EX-10.10 7 dex1010.txt LOAN AND SECURITY AGREEMENT ================================================================================ EXHIBIT 10.10 Loan and Security Agreement between AVATECH SOLUTIONS SUBSIDIARY, INC., A Delaware Corporation "Borrower" and KEY BANK AND TRUST, "Lender" $2,000,000.00 Revolving Line Of credit Dated: September , 2003 ----- ================================================================================ LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT is dated as of September , 2003 by and --- between AVATECH SOLUTIONS SUBSIDIARY, INC., a Delaware corporation ("BORROWER") and KEY BANK AND TRUST ("LENDER"). RECITALS The BORROWER has requested that the LENDER extend various credit accommodations to the BORROWER. The LENDER is willing to provide the requested credit accommodations upon the terms and conditions of this Loan And Security Agreement, and upon the granting by the BORROWER to the LENDER of the security interests, liens, and other assurances of payment provided for in this Loan And Security Agreement. NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS As used in this Loan And Security Agreement, the terms set forth in this Article 1 have the meanings set forth below, unless the specific context of this Loan And Security Agreement clearly requires a different meaning. Terms defined in this Article 1 or elsewhere in this Loan And Security Agreement are in all capital letters throughout this Loan And Security Agreement. The singular use of any defined term includes the plural and the plural use includes the singular. Section 1.1. Account Debtor. The term "ACCOUNT DEBTOR" means collectively each PERSON: (a) to or for whom the BORROWER has provided or has agreed to provide any goods or services; or (b) which owes the BORROWER any sum of money as a result of goods sold or services provided by the BORROWER; or (c) which is the maker or endorser on any INSTRUMENT payable to the BORROWER or otherwise owes the BORROWER any sum of money on account of any loan or other payment obligation. With respect to each RECEIVABLE which is payable by any governmental authority, "ACCOUNT DEBTOR" includes, without limitation, the agency, instrumentality or official which has the duty of remitting or causing the remittance of the amounts owing on such ACCOUNT or other RECEIVABLE. Section 1.2. Account, Chattel Paper, Deposit Account, Document, Equipment, Fixtures, General Intangibles, Goods, Instrument, Inventory, Investment Property and Letter-Of-Credit Right. The terms "ACCOUNT," "CHATTEL PAPER," "DEPOSIT ACCOUNT," "DOCUMENT," "EQUIPMENT," "FIXTURES," "GENERAL INTANGIBLES," "GOODS," "INSTRUMENT," "INVENTORY," "INVESTMENT PROPERTY" and "LETTER-OF-CREDIT RIGHT" shall have the same respective meanings as are given to those terms in the Uniform Commercial Code, as adopted and in effect in the State of Maryland. Section 1.3. Affiliate. The term "AFFILIATE" means collectively any PERSON: (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with the BORROWER, including, without limitation, the officers, managers and directors of the BORROWER; (b) that directly or beneficially owns or holds ten percent (10%) or more of any equity interests in the BORROWER; or (c) ten percent (10%) or more of whose equity interests are owned directly or controlled by the BORROWER. As used herein, the term "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") shall mean possession, directly or indirectly, of the power to direct the management or policies of a PERSON, whether through ownership of equity interests, by contract or otherwise. Section 1.4. Agreement. The term "AGREEMENT" means this Loan And Security Agreement, as amended, extended, or modified from time to time by the parties hereto, as well as all schedules, exhibits and attachments hereto. Section 1.5. Borrowing Base. The term "BORROWING BASE" means an amount equal to: (a) seventy-five percent (75%) of the face amount (less maximum discounts, credits and allowances which may be taken by or are granted to ACCOUNT DEBTORS in connection therewith) of billed ELIGIBLE ACCOUNTS of the BORROWER; minus (b) such reserves as the LENDER deems appropriate from time to time. Section 1.6. Business Day. The term "BUSINESS DAY" means any day other than a Saturday, Sunday, or other day on which commercial banking institutions in the State of Maryland are required to be closed. Section 1.7. Capital Lease. The term "CAPITAL LEASE" means a lease with respect to which the lessee's obligations thereunder should, in accordance with G.A.A.P., be capitalized and reflected as a liability on the balance sheet of the lessee. Section 1.8. Capital Lease Obligations. The term "CAPITAL LEASE OBLIGATIONS" means any indebtedness incurred as a lessee pursuant to a CAPITAL LEASE. Section 1.9. Closing. The term "CLOSING" means the execution and delivery of this AGREEMENT, the NOTE, and various other LOAN DOCUMENTS. The date of CLOSING is the date written above as the date of this AGREEMENT. Section 1.10. Code. The term "CODE" means the Internal Revenue Code of 1986, as amended, and all Treasury regulations, revenue rulings, revenue procedures or announcements issued thereunder. Section 1.11. Collateral. The term "COLLATERAL" means all of the tangible and intangible assets and personal property of the BORROWER, wherever located, whether now owned or hereafter acquired by the BORROWER, together with all substitutions therefor, and all replacements and renewals thereof, and all accessions, additions, replacement parts, manuals, warranties and packaging relating thereto, including but not limited to the following tangible and intangible assets and property rights of the BORROWER: (a) ACCOUNTS; (b) CHATTEL PAPER; (c) DEPOSIT ACCOUNTS; (d) DOCUMENTS; (e) EQUIPMENT; (f) FIXTURES; (g) GENERAL INTANGIBLES; (h) GOODS; (i) INSTRUMENTS; (j) INVENTORY, including returned, rejected, or repossessed INVENTORY and rights of reclamation and stoppage in transit with respect to INVENTORY; (k) INVESTMENT PROPERTY; (l) LETTER-OF-CREDIT RIGHTS; (m) RECEIVABLES; (n) copyrights, trademarks, patents, and all pending applications thereof; and (o) all RECORDS relating to or pertaining to any of the above listed COLLATERAL. Section 1.12. Collection Account. The term "COLLECTION ACCOUNT" means a bank account designated by the LENDER from which the LENDER alone has power of access and withdrawal. -2- Section 1.13. Commercial Account. The term "COMMERCIAL ACCOUNT" means the commercial checking account to be established and maintained by the BORROWER with the LENDER and which may be utilized as the means of advancing funds under the LOAN. Section 1.14. Default. The term "DEFAULT" means any event, occurrence or omission which, with the giving of notice, the passage of time, or both, would constitute an EVENT OF DEFAULT. Section 1.15. Dollar Cap. The term "DOLLAR CAP" means Two Million Dollars ($2,000,000.00). Section 1.16. Eligible Accounts. The term "ELIGIBLE ACCOUNTS" means those ACCOUNTS which are acceptable to the LENDER. The criteria for eligibility may be fixed and revised from time to time by the LENDER in its discretion. An ACCOUNT in no event shall be deemed eligible unless: (a) the ACCOUNT arises from goods sold or leased or from services performed in the ordinary course of business of the BORROWER; (b) the delivery of the goods or the performance of the services (other than installation of goods sold or leased) has been completed except to the extent the LENDER specifically agrees to make certain progress billings eligible; (c) no return, rejection, or repossession has occurred; (d) the goods delivered or the services performed have been finally and unconditionally accepted by the ACCOUNT DEBTOR without dispute, objection, complaint, offset, defense, counterclaim, adjustment or allowance; (e) the ACCOUNT DEBTOR'S obligation to pay the ACCOUNT is not subject to any repurchase obligation or return right, as with sales made on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval (except with respect to ACCOUNTS in connection with which ACCOUNT DEBTORS are entitled to return INVENTORY solely on the basis of the quality of such INVENTORY) or consignment basis; (f) no more than ninety (90) days have elapsed from the billing or invoice date; (g) no prior, contemporaneous, or subsequent assignment, claim, lien, or security interest, other than that of the LENDER, applies to the ACCOUNT; (h) no bankruptcy or insolvency proceedings or payment moratoriums of any kind apply to the ACCOUNT; (i) the ACCOUNT DEBTOR is not, in the LENDER'S sole opinion, unlikely to pay because of death, incompetency, disappearance, potential bankruptcy, insolvency, damage to or disposition of the goods, default, or any other reason whatsoever; (j) the LENDER has not, by notice to the BORROWER, in the LENDER'S sole discretion, deemed the ACCOUNT unsatisfactory for any reason; (k) no bonding company or surety asserts or has the ability to assert any claim based upon the legal doctrine of equitable subrogation, or under any other right to claim a lien into or right to payment of the ACCOUNT; (l) the ACCOUNT does not arise from or pertain to any transaction with any AFFILIATE or employee; (m) the ACCOUNT is not payable from any ACCOUNT DEBTOR located outside of the geographic boundaries of the United States of America (unless such ACCOUNT is fully secured by a letter of credit or credit insurance acceptable to the LENDER); (n) the BORROWER is legally empowered to collect the ACCOUNT against the ACCOUNT DEBTOR in the jurisdiction in which the ACCOUNT DEBTOR is located; (o) the ACCOUNT is not payable by an ACCOUNT DEBTOR with respect to which more than fifty percent (50%) of the dollar amount of that ACCOUNT DEBTOR'S RECEIVABLES to the BORROWER are more than ninety (90) days from the date of invoice; (p) the ACCOUNT does not arise from any contract with any federal, state, local or foreign government unless such governmental authority is the United States of America or an agency or representative thereof and either the LENDER has obtained full compliance to its complete satisfaction with all provisions necessary to protect the LENDER'S interests under The Assignment of Claims Act of 1940, as amended, and all regulations promulgated thereunder, and all other applicable federal procurement laws and regulations; or the payments under the contract giving rise to such ACCOUNT cannot be assigned under The Assignment of Claims Act; and (q) the LENDER has a perfected first priority security interest therein. An ACCOUNT which otherwise satisfies the -3- LENDER'S criteria for eligibility shall also be subject to the following eligibility limitations: (i) if the ACCOUNT is payable by an ACCOUNT DEBTOR to whom the BORROWER owes money, only the portion of the ACCOUNT in excess of the amount owed by any or the BORROWER to the ACCOUNT DEBTOR may be eligible; (ii) to the extent the ACCOUNT contains finance charges, such finance charges shall not be eligible; and (iii) if the BORROWER has unearned income in regard to an ACCOUNT DEBTOR or has received a deposit from an ACCOUNT DEBTOR the amount of ELIGIBLE ACCOUNTS owed from such ACCOUNT DEBTOR shall be reduced by the amount of such unearned income or deposit. In determining the aggregate amount of ACCOUNTS owed by an ACCOUNT DEBTOR which are ineligible due to being more than ninety (90) days from the billing date credit balances in excess of ninety (90) days shall not reduce such aggregate amount of ineligible ACCOUNTS. Section 1.17. Employee Benefit Plan. The term "EMPLOYEE BENEFIT PLAN" means an "employee benefit plan" as defined in Section 3(3) of ERISA. Section 1.18. Environmental Laws. The term "ENVIRONMENTAL LAWS" means individually or collectively any local, state or federal LAW, statute, rule, regulation, order, ordinance, common law, permit or license term or condition, or state superlien or environmental clean-up or disclosure statutes pertaining to the environment or to environmental contamination, regulation, management, control, treatment, storage, disposal, containment, removal, clean-up, reporting, or disclosure, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as now or hereafter amended (including, but not limited to, the Superfund Amendments and Reauthorization Act); the Resource Conservation and Recovery Act, as now or hereafter amended (including, but not limited to, the Hazardous and Solid Waste Amendments of 1984); the Toxic Substances Control Act, as now or hereafter amended; the Clean Water Act, as now or hereafter amended; the Safe Drinking Water Act, as now or hereafter amended; or the Clean Air Act, as now or hereafter amended. Section 1.19. EPA Permit. The term "EPA PERMIT" has the meaning given that term in Section 4.23 of this AGREEMENT. Section 1.20. ERISA. The term "ERISA" means the Employee Retirement Income Security Act of 1974 and regulations issued thereunder, as amended from time to time and any successor statute. Section 1.21. ERISA Affiliate. The term "ERISA AFFILIATE" means, in relation to any PERSON, any trade or business (whether or not incorporated) which is a member of a group of which that PERSON is a member and which is under common control within the meaning of the regulations promulgated under Section 414 of the CODE. Section 1.22. ERISA Liabilities. The term "ERISA LIABILITIES" means the aggregate of all unfunded vested benefits under any employee pension benefit plan, within the meaning of Section 3(2) of ERISA, of the BORROWER or any ERISA AFFILIATE of the BORROWER under any plan covered by ERISA that is not a MULTIEMPLOYER PLAN and all potential withdrawal liabilities of the BORROWER or any ERISA AFFILIATE under all MULTIEMPLOYER PLANS. Section 1.23. Event Of Default. The term "EVENT OF DEFAULT" means any of the events set forth in Article 7 of this AGREEMENT, provided that any requirement for the giving of notice, the lapse of time, or both, or any other expressly stated condition, has been satisfied. -4- Section 1.24. Facilities. The term "FACILITIES" means all real property and the improvements thereon used or occupied or leased by the BORROWER or otherwise used at any time by the BORROWER in the operation of its business or for the manufacture, storage, or location of any of the COLLATERAL. Section 1.25. Fiscal Year. The term "FISCAL YEAR" means the fiscal year of the BORROWER which is the twelve (12) month accounting period commencing July 1st of each calendar year and ending June 30th of the following calendar year. Section 1.26. G.A.A.P. The term "G.A.A.P." means, with respect to any date of determination, generally accepted accounting principles as used by the Financial Accounting Standards Board and/or the American Institute of Certified Public Accountants consistently applied and maintained throughout the periods indicated. Section 1.27. Guaranteed Pension Plan. The term "GUARANTEED PENSION PLAN" means any pension plan maintained by the BORROWER or an ERISA AFFILIATE of the BORROWER, or to which the BORROWER or an ERISA AFFILIATE contributes, some or all of the benefits under which are guaranteed by the United States Pension Benefit Guaranty Corporation. Section 1.28. Guarantors. The term "GUARANTORS" means collectively, AVATECH SOLUTIONS, INC., a Delaware corporation, and Technical Learningware Company, Inc., a Delaware corporation. Section 1.29. Guaranty Agreements. The term "GUARANTY AGREEMENTS" means collectively the Guaranty Agreements executed by the GUARANTORS for the benefit of the LENDER. Section 1.30. Guaranty Indebtedness. The term "GUARANTY INDEBTEDNESS" means any obligation, contingent or otherwise, of any referenced PERSON directly or indirectly guaranteeing any debt or obligation of any other PERSON and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such PERSON: (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such debt or obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise, other than agreements to purchase goods at an arm's length price in the ordinary course of business); or (b) entered into for the purpose of assuring in any other manner the holder of such debt or obligation of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part). The term GUARANTY INDEBTEDNESS shall not include endorsements for collection or deposit in the ordinary course of business. Section 1.31. Indebtedness. The term "INDEBTEDNESS" means, as to any referenced PERSON (determined without duplication): (a) indebtedness of such PERSON for borrowed money (whether by loan or by the issuance and sale of debt securities), or for the deferred purchase or acquisition price of property or services (other than accounts payable incurred in the ordinary course of business); (b) obligations of such PERSON in respect of letters of credit or similar instruments issued or accepted by financial institutions for the account of such PERSON (whether or not such obligations are contingent); (c) CAPITAL LEASE OBLIGATIONS of such PERSON; (d) obligations of such PERSON to redeem or otherwise retire equity interests in such PERSON; (e) indebtedness of others of the type described in clause (a), (b), (c) or (d) above secured by a lien on any of the property of such PERSON, whether or not the respective obligation so secured has been assumed by such PERSON; and (f) GUARANTY INDEBTEDNESS. -5- Section 1.32. Insolvency Proceedings. The term "INSOLVENCY PROCEEDINGS" means, with respect to any referenced PERSON, any case or proceeding commenced by or against such PERSON, under any provision of the United States Bankruptcy Code, as amended, or under any other federal or state bankruptcy or insolvency law, or any assignments for the benefit of creditors, formal or informal moratoriums, receiverships, compositions or extensions with some or all creditors with respect to any indebtedness of such PERSON. Section 1.33. Interest Rate Protection Agreement. The term "INTEREST RATE PROTECTION AGREEMENT" means, with respect to any referenced PERSON, an interest rate swap, hedge, cap or collar agreement or similar arrangement between such PERSON and one or more financial institutions providing for the transfer or mitigation of interest risks either generally or under specific contingencies. Section 1.34. Inventory. The term "INVENTORY" shall have the same meaning as provided to such term in the Uniform Commercial Code, as adopted and in effect in the State of Maryland, together with all of the BORROWER'S goods, merchandise, materials, raw materials, goods in process, finished goods, work in progress, bindings or component materials, packaging and shipping materials and other tangible or intangible personal property, now owned or hereafter acquired and held for sale or lease or furnished or to be furnished under contracts of service or which contribute to the finished products or the sale, promotion, storage and shipment thereof, whether located at facilities owned or leased by the BORROWER, in the course of transport to or from ACCOUNT DEBTORS, used for demonstration, placed on consignment, or held at storage locations. Section 1.35. Laws. The term "LAWS" means all ordinances, statutes, rules, regulations, orders, injunctions, writs or decrees of any government or political subdivision or agency thereof, or any court or similar entity established by any thereof. Section 1.36. Lender Expenses. The term "LENDER EXPENSES" means the reasonable out-of-pocket expenses or costs incurred by the LENDER arising out of, pertaining to, or in any way connected with this AGREEMENT, any of the other LOAN DOCUMENTS or the OBLIGATIONS, or any documents executed in connection herewith or transactions hereunder. The term "LENDER EXPENSES" shall include, without limitation: (a) the reasonable costs or expenses required to be paid by the BORROWER pursuant to this AGREEMENT or any of the LOAN DOCUMENTS; (b) taxes and insurance premiums advanced or otherwise paid by the LENDER in connection with the COLLATERAL or on behalf of the BORROWER; (c) filing, recording, title insurance, environmental and consulting fees, audit fees, search fees and other expenses paid or incurred by the LENDER in connection with the LENDER'S transactions with the BORROWER; (d) reasonable costs and expenses incurred by the LENDER in the collection of the ACCOUNTS (with or without the institution of legal action), or to enforce any provision of this AGREEMENT, or in gaining possession of, maintaining, handling, evaluating, preserving, storing, shipping, selling, preparing for sale and/or advertising to sell the COLLATERAL or any other property of the BORROWER whether or not a sale is consummated; (e) reasonable costs and expenses of litigation incurred by the LENDER, or any participant of the LENDER in any of the OBLIGATIONS, in enforcing or defending this AGREEMENT or any portion hereof or in collecting any of the OBLIGATIONS; (f) reasonable attorneys' fees and expenses incurred by the LENDER in obtaining advice or the services of its attorneys with respect to the structuring, drafting, negotiating, reviewing, amending, terminating, enforcing or defending of this AGREEMENT, or any portion hereof or any agreement or matter related hereto, whether or not litigation is instituted; and (g) reasonable travel expenses related to any of the foregoing. Notwithstanding anything contained above, the BORROWER shall not be required to pay any LENDER EXPENSES until the GUARANTOR receives copies of invoices, bills, -6- receipts or other documentation evidencing the LENDER EXPENSES for which the LENDER is requesting payment. Section 1.37. Loan. The term "LOAN" means the revolving credit facility extended by the LENDER to the BORROWER in accordance with the terms set forth in this AGREEMENT. Section 1.38. Loan Documents. The term "LOAN DOCUMENTS" means all agreements, instruments and documents, including without limitation each document listed as a "Loan Document" on a Closing Index of even date herewith, together with all other loan agreements (including without limitation this AGREEMENT), notes (including without limitation the NOTE), guarantees, subordination agreements, intercreditor agreements, pledges, affidavits, powers of attorney, consents, assignments, landlord and mortgage waivers, legal opinions, collateral assignments, reimbursement agreements, contracts, notices, leases, financing statements, mortgages, deeds of trust, assignments of rents or contract proceeds, intellectual property security agreements, pledges, letter of credit applications, INTEREST RATE PROTECTION AGREEMENTS, and all other written matter, whether heretofore, now or hereafter executed by or on behalf of the BORROWER, the GUARANTOR, or by any other PERSON in connection with any of the OBLIGATIONS. Section 1.39. Lock Box. The term "LOCK BOX" has the meaning given that term in Section 3.5 of this AGREEMENT. Section 1.40. Material Adverse Event. The term "MATERIAL ADVERSE EVENT" means the occurrence of any event, condition, or omission which the LENDER in the good faith reasonable exercise of the LENDER'S discretion determines could be expected to have a material adverse effect upon: (a) the condition (financial or otherwise), results of operations, properties, assets, liabilities (including, without limitation, tax liabilities, liabilities under ENVIRONMENTAL LAWS, and ERISA LIABILITIES), businesses, operations, capitalization, equity, licenses or franchises of the BORROWER or of the GUARANTOR; (b) the ability of the BORROWER or the GUARANTOR to perform any of the OBLIGATIONS when and as required by the terms of the LOAN DOCUMENTS; (c) the rights and remedies of the LENDER as provided by the LOAN DOCUMENTS; or (d) the value, condition, use, or availability of any of the COLLATERAL or upon any of the LENDER'S liens and security interests securing the OBLIGATIONS. Section 1.41. Maximum Loan Amount. The term "MAXIMUM LOAN AMOUNT" means the lesser of the BORROWING BASE or the DOLLAR CAP. Section 1.42. Multiemployer Plan. The term "MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is maintained for employees of the BORROWER, or any ERISA AFFILIATE of the BORROWER. Section 1.43. Note. The term "NOTE" means the Demand Promissory Note of even date herewith from the BORROWER as maker thereof which is payable to the order of the LENDER in the stated principal amount of Two Million Dollars ($2,000,000.00). Section 1.44. Obligations. The term "OBLIGATIONS" means collectively all of the obligations of the BORROWER to pay to the LENDER: (a) sums due to the LENDER arising out of or in connection with the LOAN or otherwise pursuant to the terms of the LOAN DOCUMENTS; (b) indemnification obligations owed by the BORROWER to the LENDER in accordance with the terms of the LOAN DOCUMENTS; (c) LENDER EXPENSES; (d) overdrafts of the BORROWER upon any accounts with the LENDER; (e) payments, duties or obligations owed to the LENDER -7- arising from or with respect to INTEREST RATE PROTECTION AGREEMENTS, foreign exchange facilities or currency transactions, existing or arising from time to time; (f) any sums owed to the LENDER arising out of or relating to any letters of credit including, without limitation, all reimbursement and indemnification obligations, and obligations to pay fees; (g) all duties of payment and performance owed to the LENDER in connection with any guaranties; (h) all other indebtedness or liability of the BORROWER to the LENDER, whether direct or indirect, joint or several, absolute or contingent, contemplated or not presently contemplated, now existing or hereafter arising; and (i) any indebtedness or liability which may exist or arise as a result of any payment made by or for the benefit of the BORROWER being avoided or set aside for any reason including, without limitation, any payment being avoided as a preference under Sections 547 and 550 of the United States Bankruptcy Code, as amended, or under any state law governing insolvency or creditors' rights. Section 1.45. Perfection Certificate. The term "PERFECTION CERTIFICATE" means the Perfection Certificate executed by the BORROWER and attached hereto as Exhibit A. Section 1.46. Permitted Liens. The term "PERMITTED LIENS" means: (a) liens for taxes, assessments, or similar charges incurred in the ordinary course of business that are not yet due and payable; (b) liens in favor of the LENDER; (c) any existing liens specifically described on Schedule 1.46 hereof; (d) any lien on specifically allocated money or securities to secure payments under workmen's compensation, unemployment insurance, social security and other similar LAWS, or to secure the performance of bids, tenders or contracts (other than for the repayment of borrowed money) or to secure statutory obligations or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business; (e) purchase money security interests for EQUIPMENT not to exceed in aggregate amount outstanding at any one time the sum of One Hundred Thousand Dollars ($100,000.00), provided that such purchase money security interests do not attach to any to any assets other than the specific item(s) of EQUIPMENT acquired with the proceeds of the loan secured by such purchase money security interests; (f) liens securing SUBORDINATED DEBT provided such liens are specifically subordinated to the liens of the LENDER securing the OBLIGATIONS pursuant to terms acceptable to the LENDER; and (g) subsequently arising liens which are expressly approved in advance of the creation of any such liens by the LENDER in writing. Section 1.47. Person. The term "PERSON" means any individual, corporation, partnership, limited liability company, association, joint-stock company, trust, estate, unincorporated organization, joint venture, court, government or political subdivision or agency thereof, or other legal entity. Section 1.48. Receivables. The term "RECEIVABLES" means all of the ACCOUNTS, INSTRUMENTS, DOCUMENTS, GENERAL INTANGIBLES, CHATTEL PAPER, notes, notes receivable, drafts, acceptances, and choses in action, of the BORROWER, now existing or hereafter created or acquired, and all proceeds and products thereof, and all rights thereto, arising from the sale or lease of or the providing of INVENTORY, GOODS, or services by the BORROWER to ACCOUNT DEBTORS, as well as all other rights, contingent or non-contingent, of any kind of the BORROWER to receive payment, benefit, or credit from any PERSON. Section 1.49. Records. The term "RECORDS" means correspondence, memoranda, tapes, discs, papers, books and other documents, or transcribed information of any type, whether expressed in ordinary, computer or machine language. -8- Section 1.50. Regulated Substance. The term "REGULATED SUBSTANCE" means any substance which, pursuant to any ENVIRONMENTAL LAW, is identified as a hazardous substance (or other term having similar import) or is otherwise subject to special requirements in connection with the use, storage, transportation, disposition or other handling thereof. Section 1.51. Release. The term "RELEASE" means a "release" as defined in Section 101(22) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as now or hereafter amended. Section 1.52. Restricted Payment. The term "RESTRICTED PAYMENT" means collectively: (a) any dividend or other payment or distribution, direct or indirect, on account of any equity interest in the BORROWER now or hereafter outstanding, except a dividend or distribution payable solely in the same class or type of equity interest to the holders of that class or type; (b) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, by the BORROWER of any equity interest in the BORROWER now or hereafter outstanding; (c) any payment made by the BORROWER to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire equity interests in the BORROWER now or hereafter outstanding; (d) any payment by the BORROWER of any management, consulting or similar fees which are not salary payments in amounts comparable to sums paid in the marketplace for similar services to unrelated employees for services actually performed; or (e) any payment by the BORROWER with respect to SUBORDINATED DEBT which is not permitted by the terms of the Subordination Agreement relating to such SUBORDINATED DEBT which was executed by the LENDER. Section 1.53. Solvent. The term "SOLVENT" means, as to any referenced PERSON, that as of the date of determination both: (a) (i) the then fair saleable value of the property of such PERSON is greater than the total amount of liabilities (including contingent liabilities) of such PERSON and is not less than the amount that will be required to pay the probable liabilities on such PERSON'S then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such PERSON; (ii) such PERSON'S capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (iii) such PERSON does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (b) such PERSON is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. Section 1.54. Subordinated Debt. The term "SUBORDINATED DEBT" means the INDEBTEDNESS of the BORROWER described on Schedule 1.54 which has been subordinated to the OBLIGATIONS pursuant to a written agreement executed by the holder of such INDEBTEDNESS and the LENDER. Section 1.55. Subsidiary. The term "SUBSIDIARY" means, with respect to any PERSON, any other PERSON of which securities or other ownership interests representing an aggregate of fifty percent (50%) or more of the equity or the ordinary voting power are, at the time as of which any determination is being made, owned or controlled directly, or indirectly through one or more intermediaries, by such PERSON. -9- Section 1.56. Termination Event. The term "TERMINATION EVENT" means: (a) a "Reportable Event" described in Section 4043 of ERISA and the regulations issued thereunder, but not including any such event for which the 30-day notice requirement has been waived by applicable regulation; (b) the withdrawal of the BORROWER or an ERISA AFFILIATE of the BORROWER from a GUARANTEED PENSION PLAN during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (c) the filing of a notice of intent to terminate a GUARANTEED PENSION PLAN or the treatment of a GUARANTEED PENSION PLAN amendment as a termination under Section 4041 of ERISA; (d) the institution of proceedings to terminate a GUARANTEED PENSION PLAN by the Pension Benefit Guaranty Corporation; (e) the withdrawal or partial withdrawal of the BORROWER or an ERISA AFFILIATE of the BORROWER from a MULTIEMPLOYER PLAN; or (f) any other event or condition which might reasonably be expected to constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any GUARANTEED PENSION PLAN. ARTICLE 2 TERMS OF THE LOAN Section 2.1. Agreement To Extend The Loan. Subject to the terms and conditions stated herein, the LENDER agrees to extend the LOAN to the BORROWER. The LENDER shall advance proceeds of the LOAN to the BORROWER by depositing into the COMMERCIAL ACCOUNT or in accordance with such other procedures as may be mutually agreed to between the LENDER and the BORROWER, such sums as the BORROWER may request, provided that the aggregate outstanding principal balance of the LOAN shall never exceed at any time the MAXIMUM LOAN AMOUNT. The BORROWER shall not request or permit any advance of proceeds of the LOAN which would cause the aggregate amount of advances made to or for the BORROWER and outstanding under the LOAN DOCUMENTS to exceed the MAXIMUM LOAN AMOUNT. In the event that the principal balance outstanding under the LOAN ever exceeds the MAXIMUM LOAN AMOUNT, the BORROWER shall immediately, upon the demand of the LENDER, reduce the principal balance of the LOAN to an amount which is not in excess of the MAXIMUM LOAN AMOUNT. Any termination of the LOAN by the LENDER shall relieve the LENDER of the LENDER'S obligation to lend money or to make financial accommodations to or for the BORROWER and the BORROWER'S accounts, and shall in no way release, terminate, discharge or excuse the BORROWER from its absolute duty to pay or perform the OBLIGATIONS. Section 2.1.1. Conditions Precedent To Each Advance. The obligation of the LENDER to make any advances under the LOAN, including the initial advance, shall be subject to each of the following conditions precedent: a. No Defaults Or Events Of Default. No event shall have occurred on or prior to such date and be continuing on such date, and no condition shall exist on such date, which constitutes a DEFAULT or EVENT OF DEFAULT. b. Continuing Accuracy Of Representations And Warranties. Each of the representations and warranties made by or on behalf of the BORROWER and the GUARANTOR to the LENDER in the LOAN DOCUMENTS shall be true and correct in all material respects when made. c. Receipt Of Reports. The LENDER shall be in receipt of all reports, financial statements, financial information and financial disclosures required by the LOAN DOCUMENTS, except to the extent that the LENDER has waived the receipt thereof. -10- d. No Illegalities. It shall not be unlawful for the LENDER to perform any of the agreements or obligations imposed upon the LENDER by any of the LOAN DOCUMENTS or for the BORROWER or the GUARANTORS to perform any of their respective agreements or obligations as provided by the LOAN DOCUMENTS. e. No Material Adverse Event. No MATERIAL ADVERSE EVENT shall have occurred and be then continuing. Section 2.1.2. Interest And Lender's Records. All sums advanced under the LOAN shall be evidenced by, and shall be repaid with interest in accordance with, the provisions of the NOTE, the terms and conditions of which are incorporated herein by reference. The date and amounts of each advance made by the LENDER and each payment made by the BORROWER shall be recorded by the LENDER on the books and records of the LENDER, but any failure to record such dates or amounts shall not relieve the BORROWER of its duties and obligations under the LOAN DOCUMENTS. Interest accrued upon the LOAN shall be computed on outstanding balances as reflected on the LENDER'S books and records. Section 2.1.3. Facility Fee. On each annual anniversary of the date of CLOSING, while the LOAN is in existence and has not been terminated, until the termination of the LOAN, the BORROWER shall pay to the LENDER a facility fee of one-quarter of one percent (1/4%) of the DOLLAR CAP. The facility fee is not to be considered a fee being paid by the BORROWER to the LENDER as an inducement to the LENDER to make advances, nor shall it be considered to modify or limit the ability of the LENDER to terminate in accordance with the provisions of this AGREEMENT the ability of the BORROWER to borrow under the LOAN, but is instead intended as part of the compensation which is earned by the LENDER for agreeing to provide the LOAN in accordance with the terms of the LOAN DOCUMENTS. Section 2.1.4. Commitment Fee. The BORROWER shall pay to the LENDER on or before CLOSING a non-refundable and unconditional commitment fee of Twenty Thousand Dollars ($20,000.00), which shall be the absolute property of the LENDER upon payment. The commitment fee shall not be considered to be a payment of any of the LENDER'S expenses incurred in connection with the LOAN and shall be paid independent of the amount of proceeds of the LOAN ultimately advanced to the BORROWER, even if that amount is less than the stated principal amount of the LOAN. Section 2.1.5. Administration Fee. On the first day of each month until the LOAN is terminated and paid in full, the BORROWER shall pay to the LENDER an administration fee of Five Hundred Dollars ($500.00) per month. Section 2.1.6. Term. All sums outstanding under the LOAN shall be paid in full on the earlier of: (a) the demand of the LENDER at any time following an EVENT OF DEFAULT; or (b) sixty (60) calendar days after the demand of the LENDER made when there are no EVENTS OF DEFAULT. Section 2.1.7. Purpose. The proceeds of the LOAN shall be used by the BORROWER solely for funding the general working capital needs of the BORROWER. Section 2.2. Payments. All payments received by the LENDER which are to be applied to reduce the OBLIGATIONS shall be credited to the balances due from the BORROWER pursuant to the normal and customary practices of the LENDER, but shall be provisional and shall not be considered final unless and until such payment is not subject to avoidance under any provision of -11- the United States Bankruptcy Code, as amended, including Sections 547 and 550, or any state law governing insolvency or creditors' rights. If any payment is avoided or set aside under any provision of the United States Bankruptcy Code, including Sections 547 and 550, or any state law governing insolvency or creditors' rights, the payment shall be considered not to have been made for all purposes of this AGREEMENT and the LENDER shall adjust its records to reflect the fact that the avoided payment was not made and has not been credited against the OBLIGATIONS. Section 2.3. Advancements. If the BORROWER fails to materially perform any of its agreements or covenants contained in this AGREEMENT or if the BORROWER fails to protect or preserve the COLLATERAL or the status and priority of the security interest of the LENDER in the COLLATERAL, the LENDER may make advances to perform the same on behalf of the BORROWER to protect or preserve the COLLATERAL or the status and priority of the security interest of the LENDER in the COLLATERAL, and all sums so advanced shall immediately upon advance become secured by the security interests granted in this AGREEMENT, and shall become part of the principal amount owed to the LENDER with interest to be assessed at the applicable rate thereon in accordance with the NOTE and subject to the terms and provisions of this AGREEMENT and all of the LOAN DOCUMENTS. The BORROWER shall repay on demand all sums so advanced on the BORROWER'S behalf, plus all expenses or costs incurred by the LENDER, including reasonable legal fees, with interest thereon at the highest rate authorized in the NOTE. The provisions of this Section shall not be construed to prevent the institution of the rights and remedies of the LENDER upon the occurrence of an EVENT OF DEFAULT. The authorization contained in this Section is not intended to impose any duty or obligation on the LENDER to perform any action or make any advancement on behalf of the BORROWER and is intended to be for the sole benefit and protection of the LENDER. Section 2.4. Automatic Debit. The BORROWER hereby irrevocably authorizes the LENDER to debit the COMMERCIAL ACCOUNT to make payment of any and all sums due under the NOTE when and as such sums are due and payable. ARTICLE 3 SECURITY FOR THE OBLIGATIONS The payment, performance and satisfaction of the OBLIGATIONS shall be secured by the following assurances of payment and security. Section 3.1. Grant Of Security Interest. In order to secure the repayment and performance of all OBLIGATIONS, both currently existing and arising in the future, the BORROWER grants to the LENDER an immediate and continuing security interest in and to the COLLATERAL. The BORROWER further pledges, hypothecates and grants to the LENDER a continuing security interest in and to, all amounts that may be owing at any time and from time to time by the LENDER to the BORROWER in any capacity, including but not limited to any balance or share belonging to the BORROWER of any deposit or other account with the LENDER, which security interest shall be independent of and in addition to any right of set-off to which the LENDER may be entitled. The LENDER shall have the right to require the BORROWER to pledge and grant a security interest to the LENDER in such additional security as the LENDER may request from time to time in the event that the LENDER deems itself to be insecure. Section 3.2. Proceeds And Products. The LENDER'S security interests provided for herein shall apply to the proceeds, including but not limited to insurance proceeds, and the products of the COLLATERAL. -12- Section 3.3. Priority Of Security Interests. Each of the security interests, pledges, and liens granted by the BORROWER to the LENDER pursuant to any of the LOAN DOCUMENTS shall be perfected first priority security interests, pledges, and liens, except for: (a) the security interest in the BORROWER'S INVENTORY which will be subordinate to the security interest of AutoDesk, Inc. in the BORROWER'S INVENTORY; and (b) the LENDER'S liens will be subject to the existing liens set forth on Schedule 1.46 hereof. Section 3.4. Future Advances. The security interests, liens, and pledges granted by the BORROWER to the LENDER pursuant to the LOAN DOCUMENTS shall secure all current and all future advances made by the LENDER to the BORROWER, or for the account or benefit of the BORROWER, and the LENDER may advance or readvance upon repayment by the BORROWER all or any portion of the sums loaned to the BORROWER and any such advance or readvance shall be fully secured by the security interests, liens, and pledges created by the LOAN DOCUMENTS. Section 3.5. Receivable Collections. The BORROWER shall establish a lock box in the control of a financial institution acceptable to the LENDER ("LOCK BOX") who will agree to deposit all items of payment received in the LOCK BOX to a blocked account in which the LENDER shall have control for purposes of perfecting its interest in such account ("LOCK-BOX ACCOUNT"). The BORROWER shall move the LOCK BOX to a different financial institution selected by the LENDER within thirty (30) days after the written request of the LENDER which request may be made at any time. All funds deposited in the LOCK-BOX ACCOUNT shall be transferred to the COLLECTION ACCOUNT each BUSINESS DAY. The BORROWER shall deposit into the COLLECTION ACCOUNT, immediately upon receipt thereof, all cash, checks, drafts, and other instruments for the payment of money, properly endorsed, which have been received by it in full or partial payment of any RECEIVABLE. Prior to any such deposit by the BORROWER into the COLLECTION ACCOUNT the BORROWER will commingle such items of payment with any of its other funds or property but will hold them separate and apart. The LENDER, from time to time, shall apply all of the collected funds held in the COLLECTION ACCOUNT toward payment of all or any part of the OBLIGATIONS, whether or not then due, in such order of application as the LENDER may determine. The LENDER shall have no obligation to provide any provisional or other credit for any deposited funds which are not collected funds free of any rights of return. Section 3.6. Collection Of Receivables By Lender. The LENDER shall have the right during any continuing DEFAULT or EVENT OF DEFAULT to send notices of assignment or notices of the LENDER'S security interest to any and all ACCOUNT DEBTORS or any third party holding or otherwise concerned with any of the COLLATERAL, and thereafter the LENDER shall have the sole right to collect the RECEIVABLES and to take possession of the COLLATERAL and RECORDS relating thereto. All of the LENDER'S collection expenses shall be charged to the BORROWER'S accounts and added to the OBLIGATIONS. During any continuing DEFAULT or EVENT OF DEFAULT the LENDER shall have the right to receive, indorse, assign and deliver in the LENDER'S name or the BORROWER'S name any and all checks, drafts and other instruments for the payment of money relating to the RECEIVABLES, and the BORROWER hereby waives notice of presentment, protest and non-payment of any instrument so endorsed. If the LENDER is collecting the RECEIVABLES, the BORROWER hereby constitutes the LENDER or the LENDER'S designee as its attorney-in-fact with power with respect to the RECEIVABLES: (a) to indorse its name upon all notes, acceptances, checks, drafts, money orders or other evidences of payment of COLLATERAL that may come into the LENDER'S possession; (b) to sign its name on any invoices relating to any of the RECEIVABLES, drafts against ACCOUNT DEBTORS, assignments and verifications of RECEIVABLES and notices to ACCOUNT DEBTORS; (c) to send verifications of RECEIVABLES to any ACCOUNT DEBTOR; (d) to notify the Post Office to change the address for delivery of mail addressed to it to such address as the LENDER may designate; (e) to receive -13- and open all mail addressed to it and to remove therefrom all cash, checks, drafts and other payments of money; and (f) to do all other acts and things reasonably necessary, proper, or convenient to carry out the terms and conditions and purposes and intent of this AGREEMENT. All acts of such attorney or designee are hereby ratified and approved, and such attorney or designee shall not be liable for any acts of omission or commission, nor for any error of judgment or mistake of fact or law in accordance with this AGREEMENT, with the exception of acts arising from actual fraud, wilful or wanton misconduct or gross negligence. The power of attorney hereby granted, being coupled with an interest, is irrevocable while any of the OBLIGATIONS remain unpaid. The LENDER, without notice to or consent from the BORROWER, may sue upon or otherwise collect, extend the time of payment of or compromise or settle for cash, credit or otherwise upon any terms, any of the RECEIVABLES or any securities, instruments or insurances applicable thereto or release the obligor thereon. The LENDER is authorized and empowered to accept the return of the goods represented by any of the RECEIVABLES, without notice to or consent by the BORROWER, all without discharging or in any way affecting the liability of the BORROWER under the LOAN DOCUMENTS. The LENDER does not, by anything herein or in any assignment or otherwise, assume any of the obligations of the BORROWER under any contract or agreement assigned to the LENDER, and the LENDER shall not be responsible in any way for the performance by the BORROWER of any of the terms and conditions thereof. Section 3.7. Maintenance Of Principal Accounts. As further security for the OBLIGATIONS, the BORROWER shall maintain its principal transaction accounts with the LENDER. Section 3.8. Guaranty Agreement. The GUARANTORS shall execute and deliver a GUARANTY AGREEMENTS which shall guarantee, among other things, the absolute full payment and performance by the BORROWER of the OBLIGATIONS. Section 3.9. Subordination Agreements. The BORROWER shall deliver to the LENDER Subordination And Intercreditor Agreements in form and substance acceptable to the LENDER with respect to the SUBORDINATED DEBT. Section 3.10. Warrants. In consideration of the LENDER providing the LOAN to the BORROWER, Avatech Solutions, Inc. shall grant to the LENDER warrants to acquire 15,000 shares of the common stock of Avatech Solutions, Inc. for a purchase price of $.01 per share, all pursuant to terms and provisions of a warrant agreement in the form attached hereto as Exhibit B. Section 3.11. Landlord Agreements. The BORROWER shall deliver to the LENDER Landlord Agreements in form and substance acceptable to the LENDER with respect to the properties described on Schedule 3.11 to this AGREEMENT. Section 3.12. Further Assurances. The BORROWER will, at its expense, promptly execute and deliver all further instruments and documents and take all further action that may be necessary or desirable and that the LENDER may reasonably request in writing from time to time in order: (a) to perfect and protect the security interests to be created hereby; (b) to enable the LENDER to exercise and enforce its rights and remedies hereunder in respect of the COLLATERAL; or (c) otherwise to effect the purposes of this AGREEMENT, including, without limitation: (i) upon the BORROWER'S acquisition thereof, delivering to the LENDER each item of CHATTEL PAPER of the BORROWER, (ii) if any RECEIVABLES are evidenced by an INSTRUMENT delivering and pledging to the LENDER such INSTRUMENT duly endorsed and accompanied by executed instruments of transfer or assignment, all in form and substance satisfactory to the LENDER, (iii) executing and filing such financing statements or amendments -14- thereto as may be necessary or desirable or that the LENDER may request in order to perfect and preserve the security interests purported to be created hereby, (iv) upon the acquisition after the date hereof by the BORROWER of any EQUIPMENT covered by a certificate of title or ownership, cause the LENDER to be listed as the lienholder on such certificate of title and within sixty (60) days of the acquisition thereof deliver evidence of the same to the LENDER, and (v) upon the acquisition after the date hereof of any asset for which an assignment, pledge, mortgage, or other document is required to be filed in order to grant or perfect a lien therein for the benefit of the LENDER, execute and deliver to the LENDER such assignment, pledge, mortgage, or other INSTRUMENT within thirty (30) days of the acquisition thereof. If the BORROWER fails to execute any instrument or document described above within five (5) BUSINESS DAYS of being requested to do so by the LENDER, the BORROWER hereby appoints the LENDER or any officer of the LENDER as the BORROWER'S attorney in fact for purposes of executing such instruments or documents in the BORROWER'S name, place and stead, which power of attorney shall be considered as coupled with an interest and irrevocable. ARTICLE 4 REPRESENTATIONS AND WARRANTIES To induce the LENDER to extend the LOAN and to enter into this AGREEMENT, the BORROWER makes the representations and warranties set forth in this Article 4. The BORROWER acknowledges the LENDER'S justifiable right to rely upon these representations and warranties. Section 4.1. Accuracy Of Information. All information submitted by or on behalf of the BORROWER or the GUARANTORS in connection with any of the OBLIGATIONS is true, accurate and, to the best of the BORROWER'S knowledge, complete in all material respects as of the date made and contain no knowingly false, incomplete or misleading statements. Section 4.2. No Litigation. There are no actions, suits, investigations, or proceedings pending or, to the knowledge of the BORROWER, threatened against the BORROWER or the assets of the BORROWER, except as specifically disclosed on Schedule 4.2 attached hereto. Section 4.3. No Liability Or Adverse Change. The BORROWER has no direct or contingent liability known to the BORROWER and not previously disclosed to the LENDER, nor does the BORROWER know of or have any reason to expect any material adverse change in the BORROWER'S assets, liabilities, properties, business, or condition, financial or otherwise. Section 4.4. Title To Collateral. The BORROWER has good and marketable title to the COLLATERAL. The liens granted by the BORROWER to the LENDER in the COLLATERAL will have the priority provided by the LOAN DOCUMENTS. Section 4.5. Authority; Approvals And Consents. Section 4.5.1. Authority. The BORROWER has the legal authority to enter into each of the LOAN DOCUMENTS and to perform, observe and comply with all of the BORROWER'S agreements and obligations thereunder, including, without limitation the borrowings contemplated hereby. Section 4.5.2. Approvals. The execution and delivery by the BORROWER of each of the LOAN DOCUMENTS, the performance by the BORROWER of all of its agreements and -15- obligations under the LOAN DOCUMENTS, and the borrowings contemplated by this AGREEMENT, have been duly authorized by all necessary action on the part of the BORROWER and do not and will not (i) contravene any provision of the organizational documents of the BORROWER; (ii) conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in the creation of any lien upon any of the property of the BORROWER under any agreement, trust deed, indenture, mortgage or other instrument to which the BORROWER is a party or by which the BORROWER or any property of the BORROWER is bound or affected (except for liens created for the benefit of the LENDER); (iii) violate or contravene any provision of any LAW, rule or regulation (including, without limitation, Regulations G, T, U or X of the Board of Governors of the Federal Reserve System) or any order, ruling or interpretation thereunder or any decree, order of judgment of any court or governmental or regulatory authority, bureau, agency or official (all as from time to time in effect and applicable to the BORROWER); or (iv) require any waivers, consents or approvals by any of the creditors of the BORROWER. Section 4.5.3. Consents. Other than filings and recordings required to perfect the security interests and liens granted hereunder, no approval, consent, order, authorization or license by, or giving notice to, or taking any other action with respect to, any governmental or regulatory authority or agency is required for the execution and delivery by the BORROWER of the LOAN DOCUMENTS or for the performance by the BORROWER of any of the agreements and obligations thereunder. Section 4.6. Binding Effect Of Documents, Etc. Each of the LOAN DOCUMENTS which the BORROWER has executed and delivered as contemplated and required to be executed and delivered as of the date of CLOSING by this AGREEMENT, has been duly executed and delivered by the BORROWER and is the legal, valid and binding obligation of the BORROWER and is enforceable against the BORROWER in accordance with all stated terms. Section 4.7. Other Names. The BORROWER has not changed its name, been the surviving entity in a merger, or changed the location of its chief executive office within the last twelve (12) years, except as is disclosed on the PERFECTION CERTIFICATE. The BORROWER does not trade under any trade or fictitious names except as set forth on the PERFECTION CERTIFICATE. Section 4.8. No Events Of Default. There is not currently existing any action, event, or condition which presently constitutes a DEFAULT or an EVENT OF DEFAULT. Section 4.9. Guaranty Agreements. The GUARANTY AGREEMENTS are the valid and binding obligation of the GUARANTORS and are fully enforceable against the GUARANTORS in accordance with all outstanding terms. Section 4.10. Taxes. The BORROWER: (a) has filed all federal, state and local tax returns and other reports which the BORROWER is required by LAW to file prior to the date hereof and which are material to the conduct of the business of the BORROWER; (b) has paid or caused to be paid all taxes, assessments and other governmental charges that are due and payable prior to the date hereof; and (c) has made adequate provision for the payment of such taxes, assessments or other charges accruing but not yet payable. The BORROWER has no knowledge of any deficiency or additional assessment in connection with any taxes, assessments or charges not provided for on the BORROWER'S books of account or reflected in the BORROWER'S financial statements. -16- Section 4.11. Compliance With Laws. The BORROWER has complied in all material respects with all applicable LAWS, including, but not limited to, all LAWS with respect to: (a) all restrictions, specifications, or other requirements pertaining to products that it sells or to the services it performs; (b) the conduct of its business; and (c) the use, maintenance, and operation of the real and personal properties owned or leased by it in the conduct of its business. Section 4.12. Chief Place Of Business. The chief executive office, chief place of business, and the place where the BORROWER keeps its RECORDS concerning the COLLATERAL is 11400 Cronridge Drive, Suite A, Owings Mills, Maryland 21117. Section 4.13. Location Of Inventory. The INVENTORY is and shall be kept solely at the BORROWER'S locations set forth in the PERFECTION CERTIFICATE and shall not be moved, sold or otherwise disposed of without prior notification to the LENDER, except for sales of INVENTORY to ACCOUNT DEBTORS in the ordinary course of the BORROWER'S businesses. None of the INVENTORY is currently stored with or in the possession of any bailee, warehouseman, or other similar PERSON, except as specifically disclosed on the Perfection Certificate delivered to the LENDER. Section 4.14. No Subsidiaries. The BORROWER has no SUBSIDIARIES other than Technical Learningware Company, Inc. Section 4.15. No Labor Agreements. The BORROWER is not subject to any collective bargaining agreement or any agreement, contract, decree or order requiring it to recognize, deal with or employ any PERSONS organized as a collective bargaining unit or other form of organized labor. Section 4.16. Eligible Accounts. Each ACCOUNT which the BORROWER contends should be included in the calculation of the BORROWING BASE from time to time will be an ELIGIBLE ACCOUNT. At the time each ELIGIBLE ACCOUNT is listed on or included in (whether singularly or in the aggregate with other ELIGIBLE ACCOUNTS) a schedule or report delivered to the LENDER to be included in the calculation of the BORROWING BASE, all of such ELIGIBLE ACCOUNTS will have been generated in compliance with the BORROWER'S normal credit policies as historically in effect (or as modified from time to time on prior written notice of the LENDER), or on such other reasonable terms disclosed in writing to the LENDER in advance of the creation of such ACCOUNTS, and such terms shall be expressly set forth on the face of all invoices. Section 4.17. Approvals. The BORROWER possesses all franchises, approvals, licenses, contracts, merchandising agreements, merchandising contracts and governmental approvals, registrations and exemptions necessary for it lawfully to conduct its business and operation as presently conducted and as anticipated to be conducted after CLOSING. Section 4.18. Financial Statements. The financial statements of the BORROWER which have been delivered to the LENDER prior to the date of this AGREEMENT, fairly present the financial condition of the BORROWER as of the respective dates thereof and the results and operations of the BORROWER for the fiscal periods ended on such respective dates, all in accordance with G.A.A.P. The BORROWER has no direct or contingent liability or obligation known to the BORROWER and not disclosed on the financial statements delivered to the LENDER. There has been no adverse change in the financial condition of the BORROWER since the financial statements of the BORROWER most recently delivered to the LENDER, and the BORROWER does not know of or have any reason to expect any material adverse change in the assets, liabilities, properties, business, or condition, financial or otherwise, of the BORROWER. -17- Section 4.19. Solvency. The BORROWER will be SOLVENT both before and after CLOSING, after giving full effect to the OBLIGATIONS and all of the BORROWER'S liabilities. Section 4.20. Fair Labor Standards Act. The BORROWER has complied in all material respects with the Fair Labor Standards Act of 1938, as amended. Section 4.21. Employee Benefit Plans. Section 4.21.1. Compliance. The BORROWER and its ERISA AFFILIATES are in compliance in all material respects with all applicable provisions of ERISA and the regulations thereunder and of the CODE with respect to all EMPLOYEE BENEFIT PLANS. Section 4.21.2. Absence Of Termination Event. No TERMINATION EVENT has occurred or is reasonably expected to occur with respect to any GUARANTEED PENSION PLAN. Section 4.21.3. Actuarial Value. The actuarial present value (as defined in Section 4001 of ERISA) of all benefit commitments (as defined in Section 4001 of ERISA) under each GUARANTEED PENSION PLAN does not exceed the assets of that plan. Section 4.21.4. No Withdrawal Liability. Neither the BORROWER nor any of its ERISA AFFILIATES has incurred or reasonably expects to incur any withdrawal liability under ERISA in connection with any MULTIEMPLOYER PLANS. Section 4.22. Environmental Conditions. Section 4.22.1. Existence Of Permits. The BORROWER has obtained all legally required permits, licenses, variances, clearances and all other necessary approvals (collectively, the "EPA PERMITS") for use of the FACILITIES and the operation and conduct of its business from all applicable federal, state, and local governmental authorities, utility companies or development-related entities including, but not limited to, any and all appropriate Federal or State environmental protection agencies and other county or city departments, public water works and public utilities in regard to the use of the FACILITIES, the operation and conduct of its business, and the handling, transporting, treating, storage, disposal, discharge, or RELEASE of REGULATED SUBSTANCES, if any, into, on or from the environment (including, but not limited to, any air, water, or soil). Section 4.22.2. Compliance With Permits. Each issued EPA PERMIT is in full force and effect, has not expired or been suspended, denied or revoked, and is not under challenge by any PERSON. The BORROWER is in compliance in all material aspects with each issued EPA PERMIT. Section 4.22.3. No Litigation. Neither the BORROWER nor any of the FACILITIES are subject to any private or governmental litigation, or to the knowledge of the BORROWER, threatened litigation, lien or judicial or administrative notice, order or action involving the BORROWER or any of the FACILITIES relating to REGULATED SUBSTANCES or environmental problems, impairments or liabilities. Section 4.22.4. No Releases. To the best knowledge of the BORROWER, there has been no RELEASE into, on or from any of the FACILITIES and no REGULATED SUBSTANCES are located on or have been treated, stored, processed, disposed of, handled or transported to or from, any of the FACILITIES in violation of any ENVIRONMENTAL LAWS. To the best knowledge -18- of the BORROWER, no REGULATED SUBSTANCES have been treated, stored, disposed, RELEASED, located, discharged, possessed, managed, processed, or otherwise handled in the operation or conduct of the BORROWER'S business in violation of any ENVIRONMENTAL LAWS. The BORROWER has complied in all material respects with all ENVIRONMENTAL LAWS affecting the FACILITIES and the BORROWER'S businesses. Section 4.22.5. Transportation. The BORROWER does not transport, in any manner, any REGULATED SUBSTANCES except in the ordinary course of the BORROWER'S business in material compliance with all ENVIRONMENTAL LAWS. Section 4.22.6. No Violation Notices. The BORROWER has not received any notices that any REGULATED SUBSTANCES transported from any FACILITY have been disposed of in violation of any ENVIRONMENTAL LAWS. Section 4.22.7. No Notice Of Violations. The BORROWER has not received written notice of any circumstances which would be likely to result in any obligation under any ENVIRONMENTAL LAW to investigate or remediate any REGULATED SUBSTANCES in, on or under any of the FACILITIES. ARTICLE 5 AFFIRMATIVE COVENANTS The BORROWER agrees during the term of this AGREEMENT and while any OBLIGATIONS are outstanding and unpaid to do and perform each of the acts and promises set forth in this Article 5: Section 5.1. Payment. All OBLIGATIONS shall be paid in full when and as due. Section 5.2. Insurance. The BORROWER shall obtain and maintain such insurance coverages as are reasonable, customary and prudent for businesses engaged in activities similar to the business activities of the BORROWER. Without limitation to the foregoing, the BORROWER shall maintain for all of its assets and properties, whether real, personal, or mixed and including but not limited to the COLLATERAL, fire and extended coverage casualty insurance in amounts satisfactory to the LENDER and sufficient to prevent any co-insurance liability (which amount shall be the full insurable value of the assets and properties insured unless the LENDER in writing agrees to a lesser amount), naming the LENDER as sole loss payee with respect to the COLLATERAL, with insurance companies and upon policy forms containing standard mortgagee clauses which are acceptable to and approved by the LENDER. The BORROWER shall submit to the LENDER the originals of the casualty insurance policies and paid receipts evidencing payment of the premiums due on the same. The casualty insurance policies shall be endorsed so as to make them noncancellable unless thirty (30) days prior notice of cancellation is provided to the LENDER. The proceeds of any insured loss shall be applied by the LENDER to the OBLIGATIONS, in such order of application as determined by the LENDER, unless the LENDER in its sole discretion permits the use thereof to repair or replace damaged or destroyed COLLATERAL. Section 5.3. Books And Records. The BORROWER shall notify the LENDER in writing if the BORROWER modifies or changes its method of accounting or enters into, modifies, or terminates any agreement presently existing, or at any time hereafter entered into with any third party accounting firm for the preparation and/or storage of the BORROWER'S accounting records. -19- Section 5.4. Collection Of Accounts; Sale Of Inventory. The BORROWER shall only collect its RECEIVABLES and sell its INVENTORY in the ordinary course of the BORROWER'S business. Section 5.5. Notice Of Litigation And Proceedings. The BORROWER shall give prompt notice to the LENDER of any action, suit, citation, violation, direction, notice or proceeding before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting the BORROWER, or the assets or properties thereof, which, if determined adversely to the BORROWER: (a) could require the BORROWER to pay over more than Twenty-Five Thousand Dollars ($25,000.00) or deliver assets the value of which exceeds that sum (whether or not the claim is considered to be covered by insurance); or (b) could reasonably be expected to have a material adverse effect upon the financial condition or business operations of the BORROWER. Section 5.6. Payment Of Liabilities To Third Persons. The BORROWER shall pay when and as due, or within applicable grace periods, all liabilities due to third persons, except when the amount thereof is being contested in good faith by appropriate proceedings and with adequate reserves therefor being set aside by the BORROWER. Section 5.7. Notice Of Change Of Business Location. The BORROWER shall notify the LENDER thirty (30) days in advance of: (a) any change in the location of its existing offices or place of business; (b) the establishment of any new, or the discontinuation of any existing, place of business; and (c) any change in or addition to the locations at which the COLLATERAL is kept. Prior to moving any COLLATERAL to any location not owned by the BORROWER (other than deliveries to ACCOUNT DEBTORS of sold or leased items), the BORROWER shall obtain and deliver to the LENDER an agreement, in the form attached hereto as Exhibit C executed by the owner of such location. In the event any COLLATERAL is stored with a warehousemen or other bailee, and the COLLATERAL is evidenced by a negotiable document of title, the BORROWER shall immediately deliver the document of title to the LENDER. Section 5.8. Payment Of Taxes. The BORROWER shall pay or cause to be paid when and as due all taxes, assessments and charges or levies imposed upon it or on any of its property or which it is required to withhold and pay over to the taxing authority or which it must pay on its income, except where contested in good faith, by appropriate proceedings and at its own cost and expense; provided, however, that the BORROWER shall not be deemed to be contesting in good faith by appropriate proceedings unless: (a) such proceedings operate to prevent the taxing authority from attempting to collect the taxes, assessments or charges; (b) the COLLATERAL is not subject to sale, forfeiture or loss during such proceedings; (c) the BORROWER'S contest does not subject the LENDER to any claim by the taxing authority or any other person; (d) the BORROWER establishes appropriate reserves, satisfactory to the LENDER in its sole discretion, for the payment of all taxes, assessments, charges, levies, legal fees, court costs and other expenses for which the BORROWER would be liable if unsuccessful in the contest; (e) the BORROWER prosecutes the contest continuously to its final conclusion; and (f) at the conclusion of the proceedings, the BORROWER promptly pays all amounts determined to be payable, including but not limited to all taxes, assessments, charges, levies, legal fees and court costs. Section 5.9. Inspections Of Records. The BORROWER shall permit representatives of the LENDER access to the BORROWER'S places of business, at intervals and at such times as determined by the LENDER, to inspect the COLLATERAL and to review and make extracts from or photocopies of the books and records of the BORROWER; provided, however, that prior to an EVENT OF DEFAULT, the LENDER shall provide the BORROWER with at least twenty-four (24) -20- hours prior notice before entering the BORROWER'S place of business, shall not be there prior to 8:00 A.M. or stay later than 6:00 P.M., and shall not materially interfere with the BORROWER'S business. The BORROWER agrees to pay to the LENDER a Two Thousand Dollar ($2,000.00) fee for each field examination conducted by the LENDER, as well as reimburse the LENDER for all reasonable expenses incurred by the LENDER in connection with any field examinations conducted at any of the BORROWER'S locations outside of the State of Maryland. Section 5.10. Notice Of Events Affecting Collateral; Compromise Of Receivables; Returned Or Repossessed Goods. The BORROWER shall promptly report to the LENDER: (a) any reclamation, return or repossession of goods; (b) all claims or disputes asserted by any ACCOUNT DEBTOR or other obligor involving in excess of Twenty-Five Thousand Dollars ($25,000.00); and (c) all matters materially affecting the value, enforceability or collectibility of any of the COLLATERAL. Without the LENDER'S consent, the BORROWER shall not compromise or adjust any of the RECEIVABLES which have been included by the BORROWER in the determination of the BORROWING BASE, extend the time for payment thereof, or grant any additional discounts, allowances or credits thereon; provided, however, that the BORROWER may grant, in the ordinary course of business, to any party obligated on any of the RECEIVABLES, any rebate, refund, or adjustment to which such party may be lawfully entitled, and may accept, in connection therewith, the return of goods, sale, or lease of which shall have given rise to such RECEIVABLES. If any goods, the sale of which has resulted in RECEIVABLES included in determining the BORROWING BASE, are returned by the ACCOUNT DEBTOR for credit or repossessed by the BORROWER, the BORROWER shall receive and hold such goods as trustee for the LENDER and as additional security for the payment of the OBLIGATIONS, and make disposition thereof as required by the LENDER. Section 5.11. Documentation Of Collateral. The BORROWER agrees that upon the request of the LENDER, the BORROWER will provide the LENDER with: (a) written statements or schedules identifying and describing the COLLATERAL, and all additions, substitutions, and replacements thereof, in such detail as the LENDER may reasonably require; (b) copies of ACCOUNT DEBTORS' invoices or billing statements; (c) evidence of shipment or delivery of goods or merchandise to or performance of services for ACCOUNT DEBTORS; and (d) such other schedules and information as the LENDER reasonably may require. The items to be provided under this Section shall be in form satisfactory to the LENDER and are to be executed and delivered to the LENDER from time to time solely for the LENDER'S convenience in maintaining RECORDS of the COLLATERAL. The failure of the BORROWER to give any of such items to the LENDER shall not affect, terminate, modify or otherwise limit the LENDER'S security interests in the COLLATERAL. The LENDER shall have the right, at any time and from time to time, to verify the eligibility of the BORROWER' RECEIVABLES, including obtaining verification of the RECEIVABLES directly from ACCOUNT DEBTORS. The LENDER agrees to comply with the nondisclosure requirements of Sections 1-301, 1-302, 1-303, 1-304 and 1-305 of the Financial Institutions Article, Annotated Code of Maryland. Section 5.12. Reporting Requirements. The BORROWER shall submit the following items to the LENDER: Section 5.12.1. Inventory Reports. On the 15th day of each calendar month, reports of INVENTORY on such reporting forms as are required by the LENDER from time to time, certified to be accurate and correct by the chief financial officer of the BORROWER, which reports shall be compiled in a manner acceptable to the LENDER. -21- Section 5.12.2. Receivables And Accounts Payable Reports. On or before the 15th day of each calendar month: (i) a RECEIVABLES report and aging, together with a calculation of ineligible RECEIVABLES; and (ii) an accounts payable report and aging, both in form reasonably acceptable to the LENDER and containing such information as the LENDER may specify from time to time. Such reports shall be accompanied by such reports, copies of sales journals, remittance reports, and other documentation as the LENDER may reasonably request from time to time. Section 5.12.3. Borrowing Base Report. Once each week (on the same day each week) as well as on the last day of each month, or more frequently if requested by the LENDER, a collateral and loan report in such form and context as may be specified by the LENDER from time to time. This report shall include updated ACCOUNTS balance and LOAN balance figures as well as detail on the activity which resulted in the updated ACCOUNTS and LOAN balance figures as of the date of the report. Section 5.12.4. Monthly Financial Statements. As soon as available and in any event within thirty (30) calendar days after the end of each calendar month, the BORROWER shall submit to the LENDER a consolidated and consolidating balance sheet of the BORROWER and its SUBSIDIARIES as of the end of such month and a consolidated and consolidating statement of income and retained earnings of the BORROWER and its SUBSIDIARIES for such month, and a consolidated and consolidating statement of cash flow of the BORROWER and its SUBSIDIARIES for such month, all in reasonable detail and stating in comparative form the respective consolidated and consolidating figures for the corresponding date and period in the previous FISCAL YEAR and all prepared in accordance with G.A.A.P. and certified by the Chief Financial Officer of the BORROWER (subject to year-end adjustment). Section 5.12.5. SEC Reports. Within forty-five (45) days after the end of each fiscal quarter, the BORROWER shall deliver to the LENDER a copy of the 10Q report filed by Avatech Solutions, Inc. for such fiscal quarter; and within one hundred twenty (120) days after the end of each FISCAL YEAR the BORROWER shall deliver to the LENDER a copy of the 10K report filed by Avatech Solutions, Inc. Section 5.12.6. Annual Financial Statements. As soon as available and in any event within one hundred twenty (120) calendar days after the end of each FISCAL YEAR of the BORROWER, the BORROWER shall submit to the LENDER a consolidated and consolidating balance sheet of the BORROWER and its SUBSIDIARIES as of the end of such FISCAL YEAR and a consolidated and consolidating statement of income and retained earnings of the BORROWER and its SUBSIDIARIES for such FISCAL YEAR, and a consolidated and consolidating statement of cash flow of the BORROWER and its SUBSIDIARIES for such FISCAL YEAR, all in reasonable detail and stating in comparative form the respective consolidated and consolidating figures for the corresponding date and period in the prior FISCAL YEAR and all prepared in accordance with G.A.A.P. and accompanied by an audited opinion thereon acceptable to the LENDER by independent accountants selected by the BORROWER and acceptable to the LENDER. Section 5.12.7. Budget. Within thirty (30) days prior to the end of each FISCAL YEAR, the BORROWER shall submit to the LENDER an annual budget and cash flow forecast for the next FISCAL YEAR. Section 5.12.8. Tax Returns. Within five (5) days after filing with the Internal Revenue Service which shall be no more than one hundred fifty (150) days after the end of the applicable FISCAL YEAR end, the BORROWER shall deliver to the LENDER copies of the BORROWER'S income tax returns together with all schedules thereto. -22- Section 5.12.9. Management Letters. Promptly upon receipt thereof, the BORROWER shall submit to the LENDER copies of any reports submitted to the BORROWER or any SUBSIDIARY by independent certified public accountants in connection with the examination of the financial statements of the BORROWER or any SUBSIDIARY made by such accountants. Section 5.12.10. Reports To Other Creditors. Promptly after the furnishing thereof, the BORROWER shall submit to the LENDER copies of any statement or report furnished to any other PERSON pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to the LENDER pursuant to any other provisions of this AGREEMENT. Section 5.12.11. Management Changes. The BORROWER shall notify the LENDER immediately of any changes in the personnel holding the positions of Chief Executive Officer, President or Chief Financial Officer of the BORROWER. Section 5.12.12. General Information. In addition to the items set forth in subparagraphs 5.12.1 through 5.12.10 above, the BORROWER agrees to submit to the LENDER such other information respecting the condition or operations, financial or otherwise, of the BORROWER as the LENDER may reasonably request from time to time. Section 5.13. Employee Benefit Plans And Guaranteed Pension Plans. The BORROWER will, and will cause each of its ERISA AFFILIATES to: (a) comply with all requirements imposed by ERISA and the CODE, applicable from time to time to any of its GUARANTEED PENSION PLANS or EMPLOYEE BENEFIT PLANS; (b) make full payment when due of all amounts which, under the provisions of EMPLOYEE BENEFIT PLANS or under applicable LAW, are required to be paid as contributions thereto; (c) not permit to exist any material accumulated funding deficiency, whether or not waived; (d) file on a timely basis all reports, notices and other filings required by any governmental agency with respect to any of its EMPLOYEE BENEFITS PLANS; (e) make any payments to MULTIEMPLOYER PLANS required to be made under any agreement relating to such MULTIEMPLOYER PLANS, or under any LAW pertaining thereto; (f) not amend or otherwise alter any GUARANTEED PENSION PLAN if the effect would be to cause the actuarial present value of all benefit commitments under any GUARANTEED PENSION PLAN to be less than the current value of the assets of such GUARANTEED PENSION PLAN allocable to such benefit commitments; (g) furnish to all participants, beneficiaries and employees under any of the EMPLOYEE BENEFIT PLANS, within the periods prescribed by LAW, all reports, notices and other information to which they are entitled under applicable LAW; and (h) take no action which would cause any of the EMPLOYEE BENEFIT PLANS to fail to meet any qualification requirement imposed by the CODE. As used in this Section, the term "accumulated funding deficiency" has the meaning specified in Section 302 of ERISA and Section 412 of the CODE, and the terms "actuarial present value", "benefit commitments" and "current value" have the meaning specified in Section 4001 of ERISA. Section 5.14. Maintenance Of Fixed Assets. The BORROWER shall maintain and preserve all of its fixed assets in a state of good and efficient working order. Section 5.15. Federal Assignment Of Claims Act. The BORROWER shall notify the LENDER if any RECEIVABLE arises out of a contract with the United States of America, or any department, agency or instrumentality thereof, and shall execute all documents or instruments and shall take all steps or actions required by the LENDER so that all monies due or to become due under such contract are assigned to the LENDER and notice given thereof to the United States in accordance with the requirements of the Federal Assignment of Claims Act, as amended. -23- Section 5.16. Compliance With Laws. The BORROWER shall comply in all material respects with all applicable LAWS, including, but not limited to, all LAWS with respect to: (a) all restrictions, specifications, or other requirements pertaining to products that it sells or to the services it performs; (b) the conduct of its business; (c) the use, maintenance, and operation of the real and personal properties owned or leased by it in the conduct of its business; and (d) the obtaining and maintenance of all necessary licenses, franchises, permits and governmental approvals, registrations and exemptions necessary to engage in its business. Without limiting the generality of the preceding sentence, the BORROWER shall: (i) comply in all material respects with, and ensure such compliance by all tenants and subtenants, if any, with, all applicable ENVIRONMENTAL LAWS and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable ENVIRONMENTAL LAWS; (ii) conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under ENVIRONMENTAL LAWS, and promptly comply with all lawful orders and directives of any governmental authority regarding ENVIRONMENTAL LAWS; and (iii) defend, indemnify and hold harmless the LENDER, and its employees, agents, officers and directors, from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any ENVIRONMENTAL LAWS applicable to the operations of the BORROWER, or any orders, requirements or demands of governmental authorities related thereto, including, without limitation, reasonable attorney's and consultant's fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing directly result from the gross negligence or willful misconduct of the party seeking indemnification therefor. The BORROWER agrees to promptly notify the LENDER of any RELEASE of a REGULATED SUBSTANCE on, to or from any FACILITY in violation of any ENVIRONMENTAL LAWS or of any notice received by the BORROWER that the BORROWER or any FACILITY is not in compliance with any ENVIRONMENTAL LAWS. Section 5.17. Depository Accounts. The BORROWER shall maintain its principal depository and operating accounts with the LENDER. ARTICLE 6 NEGATIVE COVENANTS The BORROWER covenants while any OBLIGATIONS are outstanding and unpaid not to do or to permit to be done or to occur any of the acts or occurrences set forth in this Article 6 without the prior written authorization of the LENDER, which shall not be unreasonably withheld. Section 6.1. No Change Of Name, Merger, Etc. The BORROWER shall not change its name or enter into any merger, consolidation, reorganization or recapitalization. Section 6.2. No Sale Or Transfer Of Assets. The BORROWER shall not sell, transfer, lease or otherwise dispose of all or any part of the COLLATERAL, or all or any part of any of its other assets, except that INVENTORY may be sold to ACCOUNT DEBTORS in the ordinary course of the BORROWER'S business. Section 6.3. No Encumbrance Of Assets. The BORROWER shall not mortgage, pledge, grant or permit to exist a security interest in or lien upon any of its assets of any kind, now owned or hereafter acquired, except for PERMITTED LIENS. -24- Section 6.4. No Indebtedness. The BORROWER shall not incur, create, assume, or permit to exist any INDEBTEDNESS except: (a) the OBLIGATIONS; (b) INDEBTEDNESS secured by PERMITTED LIENS; and (c) the SUBORDINATED DEBT. Section 6.5. Restricted Payments. The BORROWER shall not make any RESTRICTED PAYMENTS. Section 6.6. No Amendments Of Subordinated Debt. The BORROWER shall not modify any material terms of any of the SUBORDINATED DEBT. Section 6.7. Transactions With Affiliates. The BORROWER shall not make any contract for the purchase of any items from any AFFILIATE or the performance of any services (including employment services) by any AFFILIATE, unless such contract is on terms which fairly represent generally available terms to be obtained in transactions of a similar nature with independent third PERSONS. Section 6.8. Loans, Investments And Sale-Leasebacks. The BORROWER shall not make any advance, loan, investment, or material acquisition of assets or enter into any sale-leaseback transactions. Section 6.9. No Acquisition Of Equity In Or Assets Of Third Persons. The BORROWER shall not acquire any equity interests in, or all or substantially all of the assets of, any PERSON. Section 6.10. No Assignment. The BORROWER shall not assign or attempt to assign its rights under this AGREEMENT. Section 6.11. No Alteration Of Structure Or Operations. The BORROWER shall not amend or change materially its capital structure or its line or scope of business, nor shall it engage in business ventures other than those in which it is presently engaged. Section 6.12. Unpermitted Uses Of Loan Proceeds. The BORROWER shall not use any part of the proceeds of the LOAN hereunder for any purpose which constitutes a violation of, or is inconsistent with, regulations of the Board of Governors of the Federal Reserve System, including without limitation, the purchase or carrying of (or refinancing of indebtedness originally incurred to purchase or carry) margin securities. Section 6.13. Changes In Fiscal Year. The BORROWER shall not change its FISCAL YEAR. Section 6.14. Limitation On Issuance Of Equity Interests. The BORROWER shall not issue or sell any equity interest in the BORROWER that, by its terms or by the terms of any security into which it is convertible or exchangeable, is, or upon the happening of an event or passage of time would be: (a) convertible or exchangeable into a liability of the BORROWER; or (b) required to be redeemed or repurchased, including at the option of the holder, in whole or in part, or has, or upon the happening of an event or passage of time would have, a redemption or similar payment due. ARTICLE 7 EVENTS OF DEFAULT The occurrence of any of the following events shall constitute an EVENT OF DEFAULT. -25- Section 7.1. Failure To Pay. The failure by the BORROWER to pay any of the OBLIGATIONS when and as due. Section 7.2. Violation Of Covenants. The failure by the BORROWER to perform or a violation of any of the covenants or agreements provided in this AGREEMENT or in any of the other LOAN DOCUMENTS. Section 7.3. Representation Or Warranty. The failure of any representation or warranty made by the BORROWER or by a GUARANTOR to be true in any material respect, as of the date made. Section 7.4. Default Under Loan Documents. A breach of or default by the BORROWER under the terms, covenants, and conditions set forth in any other LOAN DOCUMENT. Section 7.5. Cross-Default. A breach of or default under the terms, covenants, or conditions of any agreement, loan, guaranty, or other transaction of the BORROWER or the GUARANTOR with the LENDER or with any other lender, including without limitation, the SUBORDINATED DEBT. Section 7.6. Judgments. The BORROWER or a GUARANTOR shall suffer final judgments for the payment of money aggregating in excess of Ten Thousand Dollars ($10,000.00) and shall not discharge the same within a period of thirty (30) days unless, pending further proceedings, execution has not been commenced or if commenced has been effectively stayed. Section 7.7. Levy By Judgment Creditor. A judgment creditor of the BORROWER shall obtain possession of any of the COLLATERAL by any means, including but not limited to levy, distraint, replevin or self-help, and the BORROWER shall not remedy same within thirty (30) days thereof; or a writ of garnishment is served on the LENDER relating to any of the accounts of the BORROWER maintained by the LENDER. Section 7.8. Failure To Pay Liabilities. The BORROWER shall fail to pay any of its debts, in any material amount, due any third PERSON and such failure shall continue beyond any applicable grace period, unless the applicable BORROWER holds a good faith defense to payment and has set aside reasonable reserves for the payment thereof. Section 7.9. Involuntary Insolvency Proceedings. The institution of involuntary INSOLVENCY PROCEEDINGS against the BORROWER and the failure of any such INSOLVENCY PROCEEDINGS to be dismissed before the earliest to occur of: (a) the date which is ninety (90) days after the institution of such INSOLVENCY PROCEEDINGS; (b) the entry of any order for relief in the INSOLVENCY PROCEEDING or any order adjudicating the BORROWER insolvent; or (c) the impairment (as to validity, priority or otherwise) of any security interest or lien of the LENDER in any of the COLLATERAL. Section 7.10. Voluntary Insolvency Proceedings. The commencement by the BORROWER of INSOLVENCY PROCEEDINGS. Section 7.11. Insolvency Proceedings Pertaining To Guarantor. The occurrence of any of the events listed in Sections 7.9 and 7.10 above to either GUARANTOR. Section 7.12. Material Adverse Event. The occurrence of a MATERIAL ADVERSE EVENT. -26- Section 7.13. Default By Guarantor. The failure by either GUARANTOR to satisfy any obligation imposed upon either GUARANTOR in the GUARANTY AGREEMENTS or any other document executed in connection therewith. Section 7.14. Attempt To Terminate Guaranties. The receipt by the LENDER of notice from a GUARANTOR that such GUARANTOR is attempting to terminate or limit any portion of its obligations under a GUARANTY AGREEMENT. Section 7.15. ERISA. If any TERMINATION EVENT shall occur and as of the date thereof or any subsequent date, the sum of the various liabilities of the BORROWER and its ERISA AFFILIATES (such liabilities to include, without limitation, any liability to the Pension Benefit Guaranty Corporation (or any successor thereto) or to any other party under Sections 4062, 4063, or 4064 of ERISA or any other provision of LAW and to be calculated after giving effect to the tax consequences thereof) resulting from or otherwise associated with such event exceeds Twenty-Five Thousand Dollars ($25,000.00); or the BORROWER or any of its ERISA AFFILIATES as an employer under any MULTIEMPLOYER PLAN shall have made a complete or partial withdrawal from such MULTIEMPLOYER PLANS and the plan sponsors of such MULTIEMPLOYER PLANS shall have notified such withdrawing employer that such employer has incurred a withdrawal liability requiring a payment in an amount exceeding Twenty-Five Thousand Dollars ($25,000.00). Section 7.16. Indictment Of Borrower Or Guarantor. The indictment of the BORROWER or of either GUARANTOR for a felony under any federal, state or other LAW. Section 7.17. Injunction. The issuance of any injunction against the BORROWER which enjoins or restrains the BORROWER from continuing to conduct any material part of the BORROWER'S business affairs. ARTICLE 8 RIGHTS AND REMEDIES ON THE OCCURRENCE OF AN EVENT OF DEFAULT Section 8.1. Lender's Specific Rights And Remedies. In addition to all other rights and remedies provided by LAW and the LOAN DOCUMENTS, upon the occurrence of any EVENT OF DEFAULT, the LENDER may: (a) accelerate and call immediately due and payable all or any part of the OBLIGATIONS; (b) seek specific performance or injunctive relief to enforce performance of the undertakings, duties, and agreements provided in the LOAN DOCUMENTS, whether or not a remedy at law exists or is adequate; and (c) exercise any rights of a secured creditor under the Uniform Commercial Code, as adopted and amended in Maryland, including the right to take possession of the COLLATERAL without the use of judicial process or hearing of any kind and the right to require the BORROWER to assemble the COLLATERAL at such place as the LENDER may specify. Section 8.2. Automatic Acceleration. Upon the occurrence of an EVENT OF DEFAULT as described in Sections 7.9 or 7.10 of this AGREEMENT, the OBLIGATIONS shall be automatically accelerated and due and payable without any notice, demand or action of any type on the part of the LENDER. Section 8.3. Sale Of Collateral. In addition to any other remedy provided herein, upon the occurrence of an EVENT OF DEFAULT, the LENDER, in a commercially reasonable fashion, may sell at public or private sale or otherwise realize upon, in Baltimore, Maryland, or elsewhere, -27- the whole or, from time to time, any part of all COLLATERAL which is personal property, or any interest which the BORROWER may have therein. Pending any such action, the LENDER may collect and liquidate the COLLATERAL. After deducting from the proceeds of sale or other disposition of such COLLATERAL all expenses, including all reasonable expenses for legal services, the LENDER shall apply such proceeds toward the satisfaction of the OBLIGATIONS. Any remainder of the proceeds after satisfaction in full of the OBLIGATIONS shall be distributed as required by applicable LAW. Notice of any sale or other disposition (other than sales or other dispositions of COLLATERAL which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market) shall be given to the BORROWER not less than ten (10) calendar days before the time of any intended public sale or of the time after which any intended private sale or other disposition of the COLLATERAL is to be made, which the BORROWER hereby agrees shall be commercially reasonable notice of such sale or other disposition. The BORROWER shall assemble, or shall cause to be assembled, at the BORROWER'S own expense, the COLLATERAL at such place or places as the LENDER shall designate. At any such sale or other disposition, the LENDER may, to the extent permissible under applicable law, purchase the whole or any part of the COLLATERAL, free from any right of redemption on the part of the BORROWER, which right is hereby waived and released to the extent lawfully permitted. Without limiting the generality of any of the rights and remedies conferred upon the LENDER under this Section, the LENDER may, to the full extent permitted by applicable law: (a) enter upon the premises of the BORROWER, exclude therefrom the BORROWER or any PERSON connected therewith, and take immediate possession of the COLLATERAL, either personally or by means of a receiver appointed by a court of competent jurisdiction, using all necessary force to do so; (b) at the LENDER'S option, use, operate, manage, and control the COLLATERAL in any lawful manner; (c) collect and receive all income, revenue, earnings, issues, and profits therefrom; and (d) maintain, alter or remove the COLLATERAL as the LENDER may determine in the LENDER'S discretion. Section 8.4. Remedies Cumulative. The rights and remedies provided in this AGREEMENT and in the other LOAN DOCUMENTS or otherwise under applicable LAWS shall be cumulative and the exercise of any particular right or remedy shall not preclude the exercise of any other rights or remedies in addition to, or as an alternative of, such right or remedy. ARTICLE 9 GENERAL CONDITIONS AND TERMS Section 9.1. Obligations Are Unconditional. The payment and performance of the OBLIGATIONS shall be the absolute and unconditional duty and obligation of the BORROWER, and shall be independent of any defense or any rights of set-off, recoupment or counterclaim which the BORROWER might otherwise have against the LENDER. The BORROWER shall pay the payments of the principal and interest to be made upon the OBLIGATIONS, free of any deductions and without abatement, diminution or set-off other than those herein expressly provided. Until such time as the OBLIGATIONS have been fully paid and performed, the BORROWER shall not: (a) suspend or discontinue any payments required by the LOAN DOCUMENTS; and (b) fail to perform and observe all of the BORROWER'S covenants and agreements set forth in the LOAN DOCUMENTS. Section 9.2. Indemnity. The BORROWER agrees to defend, indemnify and hold harmless the LENDER and the entities affiliated with the LENDER and all of the LENDER'S and its affiliated entities' employees, agents, officers and directors, from and against any losses, penalties, fines, liabilities, settlements, damages, costs and expenses, suffered in connection with any claim, -28- investigation, litigation or other proceeding (whether or not the LENDER or an affiliated entity is a party thereto) and the prosecution and defense thereof, arising out of or in any way connected with any LOAN DOCUMENT, including without limitation reasonable attorneys' and consultant's fees, except to the extent that any of the foregoing directly result from the gross negligence or willful misconduct of the party seeking indemnification therefor. Notwithstanding any termination of this AGREEMENT or payment and performance of the OBLIGATIONS, the indemnities provided for herein shall continue in full force and effect and shall protect all of the above-described PERSONS against events arising after such termination, payment or performance as well as before. Section 9.3. Lender Expenses. All LENDER EXPENSES shall be paid by the BORROWER, whether incurred prior to or after CLOSING, such that the subject transactions shall at all times be cost free to the LENDER. Section 9.4. Authorization To Obtain Financial Information. The BORROWER hereby irrevocably authorizes its accounting firm to provide the LENDER from time to time with such information as may be requested by the LENDER, and hereby authorizes the LENDER to contact directly such accounting firm in order to obtain such information. Section 9.5. Incorporation; Construction Of Inconsistent Provisions. The terms and conditions of the LOAN DOCUMENTS are incorporated by reference and made a part hereof, as if fully set forth herein. In the event of any inconsistency between this AGREEMENT and any other LOAN DOCUMENT, such inconsistency shall be construed, interpreted, and resolved so as to benefit the LENDER, independent of whether this AGREEMENT or another LOAN DOCUMENT controls, and the LENDER'S election of which interpretation or construction is for the LENDER'S benefit shall govern. Section 9.6. Waivers. The LENDER at any time or from time to time may waive all or any rights under this AGREEMENT or any other LOAN DOCUMENT, but any waiver or indulgence by the LENDER at any time or from time to time shall not constitute a future waiver of performance or exact performance by the BORROWER. Section 9.7. Continuing Obligation Of Borrower. The terms, conditions, and covenants set forth herein and in the LOAN DOCUMENTS shall survive CLOSING and shall constitute a continuing obligation of the BORROWER during the course of the transactions contemplated herein. The security interests, liens and other security provided by this AGREEMENT shall remain in effect so long as any OBLIGATION, whether direct or contingent, is outstanding, unpaid or unsatisfied. Upon the full and absolute payment (which payment is not subject to any possible challenge or contest) of all of the OBLIGATIONS, the termination of any agreement or relationship which may give rise to any future OBLIGATIONS, the termination of any commitment or agreement of the LENDER to provide additional credit to the BORROWER and the written request of the BORROWER, the LENDER shall execute any document reasonably requested by BORROWER to authorize the BORROWER to file terminations of all UCC-1 financing statements recorded evidencing the liens granted herein, and terminate all of the LOAN DOCUMENTS, at which time the BORROWER shall have no further duties or obligations to the LENDER thereunder. Section 9.8. Choice Of Law. The laws of the State of Maryland (excluding, however, conflict of law principles) shall govern and be applied to determine all issues relating to this AGREEMENT and the rights and obligations of the parties hereto, including the validity, construction, interpretation, and enforceability of this AGREEMENT and its various provisions and the consequences and legal effect of all transactions and events which resulted in the execution of this -29- AGREEMENT or which occurred or were to occur as a direct or indirect result of this AGREEMENT having been executed. Section 9.9. Submission To Jurisdiction; Venue; Actions Against Lender. For purposes of any action, in law or in equity, which is based directly or indirectly on this AGREEMENT, any other LOAN DOCUMENT or any matter related to this AGREEMENT or any other LOAN DOCUMENT, including any action for recognition or enforcement of any of the LENDER'S rights under the LOAN DOCUMENTS or any judgment obtained by the LENDER in respect thereof, the BORROWER hereby: Section 9.9.1. Jurisdiction. Irrevocably submits to the non-exclusive general jurisdiction of the courts of the State of Maryland and, if a basis for federal jurisdiction exists at any time, the courts of the United States of America for the District of Maryland. Section 9.9.2. Venue. Agrees that venue shall be proper in the Circuit Court for Baltimore City, Maryland, the Circuit Court for any county in the state of Maryland, as selected by the LENDER, and, if a basis for federal jurisdiction exists, the courts of the United States of America for the District of Maryland. Section 9.9.3. Waiver Of Objections To Venue. Waives any right to object to the maintenance of any suit in any of the courts specified in Section 9.9.2 above on the basis of improper venue or convenience of forum. The BORROWER further agrees that it shall not institute any suit or other action against the LENDER, in law or in equity, which is based directly or indirectly on this AGREEMENT, any other LOAN DOCUMENT or any matter related to this AGREEMENT or any other LOAN DOCUMENT, in any court other than a court specified in Section 9.9.2 above; provided, that in any instance in which there is then pending a suit instituted by the LENDER against the BORROWER in a court other than a court specified in Section 9.9.2 above, the BORROWER may file in such suit any counterclaim which it has against the LENDER but only if such counterclaim is a compulsory counterclaim and would be barred if not filed as a counterclaim in such suit. The BORROWER agrees that any suit brought by it against the LENDER not in accordance with this paragraph should be forthwith dismissed or transferred to a court specified in Section 9.9.2 above. Section 9.10. Notices. Any notice required or permitted by or in connection with this AGREEMENT shall be in writing and shall be made by facsimile (confirmed on the date the facsimile is sent by one of the other methods of giving notice provided for in this Section) or by electronic mail, by hand delivery, by Federal Express, or other similar overnight delivery service, or by certified mail, unrestricted delivery, return receipt requested, postage prepaid, addressed to the LENDER or the BORROWER at the appropriate address set forth below or to such other address as may be hereafter specified by written notice by the LENDER or the BORROWER. Notice shall be considered given as of the date of the facsimile or the hand delivery, as of the date of receipt of confirmation that the electronic mail was received and opened, one (1) calendar day after delivery to Federal Express or similar overnight delivery service, or three (3) calendar days after the date of mailing, independent of the date of actual delivery or whether delivery is ever in fact made, as the case may be, provided the giver of notice can establish the fact that notice was given as provided herein. If notice is tendered pursuant to the provisions of this Section and is refused by the intended recipient thereof, the notice, nevertheless, shall be considered to have been given and shall be effective as of the date herein provided. If to the LENDER: -30- KEY BANK AND TRUST 7F Gwynns Mill Court Owings Mills, Maryland 21117 Attention: Commercial Lending Division Fax No.: (410) 363-3569 E-Mail: pkillpatrick@keyb-t.com with a mandatory copy to shough@keyb-t.com If to the BORROWER: AVATECH SOLUTIONS SUBSIDIARY, INC. 11400 Cronridge Drive, Suite A Owings Mills, Maryland 21117 Attn.: Donald R. Walsh, Chief Executive Officer Fax No.: (____) -------------- E-Mail: swalsh@avat.com Section 9.11. Participations. The LENDER reserves the right to assign all or any portion of its interests in any of the OBLIGATIONS or the LOAN DOCUMENTS or to participate with other lending institutions any of the OBLIGATIONS and the LOAN DOCUMENTS on such terms and at such times as the LENDER may determine from time to time, all without any consent thereto or notice thereof to the BORROWER. The BORROWER hereby grants to each participating lending institution, to the full extent of the OBLIGATIONS, the right to set off deposit accounts maintained by the BORROWER with such institution, and the BORROWER agrees to pay the LENDER EXPENSES of any such participating lending institution which arise or are incurred as a result of the occurrence of an EVENT OF DEFAULT. Section 9.12. Miscellaneous Provisions. The parties agree that: (a) this AGREEMENT shall be effective as of the date first above written, independent of the date of execution or delivery hereof; (b) this AGREEMENT shall be binding upon the parties and their successors and assigns, contains the final and entire agreement and understanding of the parties, and may neither be amended or altered except by a writing signed by the parties; (c) time is strictly of the essence of this AGREEMENT; (d) as used herein, the singular includes the plural and the plural includes the singular, the use of any gender applies to all genders; (e) the captions contained herein are for purposes of convenience only and are not a part of this AGREEMENT; (f) a carbon, photographic, photocopy or other reproduction of a security agreement and financing statement shall be sufficient as a financing statement; (g) this AGREEMENT may be delivered by facsimile, and a facsimile of any party's signature to this AGREEMENT shall be deemed an original signature for all purposes; and (h) this AGREEMENT may be executed in several counterparts, each of which shall be an original, but all of which, when taken together, shall constitute one and the same document. Section 9.13. Waiver Of Trial By Jury. Each party to this AGREEMENT agrees that any suit, action, or proceeding, whether claim or counterclaim, brought or instituted by either party hereto or any successor or assign of any party on or with respect to this AGREEMENT or any other LOAN DOCUMENT or which in any way relates, directly or indirectly, to the OBLIGATIONS or any event, transaction, or occurrence arising out of or in any way connected with any of the OBLIGATIONS, or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION, OR PROCEEDING. IN WITNESS WHEREOF, the LENDER and the BORROWER have duly executed this AGREEMENT under seal as of the date first above written. -31- WITNESS/ATTEST: KEY BANK AND TRUST By: (SEAL) ----------------------------- ------------------------------ Patrick Killpatrick, Vice President AVATECH SOLUTIONS SUBSIDIARY, INC., A Delaware Corporation By: (SEAL) ----------------------------- ------------------------------ Donald R. Walsh Chief Executive Officer -32-