EXHIBIT 10.1

 
LOAN AND SECURITY AGREEMENT
 
THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of August 4, 2006
(the "Effective Date") among (i) SILICON VALLEY BANK, a California corporation
and with a loan production office located at One Newton Executive Park, Suite
200, 2221 Washington Street, Newton, Massachusetts 02462 (“Bank”), and (ii)
TECHNEST HOLDINGS, INC., a Nevada corporation, with offices at 1 McKinley Sq.,
Fifth Floor, Boston, Massachusetts 02109 (“Technest”), E-OIR TECHNOLOGIES, INC.,
a Virginia corporation, with offices at 10300 Spotsylvania Ave., Suite 220,
Fredericksburg, Virginia 22408 (“EOIR”), and GENEX TECHNOLOGIES INCORPORATED, a
Maryland corporation, with offices at 10411 Motor City Drive, Suite 650,
Bethesda, Maryland 20817 (“Genex”) (hereinafter, Technest, EOIR and Genex are
jointly and severally, individually and collectively, referred to as
“Borrower”), provides the terms on which Bank shall lend to Borrower and
Borrower shall repay Bank. The parties agree as follows:
 
1    ACCOUNTING AND OTHER TERMS
 
Accounting terms not defined in this Agreement shall be construed following
GAAP. Calculations and determinations must be made following GAAP. Capitalized
terms not otherwise defined in this Agreement shall have the meanings set forth
in Section 13. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meaning provided by the Code to the extent such terms
are defined therein.
 
2    LOAN AND TERMS OF PAYMENT
 
2.1        Promise to Pay. Borrower hereby unconditionally promises to pay Bank
the outstanding principal amount of all Credit Extensions and accrued and unpaid
interest thereon as and when due in accordance with this Agreement.
 
2.1.1     Term Loan.
 
(a)    Availability. Subject to the terms and conditions of this Agreement, Bank
agrees to lend to Borrower, from time to time prior to the February 15, 2007,
term loan advances (each a “Term Advance” and collectively the “Term Advances”)
in an aggregate amount not to exceed the Term Loan Amount. The first Term
Advance, which shall be requested on the Effective Date, shall be in an amount
equal to Three Million Dollars ($3,000,000.00) (the “Initial Term Advance”). In
addition, subject to the Bank’s receipt of the various documents required to be
delivered by Borrower to Bank on a monthly basis pursuant to Section 6.2 with
respect to each month through and including the month ending December 31, 2006,
and if no Event of Default has occurred or is continuing, the Borrower may
request a second Term Advance in an amount not to exceed One Million Dollars
($1,000,000.00) (the “Second Term Advance”). The aggregate principal amount of
the Initial Term Advance and the Second Term Advance shall not exceed the Term
Loan Amount. When repaid, the Term Advances may not be re-borrowed. Bank’s
obligation to lend hereunder shall terminate on the earlier of (i) the
occurrence and continuance of an Event of Default, or (ii) February 15, 2007.
 
(b)   Repayment. Borrower shall repay:
 
(i)    the Initial Term Advance in thirty-six (36) equal installments of
principal, plus monthly payments of accrued interest, commencing on September 1,
2006, (individually, the “Scheduled Payment”, and collectively the “Scheduled
Payments”); and
 
(ii)    the Second Term Advance (as applicable) in thirty-six (36) equal
installments of principal, plus monthly payments of accrued interest, commencing
on the first date of the month following the date of the Second Term Advance
(the “Second Term Advance Scheduled Payments”), as applicable (the Scheduled
Payments and the Second Term Advance Scheduled Payments, collectively, as
applicable, the “Term Loan Payment”).
 
Beginning on the first day of the month following the month in which the Funding
Date occurs, each Term Loan Payment shall be payable on the first day of each
month. Borrower’s final Term Loan Payment, due on the Commitment Termination
Date, shall include all outstanding principal and accrued and unpaid interest
under the Term Loan.
 
 

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(c)    Prepayment Fee. Borrower will pay to Bank a Prepayment Fee equal to: (i)
three percent (3.0%) of the amount of any Term Advance prepaid during the first
year of the Term Loan and (ii) two percent (2.0%) of the amount of any Term
Advance prepaid for each year thereafter, prior to the Commitment Termination
Date. Notwithstanding the foregoing, Bank agrees to waive the Prepayment Fee if
Bank refinances and re-documents this Agreement under another division of Bank
(in its sole and exclusive discretion) prior to the Commitment Termination Date.
 
2.2          Payment of Interest on the Credit Extensions.
 
(a)    Interest Rate. Subject to Section 2.2(b), the principal amount of Term
Advances outstanding shall initially accrue interest at a floating per annum
rate equal to two and three-quarters of one percentage points (2.75%) above the
Prime Rate, which interest shall be payable monthly. Upon the Borrower’s
achieving a Fixed Charge Coverage Ratio of at least 1.75 to 1.0 for three (3)
consecutive fiscal quarters after the Effective Date, the principal amount of
Term Advances outstanding shall accrue interest at a floating per annum rate
equal to two percentage points (2.00%) above the Prime Rate, which interest
shall be payable monthly. Upon the Borrower’s achieving a Fixed Charge Coverage
Ratio of at least 2.0 to 1.0 for three (3) consecutive fiscal quarters after the
Effective Date, the principal amount of Term Advances outstanding shall accrue
interest at a floating per annum rate equal to one and one-half of one
percentage points (1.50%) above the Prime Rate, which interest shall be payable
monthly.
 
(b)    Default Rate. Immediately upon the occurrence and during the continuance
of an Event of Default, Obligations shall bear interest at a rate per annum
which is five percentage points above the rate effective immediately before the
Event of Default (the “Default Rate”). Payment or acceptance of the increased
interest rate provided in this Section 2.2(b) is not a permitted alternative to
timely payment and shall not constitute a waiver of any Event of Default or
otherwise prejudice or limit any rights or remedies of Bank.
 
(c)    Adjustment to Interest Rate. Changes to the interest rate of any Credit
Extension based on changes to the Prime Rate shall be effective on the effective
date of any change to the Prime Rate and to the extent of any such change.
 
(d)    360-Day Year. Interest shall be computed on the basis of a 360-day year
for the actual number of days elapsed.
 
(e)    Debit of Accounts. Bank may debit any of Borrower’s deposit accounts,
including the Designated Deposit Account, for principal and interest payments or
any other amounts Borrower owes Bank when due. These debits shall not constitute
a set-off.
 
(f)    Payments. Unless otherwise provided, interest is payable monthly on the
first calendar day of each month. Payments of principal and/or interest received
after 12:00 noon Eastern time are considered received at the opening of business
on the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest,
as applicable, shall continue to accrue.
 
2.3          Fees. Borrower shall pay to Bank:
 
(a)    Facility Fee. A fully earned, non-refundable facility fee of Twelve
Thousand Five Hundred Dollars ($12,500.00), on the Effective Date;
 
(b)    Prepayment Fee. The Prepayment Fee, when due hereunder; and
 
(c)    Bank Expenses. All Bank Expenses (including reasonable attorneys’ fees
and expenses, plus expenses, for documentation and negotiation of this
Agreement) incurred through and after the Effective Date, when due.
 
3     CONDITIONS OF LOANS
 
3.1         Conditions Precedent to Initial Credit Extension. Bank’s obligation
to make the initial Credit Extension is subject to the condition precedent that
Bank shall have received, in form and substance satisfactory to Bank, such
documents, and completion of such other matters, as Bank may reasonably deem
necessary or appropriate (with respect to each Borrower), including, without
limitation:
 
 
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(a)    Duly executed original signatures to the Loan Documents to which it is a
party;
 
(b)    Duly executed original signatures to the Control Agreements;
 
(c)    Borrower shall have delivered its Operating Documents and a good standing
certificate of Borrower certified by the Secretary of State of the state in
which each Borrower is organized as of a date no earlier than thirty (30) days
prior to the Effective Date;
 
(d)   Duly executed original signatures to the completed Borrowing Resolutions
for Borrower;
 
(e)   Borrower shall have delivered the duly executed Subordination Agreements,
as required by Bank;
 
(f)    Bank shall have received certified copies, dated as of a recent date, of
financing statement searches, as Bank shall request, accompanied by written
evidence (including any UCC termination statements) that the Liens indicated in
any such financing statements either constitute Permitted Liens or have been or,
in connection with the initial Credit Extension, will be terminated or released;
 
(g)   Intentionally omitted;
 
(h)   Borrower shall have delivered a legal opinion of Borrower’s counsel dated
as of the Effective Date;
 
(i)    Borrower shall have delivered the duly executed original signatures to
the Guaranty and Stock Pledge Agreement, together with the completed Borrowing
Resolutions for Guarantor;
 
(j)    Borrower shall have delivered a legal opinion of Guarantor’s counsel
dated as of the Effective Date;
 
(k)   Borrower shall have delivered a duly executed registration rights
agreement in form and substance reasonably acceptable to Bank;
 
(l)    Borrower shall have delivered the insurance policies and/or endorsements
required pursuant to Section 6.5 hereof;
 
(m)          Borrower shall have paid the fees and Bank Expenses then due as
specified in Section 2.3 hereof;
 
(n)   Borrower shall have delivered satisfactory evidence of the release of all
claims held by and the termination of any litigation brought by Joseph Moulton
against each Borrower, in form and substance satisfactory to Bank;
 
(o)   payoff letter from existing lienholders;
 
(p)   the Initial Audit; and
 
(q)   such other documents, and completion of such other matters, as Bank may
reasonably deem necessary or appropriate.
 
3.2          Conditions Precedent to all Credit Extensions. Bank’s obligations
to make each Credit Extension, including the initial Credit Extension, is
subject to the following:
 
(a)    except as otherwise provided in Section 3.4, timely receipt of an
executed Payment/Advance Form;
 
 
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(b)    the representations and warranties in Section 5 shall be true in all
material respects on the date of the Payment/Advance Form and on the Funding
Date of each Credit Extension; provided, however, that such materiality
qualifier shall not be applicable to any representations and warranties that
already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring
to a specific date shall be true, accurate and complete in all material respects
as of such date, and no Default or Event of Default shall have occurred and be
continuing or result from the Credit Extension. Each Credit Extension is
Borrower’s representation and warranty on that date that the representations and
warranties in Section 5 remain true in all material respects; provided, however,
that such materiality qualifier shall not be applicable to any representations
and warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties
expressly referring to a specific date shall be true, accurate and complete in
all material respects as of such date; and
 
(c)    in Bank’s determination at Bank’s sole discretion, there has not been a
Material Adverse Change in the general affairs, management, results of
operation, financial condition or the prospect of repayment of the Obligations,
or there has not been any material adverse deviation by Borrower from the most
recent business plan of Borrower presented to and accepted by Bank.
 
3.3          Covenant to Deliver.
 
Borrower agrees to deliver to Bank each item required to be delivered to Bank
under this Agreement as a condition to any Credit Extension. Borrower expressly
agrees that the extension of a Credit Extension prior to the receipt by Bank of
any such item shall not constitute a waiver by Bank of Borrower’s obligation to
deliver such item, and any such extension in the absence of a required item
shall be at Bank’s sole discretion.
 
3.4          Procedures for Borrowing. Subject to the prior satisfaction of all
other applicable conditions to the making of the Term Loan set forth in this
Agreement, if any portion of the proceeds of the Term Loan shall be used to
purchase or finance Equipment, Borrower shall deliver to Bank by electronic mail
or facsimile a copy of the invoice for the Equipment to be purchased and the
request for the Term Loan.
 
4     CREATION OF SECURITY INTEREST
 
4.1         Grant of Security Interest. Borrower hereby grants Bank, to secure
the payment and performance in full of all of the Obligations, a continuing
security interest in, and pledges to Bank, the Collateral, wherever located,
whether now owned or hereafter acquired or arising, and all proceeds and
products thereof. Borrower represents, warrants, and covenants that the security
interest granted herein is and shall at all times continue to be a first
priority perfected security interest in the Collateral (subject only to
Permitted Liens that may have superior priority to Bank’s Lien under this
Agreement). If Borrower shall acquire a commercial tort claim, Borrower shall
promptly notify Bank in a writing signed by Borrower of the general details
thereof and grant to Bank in such writing a security interest therein and in the
proceeds thereof, all upon the terms of this Agreement, with such writing to be
in form and substance reasonably satisfactory to Bank.
 
If this Agreement is terminated, Bank’s Lien on the Collateral shall continue
until the Obligations (other than inchoate indemnity obligations) are repaid in
full in cash. Upon payment in full in cash of the Obligations and at such time
as Bank’s obligation to make Credit Extensions shall have terminated, Bank
shall, at Borrower’s sole cost and expense, release its Liens on the Collateral
and all rights therein shall revert to Borrower.
 
4.2          Authorization to File Financing Statements. Borrower hereby
authorizes Bank to file financing statements, without notice to Borrower, with 
all appropriate jurisdictions to perfect or protect Bank’s interest or rights
hereunder, including a notice that any disposition of the Collateral, by either
Borrower or any other Person, shall be deemed to violate the rights of Bank
under the Code.
 
5     REPRESENTATIONS AND WARRANTIES
 
Borrower represents and warrants as follows:
 
 
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5.1           Due Organization and Authorization. Borrower and each of its
Subsidiaries are duly existing and in good standing, as Registered Organizations
in their respective jurisdictions of formation and are qualified and licensed to
do business and are in good standing in any jurisdiction in which the conduct of
their business or their ownership of property requires that they be qualified
except where the failure to do so could not reasonably be expected to have a
material adverse effect on Borrower’s business. In connection with this
Agreement, Borrower has delivered to Bank completed certificates each signed by
Borrower and Guarantor, respectively (the “Perfection Certificate”). Borrower
represents and warrants to Bank that (a) Borrower’s exact legal name is that
indicated on the Perfection Certificate and on the signature page hereof;
(b) Borrower is an organization of the type and is organized in the jurisdiction
set forth in the Perfection Certificate; (c) the Perfection Certificate
accurately sets forth Borrower’s organizational identification number or
accurately states that Borrower has none; (d) the Perfection Certificate
accurately sets forth Borrower’s place of business, or, if more than one, its
chief executive office as well as Borrower’s mailing address (if different than
its chief executive office); (e) Borrower (and each of its predecessors) has
not, in the past five (5) years, changed its jurisdiction of formation,
organizational structure or type, or any organizational number assigned by its
jurisdiction; and (f) all other information set forth on the Perfection
Certificate pertaining to Borrower and each of its Subsidiaries is accurate and
complete. If Borrower is not now a Registered Organization but later becomes
one, Borrower shall promptly notify Bank of such occurrence and provide Bank
with Borrower’s organizational identification number.
 
The execution, delivery and performance of the Loan Documents have been duly
authorized, and do not conflict with Borrower’s organizational documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which it is a party or
by which it is bound in which the default could have a material adverse effect
on Borrower’s business.
 
5.2           Collateral. Borrower has good title to, has rights in, and the
power to transfer each item of the Collateral upon which it purports to grant a
Lien hereunder, free and clear of any and all Liens except Permitted Liens.
Borrower has no deposit accounts other than the deposit accounts with Bank and
the deposit accounts, if any, described in the Perfection Certificate delivered
to Bank in connection herewith.
 
The Collateral is not in the possession of any third party bailee (such as a
warehouse) except as otherwise provided in the Perfection Certificate. None of
the components of the Collateral shall be maintained at locations other than as
provided in the Perfection Certificate or as Borrower has given Bank notice
pursuant to Section 7.2. In the event that Borrower, after the date hereof,
intends to store or otherwise deliver any portion of the Collateral to a bailee,
then Borrower will first receive the written consent of Bank and such bailee
must execute and deliver a bailee agreement in form and substance satisfactory
to Bank in its sole discretion.
 
All Inventory is in all material respects of good and marketable quality, free
from material defects.
 
Borrower owns or has the right to use the intellectual property used in its
business, and except as set forth in the Disclosure Schedule attached hereto,
Borrower has not granted any exclusive licenses to use its intellectual
property. To Borrower’s knowledge, each of its patents is valid and enforceable,
and no part of the intellectual property has been judged invalid or
unenforceable, in whole or in part, and to the Borrower’s knowledge, no claim
has been made that any part of the intellectual property violates the rights of
any third party except to the extent such claim could not reasonably be expected
to have a material adverse effect on Borrower’s business. Except as noted on the
Disclosure Schedule attached hereto, Borrower is not a party to, nor is bound
by, any license or other agreement with respect to which Borrower is the
licensee that prohibits or otherwise restricts Borrower from granting a security
interest in Borrower’s interest in such license or agreement or any other
property. Borrower shall provide written notice to Bank within ten (10) days of
entering or becoming bound by any such license or agreement which is reasonably
likely to have a material impact on Borrower’s business or financial condition
(other than over-the-counter software that is commercially available to the
public). Borrower shall take such steps as Bank requests to obtain the consent
of, or waiver by, any person whose consent or waiver is necessary for all such
licenses or contract rights to be deemed “Collateral” and for Bank to have a
security interest in it that might otherwise be restricted or prohibited by law
or by the terms of any such license or agreement (such consent or authorization
may include a licensor’s agreement to a contingent assignment of the license to
Bank if Bank determines that is necessary in its good faith judgment), whether
now existing or entered into in the future.
 
5.3           Litigation. Except as set forth on the Disclosure Schedule
attached hereto, there are no actions or proceedings pending or, to the
knowledge of the Responsible Officers, threatened in writing by or against
Borrower or any of its Subsidiaries involving more than Two Hundred and Fifty
Thousand Dollars ($250,000.00).
 
5.4           No Material Deviation in Financial Statements. All consolidated
financial statements for Borrower and any of its Subsidiaries delivered to Bank
fairly present in all material respects Borrower’s consolidated financial
condition and Borrower’s consolidated results of operations in accordance with
GAAP. There has not been any material deterioration in Borrower’s consolidated
financial condition since the date of the most recent financial statements
submitted to Bank.
 
 
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5.5           Solvency. The fair salable value of Borrower’s assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities;
Borrower will not be left with unreasonably small capital after the transactions
contemplated by this Agreement; and Borrower is able to pay its debts (including
trade debts) as they mature.
 
5.6           Regulatory Compliance. Borrower is not an “investment company” or
a company “controlled” by an “investment company” under the Investment Company
Act. Borrower is not engaged as one of its important activities in extending
credit for margin stock (under Regulations T and U of the Federal Reserve Board
of Governors). Borrower has complied in all material respects with the Federal
Fair Labor Standards Act. Borrower has not violated any laws, ordinances or
rules, the violation of which could reasonably be expected to have a material
adverse effect on its business. None of Borrower’s or any of its Subsidiaries’
properties or assets has been used by Borrower or any Subsidiary or, to the best
of Borrower’s knowledge, by previous Persons, in disposing, producing, storing,
treating, or transporting any hazardous substance other than legally. Borrower
and each of its Subsidiaries have obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted.
 
5.7           Investments. Borrower does not own any stock, partnership interest
or other equity securities except for Permitted Investments and except for
Technest’s ownership of EOIR and Genex.
 
5.8           Tax Returns and Payments; Pension Contributions. Borrower has
timely filed all required tax returns and reports, and Borrower and its
Subsidiaries have timely paid all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower. Borrower may defer
payment of any contested taxes, provided that Borrower (a) in good faith
contests its obligation to pay the taxes by appropriate proceedings promptly and
diligently instituted and conducted, (b) notifies Bank in writing of the
commencement of, and any material development in, the proceedings, (c) posts
bonds or takes any other steps required to prevent the governmental authority
levying such contested taxes from obtaining a Lien upon any of the Collateral
that is other than a “Permitted Lien”. Borrower is unaware of any claims or
adjustments proposed for any of Borrower's prior tax years which could result in
additional taxes becoming due and payable by Borrower. Borrower has paid all
amounts necessary to fund all present pension, profit sharing and deferred
compensation plans in accordance with their terms, and Borrower has not
withdrawn from participation in, and has not permitted partial or complete
termination of, or permitted the occurrence of any other event with respect to,
any such plan which could reasonably be expected to result in any liability of
Borrower, including any liability to the Pension Benefit Guaranty Corporation or
its successors or any other governmental agency.
 
5.9           Use of Proceeds. Borrower shall use the proceeds of the Credit
Extensions solely to fund its general business requirements and not for
personal, family, household or agricultural purposes.
 
5.10         Inactive Subsidiary. Argus Sensors, Inc. a Delaware corporation,
and a Subsidiary of Technest, does not and will not conduct any business or own
any assets and will remain an inactive entity.
 
5.11         Litigation with Joseph Moulton. The litigation matter with Joseph
Moulton described on the Disclosure Schedule has been settled in full (with
respect to each Borrower), contingent only upon certain payments being made as
described on the Disclosure Schedule. Aside from the making of the payments
described on the Disclosure Schedule, all other conditions precedent to the
Settlement Agreement have been satisfied in full.
 
5.12         Full Disclosure. No written representation, warranty or other
statement of Borrower in any certificate or written statement given to Bank, as
of the date such representations, warranties, or other statements were made,
taken together with all such written certificates and written statements given
to Bank, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not viewed as facts and that actual results during the period or
periods covered by such projections and forecasts may differ from the projected
or forecasted results).
 
 
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6     AFFIRMATIVE COVENANTS
 
Borrower shall do all of the following:
 
6.1        Government Compliance. Maintain its and all its Subsidiaries’ legal
existence and good standing in their respective jurisdictions of formation and
maintain qualification in each jurisdiction in which the failure to so qualify
would reasonably be expected to have a material adverse effect on Borrower’s
business or operations. Borrower shall comply, and have each Subsidiary comply,
with all laws, ordinances and regulations to which it is subject, the
noncompliance with which could have a material adverse effect on Borrower’s
business.
 
6.2        Financial Statements, Reports, Certificates.
 
  (a)    Deliver to Bank: (i) as soon as available, but no later than thirty
(30) days after the last day of each month, a company prepared consolidated
balance sheet and income statement covering Borrower’s and each of its
Subsidiary’s operations during the period certified by a Responsible Officer and
in a form acceptable to Bank; (ii) as soon as available, but no later than one
hundred twenty (120) days after the last day of Borrower’s fiscal year, audited
consolidated financial statements prepared under GAAP, consistently applied,
together with an unqualified opinion on the financial statements from an
independent certified public accounting firm acceptable to Bank in its
reasonable discretion; (iii) within five (5) days of delivery, copies of all
statements, reports and notices made available to Borrower’s security holders or
to any holders of Subordinated Debt; (iv) in the event that Borrower becomes
subject to the reporting requirements under the Securities Exchange Act of 1934,
as amended, within five (5) days of filing, all reports on Form 10-K, 10-Q and
8-K filed with the Securities and Exchange Commission or a link thereto on
Borrower’s or another website on the Internet; (v) a prompt report of any legal
actions pending or threatened against Borrower or any of its Subsidiaries that
is likely to result in damages or costs to Borrower or any of its Subsidiaries
of Fifty Thousand Dollars ($50,000.00) or more; (vi) prompt notice of an event
that materially and adversely affects the value of Borrower’s intellectual
property; and (vii) budgets, sales projections, operating plans, and other
financial information reasonably requested by Bank.
 
(b)        Within thirty (30) days after the last day of each month, deliver to
Bank an aged listings of accounts receivable and accounts payable (by invoice
date).
 
(c)         Within thirty (30) days after the last day of each month, deliver to
Bank with the monthly financial statements, a duly completed Compliance
Certificate signed by a Responsible Officer setting forth calculations showing
compliance with the financial covenants set forth in this Agreement.
 
(d)         Allow Bank to audit Borrower’s Collateral at Borrower’s expense.
Such audits shall be conducted no more often than once every twelve (12) months
unless a Default or an Event of Default has occurred and is continuing.
Notwithstanding the foregoing, no Credit Extension may be requested prior to the
Initial Audit.
 
(e)         Within thirty (30) days after the last day of each month, deliver to
Bank a funded backlog schedule, in form acceptable to Bank.
 
(f)          Within thirty (30) days after the last day of each month, deliver
to Bank a deferred revenue report, in form acceptable to Bank.
 
6.3      Inventory; Returns. Keep all Inventory in good and marketable
condition, free from material defects. Returns and allowances between Borrower
and its Account Debtors shall follow Borrower’s customary practices as they
exist at the Effective Date. Borrower must promptly notify Bank of all returns,
recoveries, disputes and claims that involve more than Two Hundred Fifty
Thousand Dollars ($250,000.00) in the aggregate.
 
6.4      Taxes. Make, and cause each of its Subsidiaries to make, timely payment
of all foreign, federal, state, and local taxes or assessments (other than taxes
and assessments which Borrower is contesting pursuant to the terms of Section
5.8 hereof) and shall deliver to Bank, on demand, appropriate certificates
attesting to such payments, and pay all amounts necessary to fund all present
pension, profit sharing and deferred compensation plans in accordance with their
terms.
 
6.5      Insurance. Keep its business and the Collateral insured for risks and
in amounts standard for companies in Borrower’s industry and location and as
Bank may reasonably request. Insurance policies shall be in a form, with
companies, and in amounts that are satisfactory to Bank. All property policies
shall have a loss payable endorsement showing Bank as an additional loss payee
and waive subrogation against Bank, and all liability policies shall show, or
have endorsements showing, Bank as an additional insured. All policies (or the
loss payable and additional insured endorsements) shall provide that the insurer
must give Bank at least twenty (20) days notice before canceling, amending, or
declining to renew its policy. At Bank’s request, Borrower shall deliver
certified copies of policies and evidence of all premium payments. If Borrower
fails to obtain insurance as required under this Section 6.5 or to pay any
amount or furnish any required proof of payment to third persons and Bank, Bank
may make all or part of such payment or obtain such insurance policies required
in this Section 6.5, and take any action under the policies Bank deems prudent.
 
 
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6.6      Operating Accounts.
 
(a)    Maintain its and its Subsidiaries’ primary operating accounts and
securities accounts with Bank and Bank’s affiliates and a majority of Borrower’
s and such Subsidiaries’ cash or securities in excess of that amount used for
Borrower’ s or such Subsidiaries’ current operations shall be maintained at Bank
and Bank’s affiliates.  Notwithstanding the termination of the Receivables Loan
and Security Agreement, Borrower shall at all times maintain the Lockbox (as
such term is defined therein) required by the Receivables Loan and Security
Agreement.
 
(b)    Provide Bank five (5) days prior written notice before establishing any
Collateral Account at or with any bank or financial institution other than Bank
or its Affiliates. In addition, for each Collateral Account that Borrower or
Guarantor at any time maintains, Borrower shall cause the applicable bank or
financial institution (other than Bank) at or with which any Collateral Account
is maintained to execute and deliver a Control Agreement or other appropriate
instrument with respect to such Collateral Account to perfect Bank’s Lien in
such Collateral Account in accordance with the terms hereunder. The provisions
of the previous sentence shall not apply to deposit accounts exclusively used
for payroll, payroll taxes and other employee wage and benefit payments to or
for the benefit of Borrower’s employees and identified to Bank by Borrower as
such.
 
6.7      Financial Covenants.
 
Borrower shall maintain at all times, to be tested as of the last day of each
month, unless otherwise noted, on a consolidated basis:
 
(a)    Quick Ratio. If for any one or more of the monthly reporting periods set
forth herein the Borrower reports that the ratio of Quick Assets to Current
Liabilities is less than:
 
Reporting Period End Dates
Minimum Quick Ratio
Effective Date through November 30, 2006
0.70 to 1.0
December 31, 2006 through May 31, 2007
0.85 to 1.0
June 30, 2007 through August 31, 2007
1.0 to 1.0
September 30, 2007 and all monthly reporting periods thereafter
1.20 to 1.0

 
then the sum of (a) Borrower’s unrestricted cash at the Bank, plus (b) eighty
percent (80.0%) of the Borrower’s Eligible Accounts, minus (c) the Borrower’s
outstanding Obligations as defined in the Receivables Loan and Security
Agreement, must exceed $2,000,000.00.
 
(b)    Fixed Charge Coverage Ratio. A monthly Fixed Charge Coverage Ratio
measured on the last day of every month, for the three (3) month period ending
on the last day of such month, of at least 1:0 to 1:0 through periods ending
November 30, 2006; at least 1.25:1.0 for periods ending on December 31, 2006
through May 31, 2007; and at least 1.50:1.0 for all periods thereafter.
 
6.8      Protection and Registration of Intellectual Property Rights. Borrower
shall: (a) protect, defend and maintain the validity and enforceability of its
intellectual property material to its business; (b) promptly advise Bank in
writing of material infringements of any of its intellectual property material
to its business; and (c) not allow any intellectual property material to
Borrower’s business to be abandoned, forfeited or dedicated to the public
without Bank’s written consent. If Borrower decides to register any copyrights
or mask works in the United States Copyright Office, Borrower shall: (x) provide
Bank with at least fifteen (15) days prior written notice of its intent to
register such copyrights or mask works together with a copy of the application
it intends to file with the United States Copyright Office (excluding exhibits
thereto); (y) execute an intellectual property security agreement or such other
documents as Bank may reasonably request to maintain the perfection and priority
of Bank’s security interest in the copyrights or mask works intended to be
registered with the United States Copyright Office; and (z) record such
intellectual property security agreement with the United States Copyright Office
contemporaneously with filing the copyright or mask work application(s) with the
United States Copyright Office. Borrower shall promptly provide to Bank a copy
of the application(s) filed with the United States Copyright Office together
with evidence of the recording of the intellectual property security agreement
necessary for Bank to maintain the perfection and priority of its security
interest in such copyrights or mask works. Borrower shall provide written notice
to Bank of any application filed by Borrower in the United States Patent and
Trademark Office for a patent or to register a trademark or service mark within
30 days after any such filing.
 
 
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6.9      Litigation Cooperation. From the date hereof and continuing through the
termination of this Agreement, make available to Bank, without expense to Bank,
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Bank may deem them reasonably necessary to prosecute
or defend any third-party suit or proceeding instituted by or against Bank with
respect to any Collateral or relating to Borrower.
 
6.10   Landlord’s Waivers. Borrower shall deliver to Bank, on or before the date
that is fourteen (14) calendar days from the Effective Date, a fully-executed
landlord’s waiver, in form and substance acceptable to Bank in its reasonable
discretion, with respect to Borrower’s location at 10300 Spotsylvania Avenue,
Suite 220, Fredericksburg, Virginia 22408. Borrower shall use its best efforts
to deliver to Bank, on or before the date that is fourteen (14) calendar days
from the Effective Date, a fully-executed landlord’s waiver, in form and
substance acceptable to Bank in its reasonable discretion, with respect to the
following locations: (a) Jackson Square Office Park, 4701 Carr Drive,
Fredericksburg, Virginia 22408, and (b) Jackson Square Office Park, 4324 Carr
Drive, Fredericksburg, Virginia 22408.
 
6.11   Further Assurances. Borrower shall execute any further instruments and
take further action as Bank reasonably requests to perfect or continue Bank’s
Lien in the Collateral or to effect the purposes of this Agreement.
 
7         NEGATIVE COVENANTS
 
Borrower shall not do any of the following without Bank’s prior written consent,
which consent shall not be unreasonably withheld:
 
7.1     Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively, “Transfer”), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, except for Transfers (a) of Inventory
in the ordinary course of business; (b) of worn-out or obsolete Equipment; and
(c) in connection with Permitted Liens and Permitted Investments. Borrower shall
not enter into an agreement with any Person other than Bank which restricts the
subsequent granting of a security interest in the Intellectual Property.
 
7.2     Changes in Business, Management, Ownership, Control, or Business
Locations. Except as permitted by Section 7.3 hereof, (a) engage in or permit
any of its Subsidiaries to engage in any business other than the businesses
currently engaged in by Borrower and such Subsidiary, as applicable, or
reasonably related thereto; (b) liquidate or dissolve; or (c) (i) have the
departure of any Key Person, or (ii) enter into any transaction or series of
related transactions in which the stockholders of Borrower immediately prior to
the first such transaction own less than 50% of the voting stock of Borrower
immediately after giving effect to such transaction or related series of such
transactions (other than by the sale of Borrower’s equity securities in a public
offering or to venture capital investors so long as Borrower identifies to Bank
the venture capital investors prior to the closing of the transaction). Borrower
shall not, without at least thirty (30) days prior written notice to Bank:
(1) add any new offices or business locations, including warehouses (unless such
new offices or business locations contain less than Ten Thousand Dollars
($10,000.00) in Borrower’s assets or property), (2) change its jurisdiction of
organization, (3) change its organizational structure or type, (4) change its
legal name, or (5) change any organizational number (if any) assigned by its
jurisdiction of organization.
 
7.3     Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person. A Subsidiary may merge or
consolidate into another Subsidiary or into Borrower.
 
 
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7.4     Indebtedness. Create, incur, assume, or be liable for any Indebtedness,
or permit any Subsidiary to do so, other than Permitted Indebtedness.
 
7.5     Encumbrance. Create, incur, or allow any Lien on any of its property, or
assign or convey any right to receive income, including the sale of any
Accounts, or permit any of its Subsidiaries to do so, except for Permitted
Liens, or permit any Collateral not to be subject to the first priority security
interest granted herein,or enter into any agreement, document, instrument or
other arrangement (except with or in favor of Bank) with any Person which
directly or indirectly prohibits or has the effect of prohibiting Borrower or
any Subsidiary from assigning, mortgaging, pledging, granting a security
interest in or upon, or encumbering any of Borrower’s or any Subsidiary’s
intellectual property, except as is otherwise permitted in Section 7.1 hereof
and the definition of “Permitted Lien” herein.
 
7.6     Maintenance of Collateral Accounts. Maintain any Collateral Account
except pursuant to the terms of Section 6.6(b) hereof.
 
7.7     Distributions; Investments. (a) Directly or indirectly make any
Investment other than Permitted Investments, or permit any of its Subsidiaries
to do so; or (b) pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock. Borrower may repurchase the stock
of former employees or consultants pursuant to stock repurchase agreements so
long as an Event of Default does not exist at the time of such repurchase and
would not exist after giving effect to such repurchase, provided such repurchase
does not exceed in the aggregate of $200,000 per fiscal year.
 
7.8     Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower, except
for transactions that are in the ordinary course of Borrower’s business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm’s length transaction with a non-affiliated Person.
Notwithstanding the foregoing, the Borrower may not make any direct or indirect
payment, transfer or other distribution to Markland, except for (a) loan
payments to Markland made in accordance with the Disclosure Schedule, (b)
payments to Markland pursuant to the Stockholder Agreement in effect on the
Effective Date and as set forth on the Disclosure Schedule, and (c) payments for
services rendered by Markland in the ordinary course of business, provided,
that, in the case of (a) through (b) above, Borrower provides prior written
notice to Bank within thirty (30) days of any such payment, which notice
contains the amount of such payment, the purpose of such payment, and a specific
reference to this Section 7.8, and provided further, that, in the case of (a)
through (c) above, no Event of Default exists or would result at any time after
giving effect to such transaction, either immediately or solely as a result of
the passage of time.
 
7.9     Subordinated Debt. Make or permit any payment on any Subordinated Debt,
except under the terms of the Subordinated Debt or amend any provision in any
document relating to the Subordinated Debt, without Bank’s prior written
consent.
 
7.10   Compliance. Become an “investment company” or a company controlled by an
“investment company”, under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock (as defined in Regulation U of the Board of Governors of the Federal
Reserve System), or use the proceeds of any Credit Extension for that purpose;
fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply
with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could reasonably be expected to have a material
adverse effect on Borrower’s business, or permit any of its Subsidiaries to do
so; withdraw or permit any Subsidiary to withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any present pension, profit sharing and deferred compensation
plan which could reasonably be expected to result in any liability of Borrower,
including any liability to the Pension Benefit Guaranty Corporation or its
successors or any other governmental agency.
 
8         EVENTS OF DEFAULT
 
Any one of the following shall constitute an event of default (an “Event of
Default”) under this Agreement:
 
 
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8.1     Payment Default. Borrower fails to (a) make any payment of principal or
interest on any Credit Extension on its due date, or (b) pay any other
Obligations within three (3) Business Days after such Obligations are due and
payable (which three day grace period will not apply to payments due on the
Maturity Date). During the cure period, the failure to cure the payment default
is not an Event of Default (but no Credit Extension will be made during the cure
period);
 
8.2     Covenant Default.
 
(a)    Borrower fails or neglects to perform any obligation in Sections 6.2,
6.6, 6.7 or violates any covenant in Section 7; or
 
(b)    Borrower fails or neglects to perform, keep, or observe any other term,
provision, condition, covenant or agreement contained in this Agreement, any
Loan Documents, and as to any default (other than those specified in this
Section 8 below) under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure the default within ten (10) days
after the occurrence thereof; provided, however, that if the default cannot by
its nature be cured within the ten (10) day period or cannot after diligent
attempts by Borrower be cured within such ten (10) day period, and such default
is likely to be cured within a reasonable time, then Borrower shall have an
additional period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the failure
to cure the default shall not be deemed an Event of Default (but no Credit
Extensions shall be made during such cure period). Grace periods provided under
this section shall not apply, among other things, to financial covenants or any
other covenants set forth in subsection (a) above;
 
8.3     Material Adverse Change. A Material Adverse Change occurs;
 
8.4     Attachment. (a) Any material portion of Borrower’s assets is attached,
seized, levied on, or comes into possession of a trustee or receiver and the
attachment, seizure or levy is not removed in ten (10) days; (b) the service of
process upon Bank (or Bank’s Affiliate) seeking to attach, by trustee or similar
process, any funds of, or of any entity under control of Borrower (including a
Subsidiary) on deposit with the Bank; (c) Borrower is enjoined, restrained, or
prevented by court order from conducting a material part of its business; (d) a
judgment or other claim in excess of One Hundred Thousand Dollars ($100,000.00)
becomes a Lien on any of Borrower’s assets; or (e) a notice of lien, levy, or
assessment is filed against any of Borrower’s assets by any government agency
and not paid within ten (10) days after Borrower receives notice. These are not
Events of Default if stayed or if a bond is posted pending contest by Borrower
(but no Credit Extensions shall be made during the cure period);
 
8.5     Insolvency (a) Borrower is unable to pay its debts (including trade
debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an
Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower
and not dismissed or stayed within thirty (30) days (but no Credit Extensions
shall be made while of any of the conditions described in clause (a) exist
and/or until any Insolvency Proceeding is dismissed);
 
8.6     Other Agreements. There is a default in any agreement to which Borrower
or any Guarantor is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000.00) or that could have a material adverse effect on Borrower’s
or any Guarantor’s business;
 
8.7     Judgments. A judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least One Hundred Thousand
Dollars ($100,000.00) (not covered by independent third-party insurance) shall
be rendered against Borrower and shall remain unsatisfied and unstayed for a
period of ten (10) days after the entry thereof (provided that no Credit
Extensions will be made prior to the satisfaction or stay of such judgment);
 
8.8     Misrepresentations. Borrower or any Person acting for Borrower makes any
representation, warranty, or other statement now or later in this Agreement, any
Loan Document or in any writing delivered to Bank or to induce Bank to enter
this Agreement or any Loan Document, and such representation, warranty, or other
statement is incorrect in any material respect when made;
 
8.9     Subordinated Debt. A default or breach occurs under any agreement
between Borrower and any creditor of Borrower that signed a subordination,
intercreditor, or other similar agreement with Bank, or any creditor that has
signed such an agreement with Bank breaches any terms of such agreement; or
 
 
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8.10     Guaranty. (a) Any guaranty of any Obligations terminates or ceases for
any reason to be in full force and effect except pursuant to its terms as agreed
to by Bank in writing; (b) any Guarantor does not perform any obligation or
covenant under any guaranty of the Obligations; (c) any circumstance described
in Sections 8.4, 8.5, 8.7, or 8.8. occurs with respect to any Guarantor, (d) the
liquidation, winding up, or termination of existence of any Guarantor; or
(e) (i) a material impairment in the perfection or priority of Bank’s Lien in
the collateral provided by Guarantor or in the value of such collateral or
(ii) a material adverse change in the prospect of repayment of the Obligations
occurs with respect to any Guarantor.
 
        8.11     Receivables Loan and Security Agreement. An Event of Default
(as such term is defined in the  Receivables Loan and Security Agreement) occurs
under the Receivables Loan and Security Agreement.
 
9    BANK’S RIGHTS AND REMEDIES
 
9.1        Rights and Remedies. While an Event of Default occurs and continues
Bank may, without notice or demand, do any or all of the following:
 
  (a)    declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Bank);
 
  (b)    stop advancing money or extending credit for Borrower’s benefit under
this Agreement or under any other agreement between Borrower and Bank;
 
   (c)    demand that Borrower (i) deposit cash with Bank in an amount equal to
the aggregate amount of any letters of credit remaining undrawn, as collateral
security for the repayment of any future drawings under such letters of credit,
and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in
advance all letter of credit fees scheduled to be paid or payable over the
remaining term of any letters of credit;
 
  (d)    settle or adjust disputes and claims directly with Account Debtors for
amounts on terms and in any order that Bank considers advisable, notify any
Person owing Borrower money of Bank’s security interest in such funds, and
verify the amount of such account;
 
  (e)    make any payments and do any acts it considers necessary or reasonable
to protect the Collateral and/or its security interest in the Collateral.
Borrower shall assemble the Collateral if Bank requests and make it available as
Bank designates. Bank may enter premises where the Collateral is located, take
and maintain possession of any part of the Collateral, and pay, purchase,
contest, or compromise any Lien which appears to be prior or superior to its
security interest and pay all expenses incurred. Borrower grants Bank a license
to enter and occupy any of its premises, without charge, to exercise any of
Bank’s rights or remedies;
 
  (f)    apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the account
of Borrower;
 
  (g)    ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral. Bank is hereby granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower’s labels, patents, copyrights, mask works, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank’s exercise of its rights under this Section, Borrower’s
rights under all licenses and all franchise agreements inure to Bank’s benefit;
 
  (h)   place a “hold” on any account maintained with Bank and/or deliver a
notice of exclusive control, any entitlement order, or other directions or
instructions pursuant to any Control Agreement or similar agreements providing
control of any Collateral;
 
  (i)    demand and receive possession of Borrower’s Books; and
 
  (j)    exercise all rights and remedies available to Bank under the Loan
Documents or at law or equity, including all remedies provided under the Code
(including disposal of the Collateral pursuant to the terms thereof).
 
 
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9.2        Power of Attorney. Borrower hereby irrevocably appoints Bank as its
lawful attorney-in-fact, exercisable upon the occurrence and during the
continuance of an Event of Default, to: (a) endorse Borrower’s name on any
checks or other forms of payment or security; (b) sign Borrower’s name on any
invoice or bill of lading for any Account or drafts against Account Debtors; (c)
settle and adjust disputes and claims about the Accounts directly with Account
Debtors, for amounts and on terms Bank determines reasonable; (d) make, settle,
and adjust all claims under Borrower’s insurance policies; (e) pay, contest or
settle any Lien, charge, encumbrance, security interest, and adverse claim in or
to the Collateral, or any judgment based thereon, or otherwise take any action
to terminate or discharge the same; and (f) transfer the Collateral into the
name of Bank or a third party as the Code permits. Borrower hereby appoints Bank
as its lawful attorney-in-fact to sign Borrower’s name on any documents
necessary to perfect or continue the perfection of Bank’s security interest in
the Collateral regardless of whether an Event of Default has occurred until all
Obligations have been satisfied in full and Bank is under no further obligation
to make Credit Extensions hereunder. Bank’s foregoing appointment as Borrower’s
attorney in fact, and all of Bank’s rights and powers, coupled with an interest,
are irrevocable until all Obligations have been fully repaid and performed and
Bank’s obligation to provide Credit Extensions terminates.
 
9.3        Accounts Verification; Collection. Whether or not an Event of Default
has occurred and is continuing, Bank may notify any Person owing Borrower money
of Bank’s security interest in such funds and verify the amount of such account.
After the occurrence of an Event of Default and while it is continuing, any
amounts received by Borrower shall be held in trust by Borrower for Bank, and,
if requested by Bank, Borrower shall immediately deliver such receipts to Bank
in the form received from the Account Debtor, with proper endorsements for
deposit.
 
9.4        Protective Payments. If Borrower fails to obtain the insurance called
for by Section 6.5 or fails to pay any premium thereon or fails to pay any other
amount which Borrower is obligated to pay under this Agreement or any other Loan
Document, Bank may obtain such insurance or make such payment, and all amounts
so paid by Bank are Bank Expenses and immediately due and payable, bearing
interest at the then highest applicable rate, and secured by the Collateral.
Bank will make reasonable efforts to provide Borrower with notice of Bank
obtaining such insurance at the time it is obtained or within a reasonable time
thereafter. No payments by Bank are deemed an agreement to make similar payments
in the future or Bank’s waiver of any Event of Default.
 
9.5        Application of Payments and Proceeds. Unless an Event of Default has
occurred and is continuing, Bank shall apply any funds in its possession,
whether from Borrower account balances, payments, or proceeds realized as the
result of any collection of Accounts or other disposition of the Collateral,
first, to Bank Expenses, including without limitation, the reasonable costs,
expenses, liabilities, obligations and attorneys’ fees incurred by Bank in the
exercise of its rights under this Agreement; second, to the interest due upon
any of the Obligations; and third, to the principal of the Obligations and any
applicable fees and other charges, in such order as Bank shall determine in its
sole discretion. Any surplus shall be paid to Borrower or other Persons legally
entitled thereto; Borrower shall remain liable to Bank for any deficiency. If an
Event of Default has occurred and is continuing, Bank may apply any funds in its
possession, whether from Borrower account balances, payments, proceeds realized
as the result of any collection of Accounts or other disposition of the
Collateral, or otherwise, to the Obligations in such order as Bank shall
determine in its sole discretion. Any surplus shall be paid to Borrower or other
Persons legally entitled thereto; Borrower shall remain liable to Bank for any
deficiency. If Bank, in its good faith business judgment, directly or indirectly
enters into a deferred payment or other credit transaction with any purchaser at
any sale of Collateral, Bank shall have the option, exercisable at any time, of
either reducing the Obligations by the principal amount of the purchase price or
deferring the reduction of the Obligations until the actual receipt by Bank of
cash therefor.
 
9.6        Bank’s Liability for Collateral. So long as Bank complies with
reasonable banking practices regarding the safekeeping of the Collateral in the
possession or under the control of Bank, Bank shall not be liable or responsible
for: (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other Person. Borrower bears
all risk of loss, damage or destruction of the Collateral.
 
9.7        No Waiver; Remedies Cumulative. Bank’s failure, at any time or times,
to require strict performance by Borrower of any provision of this Agreement or
any other Loan Document shall not waive, affect, or diminish any right of Bank
thereafter to demand strict performance and compliance herewith or therewith. No
waiver hereunder shall be effective unless signed by Bank and then is only
effective for the specific instance and purpose for which it is given. Bank’s
rights and remedies under this Agreement and the other Loan Documents are
cumulative. Bank has all rights and remedies provided under the Code, by law, or
in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s
waiver of any Event of Default is not a continuing waiver. Bank’s delay in
exercising any remedy is not a waiver, election, or acquiescence.
 
 
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9.8        Demand Waiver. Borrower waives demand, notice of default or dishonor,
notice of payment and nonpayment, notice of any default, nonpayment at maturity,
release, compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
 
10         NOTICES
 
All notices, consents, requests, approvals, demands, or other communication by
any party to this Agreement or any other Loan Document must be in writing and
shall be deemed to have been validly served, given, or delivered: (a) upon the
earlier of actual receipt and three (3) Business Days after deposit in the U.S.
mail, first class, registered or certified mail return receipt requested, with
proper postage prepaid; (b) upon transmission, when sent by electronic mail or
facsimile transmission; (c) one (1) Business Day after deposit with a reputable
overnight courier with all charges prepaid; or (d) when delivered, if
hand-delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address, facsimile number, or email address indicated
below. Bank or Borrower may change its address or facsimile number by giving the
other party written notice thereof in accordance with the terms of this Section
10.
 
If to Borrower:       Technest Holdings, Inc.
 1 McKinley Square, 5th Floor
 Boston, Massachusetts 02109
 Attn: Co-General Counsel
 Fax: (617) 722-9809
 Email: soconnor@technestinc.com

 E-OIR Technologies, Inc.
 10300 Spotsvlvania Ave., Suite 220
 Fredericksburg, Virginia 22408
 Attn: Co-General Counsel
 Fax:  (540) 834-4889
 Email: soconnor@technestinc.com

 Genex Technologies Incorporated
 10411 Motor City Drive, Suite 650
 Bethesda, Maryland 20817
 Attn: Co-General Counsel
 Fax: (301) 767-2811
 Email: soconnor@technestinc.com

 
If to Bank:          Silicon Valley Bank
One Newton Executive Park, Suite 200
2221 Washington Street
Newton, Massachusetts 02462
Attn: Mr. Michael Tramack
Fax: (617) 969-5962
Email:  mtramack@svb.com
 

 
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with a copy to:                      Riemer & Braunstein LLP
Three Center Plaza
Boston, Massachusetts 02108
Attn: David A. Ephraim, Esquire
Fax: (617) 880-3456
Email: DEphraim@riemerlaw.com
 
 
 
 
 
 
 
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CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER AND JUDICIAL REFERENCE
 
Massachusetts law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Massachusetts; provided, however, that if for
any reason Bank cannot avail itself of such courts in the Commonwealth of
Massachusetts, Borrower accepts jurisdiction of the courts and venue in Santa
Clara County, California. NOTWITHSTANDING THE FOREGOING, BANK SHALL HAVE THE
RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE
COURTS OF ANY OTHER JURISDICTION WHICH BANK DEEMS NECESSARY OR APPROPRIATE IN
ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE BANK’S RIGHTS AGAINST
BORROWER OR ITS PROPERTY.
 
TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH WAIVE THEIR
RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED
UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION,
INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A
MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY
HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
 
12    GENERAL PROVISIONS
 
12.1        Successors and Assigns. This Agreement binds and is for the benefit
of the successors and permitted assigns of each party. Borrower may not assign
this Agreement or any rights or obligations under it without Bank’s prior
written consent (which may be granted or withheld in Bank’s discretion). Bank
has the right, without the consent of or notice to Borrower, to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank’s obligations, rights, and benefits under this Agreement and the other Loan
Documents.
 
12.2        Indemnification. Borrower agrees to indemnify, defend and hold Bank
and its directors, officers, employees, agents, attorneys, or any other Person
affiliated with or representing Bank harmless against: (a) all obligations,
demands, claims, and liabilities (collectively, “Claims”) asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses incurred, or paid by Bank from, following,
or arising from transactions between Bank and Borrower (including reasonable
attorneys’ fees and expenses), except for Claims and/or losses directly caused
by Bank’s gross negligence or willful misconduct.
 
12.3        Time of Essence. Time is of the essence for the performance of all
Obligations in this Agreement.
 
12.4        Severability of Provisions. Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.
 
12.5        Amendments in Writing; Integration. All amendments to this Agreement
must be in writing signed by both Bank and Borrower. This Agreement and the Loan
Documents represent the entire agreement about this subject matter and supersede
prior negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement and the Loan Documents merge into this
Agreement and the Loan Documents.
 
12.6        Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, are an original, and all taken together, constitute
one Agreement.
 
12.7        Survival. All covenants, representations and warranties made in this
Agreement continue in full force until this Agreement has terminated pursuant to
its terms and all Obligations (other than inchoate indemnity obligations and any
other obligations which, by their terms, are to survive the termination of this
Agreement) have been satisfied. The obligation of Borrower in Section 12.2 to
indemnify Bank shall survive until the statute of limitations with respect to
such claim or cause of action shall have run.
 
 
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12.8        Confidentiality. In handling any confidential information, Bank
shall exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (a) to Bank’s
Subsidiaries or Affiliates; (b) to prospective transferees or purchasers of any
interest in the Credit Extensions (provided, however, Bank shall use
commercially reasonable efforts to obtain such prospective transferee’s or
purchaser’s agreement to the terms of this provision); (c) as required by law,
regulation, subpoena, or other order; (d) to Bank’s regulators or as otherwise
required in connection with Bank’s examination or audit; and (e) as Bank
considers appropriate in exercising remedies under this Agreement. Confidential
information does not include information that either: (i) is in the public
domain or in Bank’s possession when disclosed to Bank, or becomes part of the
public domain after disclosure to Bank; or (ii) is disclosed to Bank by a third
party, if Bank does not know that the third party is prohibited from disclosing
the information.
 
12.9        Borrower Liability. Any Borrower may, acting singly, request
Advances hereunder. Each Borrower hereby appoints the other as agent for the
other for all purposes hereunder, including with respect to requesting Advances
hereunder. Each Borrower hereunder shall be obligated to repay all Advances made
hereunder, regardless of which Borrower actually receives said Advance, as if
each Borrower hereunder directly received all Advances. Each Borrower waives any
suretyship defenses available to it under the Code or any other applicable law.
Each Borrower waives any right to require Bank to: (i) proceed against any
Borrower or any other person; (ii) proceed against or exhaust any security; or
(iii) pursue any other remedy. Bank may exercise or not exercise any right or
remedy it has against any Borrower or any security it holds (including the right
to foreclose by judicial or non-judicial sale) without affecting any Borrower’s
liability. Notwithstanding any other provision of this Agreement or other
related document, each Borrower irrevocably waives all rights that it may have
at law or in equity (including, without limitation, any law subrogating Borrower
to the rights of Bank under this Agreement) to seek contribution,
indemnification or any other form of reimbursement from any other Borrower, or
any other Person now or hereafter primarily or secondarily liable for any of the
Obligations, for any payment made by Borrower with respect to the Obligations in
connection with this Agreement or otherwise and all rights that it might have to
benefit from, or to participate in, any security for the Obligations as a result
of any payment made by Borrower with respect to the Obligations in connection
with this Agreement or otherwise. Any agreement providing for indemnification,
reimbursement or any other arrangement prohibited under this Section shall be
null and void. If any payment is made to a Borrower in contravention of this
Section, such Borrower shall hold such payment in trust for Bank and such
payment shall be promptly delivered to Bank for application to the Obligations,
whether matured or unmatured.
 
12.10       Right of Set Off. Borrower hereby grants to Bank, a lien, security
interest and right of set off as security for all Obligations to Bank, whether
now existing or hereafter arising upon and against all deposits, credits,
collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of Bank
(including a Bank subsidiary) or in transit to any of them. At any time after
the occurrence and during the continuance of an Event of Default, without demand
or notice, Bank may set off the same or any part thereof and apply the same to
any liability or obligation of Borrower even though unmatured and regardless of
the adequacy of any other collateral securing the Obligations. ANY AND ALL
RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY
OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF
SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER ARE
HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
 
13    DEFINITIONS
 
13.1        Definitions. As used in this Agreement, the following terms have the
following meanings:
 
“Account” is any “account” as defined in the Code with such additions to such
term as may hereafter be made, and includes, without limitation, all accounts
receivable and other sums owing to Borrower.
 
“Account Debtor” is any “account debtor” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Affiliate” of any Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person’s senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person’s managers and members.
 
“Agreement” is defined in the preamble hereof.
 
 
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“Bank” is defined in the preamble hereof.
 
“Bank Expenses” are all audit fees and expenses, costs, and expenses (including
reasonable attorneys’ fees and expenses) for preparing, negotiating,
administering, defending and enforcing the Loan Documents (including, without
limitation, those incurred in connection with appeals or Insolvency Proceedings)
or otherwise incurred with respect to Borrower.
 
“Board” is Borrower’s board of directors.
 
“Borrower” is defined in the preamble hereof
 
“Borrower’s Books” are all Borrower’s books and records including ledgers,
federal and state tax returns, records regarding Borrower’s assets or
liabilities, the Collateral, business operations or financial condition, and all
computer programs or storage or any equipment containing such information.
 
“Borrowing Resolutions” are, with respect to any Person, those resolutions
adopted by such Person’s Board and delivered by such Person to Bank approving
the Loan Documents to which such Person is a party and the transactions
contemplated thereby, together with a certificate executed by its secretary on
behalf of such Person certifying that (a) such Person has the authority to
execute, deliver, and perform its obligations under each of the Loan Documents
to which it is a party, (b) that attached as Exhibit A to such certificate is a
true, correct, and complete copy of the resolutions then in full force and
effect authorizing and ratifying the execution, delivery, and performance by
such Person of the Loan Documents to which it is a party, (c) the name(s) of the
Person(s) authorized to execute the Loan Documents on behalf of such Person,
together with a sample of the true signature(s) of such Person(s), and (d) that
Bank may conclusively rely on such certificate unless and until such Person
shall have delivered to Bank a further certificate canceling or amending such
prior certificate.
 
“Business Day” is any day that is not a Saturday, Sunday or a day on which Bank
is closed.
 
“Cash Equivalents” means (a) marketable direct obligations issued or
unconditionally guaranteed by the United States or any agency or any State
thereof having maturities of not more than one (1) year from the date of
acquisition; (b) commercial paper maturing no more than one (1) year after its
creation and having the highest rating from either Standard & Poor’s Ratings
Group or Moody’s Investors Service, Inc., (c) Bank’s certificates of deposit
issued maturing no more than one (1) year after issue; and (d) money market
funds at least ninety-five percent (95%) of the assets of which constitute Cash
Equivalents of the kinds described in clauses (a) through (c) of this
definition.
 
“Code” is the Uniform Commercial Code, as the same may, from time to time, be
enacted and in effect in the Commonwealth of Massachusetts; provided, that, to
the extent that the Code is used to define any term herein or in any Loan
Document and such term is defined differently in different Articles or Divisions
of the Code, the definition of such term contained in Article or Division 9
shall govern; provided further, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection, or priority of, or
remedies with respect to, Bank’s Lien on any Collateral is governed by the
Uniform Commercial Code in effect in a jurisdiction other than the Commonwealth
of Massachusetts, the term “Code” shall mean the Uniform Commercial Code as
enacted and in effect in such other jurisdiction solely for purposes on the
provisions thereof relating to such attachment, perfection, priority, or
remedies and for purposes of definitions relating to such provisions.

“Collateral” is any and all properties, rights and assets of Borrower described
on Exhibit A.
 
“Collateral Account” is any Deposit Account, Securities Account, or Commodity
Account.
 
“Commitment Termination Date” is for each Term Advance, the first day of the
month that is the thirty-sixth month after the month in which such Term Advance
was made.
 
“Commodity Account” is any “commodity account” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Compliance Certificate” is that certain certificate in the form attached hereto
as Exhibit C.
 
 
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“Contingent Obligation” is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (a) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation directly
or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by
that Person, or for which that Person is directly or indirectly liable; (b) any
obligations for undrawn letters of credit for the account of that Person; and
(c) all obligations from any interest rate, currency or commodity swap
agreement, interest rate cap or collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; but “Contingent Obligation”
does not include endorsements in the ordinary course of business. The amount of
a Contingent Obligation is the stated or determined amount of the primary
obligation for which the Contingent Obligation is made or, if not determinable,
the maximum reasonably anticipated liability for it determined by the Person in
good faith; but the amount may not exceed the maximum of the obligations under
any guarantee or other support arrangement.
 
“Control Agreement” is any control agreement entered into among the depository
institution at which Borrower maintains a Deposit Account or the securities
intermediary or commodity intermediary at which Borrower (or Guarantor, with
respect to the assets subject to the Stock Pledge Agreement) maintains a
Securities Account or a Commodity Account, Borrower, and Bank pursuant to which
Bank obtains control (within the meaning of the Code) over such Deposit Account,
Securities Account, or Commodity Account.
 
“Credit Extension” is any Term Loan, or any other extension of credit by Bank
for Borrower’s benefit.
 
“Current Liabilities” are all obligations and liabilities of Borrower to Bank
under the Receivables Loan and Security Agreement, plus, without duplication,
the aggregate amount of Borrower’s Total Liabilities that mature within one (1)
year (including the current portion of the Term Loan Obligations), but excluding
Subordinated Debt for borrowed money from Affiliates.
 
“Default” means any event which with notice or passage of time or both, would
constitute an Event of Default.
 
“Default Rate” is defined in Section 2.2(b).
 
“Deferred Revenue” is all amounts received or invoiced in advance of performance
under contracts and not yet recognized as revenue.
 
“Deposit Account” is any “deposit account” as defined in the Code with such
additions to such term as may hereafter be made.
 
“Designated Deposit Account” is Borrower’s deposit account, account number
_____________, maintained with Bank.
 
“Disclosure Schedule” is that certain schedule, in form reasonably acceptable to
Bank, attached hereto as Exhibit D.
 
“Dollars,” “dollars” and “$” each mean lawful money of the United States.
 
“EBITDA” shall mean earnings before interest, taxes, depreciation and
amortization.
 
“Effective Date” is defined in the preamble of this Agreement.
 
“Eligible Accounts” are those accounts receivable owing to the Borrower that are
not more than ninety (90) days from their respective invoice dates.
 
“Equipment” is all “equipment” as defined in the Code with such additions to
such term as may hereafter be made, and includes without limitation all
machinery, fixtures, goods, vehicles (including motor vehicles and trailers),
and any interest in any of the foregoing.
 
“ERISA” is the Employee Retirement Income Security Act of 1974, and its
regulations.
 
“Event of Default” is defined in Section 8.
 
 
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“Facility Fee” is defined in Section 2.3(a).
 
“Fixed Charge Coverage Ratio” means the result of dividing (i) Borrower’s
EBITDA, plus non-cash stock compensation expenses and other non-cash expenses as
reasonably determined  by Borrower and allowed by Bank, by (ii) the sum of
Borrower’s principal and interest payments on all debt, cash taxes, dividends
and unfunded capital expenditures (not including amounts paid to Markland
pursuant to clause (c) of Section 7.8).
 
“Funding Date” is any date on which a Credit Extension is made to or on account
of Borrower which shall be a Business Day.
 
“GAAP” is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other Person as
may be approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination.
 
“General Intangibles” is all “general intangibles” as defined in the Code in
effect on the date hereof with such additions to such term as may hereafter be
made, and includes without limitation, all copyright rights, copyright
applications, copyright registrations and like protections in each work of
authorship and derivative work, whether published or unpublished, any patents,
trademarks, service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, any trade secret rights,
including any rights to unpatented inventions, payment intangibles, royalties,
contract rights, goodwill, franchise agreements, purchase orders, customer
lists, route lists, telephone numbers, domain names, claims, income and other
tax refunds, security and other deposits, options to purchase or sell real or
personal property, rights in all litigation presently or hereafter pending
(whether in contract, tort or otherwise), insurance policies (including without
limitation key man, property damage, and business interruption insurance),
payments of insurance and rights to payment of any kind.
 
“Guarantor” is any present or future guarantor of the Obligations, including
Markland.
 
“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations, and (d)
Contingent Obligations.
 
"Initial Audit" shall be the receipt by Bank of the results of a complete audit
of Borrower's Accounts, with results satisfactory to Bank in its sole and
absolute discretion.
 
“Initial Term Advance” is defined in Section 2.1.1(a).
 
“Insolvency Proceeding” is any proceeding by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
 
“Inventory” is all “inventory” as defined in the Code in effect on the date
hereof with such additions to such term as may hereafter be made, and includes
without limitation all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products, including without
limitation such inventory as is temporarily out of Borrower’s custody or
possession or in transit and including any returned goods and any documents of
title representing any of the above.
 
“Investment” is any beneficial ownership interest in any Person (including
stock, partnership interest or other securities), and any loan, advance or
capital contribution to any Person.
 
“IP Agreement” is that certain Intellectual Property Security Agreement executed
and delivered by Borrower to Bank dated as of the Effective Date.
 
“Key Person” shall mean the Chief Financial Officer or the Chief Executive
Officer.
 
“Lien” is a mortgage, lien, deed of trust, charge, pledge, security interest or
other encumbrance.
 
 
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“Loan Documents” are, collectively, this Agreement, the Warrant, the Perfection
Certificate, the IP Agreement, the Subordination Agreement, any note, or notes
or guaranties executed by Borrower or any Guarantor, and any other present or
future agreement between Borrower any Guarantor and/or for the benefit of Bank
in connection with this Agreement, all as amended, restated, or otherwise
modified.
 
“Markland” is Markland Technologies, Inc., a Florida corporation and the parent
company of Technest.
 
“Material Adverse Change” is (a) a material impairment in the perfection or
priority of Bank’s Lien in the Collateral or in the value of such Collateral;
(b) a material adverse change in the business, operations, or condition
(financial or otherwise) of Borrower; or (c) a material impairment of the
prospect of repayment of any portion of the Obligations; or (d) Bank determines,
based upon information available to it and in its reasonable judgment, that
there is a reasonable likelihood that Borrower shall fail to comply with one or
more of the financial covenants in Section 6 during the next succeeding
financial reporting period.
 
“Obligations” are Borrower’s obligation to pay when due any debts, principal,
interest, Bank Expenses and other amounts Borrower owes Bank now or later,
whether under this Agreement, the Loan Documents, or otherwise, including,
without limitation, all obligations relating to letters of credit, cash
management services, and foreign exchange contracts, if any, and including
interest accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank, and the performance of Borrower’s
duties under the Loan Documents.
 
“Operating Documents” are, for any Person, such Person’s formation documents, as
certified with the Secretary of State of such Person’s state of formation on a
date that is no earlier than 30 days prior to the Effective Date, and, its
bylaws in current form, each of the foregoing with all current amendments or
modifications thereto.
 
“Payment/Advance Form” is that certain form attached hereto as Exhibit B.
 
“Perfection Certificate” is defined in Section 5.1.
 
“Permitted Indebtedness” is:
 
(a)    Borrower’s Indebtedness to Bank under this Agreement and the other Loan
Documents;
 
(b)    Indebtedness existing on the Effective Date and shown on the Perfection
Certificate;
 
(c)    Subordinated Debt;
 
(d)   unsecured Indebtedness to trade creditors incurred in the ordinary course
of business;

(e)    Indebtedness secured by Permitted Liens; and

(f)    extensions, refinancings, modifications, amendments and restatements of
any items of Permitted Indebtedness (a) through (e) above, provided that the
principal amount thereof is not increased or the terms thereof are not modified
to impose more burdensome terms upon Borrower or its Subsidiary, as the case may
be.
 
“Permitted Investments” are:
 
(a)    Investments shown on the Perfection Certificate and existing on the
Effective Date; and
 
(b)    Cash Equivalents.
 
“Permitted Liens” are:
 
(a)    Liens existing on the Effective Date and shown on the Perfection
Certificate or arising under this Agreement and the other Loan Documents;
 
(b)    Liens for taxes, fees, assessments or other government charges or levies,
either not delinquent or being contested in good faith and for which Borrower
maintains adequate reserves on its Books, if they have no priority over any of
Bank’s Liens;
 
 
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(c)    purchase money Liens (i) on Equipment acquired or held by Borrower
incurred for financing the acquisition of the Equipment securing no more than
One Hundred Thousand Dollars ($100,000.00) in the aggregate amount outstanding,
or (ii) existing on Equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the Equipment;
 
(d)    Leases or subleases and non-exclusive licenses or sublicenses granted in
the ordinary course of Borrower’s business, if the leases, subleases, licenses
and sublicenses permit granting Bank a first perfected security interest;
 
(e)    Liens under Article 2 of the Uniform Commercial Code that are special
property interests in goods identified as goods to which a contract refers;
 
(f)    Pledges of or liens on manufactured products as security for any drafts
or bills of exchange drawn in connection with the importation of such
manufactured products in the ordinary course of business; and
 
(g)    Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (f), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
 
“Person” is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
 
“Prepayment Fee” is defined in Section 2.1.1(c).
 
“Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not
Bank’s lowest rate.
 
“Quick Assets” is, on any date, Borrower’s consolidated, unrestricted cash at
the Bank, Cash Equivalents and net billed accounts receivable determined
according to GAAP.
 
“Receivables Loan and Security Agreement” is that certain Loan and Security
Agreement (Working Capital Line of Credit) by and between Borrower and Bank as
of even date herewith, as amended from time to time.
 
“Registered Organization” is any “registered organization” as defined in the
Code with such additions to such term as may hereafter be made.
 
“Responsible Officer” is any of the Chief Executive Officer, President, Chief
Financial Officer and Controller of Borrower.
 
“Scheduled Payments” is defined in Section 2.1.1(b).
 
“Second Term Advance” is defined in Section 2.1.1(a).
 
“Second Term Advance Scheduled Payments” is defined in Section 2.1.1(b).
 
“Securities Account” is any “securities account” as defined in the Code with
such additions to such term as may hereafter be made.
 
“Settlement Agreement” is that certain Settlement Agreement and Release between
Joseph R. Moulton, Sr, EOIR and Technest, and dated as of the Effective Date.
 
“Stock Pledge Agreement” is that certain Stock Pledge Agreement of even date
herewith by and among Bank and Guarantor in which Guarantor pledges to Bank
certain stock of Technest with a market value of at least $6,000,000.00 as of
the Effective Date. Such Stock Pledge Agreement shall terminate in two (2) years
from the Effective Date if no Event of Default has occurred and is continuing
hereunder.
 
“Stockholder Agreement” is that certain Stockholder Agreement by and among
Technest and Markland and dated as of March 13, 2006.
 
 
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“Subordinated Debt” is indebtedness incurred by Borrower subordinated to all of
Borrower’s now or hereafter indebtedness to Bank (pursuant to a subordination,
intercreditor, or other similar agreement in form and substance satisfactory to
Bank entered into between Bank and the other creditor), on terms acceptable to
Bank.
 
“Subsidiary” means, with respect to any Person, any Person of which more than
50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by such Person or one or more Affiliates of such Person.
 
“Term Loan” is a loan made by Bank pursuant to the terms of Section 2.1.1
hereof.
 
“Term Loan Amount” is an aggregate amount equal to $4,000,000.00 outstanding at
any time.
 
“Term Loan Payment” is defined in Section 2.1.1(b).
 
“Total Liabilities” is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower’s consolidated balance sheet, including
all Indebtedness.
 
“Transfer” is defined in Section 7.1.
 
“Warrant” is that certain Warrant to Purchase Stock dated as of the Effective
Date executed by Borrower in favor of Bank.
 
[Signature page follows.]
 
 
 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as a sealed instrument under the laws of the Commonwealth of Massachusetts as of
the Effective Date.
 
BORROWER:
 
TECHNEST HOLDINGS, INC.
 

 
By: /s/ Gino Pereira                                        
Name: Gino Pereira                                         
Title: Chief Financial Officer                          
 
E-OIR TECHNOLOGIES, INC.
 
By: /s/ Joseph P. Mackin                              
Name: Joseph P. Mackin                                 
Title: Chief Executive Officer                        
 
GENEX TECHNOLOGIES INCORPORATED
 
By: /s/ Joseph P. Mackin                              
Name: Joseph P. Mackin                                 
Title: Chief Executive Officer                        
BANK:
 
SILICON VALLEY BANK
 
By: /s/ Michael Tramack                               
Name: Michael Tramack                                
Title: Senior Vice President                           
 
 
 
 
 
 
 
[Signature page to Loan and Security Agreement]

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EXHIBIT A

The Collateral consists of all of Borrower’s right, title and interest in and to
the following personal property:
 
All goods, Accounts (including health-care receivables), Equipment, Inventory,
contract rights or rights to payment of money, leases, license agreements,
franchise agreements, General Intangibles, commercial tort claims, documents,
instruments (including any promissory notes), chattel paper (whether tangible or
electronic), cash, deposit accounts, fixtures, letters of credit rights (whether
or not the letter of credit is evidenced by a writing), securities, and all
other investment property, supporting obligations, and financial assets, whether
now owned or hereafter acquired, wherever located; and
 
all Borrower’s Books relating to the foregoing, and any and all claims, rights
and interests in any of the above and all substitutions for, additions,
attachments, accessories, accessions and improvements to and replacements,
products, proceeds and insurance proceeds of any or all of the foregoing.
 

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EXHIBIT B

Loan Payment/Advance Request Form

Deadline for same day processing is Noon E.S.T.* 
 

Fax To:  
Date: _____________________

 
LOAN PAYMENT:
Technest Holdings, Inc.
Genex Technologies Incorporated
E-OIR Technologies, Inc.

From Account #___________________________           To Account
#________________________________
                (Deposit Account #)                   (Loan Account #)
Principal $_______________________________            and/or Interest
$______________________________

Authorized Signature:_____________________             Phone
Number:_______________________________
Print Name/Title:__________________________

 
Loan Advance:

Complete Outgoing Wire Request section below if all or a portion of the funds
from this loan advance are for an outgoing wire.

From Account #___________________________           To Account
#________________________________
                (Deposit Account #)                   (Loan Account #)

Amount of Advance $______________________

All Borrower’s representations and warranties in the Agreement are true, correct
and complete in all material respects on the date of the request for an advance;
provided, however, that such materiality qualifier shall not be applicable to
any representations and warranties that already are qualified or modified by
materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date:

Authorized Signature:_____________________             Phone
Number:_______________________________
Print Name/Title:__________________________

 
Outgoing Wire Request:
Complete only if all or a portion of funds from the loan advance above is to be
wired.
Deadline for same day processing is noon, E.S.T.

Beneficiary Name: ___________________________       Amount of Wire:
$_____________________________
Beneficiary Bank: ____________________________              Account Number:
_____________________________ 
City and State:  

Beneficiary Bank Transit (ABA) #: _______________              Beneficiary Bank
Code (Swift, Sort, Chip, etc.): ________
                                                (For International Wire Only)

Intermediary Bank: ___________________________             Transit (ABA) #:
______________________________ 
For Further Credit to:
_________________________________________________________________________________

Special Instruction:
__________________________________________________________________________________

___________________________________
* Unless otherwise provided for an Advance bearing interest at LIBOR.

 
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By signing below, I (we) acknowledge and agree that my (our) funds transfer
request shall be processed in accordance with and subject to the terms and
conditions set forth in the agreements(s) covering funds transfer service(s),
which agreements(s) were previously received and executed by me (us).

Authorized Signature: ___________________________    2nd Signature (if
required): ___________________________________
Print Name/Title: _______________________________    Print Name/Title:
__________________________________________
Telephone #: __________________________________   Telephone #:
_____________________________________________

 

 
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EXHIBIT C

COMPLIANCE CERTIFICATE

 

TO:   SILICON VALLEY BANK
Date: ____________________________
FROM:    (A) TECHNEST HOLDINGS, INC.
 (B) E-OIR TECHNOLOGIES, INC.
 (C) GENEX TECHNOLOGIES INCORPORATED
 

           
The undersigned authorized officer of Technest Holdings, Inc., E-OIR
Technologies, Inc. and Genex Technologies Incorporated (“Borrower”) certifies
that under the terms and conditions of the Agreement between Borrower and Bank
(the “Agreement”), (1) Borrower is in complete compliance for the period ending
_______________ with all required covenants except as noted below, (2) there are
no Events of Default, (3) all representations and warranties in the Agreement
are true and correct in all material respects on this date except as noted
below; provided, however, that such materiality qualifier shall not be
applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof; and provided, further that those
representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, (4)
Borrower, and each of its Subsidiaries, has timely filed all required tax
returns and reports, and Borrower has timely paid all foreign, federal, state
and local taxes, assessments, deposits and contributions owed by Borrower except
as otherwise permitted pursuant to the terms of Section 5.8 of the Agreement,
and (5) no Liens have been levied or claims made against Borrower or any of its
Subsidiaries relating to unpaid employee payroll or benefits of which Borrower
has not previously provided written notification to Bank. Attached are the
required documents supporting the certification. The undersigned certifies that
these are prepared in accordance with generally GAAP consistently applied from
one period to the next except as explained in an accompanying letter or
footnotes. The undersigned acknowledges that no borrowings may be requested at
any time or date of determination that Borrower is not in compliance with any of
the terms of the Agreement, and that compliance is determined not just at the
date this certificate is delivered. Capitalized terms used but not otherwise
defined herein shall have the meanings given them in the Agreement.
 

Please indicate compliance status by circling Yes/No under “Complies” column.
 
Reporting Covenant
Required
Complies
 
 
 
Monthly financial statements with
Compliance Certificate
Monthly within 30 days
Yes No
Annual financial statement (CPA Audited) + CC
FYE within 120 days
Yes No
10-Q, 10-K and 8-K
Within 5 days after filing with SEC
Yes No
Deferred Revenue Report, Funded Backlog schedules,
A/R & A/P Agings
Monthly within 30 days
Yes No
 
The following Intellectual Property was registered after the Effective Date (if
no registrations, state “None”)
____________________________________________________________________________

 
 
Financial Covenant
Required
Actual
Complies
       
Maintain on a Monthly Basis:
     
Minimum Quick Ratio
_____:1.0
_____:1.0
Yes No
Minimum Fixed Charge Coverage Ratio
_____:1.0
_____:1.0
Yes No

 
 
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The following financial covenant analyses and information set forth in Schedule
1 attached hereto are true and accurate as of the date of this Certificate.

The following are the exceptions with respect to the certification above: (If no
exceptions exist, state “No exceptions to note.”)
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
 

Technest Holdings, Inc.
 
By: ____________________________________
Name: __________________________________
Title: ___________________________________
 
E-OIR Technologies, Inc.
 
By: ____________________________________
Name: __________________________________
Title: ___________________________________
 
Genex Technologies Incorporated
 
By: ____________________________________
Name: __________________________________
Title: ___________________________________
 
BANK USE ONLY
 
Received by: _____________________
authorized signer
Date:  __________________________
 
Verified: ________________________
authorized signer
Date:  __________________________
 
Compliance Status:    Yes  No

 

 
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Schedule 1 to Compliance Certificate

Financial Covenants of Borrower

Dated: ____________________

In the event of a conflict between this Schedule and the Loan Agreement, the
terms of the Loan Agreement shall control.

I.    Quick Ratio (Section 6.7(a))
 
Required: _____:1.00

Actual:

A.
Aggregate value of the unrestricted cash at Bank and cash equivalents of
Borrower
$_______ 
     
B.
Aggregate value of the net billed accounts receivable of Borrower
$_______ 
     
C.
Quick Assets (the sum of lines A and B)
$_______ 
     
D.
Aggregate value of liabilities of Borrower (including all Indebtedness) but
excluding Subordinated Debt permitted by Bank to be paid by Borrower to
Affiliates
 
$_______ 
     
E.
Current Liabilities (line D) 
$_______ 
     
F.
Quick Ratio (line C divided by line E)
 ________ 

Is line F equal to or greater than ___:1:00?

________ No, not in compliance        ________ Yes, in compliance

II.    Fixed Charge Coverage Ratio (See definitions and Section 6.7(b))

Required:    _______

Actual:

A.
Borrower’s EBITDA, plus non-cash stock compensation expenses and other non-cash
expenses as reasonably determined  by Borrower and allowed by Bank
 
$_______
B.
The sum of Borrower’s principal and interest payments on all debt, cash taxes,
dividends and unfunded capital expenditures (not including amounts paid to
Markland pursuant to clause (c) of Section 7.8)
 
$_______
C.
Fixed Charge Coverage Ratio (line A divided by Line B)
  ____:1.00

Is line C less than or equal to ____:1.00?

________ No, not in compliance        ________ Yes, in compliance
 
 

 
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