and kind of shares or other securities subject to any then outstanding options under the Plan, and (iii) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 14 if such adjustment would cause the Plan to fail to comply with Section 422 of the Code. 14.2. BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this Section 14 will be made by the Board of Directors, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. 15. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION. ETC. 15.1. GENERAL. In the event of a consolidation or merger or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash, or other property of any other corporation or business entity or in the event of a liquidation of the Company, the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding options: (a) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), PROVIDED that any such options substituted for Incentive Stock Options shall meet the requirements of Section 424(a) of the Code, (b) upon written notice to the -7- optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice, (c) in the event of a merger under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the merger (the "Merger Price"), make or provide for a cash payment to the optionees equal to the difference between (i) the Merger Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Merger Price) and (ii) the aggregate exercise price of all such outstanding options in exchange for the termination of such options, and (d) provide that all or any outstanding options shall become exercisable in full immediately prior to such event. 15.2. SUBSTITUTE OPTIONS. The Company may grant options under the Plan in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances. 16. NO SPECIAL EMPLOYMENT RIGHT. Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment "at will" or pursuant to the terms of any applicable employment agreement or to increase or decrease the compensation of the optionee. 17. OTHER EMPLOYEE BENEFITS. Except as to plans which by their terms include such amounts as compensation, the amount of any compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance, or salary continuation plan, except as otherwise specifically determined by the Board of Directors. 18. AMENDMENT OF THE PLAN. 18.1. PROCESS TO AMEND PLAN. The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect, except that if at any time the approval of the shareholders of the Company is required under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, or under other applicable law, the Board of Directors may not effect such modification or amendment without such approval. -8- 18.2. EFFECT OF AMENDMENT AND CONSENT OF OPTIONEES. The termination or any modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify the terms and provisions of the Plan and of any outstanding Incentive Stock Options granted under the Plan to the extent necessary to qualify any or all such options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code. 19. WITHHOLDING. The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state, or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (a) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (b) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so delivered or withheld shall have a fair market value equal to such withholding obligation. The fair market value of the shares used to satisfy such withholding obligation shall be determined by the Company as of the date that the amount of tax to be withheld is to be determined. Any optionee who has made an election pursuant to this Section 19 may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements. 20. CANCELLATION AND NEW GRANT OF OPTIONS, ETC. The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of any affected optionees, (a) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the canceled options or (b) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options. 21. EFFECTIVE DATE AND DURATION OF THE PLAN. 21.1 EFFECTIVE DATE. The Plan shall become effective when adopted by the Board of Directors, but no option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, i.e., on or before February 2, 1999, options previously granted under the Plan shall not vest and shall terminate and no options shall be granted thereafter. Amendments to the Plan not requiring -9- shareholder approval shall become effective when adopted by the Board of Directors; amendments requiring shareholder approval (as provided in Section 18) shall become effective when adopted by the Board of Directors, but no option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular person) unless and until such amendment shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months of the Board's adoption of such amendment, any options granted on or after the date of such amendment shall terminate to the extent that such amendment was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. 21.2. TERMINATION. The Plan shall terminate upon the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, i.e., on April 3, 2008. Options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 22. PROVISION FOR FOREIGN PARTICIPANTS. The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit, or other matters. Adopted by the Board of Directors on April 2, 1998. -10- EX-10.11 13 a2080957zex-10_11.txt EXHIBIT 10.11 EXHIBIT 10.11 AVATECH SOLUTIONS, INC. 2000 STOCK OPTION PLAN 1. PURPOSE. The purpose of this plan (the "Plan") is to secure for Avatech Solutions, Inc., a Delaware corporation (the "Company"), and its shareholders, the benefits arising from capital stock ownership by employees, officers, and directors of the Company, and its subsidiary corporations, who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include all present and future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended from time to time (the "Code"). Those provisions of the Plan which make express reference to Section 422 shall apply only to Incentive Stock Options (as that term is defined in the Plan). 2 TYPES OF OPTIONS AND ADMINISTRATION. 2.1 TYPES OF OPTIONS. Options granted pursuant to the Plan may be either (a) incentive stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code; or (b) Non-Statutory Options which are not intended to meet the requirements of Section 422 of the Code ("Non-Statutory Options"). 2.2. ADMINISTRATION. 2.2.1. The Plan will be administered by the Board of Directors of the Company (or any committee thereof appointed pursuant to Section 2.2.2), whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. The Board of Directors may, in its sole discretion, grant options to purchase shares of the Company's Common Stock ("Common Stock"), establish a vesting schedule, and issue shares upon exercise of such options as provided in the Plan. The Board shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations which are, in the judgment of the Board of Directors, necessary or desirable for the administration of the Plan. The Board of Directors may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent that it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director or person acting pursuant to authority delegated by the Board of Directors shall be liable for any action or determination under the Plan made in good faith. -1- 2.2.2. The Board of Directors may, to the full extent permitted by or consistent with applicable laws or regulations and Section 2.2.1 of this Plan delegate any or all of its powers under the Plan to a committee (the "Committee") appointed by the Board of Directors, and if the Committee is so appointed all references to the Board of Directors in the Plan shall mean and relate to such Committee. 3. ELIGIBILITY. Options may be granted to persons who are, at the time of grant, employees, officers, or directors of the Company; PROVIDED, HOWEVER, that the class of employees to whom Incentive Stock Options may be granted shall be limited to all employees of the Company. A person who has been granted an option may, if he or she is otherwise eligible, be granted additional options if the Board of Directors shall so determine. 4. STOCK SUBJECT TO PLAN. Subject to adjustment as provided in Section 14 and Section 15 below, the maximum number of shares of Common Stock which may be issued and sold under the Plan is Two Hundred Fifty Thousand (250,000) shares of Common Stock. If an option granted under the Plan shall expire or terminate for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. If shares issued upon exercise of an option under the Plan are tendered to the Company in payment of the exercise price of an option granted under the Plan, such tendered shares shall again be available for subsequent option grants under the Plan; PROVIDED, HOWEVER, that in no event shall such shares be made available for issuance to reporting persons or pursuant to exercise of Incentive Stock Options. 5. FORMS OF OPTION AGREEMENTS. As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients. 6. PURCHASE PRICE. 6.1. GENERAL. Subject to Section 2.2.1 of this Plan, the purchase price per share of stock deliverable upon the exercise of an option shall be determined by the Board of Directors; PROVIDED, HOWEVER, that in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the fair market value of such stock, as determined by the Board of Directors, at the time of grant of such option, or less than 110% of such fair market value in the case of options described in Section 11(b). 6.2. PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or, to the extent provided in the applicable option agreement: (a) by delivery to the Company of shares of Common Stock of the Company already owned by the optionee having a fair market value equal in amount to the exercise price of the options being exercised or (b) -2- by any other means (including, without limitation, by delivery of a promissory note of the optionee payable on such terms as are specified by the Board of Directors) which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Regulation T promulgated by the Federal Reserve Board). The fair market value of any shares of the Company's Common Stock or other non-cash consideration which may be delivered upon exercise of an option shall be determined by the Board of Directors. 7. OPTION PERIOD. Each option and all rights thereunder shall expire on such date as shall be set forth in the applicable option agreement, except that, in the case of an Incentive Stock Option, such date shall not be later than ten (10) years after the date on which the option is granted and, in all cases, options shall be subject to earlier termination as provided in the Plan. 8. EXERCISE OF OPTIONS. Each option granted under the Plan shall be exercisable in three (3) equal annual installments from the date of grant; provided, however, that the Board of Directors may, in individual cases, elect to grant an option that shall be exercisable in full or in installments at such time or times and during such period as shall be set forth in the agreement evidencing such option, subject to the provisions of the Plan. 9. NONTRANSFERABILITY OF OPTIONS. Options shall not be assignable or transferable by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the optionee, shall be exercisable only by the optionee. 10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP. Except as provided in Section 11(d) with respect to Incentive Stock Options, and subject to the provisions of the Plan, the Board of Directors shall determine the period of time during which an optionee may exercise an option following (a) the termination of the optionee's employment or other relationship with the Company (and such period may end on the day prior to such termination of employment) or (b) the death or disability of the optionee. Such periods shall be set forth in the agreement evidencing such option. 11. INCENTIVE STOCK OPTIONS. Options granted under the Plan that are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions: (a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options. (b) 10% SHAREHOLDER. If any employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all -3- classes of stock of the Company (after taking into account the attribution of stock ownership rules of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual: (i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the fair market value of one share of Common Stock at the time of grant; and (ii) The option exercise period shall not exceed five years from the date of grant. (c) DOLLAR LIMITATION. For so long as the Code shall so provide, options granted to any employee under the Plan (and any other incentive stock option plans of the Company) that are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate fair market value (determined as of the respective date or dates of grant) of more than $100,000. (d) TERMINATION OF EMPLOYMENT. DEATH OR DISABILITY. No Incentive Stock Option may be exercised unless, at the time of such exercise, the optionee is, and has been continuously since the date of grant of his or her option, employed by the Company, except that: (i) an Incentive Stock Option may be exercised within the period of three months after the date the optionee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable option agreement); PROVIDED, HOWEVER, that the agreement with respect to such option may designate a longer exercise period, PROVIDED FURTHER that the exercise after such three-month period shall be treated as the exercise of a non-statutory option under the Plan; (ii) if the optionee dies while in the employ of the Company, or within three months after the optionee ceases to be such an employee, the Incentive Stock Option may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of three months after the date of death (or within such lesser period as may be specified in the applicable option agreement); and (iii) if the optionee becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while in the employ of the Company, the Incentive Stock Option may be exercised within the period of one year after the date the optionee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable option agreement). -4- For all purposes of the Plan and any option granted hereunder, "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date. 12. ADDITIONAL PROVISIONS. 12.1. INVESTMENT REPRESENTATIONS. The Company can require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any public offering of its Common Stock. 12.2. COMPLIANCE WITH SECURITIES LAWS. Each option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration, or qualification of the shares subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of or in connection with, the issuance or purchase of shares thereunder, such option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent, or approval, or satisfaction of such condition shall have been effected or obtained upon conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration, or qualification, or to satisfy such condition. 12.3. VIOLATIONS OF LAW. The Company shall not be required to sell or issue any shares of stock under any option if the sale or issuance of such shares would constitute a violation by the individual exercising the option or the Company of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. Specifically in connection with the Securities Act of 1933, as amended (the "Act") the Company shall not be required to sell or issue such shares unless the Company has received evidence satisfactory to it that the holder of such option may acquire such shares pursuant to an exemption from registration under such Act, and the shares of stock to be issued upon the exercise of all or any portion of any option granted under the Plan shall be issued on the condition that the optionee represents that the purchase of stock upon such exercise shall be for investment purposes and not with a view to resale, distribution, offering, transferring, mortgaging, pledging, hypothecating or otherwise disposing of any such stock under the circumstances which would constitute a public offering or -5- distribution under the Act or the securities laws of any state. No shares of stock shall be issued upon the exercise of any option unless the Company shall have received from the optionee a written statement satisfactory to legal counsel for the Company containing the above representations, stating that certificates representing such shares may bear a legend restricting their transfer and stating that the Company's transfer agent or agents may be given instructions to stop transfer of any certificate bearing such legend. Such representation and restrictions provided for herein shall not be required if (i) an effective registration statement for such shares under the Act and any applicable state laws has been filed with the Securities and Exchange Commission and with the appropriate agency or commission of any state whose laws apply to the transaction, or (ii) an opinion of counsel satisfactory to the Company has been delivered to the Company to the effect that registration is not required under the Act or under the applicable securities laws of any state. Any determination by the Committee regarding the foregoing shall be final, binding, and conclusive. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an option or the issuance of shares pursuant thereto to comply with any law or regulation or any governmental authority. 12.4 RESTRICTION ON TRANSFER OF STOCK The certificate or certificates for Common Stock issued upon the exercise of an option shall bear the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER CONTAINED IN THE COMPANY'S 2000 STOCK OPTION PLAN AND IN AN OPTION AGREEMENT, A COPY OF WHICH WILL BE FURNISHED UPON REQUEST BY THE ISSUER. UNDER THE PROVISIONS OF THE PLAN AND THE AGREEMENT, THE HOLDER OF THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAS NO RIGHT TO REQUIRE THE COMPANY TO -6- REGISTER THE SECURITIES REPRESENTED HEREBY. 13. RIGHTS AS A SHAREHOLDER. The holder of an option shall have no rights as a shareholder with respect to any shares covered by the option (including, without limitation any rights to receive dividends or non-cash distributions with respect to such shares) or to inspect books and records until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 14. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS AND RELATED TRANSACTIONS. 14.1. GENERAL. If, through or as a result of any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other similar transaction, (a) the outstanding shares of Common Stock are increased, decreased, or exchanged for a different number or kind of shares or other securities of the Company or (b) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment may be made in (i) the maximum number and kinds of shares reserved for issuance under the Plan, (ii) the number and kind of shares or other securities subject to any then outstanding options under the Plan, and (iii) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 14 if such adjustment would cause the Plan to fail to comply with Section 422 of the Code. 14.2. BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this Section 14 will be made by the Board of Directors, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments. 15. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION. ETC. 15.1. GENERAL. In the event of a consolidation or merger or sale of all or substantially all of the assets of the Company in which outstanding shares of Common Stock are exchanged for securities, cash, or other property of any other corporation or business entity or in the event of a liquidation of the Company, the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions, as to outstanding options: (a) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), PROVIDED that any such options substituted for Incentive Stock Options shall -7- meet the requirements of Section 424(a) of the Code, (b) upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such transaction unless exercised by the optionee within a specified period following the date of such notice, (c) in the event of a merger under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the merger (the "Merger Price"), make or provide for a cash payment to the optionees equal to the difference between (i) the Merger Price times the number of shares of Common Stock subject to such outstanding options (to the extent then exercisable at prices not in excess of the Merger Price) and (ii) the aggregate exercise price of all such outstanding options in exchange for the termination of such options, and (d) provide that all or any outstanding options shall become exercisable in full immediately prior to such event. 15.2. SUBSTITUTE OPTIONS. The Company may grant options under the Plan in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances. 16. NO SPECIAL EMPLOYMENT RIGHT. Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment "at will" or pursuant to the terms of any applicable employment agreement or to increase or decrease the compensation of the optionee. 17. OTHER EMPLOYEE BENEFITS. Except as to plans which by their terms include such amounts as compensation, the amount of any compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance, or salary continuation plan, except as otherwise specifically determined by the Board of Directors. 18. AMENDMENT OF THE PLAN. 18.1. PROCESS TO AMEND PLAN. The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect, except that if at any time the approval of the shareholders of the Company is required under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, or under other applicable law, the Board of Directors may not effect such modification or amendment without such approval. -8- 18.2. EFFECT OF AMENDMENT AND CONSENT OF OPTIONEES. The termination or any modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify the terms and provisions of the Plan and of any outstanding Incentive Stock Options granted under the Plan to the extent necessary to qualify any or all such options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code. 19. WITHHOLDING. The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state, or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (a) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (b) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so delivered or withheld shall have a fair market value equal to such withholding obligation. The fair market value of the shares used to satisfy such withholding obligation shall be determined by the Company as of the date that the amount of tax to be withheld is to be determined. Any optionee who has made an election pursuant to this Section 19 may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements. 20. CANCELLATION AND NEW GRANT OF OPTIONS, ETC. The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of any affected optionees, (a) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the canceled options or (b) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options. 21. EFFECTIVE DATE AND DURATION OF THE PLAN. 21.1 EFFECTIVE DATE. The Plan shall become effective when adopted by the Board of Directors, but no option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, i.e., on or before November 9, 2000, options previously -9- granted under the Plan shall not vest and shall terminate and no options shall be granted thereafter. Amendments to the Plan not requiring shareholder approval shall become effective when adopted by the Board of Directors; amendments requiring shareholder approval (as provided in Section 18) shall become effective when adopted by the Board of Directors, but no option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular person) unless and until such amendment shall have been approved by the Company's shareholders. If such shareholder approval is not obtained within twelve months of the Board's adoption of such amendment, any options granted on or after the date of such amendment shall terminate to the extent that such amendment was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan. 21.2. TERMINATION. The Plan shall terminate upon the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, i.e., on November 10, 2009. Options outstanding on such date shall continue to have force and effect in accordance with the provisions of the instruments evidencing such options. 22. PROVISION FOR FOREIGN PARTICIPANTS. The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit, or other matters. Adopted by the Board of Directors on November 9, 1999. -10- EX-10.12 14 a2080957zex-10_12.txt EXHIBIT 10.12 EXHIBIT 10.12 AVATECH SOLUTIONS, INC. STOCKHOLDERS' AGREEMENT THIS STOCKHOLDERS' AGREEMENT (the "Agreement") is made as of the first day of April, 1998, by and among those shareholders whose names are set forth as signatories to this Agreement (collectively referred to hereinafter as the "Stockholders"), and AVATECH SOLUTIONS, INC., a Delaware corporation (the "Corporation" or "Avatech"). EXPLANATORY STATEMENT A. The parties hereto believe that it is desirable and in their mutual best interests to control the ownership of the Common Stock and that the execution of this Agreement will help facilitate the continuous, harmonious and effective management of the affairs, policies, and operations of the Corporation. B. It is the intention of the parties, by executing this Agreement, to restrict the transfer of all shares of Common Stock and to provide a market for the sale of Common Stock shares upon the occurrence of certain events as provided herein. C. Certain of the Stockholders, as listed in ATTACHMENT A attached hereto and incorporated by reference herein, are employees of the Corporation. The Corporation recognizes that the loss of the services of any employed Stockholder would constitute a serious impairment to the effective conduct of the Corporation's business, and hopes that by executing this Agreement, each employed Stockholder will be induced to remain in the Corporation's employ. AGREEMENT NOW, THEREFORE, in consideration of the matters set forth in this Explanatory Statement and the mutual covenants, promises, agreements, representations and warranties of the parties hereto, the parties hereto do hereby covenant, promise, agree, represent, and warrant as follows: 1. DEFINITIONS. Capitalized words and phrases used in this Agreement have the following meanings: 1.1. "Accountants" means the independent certified public accountants examining or reviewing the books and accounts of the Corporation at the relevant time; if there be none, then the independent certified public accountants who last performed such services for the Corporation. 1.2. "Act" means the Securities Act of 1933, as amended. 1.3. "Agreed Value" means the per share dollar amount last established by the Board of Directors of Avatech for purposes of the 1998 Employee Stock Purchase Plan ("ESPP"). Notwithstanding anything contained in this Agreement to the contrary, if the date of the most recent determination of Agreed Value is more than eighteen (18) months prior to the date on which the death of the Decedent (as such term is defined below) occurred, the Disability occurred, the Transfer Notice was received, the Involuntary Transfer Notice was received, or the Termination occurred, Agreed Value shall be determined by the Board of Directors, or, if the Board of Directors so chooses, by a valuator retained by the Corporation. Notwithstanding anything contained in this Agreement to the contrary, if the shares were purchased by an employee pursuant to the ESPP within six (6) months of the date on which the death of the Decedent (as such term is defined below) occurred, the Disability occurred, the Transfer Notice was received, or the Involuntary Transfer Notice was received, or the Termination occurred, Agreed Value shall be the ESPP Value. 1.4. "Agreement" means this Stockholders' Agreement, as amended from time to time. 1.5. "Book Value" means the dollar amount value, computed on the accrual basis of accounting, and in accordance with generally accepted accounting principles, of the net aggregate stockholders' equity of the Corporation, divided by the total number of shares of Common Stock outstanding on the date of the computation (as hereinafter provided). Notwithstanding anything contained in this Agreement to the contrary, the computation of Book Value shall be subject to the following provisions: 1.5.1. In no event shall the determination of Book Value include any proceeds, collected or collectible by the Corporation, under any policy or policies of life or disability insurance insuring the life or disability of a Stockholder as a result of the death or disability of a Stockholder. 1.5.2. No additional allowance of any kind shall be made for the goodwill, trade names or any other intangible asset or asses (the "Intangible Assets") of the Corporation other than the aggregate dollar amount for any of such Intangible Assets appearing on the most recent balance sheet of the Corporation prior to the date set forth in Section 1.5.3 for determining Book Value. 1.5.3. Book Value shall be computed and determined as of the end of the last full year immediately preceding the year in which either the death of the Decedent occurred, the Disability occurred, the Transfer Notice was received, the Involuntary Transfer Notice was received, or the Termination occurred. 1.5.4. In no event shall any reserve for contingent liabilities, in excess of the amount of such reserve appearing on the most recent balance sheet of the Corporation prior to the date set forth in Section 1.5.3 for determining Book Value, be treated as a liability for purposes of determining Book Value. 1.5.5. In no event shall any adjustment be made to Book Value as a result of any event occurring subsequent to the valuation date set forth in Section 1.5.3, whether or not that event constitutes an adjustment to the federal or state income tax liability of the Corporation. 1.5.6. Book Value shall be determined by the Accountants. The determination by the Accountants shall, for purposes of this Agreement, be final, conclusive and binding upon each of the parties hereto. 1.5.7. Anything contained in this Agreement to the contrary notwithstanding, Book Value shall be calculated for the purposes of this Agreement on an accrual basis even if the Corporation shall have utilized different accounting principles for any prior period. 1.6. "Closing" means the Decedent Closing Date, the Transfer Closing Date, the Involuntary Transfer Closing Date, the Disability Closing Date, or the Termination Closing Date, where there is no distinction among them in the context. 1.7. "Code" means the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of any succeeding law). 1.8. "Common Stock" means the Corporation's ten million, (10,000,000) authorized shares of common stock, with par value of $.01 per share. 1.9. "Corporation" means Avatech Solutions, Inc., a Delaware corporation. 1.10. "Days" means all calendar days, inclusive of Saturdays, Sundays and days which are legal holidays under the laws of the United States or the State. 1.11. "Disability" means, with respect to a Stockholder who is an employee of the Corporation or its subsidiaries at the time the Disability occurs, the first to occur of: 1.11.1. A Stockholder being declared legally incompetent under the laws of the State, in which event the date of the Disability shall be deemed to be the date of such declaration. 1.11.2. The Corporation receiving a written opinion from a physician designated by the Corporation to the effect that a Stockholder has incurred a mental or physical condition that can reasonably be expected to prevent such Stockholder from carrying out the Stockholder's material duties for the Corporation for a period of six months or longer from the date of such opinion, in which event the date of the Disability shall be deemed to be the date of the physician's written opinion; each Stockholder hereby covenants and agrees to cooperate with any physician so designated by the Corporation to determine whether such Stockholder has suffered a Disability, provided that any physician so designated shall consult with any physician designated by, or on behalf of, such Stockholder. 1.11.3. The Corporation being entitled to receive a payment under any Disability Policy with respect to a Stockholder, in which event the date of the Disability shall be deemed to be the date on which the Stockholder was first deemed disabled pursuant to the Disability Policy. 1.11.4. A Stockholder being deemed disabled under the provisions of the Social Security Act, 42 U.S.C. Section 416, in which event the date of the Disability shall be deemed to be the first date on which the Stockholder satisfied the requirements contained therein. 1.12 "Disability Policy" means any disability insurance policy insuring against the Disability of a Stockholder and set forth on the Disability Insurance Schedule attached hereto as Schedule 1.12. 1.13. "ESPP Value" means the actual amount paid by the employee per share for his or her shares which actual amount is 85% of the fair market value at the time of purchase. 1.14. "Event of Bankruptcy" means with respect to any Stockholder, any of the following: 1.14.1. Filing a voluntary petition in bankruptcy or for reorganization or for the adoption of an arrangement under the Bankruptcy Code (as now or in the future amended) or an admission seeking the relief therein provided. 1.14.2. Making a general assignment for the benefit of creditors. 1.14.3. Consenting to the appointment of a receiver for all or substantially all of a Stockholder's property. 1.14.4. In the case of the filing of an involuntary petition in bankruptcy, an entry of an order for relief. 1.14.5. The entry of a court order appointing a receiver or trustee for all or a substantial part of a Stockholder's property, without the Stockholder's consent. 1.14.6. The assumption of custody or sequestration by a court of competent jurisdiction of all or substantially all of a Stockholder's property. 1.15. "Involuntary Transfer" means any nonvolitional Transfer of Common Stock whatsoever and shall be deemed to occur if: 1.15.1. A Stockholder is subject to an Event of Bankruptcy. 1.15.2. A Stockholder's shares of Common Stock are to be Transferred pursuant to: (i) a divorce or separation decree, property settlement or any other form of judicially approved marital arrangement; (ii) the foreclosure of any lien or other security interest; (iii) a judicial sale; or (iv) otherwise by operation of law. 1.16. "Life Policy" means any life insurance policy insuring the life of a Stockholder and set forth on the Life Insurance Schedule attached hereto as Schedule 1.16. 1.17. "Termination" means the termination of a Stockholder's employment with the Corporation for any reason whatsoever other than death or Disability, the Stockholder with respect to whom a Termination occurs is referred to as the "Terminated Stockholder." It is understood that the Termination provisions hereof shall not be applicable to non-employee stockholders. 1.18. "Note" means the Corporation's unsecured non-negotiable promissory note in the form attached hereto as Exhibit 1.18. 1.19. "Person" means any individual, partnership, corporation, trust or other entity. 1.20. "Security" has the meaning set forth in the Act. 1.21. "Seller" means the personal representatives of the Decedent, the Disabled Stockholder, the Transferor, the Involuntary Transferor, the Terminated Stockholder or the Terminated Stockholder, where there is no distinction among them in the context. 1.22. "Shares" means the Decedent Shares, the Transferor Shares, the Involuntary Transferor Shares, the Disability Shares, the Termination Shares or the Termination Shares, where there is no distinction among them in the context. 1.23. "State" means the State of Delaware. 1.24. "State Acts" means the securities laws of any state or the District of Columbia, as amended from time to time. 1.25. "Stockholder" means a Person owning of record any shares of Common Stock and executing this Agreement or a counterpart thereof. 1.26. "Transfer" means any sale, hypothecation, pledge, assignment or other transfer, be it voluntary or involuntary to a Stockholder or third person, inter vivos, testamentary, by operation of the laws of devise and descent or any other laws, and, when used as a verb, to voluntarily or involuntarily, to a Stockholder or third person, inter vivos, testamentary, by operation of the laws of devise and descent or any other laws, sell, hypothecate, pledge, assign or otherwise transfer. 1.27. "Voluntary Transfer" means any Transfer of Common Stock other than an Involuntary Transfer. 2. EXPLANATORY STATEMENT: RESTRICTIONS ON TRANSFER. 2.1. The matters set forth in the Explanatory Statement are incorporated by reference in, and made a substantive part of, this Agreement. 2.2. Each Stockholder covenants, promises and agrees that he shall not Transfer all, any portion of, or any interest or rights in, the shares of Common Stock owned of record or beneficially by such Stockholder except pursuant to the terms and provisions of this Agreement. Each Stockholder hereby acknowledges the reasonableness of the restrictions on Transfers imposed by this Agreement in view of the purposes of the Corporation and the relationships of the Stockholders. 2.3. Strict compliance shall be required with each and every provision of this Agreement and particularly with the procedures set forth herein with respect to any Transfer of any shares of Common Stock. It is understood and agreed by the parties hereto that no Stockholder shall have the right or power to Transfer any shares of Common Stock except in strict compliance with the procedures set forth in this Agreement. The attempted Transfer of any shares of Common Stock by any Stockholder shall be deemed invalid, null and void, and of no force or effect, and the transferee of any such shares shall not be entitled to vote such shares, receive dividends on such shares or have any other rights in and with respect to such shares unless such Transfer is made in conformance with and pursuant to the terms of this Agreement. 3. ESTATE AND GIFT TAX PLANNING EXCEPTION. Notwithstanding anything in this Agreement to the contrary, any Stockholder may Transfer any or all of his Common Stock to a family member (or a trust for the benefit of such persons) pursuant to this Section. (For the purposes of this exception, a "family member" is defined as any husband, wife, son, daughter, grandson, or granddaughter of the Stockholder). Upon such Transfer, the family member shall hold the shares of Common Stock received in such Transfer subject to the terms of this Agreement, and shall execute, seal and deliver a document substantially in the form of ATTACHMENT B attached hereto, binding him to the terms and conditions of this Agreement as an additional Stockholder party. 4. DEATH OF A STOCKHOLDER. 4.1. Upon the death of a Stockholder (the "Decedent"), the Decedent's personal representatives (the "Representatives") shall have the option to retain ownership of the shares or sell all of the shares of Common Stock owned of record and beneficially by the Decedent at the time of the Decedent's death (the "Decedent Shares") to the Corporation or other Stockholders in accordance with this Agreement. In the event that the Representatives desire to sell the shares, Representatives shall first provide written notice to the Corporation and the Corporation shall have the option, but not the obligation, to purchase the shares. In the event that the Corporation elects to purchase the shares, the Corporation shall, by written notice addressed to the Representatives, fix a closing date (the "Decedent Closing Date") for such purchase. The Decedent Closing Date shall be neither earlier than ninety (90) Days after the Representatives' written notice is received by the Corporation. If the Corporation elects to purchase the Decedent Shares, the Corporation shall purchase the Decedent Shares on the Decedent Closing Date at a price per share (the "Decedent Purchase Price") which shall be equal to Agreed Value. 4.2. In the event that a Life Policy exists on the life of the Decedent Stockholder, the dollar amount of the Decedent Purchase Price multiplied by the number of Decedent Shares (the "Aggregate Decedent Purchase Price") shall be paid in cash on the Decedent Closing Date to the extent of the dollar amount of the net (i.e., after tax, including by way of example, any alternative minimum tax liability imposed on the Corporation by virtue of its receipt of such proceeds) cash proceeds received by the Corporation under the Life Policy insuring the life of the Decedent (the "Net Life Insurance Proceeds"). To the extent that the Net Life Insurance proceeds exceed the Aggregate Decedent Purchase Price (the "Excess Insurance Proceeds"), the Excess Insurance Proceeds shall belong to the Corporation and neither the Decedent nor the Decedent's personal representatives shall have any right, title or interest in or to the Excess Insurance Proceeds. In the event that the Aggregate Decedent Purchase Price shall exceed the Net Life Insurance Proceeds (the "Decedent Purchase Price Cash Shortfall"), the Corporation shall have the right to either: 4.2.1. Pay the Decedent Purchase Price Cash Shortfall in cash on the Decedent Closing Date; or 4.2.2. Elect prior to or on the Decedent Closing Date to pay the Decedent Purchase Price Cash Shortfall in installments as provided in Section 9 of this Agreement. 4.3 If the Corporation fails to exercise its option to purchase the Decedent Shares, the Representatives shall continue to hold the Decedent Shares subject to all of the terms and conditions of this Agreement. 5. VOLUNTARY TRANSFER OF STOCK. 5.1. Subject to the restrictions on transferability imposed by the Act and State Acts, Stockholder (individually, a "Transferor") shall be permitted to Voluntarily Transfer all of the shares of Common Stock owned of record and beneficially by the Transferor (the "Transferor Shares") to any other Person (a "Transferee"), pursuant to a bona fide written offer (the "Transferee Offer") by such Transferee to purchase all, but not less than all, of the Transferor Shares for a purchase price denominated and payable in United States dollars, in accordance with the provisions of this Section 5 of this Agreement. 5.2. Prior to any Voluntary Transfer of the Transferor Shares, the Transferor shall first give the Corporation written notice (the "Transfer Notice"). The Transfer Notice shall contain each of the following: 5.2.1. The identity of the Transferee. 5.2.2. A true, correct and complete copy of the Transferee Offer. 5.2.3. An offer (the "Offer") by the Transferor to sell the Transferor Shares to the Corporation for a price per share (the "Transfer Purchase Price") equal to the lesser of Agreed Value or the per share price contained in the Transferee Offer. 5.3. The Offer shall be and remain irrevocable for a period (the "Offer Period") ending at 11:59 P.M., local time at the Corporation's principal office, on the ninetieth (90th) Day following the date the Transfer Notice was received by the Corporation. At any time during the Offer Period, the Corporation may accept the Offer by giving written notice to the Transferor of such acceptance (the "Offeree Notice"). The Transferor shall not cast a vote as a stockholder or as a director on the question of whether the Corporation shall accept the Offer. In the event that the Offer is accepted by the Corporation, the Offeree Notice shall fix a closing date (the "Transfer Closing Date") for such purchase which shall be neither earlier than ten (10) nor later than ninety (90) Days after the expiration of the Offer Period. 5.4. In the event that the Offer is accepted by the Corporation, the dollar amount of the Transfer Purchase Price multiplied by the number of Transferor Shares (the "Aggregate Transfer Purchase Price") shall be paid in cash on the Transfer Closing Date unless the Corporation shall elect prior to or on the Transfer Closing Date to pay the Aggregate Transfer Purchase Price in installments pursuant to the provisions of Section 9 of this Agreement. 5.5. If the Corporation shall reject the Offer or fail to accept the Offer (within the time and in the manner specified in this Section 5 of this Agreement), then the Transferor shall be free for a period (the "Free Transfer Period") of thirty (30) Days from the expiration of the Offer Period to Transfer the Transferor Shares to the Transferee, for the same or greater price and on the same terms and conditions as set forth in the Transfer Notice. Such Transfer shall be: (i) subject to any additional restrictions on Transfers that may be imposed by this Agreement, by any other agreement between all of the parties hereto, by statute, law, ordinance, rule or regulation or by the Charter or By-Laws of the Corporation; (ii) permitted, provided that the purchase of the Transferor Shares will not result in the imposition of a personal holding company tax or other similar Federal or state punitive tax on the Corporation; and (iii) permitted, provided that the Transferee and, if the Transferee is married the spouse of the Transferee, shall execute, seal and deliver a document substantially in the form of ATTACHMENT B attached hereto (the additional requirements set forth in clauses (i)--(iii) of this sentence are referred to collectively as the "Additional Restrictions"). If the Transferor does not Transfer the Transferor Shares within the Free Transfer Period, the Transferor's right to Transfer the Transferor Shares pursuant to this Section 5 of this Agreement shall cease and terminate. 5.6. Any Transfer by a Transferor after the last day of the Free Transfer Period or made without strict compliance with the terms, provisions and conditions of this Section 5 of this Agreement and the other terms, provisions and conditions of this Agreement shall be absolutely null and void. 5.7. In the event that the Corporation elects to accept the Offer and the Transferor should die or become an Involuntary Transferor, a Disabled Stockholder, a Terminated Stockholder prior to the Transfer Closing Date, the provisions of this Section 5 shall be and remain operative, and the provisions of Sections 4, 6, 7, or 8, as the case may be, shall be inapplicable. 5.8. Notwithstanding the provisions of this Section 5 to the contrary, but provided that each of the Additional Restrictions is complied with, any Stockholder may at any time, and from time to time, Transfer all or any portion of the shares of Common Stock owned by such Stockholder to any other Stockholder. 5.9 If the Corporation or any Stockholder is purchasing any Common Stock of a Stockholder who has transferred a portion of his Stock to a family member or a trust pursuant to this exception, then the Corporation or such Stockholder shall purchase the Common Stock held by the family member in the same manner and upon the same terms as the Stock of the transferring Stockholder's Stock is being purchased. 6. INVOLUNTARY TRANSFER OF STOCK. 6.1. In the event of an Involuntary Transfer of any shares of Common Stock owned of record or beneficially by any Stockholder (the "Involuntary Transferor Shares"), the Corporation shall have the option (the "Involuntary Transfer Purchase Option") to purchase all, but not less than all, of the Involuntary Transfer Shares for a price per share (the "Involuntary Transfer Purchase Price") equal to Agreed Value. 6.2. The Involuntary Transfer Purchase Option shall be and remain irrevocable for a period (the "Involuntary Transfer Period") ending at 11:59 P.M., local time at the Corporation's principal office on the thirtieth (30th) Day following the date of the Corporation's receipt of notice (the "Involuntary Transfer Notice") from the Stockholder owning the Involuntary Transfer Shares (the "Involuntary Transferor") or any Person acquiring or to acquire any interest in the Involuntary Transfer Shares (the "Involuntary Transferee"). At the earliest practicable opportunity, the Involuntary Transferor covenants and agrees to furnish the Involuntary Transfer Notice to the Corporation or cause the Involuntary Transfer Notice to be furnished to the Corporation. The Involuntary Transfer Notice shall set forth the nature and terms of the Involuntary Transfer, the number of shares of Common Stock involved therein, and shall identify the Involuntary Transferee. 6.3. At any time during the Involuntary Transfer Period, the Corporation may elect to exercise the Involuntary Transfer Purchase Option by giving written notice of its election to the Involuntary Transferor and the Involuntary Transferee. The Involuntary Transferor shall not cast a vote as a stockholder or as a director on the question of whether the Corporation shall elect to exercise the Involuntary Transfer Purchase Option. 6.4. In the event that the Corporation elects to exercise the Involuntary Transfer Purchase Option, the Corporation's notice of such election shall fix a closing date (the "Involuntary Transfer Closing Date") for such purchase which shall be not earlier than five (5) Days after the date of such notice of election, nor later than thirty (30) Days after the expiration of the Involuntary Transfer Period. 6.5. In the event that the Corporation elects to exercise the Involuntary Transfer Purchase Option, the dollar amount of the Involuntary Transfer Purchase Price multiplied by the number of Involuntary Transferor Shares (the "Aggregate Involuntary Transfer Purchase Price") shall be paid in cash on the Involuntary Transfer Closing Date. 6.6. If the Corporation fails to exercise the Involuntary Transfer Purchase Option, the Involuntary Transfer Shares may be Involuntarily Transferred free and clear of this Agreement. 6.7. In the event that the Corporation elects to exercise the Involuntary Transfer Purchase Option and the Involuntary Transferor should die or become a Transferor, a Disabled Stockholder, or a Terminated Stockholder prior to the Involuntary Transfer Closing Date, the provisions of this Section 6 shall be and remain operate, and the provisions of Sections 4, 5, 7, or 8, as the case may be, shall be inapplicable. 7. DISABILITY OF A STOCKHOLDER. 7.1 Provided that a Stockholder shall not have terminated full-time employment with the Corporation for any reason other than Disability, upon the Disability of a Stockholder employed by the Corporation at the time the Disability occurs (the "Disabled Stockholder"), the Corporation shall have the option to purchase (the "Disability Purchase Option"), and the Disabled Stockholder shall have the obligation to sell, all of the shares of Common Stock owned of record and beneficially by the Disabled Stockholder at the time of the Disability (the "Disability Shares") for a price per share equal to the Agreed Value (the "Disability Purchase Price"). 7.2. The Disability Purchase Option shall be and remain irrevocable for a period (the "Disability Transfer Period") ending at 11:59 P.M., local time at the Corporation's principal office on the ninetieth (90) Day following the date of the Corporation's receipt of notice (the "Disability Transfer Notice") from the Disability Stockholder. At the earliest practicable opportunity, the Disability Stockholder covenants and agrees to furnish the Disability Transfer Notice to the Corporation. The Disability Transfer Notice shall set forth the nature of the disability and the number of shares of Common Stock involved therein. 7.3. At any time during the Disability Transfer Period, the Corporation may elect to exercise the Disability Purchase Option by giving written notice of its election to the Disability Stockholder. The Disability Stockholder shall not cast a vote as a stockholder or as a director on the question of whether the Corporation shall elect to exercise the Disability Purchase Option. 7.4. In the event that the Corporation elects to exercise the Disability Purchase Option, the Corporation's notice of such election shall fix a closing date (the "Disability Closing Date") for such purchase which shall be not earlier than five (5) Days after the date of such notice of election, nor later than thirty (30) Days after the expiration of the Disability Transfer Period. 7.5. If the Corporation fails to exercise the Disability Purchase Option, the Disabled Stockholder shall continue to hold Disability Shares subject to all the terms and conditions of this Agreement. 7.6. The dollar amount of the Disability Purchase Price multiplied by the number of Disability Shares (the "Aggregate Disability Purchase Price") shall be paid in installments as provided in Section 9 of this Agreement. 7.7. In the event that the Disabled Stockholder should die or become a Transferor, an Involuntary Transferor, or a Terminated Stockholder after the date the Disability occurred but prior to the Disability Closing Date, the provisions of Section 7 shall be and remain operative, and the provisions of Sections 4, 5, 6, or 8, as the case may be, shall be inapplicable. 8. TERMINATION OF EMPLOYMENT. 8.1. Immediately upon a Termination, the Terminated Stockholder shall be deemed (without any further action required on the part of the Terminating Stockholder) to have offered for sale (the "Termination Offer") to the Corporation all of the shares of Common Stock owned of record and beneficially by the Terminated Stockholder on the date of the Termination (the "Termination Shares"). 8.2. The Termination Offer shall be deemed made by the Terminated Stockholder on the date the Terminated Stockholder receives written notice from the Corporation of a Termination (the "Termination Notice"). The Termination Offer shall be and remain irrevocable for a period (the "Termination Offer Period") ending at 11:59 P.M., local time at the Corporation's principal office on the sixtieth (60th) Day following the date the Termination Notice was received. At any time during the Termination Offer Period, the Corporation may accept the Termination Offer by giving written notice to the Terminated Stockholder (the "Terminated Stockholder Notice") of such acceptance. The Terminated Stockholder shall not cast a vote as a stockholder or as a director on the question of whether the Corporation shall accept the Termination Offer. 8.3. In the event that the Termination Offer is accepted by the Corporation, the Terminated Stockholder Notice shall fix a closing date (the "Termination Closing Date") for such purchase which shall be not earlier than ten (10) nor later than ninety (90) Days after the expiration of the Termination Offer Period. 8.4. In the event that the Termination Offer is accepted by the Corporation, the Corporation shall purchase the Termination Shares at a price per share (the "Termination Purchase Price") equal to Agreed Value; provided, however that Termination Shares purchased pursuant to the ESPP in the six (6) months preceding Termination shall be purchased at a price per share equal to the ESPP Value, and any Termination Shares purchased pursuant to the ESPP more than six (6) months prior to the Termination shall be purchased at a price per share equal to 85% of the Agreed Value. The dollar amount of the Termination Purchase Price multiplied by the number of Termination Shares (the "Aggregate Termination Purchase Price") shall be paid in cash on the Termination Closing Date unless the Corporation shall elect prior to or on the Termination Closing Date to pay the Aggregate Termination Purchase Price in installments pursuant to the provisions of Section 9 of this Agreement. 8.5. In the event that the Termination Offer is accepted by the Corporation and the Terminated Stockholder should die or become a Transferor, an Involuntary Transferor, or a Disabled Stockholder prior to the Termination Closing Date, the provisions of this Section 8 shall be and remain operative, and the provisions of Sections 4, 5, 6 or 7, as the case may be, shall be inapplicable. In the event that the Termination Offer is rejected or not accepted by the Corporation, the Terminated Stockholder shall continue to hold the Termination Shares subject to all of the terms and conditions of this Agreement. 9. INSTALLMENT PAYMENTS. 9.1. In the event that the Corporation is to pay the Decedent Purchase Price Cash Shortfall, the Aggregate Transfer Purchase Price, the Aggregate Disability Purchase Price, the Aggregate Termination Purchase Price or the Aggregate Termination Purchase Price (collectively, the "Aggregate Indebtedness"), the Aggregate Indebtedness shall be paid by the Corporation in twenty (20) equal quarterly installments by making, sealing and delivering the Note to the personal representatives of the Decedent, the Transferor, the Disabled Stockholder, the Terminating Stockholder or the Terminated Stockholder (collectively, the "Payee"). 9.2. In the event that a Payee should die prior to the payment by the Corporation of the Aggregate Indebtedness, the terms of payment shall be and remain those elected by the Corporation, and the provisions of Section 4 shall be inapplicable. 10. INSOLVENCY. If the Corporation shall not be permitted to purchase lawfully all of the Shares or to pay, from time to time, any payment owed on the Aggregate Indebtedness: (i) the entire amount which may lawfully be paid shall be paid immediately on such account; and (ii) the surviving or remaining Stockholders shall promptly take such steps as may be appropriate or necessary to enable the Corporation to purchase and pay lawfully for all of the Shares purchased under the applicable provisions of this Agreement, or to pay, from time to time, any payment owing on the Aggregate Indebtedness including, by way of illustration and not by way of limitation, an up-to-date appraisal of the assets of the Corporation, or including in the Note such language as is required by law to allow the Corporation to issue the Note (and the Payee hereby consents to the inclusion of such language, if required, in the Note). 11. DELIVERY OF CERTIFICATES. 11.1. The Closing shall take place at 10:00 A.M. at the offices of the Corporation. At the Closing, the stock certificate or certificates representing the Shares shall be delivered to the Corporation duly endorsed in blank, and the Corporation shall pay the purchase price therefor in cash, or in the case of an election by the Corporation pursuant to Section 9 of this Agreement, by making, sealing and delivering the Note. 11.2. If a tender of the purchase price in cash or by the Note shall be refused, or the stock certificate or certificates representing the Shares, duly executed, as aforesaid, shall not be so delivered, then the Corporation is hereby appointed the attorney-in-fact of the Seller, with full power and authority to execute, seal and deliver the stock certificate or certificates in the Seller's name and stead, and to perform any and all other and further acts desirable, necessary or proper in order to transfer such stock certificate or certificates to the Corporation in accordance with the terms, provisions and conditions of this Agreement. 11.3 The power of appointment granted pursuant to Section 11.2 hereof is a special power of appointment coupled with an interest and is irrevocable and shall survive the death, Disability, legal incapacity, Event of Bankruptcy or insolvency of a Stockholder. 12. SECURITIES LAWS AND ENDORSEMENTS OF STOCK CERTIFICATES. 12.1. The Stockholders severally acknowledge that the Common Stock acquired by them has not been registered under the Act, or any State Acts. The Stockholders severally represent and warrant that they acquired their shares of the Common Stock without a view to the offer, offer for sale, or the sale in connection with the distribution of such shares of Common Stock and that they will hold such shares of Common Stock indefinitely unless subsequently registered under the Act and the State Acts or unless an exemption from such registration is available and an opinion of counsel for the Corporation, in form and substance satisfactory to the Corporation, is obtained to that effect. The provisions of Sections 4, 5, 6, 7, and 8 hereof are in all respects subject to the Act and the State Acts and all regulations promulgated thereunder. All certificates representing shares of Common Stock subject to this Agreement shall be legended conspicuously in substantially the following form: The securities represented by this stock certificate have been acquired pursuant to an investment representation on the part of the holder thereof and shall not be sold, pledged, hypothecated, donated, or otherwise transferred, whether or not for consideration, by the holder except upon the issuance to the Corporation of a favorable opinion of its counsel and the submission to the Corporation of such other evidence as may be satisfactory to counsel for the Corporation in either case to the effect that any such transfer shall not be in violation of the Securities Act of 1933, as amended, and applicable state securities law. 12.2. Each Stockholder realizes that the Corporation does not file, and does not in the foreseeable future contemplate filing, periodic reports in accordance with the provisions of Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended, and also understands that the Corporation has not agreed to register any of its securities for distribution in accordance with the provisions of the Act or to take any actions respecting the obtaining of an exemption from registration for such securities or any transaction with respect thereto. Hence, by virtue of certain rules respecting "restricted securities" promulgated under the Act, the Common Stock acquired by the Stockholders must be held indefinitely unless and until subsequently registered under the Act and/or the State Acts or unless an exemption from such registration is available, in which case the amount of the Common Stock that may be sold may be limited. 12.3. Upon the execution of this Agreement, all certificates representing shares of Common Stock owned of record and beneficially by the Stockholders shall be conspicuously legended as follows: The shares of stock represented by this Certificate are restricted as to transfer by the terms, conditions and covenants of an Agreement with respect thereto dated as of the 1st day of April, 1998, a copy of which is on file with the Corporation. The Corporation will gratuitously furnish a copy of said Agreement to any party having a valid interest therein. Any transfer of stock other than in accordance with said Agreement shall be absolutely null and void. 13. STOCK ISSUED IN THE FUTURE. Unless waived in writing by all of the parties hereto, before any additional shares of Common Stock are issued in the future to any person, other than a signatory to this Agreement, such person and such person's spouse shall be required to become a party to and to execute, acknowledge, seal and deliver a copy of this Agreement prior to the issuance of such shares of Common Stock, and the certificates therefor shall be legended as provided in Section 12 of this Agreement; thereafter, such person shall be deemed to be a "Stockholder" for all purposes of this Agreement. 14. AFTER-ACQUIRED STOCK. Whenever any Stockholder acquires any additional shares of Common Stock other than the shares of Common Stock owned at the time of the execution of this Agreement, such shares of Common Stock so acquired shall be subject to the terms of this Agreement, and the certificates therefor shall be surrendered to the Corporation for legending in accordance with Section 12 of this Agreement, unless already so legended. 15. TERMINATION. This Agreement shall be perpetual until the happening of any of the events listed below, upon the first to occur of which all rights, duties and obligations, other than the duties and obligations relating to registration under or exemption from the Act and the State Acts, as set forth in Section 12 of this Agreement, and rights, duties and obligations respecting payment of the Aggregate Indebtedness to any one or more of the Stockholders, shall cease: 15.1. The agreement in writing of all holders of the outstanding shares of Common Stock who are parties to, or who are bound by, this Agreement to terminate this Agreement. 15.2. The dissolution of the Corporation. 15.3. The receipt by the Corporation from the Securities and Exchange Commission of an order of effectiveness as to any registration statement for the sale of any capital stock of the Corporation under the Act, whether or not such capital stock is owned by any of the Stockholders. 15.4. In the event that there shall be only one (1) owner of issued and outstanding shares of Common Stock of the Corporation. 15.5. In the event that there is a merger, consolidation or share exchange whereby the Corporation is not the surviving or successor corporation, as the case may be. 16. AGREEMENT DRAFTED BY CORPORATION'S ATTORNEY. The Stockholders severally acknowledge and represent that the Corporation's counsel, Shapiro and Olander prepared this Agreement on behalf of and in the course of its representation of the Corporation, as directed by the Board of Directors of the Corporation. Further, each Stockholder severally acknowledges and represents that he or she has been advised that a conflict of interest may exist between his interests and those of the Corporation and the other Stockholders, has been advised by the Corporation's counsel to seek the advice of independent counsel, has had the opportunity to seek the advice of independent counsel, has been advised by the Corporation's counsel that this Agreement may have tax consequences, has received no representations from the Corporation's counsel concerning the tax consequences of this Agreement, has been advised by the Corporation's counsel to seek the advice of independent tax counsel, and has had the opportunity to seek the advice of independent tax counsel. 17. NOTICES. Any notice, payment, demand or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall either be: (a) delivered personally to the party or to an officer of the party to whom it is directed, in which case a signed receipt therefor shall be received; or (b) sent by certified mail, return receipt requested, postage prepaid, addressed as follows: if to the Corporation or if to the Stockholders, at the addresses set forth below their several signatures, or to such other address or addresses as may be designated from time to time in accordance with this Section 17. Any such notice shall be deemed to be delivered, given and received for all purposes of this Agreement as of: (i) the date noted on the signed receipt if delivered personally; or (ii) the date deposited in a regularly maintained receptacle for the deposit of the United States mail, if sent by certified mail. 18. ADDITIONAL ACTIONS AND DOCUMENTS. 18.1. Each of the parties hereto agrees to take or cause to be taken such further actions, to execute, acknowledge, seal and deliver or cause to be executed, acknowledged, sealed and delivered such further instruments and documents and to use his reasonable efforts to obtain such requisite consents as any other party may from time to time reasonably request in order to fully effectuate the purposes and fulfill the intent of this Agreement. 18.2. Any Stockholder who is an officer or director or both of the Corporation and whose stock ownership in the Corporation shall terminate for any reason whatsoever shall resign, effective upon such termination, as such an officer and director, and shall resign as a trustee of any pension or profit sharing plan of the Corporation or any other employee benefit plan of the Corporation of which such Stockholder is a trustee. 19. CONSENT AND APPROVAL OF SPOUSE. Each married party to this Agreement agrees to obtain the consent and approval of his spouse, by the execution, sealing and delivery of this Agreement by such spouse, to all the terms, provisions and conditions of this Agreement. Should an unmarried party to this Agreement become married, or should a married party to this Agreement divorce and remarry after the date hereof, such party agrees to obtain the consent and approval of such spouse, by the execution, sealing and delivery of this Agreement by such spouse, to all of the terms, provisions and conditions of this Agreement. 20. INSERTION IN WILL. Each Stockholder agrees to insert in his Will a provision, or to execute a Codicil thereto, directing and authorizing the Stockholder's personal representatives to fulfill and comply with the terms, provisions and conditions of this Agreement and to sell and transfer the Stockholder's shares of Common Stock in accordance herewith. 21. INSURANCE. 21.1. The Corporation shall have the right to make application for, take out, and maintain in effect Life Policies whenever and in such amounts as, in the opinion of the Board of Directors of the Corporation, may be required for the benefit of the Corporation. 21.2. The Corporation shall have the right to make application for, take out, and maintain in effect Disability Policies whenever and in such amounts as, in the opinion of the Board of Directors of the Corporation, may be required for the benefit of the Corporation. 21.3. Each Stockholder hereby covenants and agrees to take such other and further actions and execute and deliver such other and further documents necessary to enable the Corporation to acquire the Life Policies and the Disability Policies. 22. OPTION TO PURCHASE INSURANCE POLICIES. The Seller (or upon the termination of this Agreement in accordance with Section 15, all of the Stockholders) shall have the option to purchase any life insurance policies on his life (or their lives) owned by the Corporation within ninety (90) Days after the Closing (or date of the termination of this Agreement) by tendering to the Corporation in cash, or by certified check, that dollar amount which is equal to the sum of: 22.1. The interpolated terminal reserve of each such policy and any paid up additions; plus 22.2. Any dividends or dividend accumulations credited to such policy; plus 22.3. The unearned portion of any premium paid beyond the date the policy is to be transferred; less 22.4. Any indebtedness against such policy and any loan interest accrued thereon as of the date of transfer. In the event that a Stockholder exercises this option to purchase the life insurance policies, the Corporation shall promptly deliver to such Stockholder the policy or policies together with such written documents as are necessary to convey full title in the policies to the Stockholder. If the Stockholder does not exercise this purchase option, the Corporation may dispose of or deal with the policy or policies in the manner it desires. 23. INTEGRATION. This instrument contains the entire integrated agreement among the parties and supersedes all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein, and no modification shall be binding upon the party affected unless set forth in writing and duly executed by each party affected. 24. OWNERSHIP OF STOCK. Each Stockholder severally represents and warrants that: 24.1. He or she is the sole owner of the number of shares of Common Stock set forth opposite his or her signature hereto, evidenced by the certificate number or numbers shown immediately after such number of shares. 24.2. All of such shares are free and clear of any and all liens, claims, charges, security interests, or encumbrances of any kind. 24.3. He or she has the full and entire right, power and authority to sell or otherwise transfer such shares in accordance with the terms, provisions and conditions of this Agreement. 25. BINDING EFFECT. Each of the covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of their respective heirs, guardians, personal and legal representatives, successors and permitted assigns. 26. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Delaware, except in regard to its choice of law. 27. SPECIFIC PERFORMANCE. In the event of a breach of this Agreement, any non-breaching party hereto may maintain an action for specific performance against the party or parties hereto who are alleged to have breached any of the terms, conditions, representations, warranties, provisions, covenants or agreements herein contained, and it is hereby further agreed that no objection to the form of action in any proceeding for specific performance of this Agreement shall be raised by any party hereto so that such specific performance of this Agreement may not be obtained by the aggrieved party. Anything contained herein to the contrary notwithstanding, this Section 27 shall not be construed to limit in any manner whatsoever any other rights and remedies that an aggrieved party may have by virtue of any breach of this Agreement. 28. HEADINGS. The descriptive headings of the several sections and subsections of this Agreement are inserted for convenience only, do not constitute a substantive part of this Agreement, and are not intended to describe, interpret, define, or limit the scope, extent or intent of this Agreement as a whole, or any provision hereof. All schedules and exhibits referred to in this Agreement are hereby deemed a substantive part of this Agreement. 29. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be an original, but all of which shall together constitute one document. 30. CONSTRUCTION. Each and every term and provision of this Agreement has been mutually agreed to and negotiated by the parties hereto, and shall be construed simply according to its fair meaning and not strictly for or against any party. 31. SEVERABILITY. Each and every term and provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the legality or validity of the remainder of this Agreement. 32. TIME. Time is of the essence with respect to all aspects of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed, sealed and delivered this Agreement or caused this Agreement to be executed, sealed and delivered on the day and year first hereinabove set forth. WITNESS/ATTEST: AVATECH SOLUTIONS, INC. ____________________________________ ____________________________________ V. Joel Nicholson, Secretary Ronald Diegelman, President ____________________________________ Employee
EX-10.13 15 a2080957zex-10_13.txt EX-10.13 EXHIBIT 10.13 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (the "Agreement") is entered into as of this 26th day of February, 1998, but shall be effective as of the 1st day of January, 1998, by and between AVATECH SOLUTIONS, INC., a Delaware corporation (hereinafter referred to as the "Avatech"), and HENRY D. FELTON (hereinafter referred to as the "Executive"). EXPLANATORY STATEMENT WHEREAS, the Board of Directors of Avatech Solutions, Inc. directed Avatech to negotiate and enter into a severance agreement with the Executive, subject to the terms set forth below, to provide him with compensation in the event he is terminated for any reason other than cause and to ensure his continued cooperation and consultation during the eighteen (18) months following his severance from the Corporation; and WHEREAS, Executive desires to enter into this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants, promises, agreements, representations, and warranties of the parties hereto, each to the other made, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant, promise, agree, represent, and warrant as follows: SECTION 1. SEVERANCE PAYMENTS. 1.1 TERMINATION OTHER THAN FOR CAUSE. In the event Executive is terminated for any reason other than "cause" as defined below, Avatech shall pay monthly severance payments equivalent to the Executive's base salary of $9,000.00 monthly for eighteen (18) months following Executive's termination for so long as Executive complies with the restrictive covenants set forth in Section 2 hereof. 1.2 DEFINITION OF "CAUSE". For purposes of Section 1.1 hereof, the term "cause" shall include, but not be limited to: (i) fraud, misappropriation, or intentional material damage to the property or business of Avatech; or (ii) a violation of Section 2 of this Agreement. 1.3 RESIGNATION. No severance payments shall be due hereunder in the event the Executive resigns or his employment is terminated by Avatech for "cause." SECTION 2. RESTRICTIVE COVENANTS. 2.1 ACKNOWLEDGMENTS. Executive recognizes and acknowledges that Avatech's relationship with its customers is special and unique and is based upon the development and maintenance of good will by Avatech and its executives. Executive also recognizes and acknowledges that as a result of Executive's service with Avatech, Executive will gain valuable information about Avatech's relationships with its customers, their respective special needs, and other matters that Executive would not otherwise know and that is not otherwise readily available, and that such knowledge is essential to Avatech's business. 2.2 COVENANTS. Executive shall not divulge any customer lists or other confidential information of Avatech, except to the extent Avatech authorizes in writing or as may be required by law. Executive promises, agrees, and covenants that: (a) If Executive's employment is terminated or ceases for any reason, then Executive, for a period of eighteen (18) months following the cessation of Executive's employment, shall not, whether as an Executive, independent contractor, stockholder, partner, advisor, or sole practitioner, within a radius of five hundred (500) air miles from the location of the any office of Avatech, engage in any business that competes with the business of Avatech. Executive expressly acknowledges that five hundred (500) air miles is a reasonable radius restriction considering the broad area that Avatech serves; (b) Executive shall not, for a period of eighteen (18) months following the cessation of Executive's employment under this Agreement for any reason (and during the Term of this Agreement), directly or indirectly, for Executive's own account or for the account of others (including without limitation any other person in which Executive has an interest, whether as a stockholder, director, officer, investor, lender, partner, Executive, sole proprietor, independent contractor, or consultant), solicit any customers of Avatech; and (c) Executive shall not, for a period of eighteen (18) months following the cessation of Executive's employment under this Agreement for any reason (and during the Term of this Agreement), directly or indirectly, for Executive's own account or for the account of others (including without limitation any other person in which Executive has an interest, whether as a stockholder, director, officer, investor, lender, partner, Executive, sole proprietor, independent contractor, or consultant), urge, induce, entice, or in any manner whatsoever solicit any Executives to leave Avatech's employ. 2 Avatech may within thirty (30) days of the cessation of Executive's employment under this Agreement send Executive a list of those persons that were "customers" under Section 2.2(b); provided, however, that the failure by Avatech to send such list shall not affect the enforceability of this Section 2. 2.3 ENFORCEMENT. Executive acknowledges the extreme importance being placed on the foregoing covenants and his agreement in Section 2.2 and fully agrees that these restrictions are fair and reasonable. Executive also acknowledges the law governing the restrictive covenants is based on the facts and circumstances and therefore specifically agrees that in the event any court to which a dispute over these restrictions is referred shall find any of these restrictions overboard or unreasonable, Executive authorizes such court to enforce the restrictions to the greatest extent it deems reasonable, and Executive further agrees that in the event of a breach of any of the terms of this Section or Section 2.2, Avatech shall be entitled to secure an order in any suit brought for these purposes to enjoin such Executive from further violating any of the provisions of this Section or Section 2.2. Pending the hearing and decision of the application for such an order, Avatech shall be entitled to a temporary restraining order without prejudice to any other remedy available to Avatech. Such Executive shall be responsible for all costs incurred by Avatech resulting from his breach of these provisions, including reasonable attorneys' fees. 2.4 SEVERABILITY. If any court or tribunal of competent jurisdiction shall refuse to enforce one or more of the agreements or covenants in this Section 2 (the "Separate Covenants") because the time limit applicable thereto is deemed unreasonable, it is expressly understood and agreed that such Separate Covenant or Separate Covenants shall not be void but that for the purpose of such proceedings such time limitation shall be deemed to be reduced, and the parties request that such court make such reduction, to the extent necessary to permit the enforcement of such Separate Covenant or Separate Covenants. If any court or tribunal of competent jurisdiction shall refuse to enforce any or all of the Separate Covenants because, taken together, they are more extensive (whether as to geographic area, scope of business, or otherwise) than is deemed to be reasonable, it is expressly understood and agreed between the parties hereto that such Separate Covenant or Separate Covenants shall not be void but that for the purpose of such proceedings the restrictions contained therein (whether as to geographic area, scope of business or otherwise) shall be deemed to be reduced, and the parties request that such court make such reduction, to the extent necessary to permit the enforcement of such Separate Covenant or Separate Covenants. SECTION 3. REPRESENTATIONS AND WARRANTIES. Executive represents and warrants that no agreement, contract, or understanding prohibits or interferes with the execution and delivery of this Agreement and the performance of his services under this Agreement. 3 SECTION 4. MISCELLANEOUS. The Avatech is expressly permitted to assign all of its rights and obligations under this Agreement to one or more direct or indirect subsidiaries or affiliates. The validity, legality, and construction of this Agreement or of any of its provisions shall be determined under the laws of the State of Delaware, it being agreed that this Agreement is made in the State of Delaware. If any provision contained in this Agreement cannot be enforced to its fullest extent, then such provision shall be enforced to the maximum extent permitted by law, and the parties hereto consent and agree that such provision may be judicially modified accordingly in any proceeding brought to enforce such provision. The invalidity, illegality, or inability to enforce any provision of this Agreement shall not affect or limit the validity and enforceability of any other provision hereof. Where context requires, the plural shall include the singular and vice versa. SECTION 5. NOTICES. All notices and communications hereunder shall be in writing and shall be deemed given when sent postage prepaid by registered or certified mail, return receipt requested, by hand delivery with a signed returned copy, or delivery by a nationally recognized overnight delivery service, and addressed as follows: If intended for Avatech: Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, Maryland 21117 Attn: V. Joel Nicholson, Executive Vice President and Secretary with a copy to: Shapiro and Olander 36 South Charles Street 20th Floor Baltimore, Maryland 21201-3147 Attention: A Lynne Puckett, Esquire If intended for Executive: Henry D. Felton 13001 Dover Road Reisterstown, Maryland 21146 If, however, a party furnishes another party with notice of a change of address, as provided in this Section, then all notices and communications thereafter shall be addressed as provided in such notice. 4 SECTION 6. ENTIRE AGREEMENT. This Agreement contains the entire understanding between Avatech and Executive with respect to matters set forth herein and supersedes all other oral and written agreements or understandings between them with respect to matters set forth herein. Nothing in this Agreement constitutes a commitment to issue stock in Avatech to Executive. No modification or addition hereto or waiver or cancellation of any provision shall be valid except as provided in a writing signed by the party against whom such modification, addition, waiver, or cancellation is being enforced. IN WITNESS WHEREOF, the parties hereto have executed this Severence Agreement as of the day and year first above written. WITNESS: AVATECH SOLUTIONS, INC. By: /s/ V. Joel Nicholson (SEAL) - --------------------------------- ------------------------------ V. Joel Nicholson, Executive Vice President and Secretary WITNESS: /s/ Henry D. Felton (SEAL) - --------------------------------- ------------------------------ Henry D. Felton 5 EX-10.14 16 a2080957zex-10_14.txt EX-10.14 EXHIBIT 10.14 SEVERANCE AGREEMENT THIS SEVERANCE AGREEMENT (the "Agreement") is entered into as of this 27th day of February, 1998, but shall be effective as of the 1st day of January, 1998, by and between AVATECH SOLUTIONS, INC., a Delaware corporation (hereinafter referred to as the "Avatech"), and V. JOEL NICHOLSON (hereinafter referred to as the "Executive"). EXPLANATORY STATEMENT WHEREAS, the Board of Directors of Avatech Solutions, Inc. directed Avatech to negotiate and enter into a severance agreement with the Executive, subject to the terms set forth below, to provide him with compensation in the event he is terminated for any reason other than cause and to ensure his continued cooperation and consultation during the eighteen (18) months following his severance from the Corporation; and WHEREAS, Executive desires to enter into this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants, promises, agreements, representations, and warranties of the parties hereto, each to the other made, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant, promise, agree, represent, and warrant as follows: SECTION 1. SEVERANCE PAYMENTS. 1.1 TERMINATION OTHER THAN FOR CAUSE. In the event Executive is terminated for any reason other than "cause" as defined below, Avatech shall pay monthly severance payments equivalent to the Executive's base salary of $8,400.00 monthly for eighteen (18) months following Executive's termination for so long as Executive complies with the restrictive covenants set forth in Section 2 hereof. 1.2 DEFINITION OF "CAUSE". For purposes of Section 1.1 hereof, the term "cause" shall include, but not be limited to: (i) fraud, misappropriation, or intentional material damage to the property or business of Avatech; or (ii) a violation of Section 2 of this Agreement. 1.3 RESIGNATION. No severance payments shall be due hereunder in the event the Executive resigns or his employment is terminated by Avatech for "cause." SECTION 2. RESTRICTIVE COVENANTS. 2.1 ACKNOWLEDGMENTS. Executive recognizes and acknowledges that Avatech's relationship with its customers is special and unique and is based upon the development and maintenance of good will by Avatech and its executives. Executive also recognizes and acknowledges that as a result of Executive's service with Avatech, Executive will gain valuable information about Avatech's relationships with its customers, their respective special needs, and other matters that Executive would not otherwise know and that is not otherwise readily available, and that such knowledge is essential to Avatech's business. 2.2 COVENANTS. Executive shall not divulge any customer lists or other confidential information of Avatech, except to the extent Avatech authorizes in writing or as may be required by law. Executive promises, agrees, and covenants that: (a) If Executive's employment is terminated or ceases for any reason, then Executive, for a period of eighteen (18) months following the cessation of Executive's employment, shall not, whether as an Executive, independent contractor, stockholder, partner, advisor, or sole practitioner, within a radius of five hundred (500) air miles from the location of the any office of Avatech, engage in any business that competes with the business of Avatech. Executive expressly acknowledges that five hundred (500) air miles is a reasonable radius restriction considering the broad area that Avatech serves; (b) Executive shall not, for a period of eighteen (18) months following the cessation of Executive's employment under this Agreement for any reason (and during the Term of this Agreement), directly or indirectly, for Executive's own account or for the account of others (including without limitation any other person in which Executive has an interest, whether as a stockholder, director, officer, investor, lender, partner, Executive, sole proprietor, independent contractor, or consultant), solicit any customers of Avatech; and (c) Executive shall not, for a period of eighteen (18) months following the cessation of Executive's employment under this Agreement for any reason (and during the Term of this Agreement), directly or indirectly, for Executive's own account or for the account of others (including without limitation any other person in which Executive has an interest, whether as a stockholder, director, officer, investor, lender, partner, Executive, sole proprietor, independent contractor, or consultant), urge, induce, entice, or in any manner whatsoever solicit any Executives to leave Avatech's employ. 2 Avatech may within thirty (30) days of the cessation of Executive's employment under this Agreement send Executive a list of those persons that were "customers" under Section 2.2(b); provided, however, that the failure by Avatech to send such list shall not affect the enforceability of this Section 2. 2.3 ENFORCEMENT. Executive acknowledges the extreme importance being placed on the foregoing covenants and his agreement in Section 2.2 and fully agrees that these restrictions are fair and reasonable. Executive also acknowledges the law governing the restrictive covenants is based on the facts and circumstances and therefore specifically agrees that in the event any court to which a dispute over these restrictions is referred shall find any of these restrictions overboard or unreasonable, Executive authorizes such court to enforce the restrictions to the greatest extent it deems reasonable, and Executive further agrees that in the event of a breach of any of the terms of this Section or Section 2.2, Avatech shall be entitled to secure an order in any suit brought for these purposes to enjoin such Executive from further violating any of the provisions of this Section or Section 2.2. Pending the hearing and decision of the application for such an order, Avatech shall be entitled to a temporary restraining order without prejudice to any other remedy available to Avatech. Such Executive shall be responsible for all costs incurred by Avatech resulting from his breach of these provisions, including reasonable attorneys' fees. 2.4 SEVERABILITY. If any court or tribunal of competent jurisdiction shall refuse to enforce one or more of the agreements or covenants in this Section 2 (the "Separate Covenants") because the time limit applicable thereto is deemed unreasonable, it is expressly understood and agreed that such Separate Covenant or Separate Covenants shall not be void but that for the purpose of such proceedings such time limitation shall be deemed to be reduced, and the parties request that such court make such reduction, to the extent necessary to permit the enforcement of such Separate Covenant or Separate Covenants. If any court or tribunal of competent jurisdiction shall refuse to enforce any or all of the Separate Covenants because, taken together, they are more extensive (whether as to geographic area, scope of business, or otherwise) than is deemed to be reasonable, it is expressly understood and agreed between the parties hereto that such Separate Covenant or Separate Covenants shall not be void but that for the purpose of such proceedings the restrictions contained therein (whether as to geographic area, scope of business or otherwise) shall be deemed to be reduced, and the parties request that such court make such reduction, to the extent necessary to permit the enforcement of such Separate Covenant or Separate Covenants. SECTION 3. REPRESENTATIONS AND WARRANTIES. Executive represents and warrants that no agreement, contract, or understanding prohibits or interferes with the execution and delivery of this Agreement and the performance of his services under this Agreement. 3 SECTION 4. MISCELLANEOUS. The Avatech is expressly permitted to assign all of its rights and obligations under this Agreement to one or more direct or indirect subsidiaries or affiliates. The validity, legality, and construction of this Agreement or of any of its provisions shall be determined under the laws of the State of Delaware, it being agreed that this Agreement is made in the State of Delaware. If any provision contained in this Agreement cannot be enforced to its fullest extent, then such provision shall be enforced to the maximum extent permitted by law, and the parties hereto consent and agree that such provision may be judicially modified accordingly in any proceeding brought to enforce such provision. The invalidity, illegality, or inability to enforce any provision of this Agreement shall not affect or limit the validity and enforceability of any other provision hereof. Where context requires, the plural shall include the singular and vice versa. SECTION 5. NOTICES. All notices and communications hereunder shall be in writing and shall be deemed given when sent postage prepaid by registered or certified mail, return receipt requested, by hand delivery with a signed returned copy, or delivery by a nationally recognized overnight delivery service, and addressed as follows: If intended for Avatech: Avatech Solutions, Inc. 11403 Cronhill Drive, Suite A Owings Mills, Maryland 21117 Attn: Henry D. Felton, Chairman and Chief Executive Officer with a copy to: Shapiro and Olander 36 South Charles Street 20th Floor Baltimore, Maryland 21201-3147 Attention: A Lynne Puckett, Esquire If intended for Executive: V. Joel Nicholson 6418 Dry Barley Lane Columbia, Maryland 21045 If, however, a party furnishes another party with notice of a change of address, as provided in this Section, then all notices and communications thereafter shall be addressed as provided in such notice. 4 SECTION 6. ENTIRE AGREEMENT. This Agreement contains the entire understanding between Avatech and Executive with respect to matters set forth herein and supersedes all other oral and written agreements or understandings between them with respect to matters set forth herein. Nothing in this Agreement constitutes a commitment to issue stock in Avatech to Executive. No modification or addition hereto or waiver or cancellation of any provision shall be valid except as provided in a writing signed by the party against whom such modification, addition, waiver, or cancellation is being enforced. IN WITNESS WHEREOF, the parties hereto have executed this Severence Agreement as of the day and year first above written. WITNESS: AVATECH SOLUTIONS, INC. By: (SEAL) - ------------------------------- ------------------------------- V. Joel Nicholson, Executive Henry D. Felton, Chairman and Vice President Chief Executive Officer and Secretary WITNESS: (SEAL) - ------------------------------- ------------------------------- V. Joel Nicholson 5 EX-10.15 17 a2080957zex-10_15.txt EX-10.15 EXHIBIT 10.15 July 25, 2000 Mr. A. Gary Rever 11403A Cronhill Drive Owings Mills, MD 21117 Dear Gary: It gives me great pleasure to set forth the principal terms of an offer for you to join Avatech Solutions, Inc. ("Avatech Solutions") as its Senior Vice President and Chief Financial Officer reporting to me. On behalf of Avatech Solutions, let me propose the following: COMPENSATION: You will be employed as an "employee-at-will" effective August 1, 2000. Effective with your start date, you win be paid semi-monthly in the amount of $3,500.00. In addition, the Company will award you 60,000 options, with a strike price of $4.25 vesting over a period of three (3) years except in the event of a Change of Control as defined below. This compensation package will be reviewed at a minimum at the end of a two-year period from your start date. CHANGE OF CONTROL: In the event that there is a termination of your employment, diminution in your responsibility or compensation, or relocation requirement, within one year following a Change of Control (defined as (i) a purchase of more than 50% of the outstanding common stock of the Company, or (ii) a change in leadership resulting in the replacement of both the CEO and Executive Vice President/Secretary of the Company, or (iii) a merger with another entity resulting in the merging entity owning greater than 30% of Avatech's common shares outstanding as of the date of the merger, the Company will pay you six months base compensation or a minimum of $42,000 in cash and continue corporate sponsored health benefits for six months if the Change in Control occurs within six months from the date of your start date, one year base compensation or a minimum of $84,000 in cash and continue corporate sponsored health benefits for one year if a Change in Control occurs after six months but up to one year from your start date, eighteen months base compensation or a minimum of $126,000 in cash and continue corporate sponsored health benefits for eighteen months if a Change in Control occurs 12 months after your start date. Also, the 60,000 options referred to above immediately vest upon a Change of Control. BENEFITS: Avatech Solutions currently provides a wide variety of Employee Benefits which you may participate in as follows: o Paid health care premiums for employee; o Paid Life Insurance Policy in the amount of $25,000; o Dental Program available at your cost; o A Section 125 program is available to minimize the cost of out of pocket medical costs you may incur; o An Employee Stock Purchase Plan is available which will allow you to purchase a limited amount of Avatech Solutions Common Stock at 85% of the current market value; and o After six months of employment, participation in Avatech Solutions' 401K Plan, Avatech Solutions matches your contribution at 25% of up to 6% of your annual compensation. TIME OFF: You will be eligible for vacation time and sick leave consistent with the Company's standard policy. Your position entitles three (3) weeks, fifteen (15) days of paid time off. Avatech Solutions is assembling a world class team to implement our broad technology portfolio. I hope you will decide to join us in building this exciting company. Please indicate your acceptance by signing and returning one copy of this offer letter and one copy of the enclosed Confidentiality and Non-Disclosure Agreement. If you have any questions or need additional information, please call me at ___________. Respectfully, /s/ Henry D. Felton ----------------------------------- Henry D. Felton AGREED AND ACCEPTED THIS 1ST DAY OF AUGUST, 2000 /s/ A. Gary Rever ---------------------------------- A. Gary Rever Social Security No. ______________ EX-23.1 18 a2080957zex-23_1.txt EXHIBIT 23.1 Exhibit 23.1 Independent Auditors' Consent The Board of Directors PlanetCAD Inc.: We consent to the use of our report incorporated by reference herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP Boulder, Colorado May 28, 2002 EX-23.2 19 a2080957zex-23_2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the reference to our firm under the caption "Experts" and to the use of our report dated October 3, 2001 (except for Note 4 for which the date is February 1, 2002), with respect to the consolidated financial statements and schedule of Avatech Solutions, Inc. and Subsidiaries, included in the Proxy Statement of PlanetCAD, Inc. that is made a part of the Registration Statement (Form S-4 No. 33- ) and Prospectus of PlanetCAD, Inc. for the merger of Avatech Solutions, Inc. with a wholly-owned subsidiary of PlanetCAD, Inc. /s/ Walpert & Wolpoff, LLP Baltimore, Maryland May 28, 2002 EX-23.3 20 a2080957zex-23_3.txt EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated December 23, 1999, with respect to the consolidated financial statements and schedule of Avatech Solutions, Inc. and Subsidiaries, included in the Proxy Statement of PlanetCAD, Inc. that is made a part of the Registration Statement (Form S-4 No. 33- ) and Prospectus of PlanetCAD, Inc. for the merger of Avatech Solutions, Inc. with a wholly-owned subsidiary of PlanetCAD, Inc. /s/ ERNST & YOUNG LLP Baltimore, Maryland May 24, 2002 EX-23.7 21 a2080957zex-23_7.txt EXHIBIT 23.7 Exhibit 23.7 CONSENT OF ALLIANT PARTNERS We hereby consent to the inclusion in this Registration Statement on Form S-4 for PlanetCAD Inc. dated May 30, 2002 of our name and summary of and references to our fairness opinion rendered to the Board of Directors of PlanetCAD Inc. on May 1, 2002 in the sections titled "Summary," "The Merger - Background of the Merger" and "Opinion of PlanetCAD's Financial Advisor" and the inclusion of our fairness opinion letter, which is attached as Annex E to the Registration Statement. Palo Alto, California May 30, 2002 /s/ Alliant Partners ALLIANT PARTNERS EX-99.5 22 a2080957zex-99_5.txt EX-99.5 EXHIBIT 99.5 CONSENT As a person named for appointment to the board of directors of PlanetCAD Inc. following the consummation of the merger described in the Registration Statement on Form S-4 filed by PlanetCAD in May 2002 (the "Form S-4"), I consent to the inclusion of my name and biography in the Form S-4, and I consent to being named for appointment to the board of directors of PlanetCAD. Date: May 29, 2002 Signature: /s/ Henry D. Felton -------------------------- Henry D. Felton EX-99.6 23 a2080957zex-99_6.txt EX-99.6 EXHIBIT 99.6 CONSENT As a person named for appointment to the board of directors of PlanetCAD Inc. following the consummation of the merger described in the Registration Statement on Form S-4 filed by PlanetCAD in May 2002 (the "Form S-4"), I consent to the inclusion of my name and biography in the Form S-4, and I consent to being named for appointment to the board of directors of PlanetCAD. Date: May 29, 2002 Signature: /s/ W. James Hindman --------------------------- W. James Hindman -----END PRIVACY-ENHANCED MESSAGE-----