-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VQx9M8J80qRW/WtNDtc4pXWnDlDUEAAF7gawW4LoRFnBBP9nTXjlp3TZtdnnwmGl qLDaHVN7mZZbFT0obgV+yw== 0000804731-02-000002.txt : 20020415 0000804731-02-000002.hdr.sgml : 20020415 ACCESSION NUMBER: 0000804731-02-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENERA INC CENTRAL INDEX KEY: 0000804731 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 943213541 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09812 FILM NUMBER: 02594305 BUSINESS ADDRESS: STREET 1: ONE MARKET, SPEAR TOWER STREET 2: SUITE 1850 CITY: SAN FRANCISCO STATE: CA ZIP: 94105-1018 BUSINESS PHONE: 4155364744 MAIL ADDRESS: STREET 1: ONE MARKET, SPEAR TOWER STREET 2: SUITE 1850 CITY: SAN FRANCISCO STATE: CA ZIP: 94105-1018 FORMER COMPANY: FORMER CONFORMED NAME: TENERA LP DATE OF NAME CHANGE: 19920703 10-K 1 ye200110k.txt YEAR ENDED DECEMBER 31, 2001 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------- FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-9812 TENERA, INC. (Exact name of registrant as specified in its charter) Delaware 94-3213541 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 Bush Street, Suite 850, San Francisco, California 94104 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 445-3200 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --------- ---------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy as information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 1, 2002, the aggregate market value of the Registrant's Common Stock held by nonaffiliates of the Registrant was $2,731,716 based on the last transaction price as reported on the American Stock Exchange. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purposes. The number of shares outstanding on March 1, 2002 was 9,984,259. (This page intentionally left blank.) PART I Item 1. Business Except for historical information, the following description of the Company's business contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those set forth in these forward-looking statements as a result of a number of factors, including those set forth in this Annual Report under the heading, "Risk Factors". General TENERA, Inc. (including its subsidiaries, "TENERA", or the "Company") provides a broad range of technology-based professional and technical services, and business-to-business web-based e-Learning services. The Company's professional and technical services are designed to solve complex management, engineering, environmental, health and safety challenges associated with the management of federal government properties, energy assets, and petrochemical and manufacturing concerns. TENERA's web-based e-Learning products and services are designed to provide a suite of on-line, interactive, compliance and regulatory-driven training applications for use by clients' employees. TENERA, Inc., a Delaware corporation, is the parent company of the subsidiaries described below. In 1995, the Company formed TENERA Rocky Flats, LLC ("Rocky Flats"), a Colorado limited liability company, to provide professional and technical services in connection with participation in the Performance Based Integrating Management Contract ("Rocky Flats Contract") at the Department of Energy's ("DOE") Rocky Flats Environmental Technology Site ("Site"). In August 2000, Closure Mission Support Services, LLC ("CMSS"), a Colorado limited liability company, was formed by Rocky Flats as a majority-owned joint venture to provide professional and technical services in connection with a recompete of the professional support services at the Site. In the fourth quarter of 2000, the Company was awarded a new contract for an initial three (3) year period followed by three one-year renewal options exercisable by the prime contractor. In 1997, the Company formed TENERA Energy, LLC ("Energy"), a Delaware limited liability company, to consolidate its commercial electric power utility business into a separate legal entity. Energy offers professional environmental and ecological services, and risk management services to nuclear and fossil plant operators. In 1999, the Company formed TENERA GoTrain.Net, LLC ("GoTrain"), a Delaware limited liability company, initially as a joint venture operation with a minority interest partner, SoBran, Inc., an Ohio corporation, specializing in Internet technologies. In February 2000, the Company purchased certain Internet-based development assets of SoBran, Inc., including SoBran's minority interest in TENERA GoTrain, LLC. GoTrain, now a wholly-owned subsidiary, is an e-Learning application service provider offering Web-based, e-Learning solutions to selected industries needing regulatory-driven environmental, safety, and health (ES&H) training, specifically manufacturing, utilities, petrochemical, and Fortune 1000 companies. In March 2000, GoTrain and EnviroWin Software, LLC, a Delaware limited liability company, an ES&H desktop solutions provider, formed Training, LLC, a joint venture to produce certain Web-based ES&H training products for delivery via the GoTrain distance learning platform. In June 2001, Training, LLC was dissolved with GoTrain free to use the training courses developed by the joint venture. Also in June 2001, GoTrain entered into a five-year co-development and distribution agreement with SmartForce, a leader in e-Learning solutions and content. The agreement provides for collaborating in the creation of ES&H and regulatory content, and the co-marketing and distribution of such content and other e-Learning offerings via the SmartForce internet platform (see Note 6 to Consolidated Financial Statements). As of January 1, 2002, TENERA GoTrain.Net, LLC changed its legal structure and all of the assets and liabilities were transferred to GoTrain Corp, a Delaware corporation. The Company is principally organized into two operating segments: Professional and Technical Services and e-Learning (see Note 7 to Consolidated Financial Statements for additional information regarding Company segments). 1 Markets and Business Strategy Professional and Technical Services Segment. TENERA provides professional and technical services to DOE owned sites and national research laboratories, commercial electric generating plants and other regulatory-impacted industries to solve complex management, engineering, environmental, health and safety issues associated with their properties and energy assets. TENERA's services primarily focus on environmental and ecological services, and risk management, which assist its commercial clients with respect to their nuclear and fossil plant operations, maintenance, and safety. TENERA provides its governmental clients, the DOE and DOE prime contractors with assistance in devising, implementing, and monitoring strategies to improve performance and cost effectiveness from an operational, safety, and environmental perspective at DOE-owned nuclear reactor sites and national research laboratories. TENERA has developed expertise in providing solutions to complex technical and regulatory issues facing the commercial electric power generation industry. Over the past several years, commercial electric utilities have experienced increased competitive pressure due to continued deregulation of the electric industry. For example, utilities are no longer able to recover capital expenditures through rate increases, due to mandated rate changes, and increasing competition from independent power producers, alternative energy production, and cogeneration. During the same period, utilities and independent power producers have responded to continued regulatory pressures to comply with complex safety and environmental guidelines. Safety problems and environmental issues have also emerged at government-owned weapons production facilities. The end of the "Cold War" has prompted DOE to shut down many of its aging weapons production facilities and begin the challenging task of dismantling, disposal, and clean-up of the facilities. A massive program is underway throughout the DOE complex of nuclear weapons production facilities and national laboratories to implement this new shutdown mission, while complying with health, safety, and environmental requirements similar to those applicable to commercial facilities, principally in the areas of hazardous wastes, decontamination, decommissioning, and remediation. Electric power generators, as well as a variety of other industries, have been subjected to extensive regulation regarding environmentally safe handling of hazardous materials. The Company's principal markets are the DOE-owned nuclear materials production sites and national research laboratories, and the electric power generation industry, including regulated and deregulated producers. The Company's largest business area, DOE-owned nuclear weapons production sites, faces close scrutiny resulting from public concern over health, safety, and the environment. The Company believes that DOE's mission of closing aging weapons plants, coupled with increased enforcement of environmental laws and regulations continues to be prompted by publicity and public awareness of environmental problems and health hazards posed by hazardous materials and toxic wastes. The dismantlement and cleanup of the aging DOE weapons complex represents a significant market for the Company's service offerings. The DOE has begun programs to address safety problems and environmental concerns, which have emerged at its nuclear facilities. These programs are designed to bring the operations into compliance with a variety of health, safety, and environmental requirements, similar to those applicable to the commercial electric utility industry. The DOE's decontamination, decommissioning, and remediation programs are also aimed at achieving significant cleanup of its hazardous waste production and storage facilities and the partial shutdown of nuclear operations at a number of its sites. The electric utility industry has undergone considerable change in recent years and faces a complex mix of economic and regulatory pressures. There is continuing deregulation of the production and distribution of electricity, accompanied by the desire of utilities to meet demand for electricity through higher operating efficiency. Some of the Company's largest electric utility clients have responded to a more competitive environment by implementation of significant cost control measures and activity in the merger and acquisition arena. Economic pressures have resulted in certain changes in the focus of electric utility management. For example, the ratemaking process now represents a significant area of risk to utilities. This has highlighted the importance of careful planning and documentation in connection with rate case preparation. 2 Furthermore, utilities appear to be shifting their emphasis to ongoing performance reviews in making their rate base decisions, related to such measures as plant capacity factors. These changes in the ratemaking process subject the utilities to substantial economic penalties for extended plant outages and have stimulated actions by them to assure more reliable operations. The markets for electric utility and DOE facility professional and technical services cover a broad range of activities. Typical markets include waste management, outage support, operating plant services, licensing support, safety and health management, maintenance and information services, decommissioning consulting, risk assessment, quality assurance and control, organizational effectiveness, engineering support, records management, fuel-related services, plant security, and surplus asset disposal. It has been TENERA's strategy to provide solutions to these issues by providing clients with a high level of professional skills and a broad range of scientific, technological, and management resources. These include software and databases, which are used in support of consulting projects. The Company assists its clients in the initial identification and analysis of a problem, the implementation of a feasible solution that the client believes will be sensitive to business and public interest constraints, and the ongoing monitoring of that solution. e-Learning Segment. The Company, through its GoTrain subsidiary, develops, markets, and delivers an extensive library of e-Learning products designed to provide cost-effective solutions to regulatory mandated ES&H-related training needs for its clients. The Company also provides custom e-Learning products and services in response to all aspects of enterprise and workforce effectiveness, safety, compliance, and performance. The Company's proprietary Training Management Operating System ("Training System") is designed to provide a set of e-Learning tools that is generally scalable to any size client. e-Learning courses and tools are applicable to large companies, often with geographically distributed work forces involved in complex "around-the-clock" operations, as well as, small companies that lack dedicated training resources. The Company believes that the transition to internet-based training will replace a substantial portion of instructor-led training, currently representing 70% of all training programs. The Company serves clients required to comply with a wide range of Federal and state laws and regulations governing environmental, health, and safe work practices in the workplace. The Company applies its expertise in adult learning, regulatory processes, performance improvement techniques, and Web designed and delivered interactive content, to improve the competitive position for its clients by supporting a safe, productive, and compliant work environment. The Company believes many factors affect the ES&H Web-based e-Learning market. Highly competitive marketplaces encourage many companies to seek performance gains from lowered costs and improved competitive positioning. e-Learning provides opportunities to lower training costs and establish a safer, more productive, and compliant work force spending more time at their respective workstations, leading to improved competitive positioning. Recently promulgated standards from OSHA, EPA, DOT and ISO 9000 present new opportunities for the e-Learning products that contain, manage and report the training data necessary to demonstrate compliance. Services and Products The following table reflects the percentage of revenues derived for each of these segments for the period indicated during the fiscal years ended December 31, 1999 through 2001:
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Professional and Technical Services ................................... 94.5% 98.7% 98.1% e-Learning ............................................................ 5.5% 1.3% 1.9% - ----------------------------------------------------------------------------------------------------------------
3 Professional and Technical Services Segment. Services performed by the Company typically include one or more of the following: consultation with the client to determine the nature and scope of the problem, identification and evaluation of the problem and its impact, development and design of a process for correcting the problem, preparation of business plans, preparation of reports for obtaining regulatory agency permits, and analysis in support of regulatory and legal proceedings. The Company's professional and technical services involve determining a solution to client problems and challenges in the design, operation, and management of large facilities. Focus is also placed on providing expertise in the wide range of disciplines required to resolve complex legal and regulatory issues and offering executives guidance in strategic planning and implementing a coordinated, effective response to such issues. The Company applies its professional skills, software, and specialized databases to all aspects of these problems and challenges in the following general areas: o Environmental and ecological issues at DOE and electric utility facilities o Risk management o Operations and maintenance performance improvement o Plant safety o Nuclear safety and criticality at DOE facilities o Engineering design review and verification e-Learning Segment. The Company's products include a suite of on-line interactive, compliance and regulatory-driven training applications for business clients' use with their employee base. The applications support a suite of automated back office functions and tools that manage training curriculum and records for business clients. These training applications are provided from a Company-owned library of courses, or are customized to clients' specifications. GoTrain products and services include: o Training Management Operating System (Web-based delivery platform) o Library of ES&H Web-based e-Learning o Custom Web-based e-Learning o Courseware tools o Multi-lingual e-Learning Marketing Professional and Technical Services Segment. The Company's marketing strategy emphasizes its ability to offer a broad range of services designed to meet the needs of its clients in a timely and cost-efficient manner. The Company can undertake not only small tasks requiring a few professionals but also the management, staffing, design, and implementation of major projects that may last for many months and involve large numbers of professionals and subcontractors in several geographic locations. Characteristic of TENERA's marketing strategy are significant projects in which initial contracts have been only a fraction of the ultimate sale. The Company provides financial incentives to attract senior technical professionals with extensive utility industry experience and to encourage these individuals to market the complete range of TENERA's services throughout existing and potential customer organizations. TENERA's marketing efforts are facilitated by the technical reputation and industry recognition often enjoyed by its professional staff. TENERA's reputation in the electric power industry and as a DOE contractor often leads to invitations to participate at an early stage in the conceptualization of a project. During this phase, the Company assists clients in developing an approach for efficiently and productively solving a problem. If new services or products are developed for a client, they generally are marketed to other clients with similar needs. 4 The Company's reputation also leads to invitations to participate in multi-company teams assembled to bid on large DOE or utility projects. e-Learning Segment. The Company uses a multiple sales channel strategy to penetrate targeted markets. The Company uses a sales channel approach to connect products to markets. Field salesmen activity currently accounts for a majority of sales, however, other channels used by the Company include a customer service center and via-Internet sales. In late 2000, the Company began its marketing and communications campaign designed to gain market attention, generate sales leads, achieve brand recognition, and grow market share. This campaign continued through the first half of 2001 and was reduced considerably in the second half of the year to conserve cash. The Company expects to increase its marketing and sales program during 2002, having completed $1.5 million of convertible debt financing in March 2002 (see Note 9 to Consolidated Financial Statements). Multiple venues used in implementing the strategy include direct advertising, publication interviews and reviews, speaking circuits, trade shows, and industry and trade associations. The Company has developed, and has opportunities to expand, a number of strategic alliances. Alliances form an integral component in the Company's ability to obtain product content and in establishing its full-service e-Learning approach. Alliances pursued by the Company can be categorized into the following three primary groups: teaming agreements, distributorships, and content or technology partners. In June 2001, GoTrain entered into a five-year co-development and distribution agreement with SmartForce, a leader in e-Learning solutions and content. The agreement provides for collaborating in the creation of ES&H and regulatory content, and the co-marketing and distribution of such content and other e-Learning offerings via the SmartForce internet platform (see Note 6 to Consolidated Financial Statements). Clients During the year ended December 31, 2001, TENERA provided services to approximately 60 clients involving over 70 contracts. During the year ended December 31, 2000, TENERA provided services to over 40 clients involving over 50 contracts. Over 60% of TENERA's clients during the year ended December 31, 2001, had previously used its services. Less than 1% of all revenues were from clients outside of the United States. Professional and Technical Services Segment. During the year ended December 31, 2001, one Professional and Technical Services Segment client, Kaiser-Hill Company, LLC ("Kaiser-Hill"), prime contractor of the Rocky Flats Contract, accounted for 71% of the Company's total revenue. During the year ended December 31, 2000, Kaiser-Hill accounted for 70% of the Company's total revenue. The Company has maintained a working relationship with Kaiser-Hill for six years, during which time various contracts have been completed and replaced with new or follow-on contracts. The existing contract, awarded in the fourth quarter of 2000, is for a lower value than the Company's prior contract, reflecting Kaiser-Hill's decision to discontinue use of lower-tier subcontractor teams at the Site. There can be no assurance that this relationship will be maintained beyond the existing contract, and the loss of this client would have a material adverse effect on the Company (see "Risk Factors"). e-Learning Segment. The Company provided services to fifteen e-Learning Segment clients during 2001 versus ten clients during 2000. At December 31, 2001, ten e-Learning Segment clients had contracted access for over 200,000 learners in the Company's Web-based Training System for use within the next twelve months. Operations TENERA generally receives payments on amounts billed 30 to 90 days after billing, except for retention under contracts. TENERA has historically experienced a low percentage of losses due to poor credit risks since the majority of TENERA's clients are utility companies, DOE, or DOE prime contractors,. Professional and Technical Services Segment. The Company primarily contracts for its services in one of three ways: time and materials ("T & M"), time and materials plus incentive fee ("TMIF"), or fixed price. T & M and TMIF contracts, which cover the majority of TENERA's revenues, are generally billed monthly by applying a multiplier factor to specific labor costs or by use of a fixed hourly labor rate charged to each project. T & M and TMIF contracts are generally structured to include "not-to-exceed" ceilings; however, if after 5 initial review or after work has started, it is noted that additional work is required, the contract normally can be renegotiated to include such additional work and to increase the contract ceiling accordingly. Fixed-price contracts are generally applicable where TENERA has been requested to deliver services and/or products previously developed by it or deliverable to multiple customers. At December 31, 2001, of the total outstanding contracts, less than 10% were fixed-price. e-Learning Segment. The typical medium and large business contract for GoTrain products has annual renewal options and is volume priced based on the individual learner annual subscriptions. Custom training course development is provided to clients on a non-refundable fixed-price contract basis, with entitlement to unlimited client use of the product. However, a per-use fee (learner seat) is charged in custom training course contracts for use of the Training System. For small businesses and individual learners, the buying process typically involves use of credit cards or pre-established task orders. Backlog As of December 31, 2001, TENERA had contracted a backlog of approximately $13.9 million, all of which is cancelable by the clients. The Professional and Technical Services and e-Learning segments account for $10.2 million and $3.7 million, respectively, of the backlog. Contracted backlog represents the aggregate of the remaining value of those active contracts entered into by TENERA for services that are limited by a contractual amount and does not include any estimates of open-ended services contracts or unfunded backlog that may result from additions to existing contracts. Since all outstanding contracts are cancelable, there is no assurance that the Company will realize the revenues from these contracts. If any contract is canceled, there is no assurance that the Company will be successful in replacing such contract (see "Risk Factors"). Competition The markets for professional and technical services, and e-Learning are highly competitive. TENERA competes with several larger firms with significantly greater resources (see "Risk Factors"). The primary competitive factor in the market for Professional and Technical Services is price, and certain of TENERA's competitors are able to offer similar services at prices that are lower than those offered by TENERA. In the e-Learning marketplace, the most significant competitive factors are product features and price. Although many larger competitors offer broad-based e-Learning solutions for various industries, no competitors currently dominate the Company's targeted niche of the e-Learning marketplace: ES&H compliance and regulatory driven training. Product Development Professional and Technical Services Segment. TENERA's policy is to undertake development projects of software, systems, and databases only if they can be expected to lead directly to proprietary products that may be generally marketable. A portion of TENERA's product development effort may be funded through customer-sponsored projects, although the rights to the systems and databases generally remain with TENERA. Because TENERA's development activities involve the integration of customer-funded, cost sharing, and TENERA-funded projects, it is not possible to segregate, on a historical basis, all of the specific costs allocable as development costs. Over the past three years, costs associated with TENERA funded projects were immaterial. e-Learning Segment. In 2001, TENERA spent approximately $800,000 in acquiring and developing products related to its e-Learning business. In 2000 and 1999, the Company spent approximately $700,000 and $100,000, respectively, on development for similar activities. These development efforts were responsible for the Company's successful launch, operation and access to its Web-based Training System and accompanying training course library. 6 Patents and Licenses The Company does not hold any patents material to its business. TENERA relies upon trade secret laws and contracts to protect its proprietary rights in software systems and databases. The service and license agreements under which clients acquire certain rights to access and use TENERA's e-Learning software technologies generally restrict the clients' use of the systems to their own operations and prohibit disclosure to others. Personnel At December 31, 2001, the Company employed a total of 144 consultants, engineers, scientists and software developers, and a supporting administrative staff of 18 employees. Many employees hold advanced degrees. TENERA also retains the services of numerous independent contractors in order to fulfill specific needs for particular projects. None of TENERA's employees are represented by a labor union. Item 2. Properties The Company's headquarters are located in San Francisco, California, and consist of approximately 5,400 square feet of leased office space, expiring in December 2005. TENERA also leases approximately 12,800 square feet in Knoxville, Tennessee, expiring in January 2004, 6,500 square feet in Louisville, Colorado on a month-to-month basis, and approximately 5,300 square feet in San Luis Obispo, California, with 26% of the space expiring in December 2002 and 74% expiring in December 2004. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Shares of the Company's Common Stock are listed for trading on AMEX under the symbol TNR. The first trading day on AMEX was June 30, 1995, at which time 10,417,345 shares were outstanding. There were approximately 500 shareholders of record as of March 1, 2002.
- ---------------------------------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------- ------------------------- ------------------------- Price Range of Price Range of Price Range of TENERA, Inc. Shares TENERA, Inc. Shares TENERA, Inc. Shares ------------------------- ------------------------- ------------------------- High Low High Low High Low - ---------------------------------------------------------------------------------------------------------------- First Quarter ...... $0.875 $0.250 $2.250 $0.8125 $2.000 $1.0625 Second Quarter ..... 0.490 0.355 1.625 0.875 1.625 1.000 Third Quarter ...... 0.590 0.300 1.250 0.750 1.500 1.000 Fourth Quarter ..... 0.440 0.210 0.875 0.500 1.125 0.750 - ----------------------------------------------------------------------------------------------------------------
The Board of Directors of the Company determines the amount of cash dividends that the Company may make to shareholders after consideration of projected cash requirements and a determination of the amount of retained funds necessary to provide for growth of the Company's business. The Company has made no distributions since 1991. The Company does not anticipate resumption of dividends in the foreseeable future. 8 Item 6. Selected Financial Data The following consolidated selected financial data of the Company for the five prior years should be read in conjunction with the consolidated financial statements and related notes included elsewhere. TENERA, INC. FINANCIAL HIGHLIGHTS (In thousands, except per share and statistical amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------- 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- OPERATIONS DATA Revenue ......................................... $20,065 $32,443 $37,922 $27,445 $21,121 Operating (Loss) Income.......................... (3,100) (19) 2,336 1,874 (2,139) Net (Loss) Earnings.............................. (2,030) 100 1,342 1,674 (1,890) (Loss) Earnings per Share-- Basic ............... (0.20) 0.01 0.13 0.17 (0.19) (Loss) Earnings per Share-- Diluted ............. (0.20) 0.01 0.13 0.16 (0.19) Weighted Average Shares-- Basic.................. 9,984 9,960 10,050 10,124 10,123 Weighted Average Shares-- Diluted................ 9,984 10,195 10,409 10,450 10,123 CASH FLOW DATA Net Cash (Used) Provided by Operating Activities $(1,052) $ (164) $ 631 $ 906 $(2,681) Net (Decrease) Increase in Cash and Cash Equivalents ..................................... (1,201) (1,006) 132 1,069 (1,672) FINANCIAL POSITION AT DECEMBER 31 Cash and Cash Equivalents ....................... 1,286 2,487 3,493 3,361 2,292 Working Capital ................................. 2,087 4,443 5,467 4,474 2,831 Total Assets .................................... 6,978 10,074 10,710 9,206 6,052 Total Liabilities ............................... 3,113 4,181 4,950 4,538 3,065 Stockholders' Equity............................. 3,865 5,893 5,760 4,668 2,987 OTHER INFORMATION Number of Employees ............................. 162 192 187 196 187 - ----------------------------------------------------------------------------------------------------------------
9 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Forward-Looking Statements With the exception of historical facts, the statements contained in this discussion are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the Safe Harbor provisions created by that statute. Certain statements contained in the following Management's Discussion and Analysis of Results of Operations and Financial Condition, including, without limitation, statements containing the words "believes", "anticipates", "estimates", "expects", "future", "intends", and words of similar import, constitute forward-looking statements that involve risks and uncertainties. Such statements are based on current expectations and are subject to risk, uncertainties and changes in condition, significance, value and effect, including those described in the Risk Factors section of this report and other recent documents the Company files with the Securities and Exchange Commission, specifically forms 10-Q and 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause the Company's actual results to differ materially from those anticipated events. Critical Accounting Policies The Company considers certain accounting policies related to revenue recognition, allowance for doubtful accounts, and cost capitalization and impairment to be critical policies due to the estimation processes involved in each. Revenue Recognition. A significant portion of the Company's e-Learning Segment revenue relates to sales of custom training courses, set-up fees, and subscription licensing arrangements. Revenue is recognized ratably over the term of the contract and begins when delivery of product occurs. In some cases, the term of the contract is not a fixed time period and management must estimate the expected revenue recognition period based upon cancellation provisions in the contract, as well as experience with similar contracts. Changes in these factors could have a significant effect on e-Learning revenue recognition. Additionally, a portion of the Professional and Technical Services Segment revenue is derived from fixed-price contracts. Revenue for these contracts is recognized using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. Recognized revenues are subject to revisions as the contract progresses to completion. Revisions in revenue estimates are made in the period in which the facts that give rise to the revision become known. Allowance for Doubtful Accounts. The Company is required to estimate the collectibility of its trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the credit-worthiness of each client. If the financial condition of the Company's clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Cost Capitalization and Impairment. The Company has significant assets related to the capitalization of costs of internal-use e-Learning operating system software and costs related to the development of e-Learning training courses. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments. Changes in strategy and/or market conditions could significantly impact these judgments and require adjustments to recorded asset balances. 10 TENERA, INC. RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------- Percent of Revenue ----------------------------------------- Year Ended December 31, ----------------------------------------- 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Revenue ............................................................. 100.0% 100.0% 100.0% Direct Costs ........................................................ 78.2 78.5 77.4 General and Administrative Expenses ................................. 37.3 21.6 16.4 Other Income ........................................................ -- * * -------- --------- ---------- Operating (Loss) Income........................................... (15.5) (0.1) 6.2 Interest Income, net ................................................ 0.1 0.6 0.3 -------- --------- ---------- Net (Loss) Earnings Before Income Tax (Benefit) Expense ............. (15.4%) 0.5% 6.5% ======== ========= ========== - ----------------------------------------------------------------------------------------------------------------- * Less than 0.05%
Year Ended December 31, 2001 versus Year Ended December 31, 2000 Net losses before income tax benefit for the year ended December 31, 2001 were $3,100,000, compared to net earnings before tax expense of $163,000 for the same period in 2000. The decrease in earnings primarily results from lower Professional and Technical Services Segment revenue, coupled with higher sales and marketing expenses in the e-Learning Segment. Professional and Technical Services Segment revenue for the period ended December 31, 2001 decreased 41% ($13.0 million) from 2000, primarily due to a lower allocation at the Rocky Flats Site of work to lower-tier subcontractor teams, including the Company under its new contract effective October 1, 2000, as previously reported, and closure of the Company's commercial strategic consulting business area. For the year 2001, the concentration of revenue from government projects decreased to 73% of total Company revenue, from 85% in 2000. Revenue in the e-Learning Segment increased by 156% ($671,000) for the period ended December 31, 2001, as compared to 2000, mainly due to a greater number of new contracts. Direct costs were lower in 2001, compared to a year ago, primarily as a result of decreased revenue generation. Gross margin was 22% in 2001, the same as in 2000. General and administrative costs were 8% higher for the year ended December 31, 2001, compared to a year ago, primarily as a result of increased business development costs in the e-Learning Segment and costs associated with pursuit of a DOE contract at Grand Junction, Colorado for Professional and Technical Services. In March 2002, the DOE announced the award of the Grand Junction contract to another team of companies. The lower net interest income in 2001, as compared to a year ago, is primarily due to lower average cash balances and lower interest rates, together with the impact of a receivables assignment in the third quarter of 2001. As reported previously, an electric utility client in the Company's Professional and Technical Services Segment initiated bankruptcy proceedings in early April 2001. The Company assigned all of its pre-petition receivables to a third party in August 2001 in return for 75% of the amounts owed. For the third quarter of 2001, the Company reported the 25% finance charge discount as interest expense. Year Ended December 31, 2000 versus Year Ended December 31, 1999 Net earnings before income tax expense for the year ended December 31, 2000 were $163,000, compared to $2,455,000 for the same period in 1999. The decrease in earnings primarily resulted from lower Professional and Technical 11 Services Segment revenue, coupled with higher sales and marketing expenses in the e-Learning Segment. Professional and Technical Services Segment revenue for 2000 decreased 13% ($5.2 million) from 1999, primarily due to a decline in the use of the Company's subcontractor teams at the Site, and closure of the commercial strategic consulting business area, partially offset by increased contract activity in the commercial environmental and ecological services business area. For the year 2000, the concentration of revenue from government projects increased to 85% of total Company revenue from 81% in 1999. Revenue in the e-Learning Segment decreased by $280,000 in 2000, as compared to 1999, mainly due to less fixed-priced contract work in 2000 than 1999. The majority of the contracts in 2000 were based on a per-use structure (see Item 1, "Business"), which began in the fourth quarter. Direct costs were lower in 2000, compared to the year before, primarily as a result of decreased revenue generation. Gross margin decreased to 22% in 2000 from 23% in 1999, mainly due to an increase in the proportion of revenue derived from lower margin government business. General and administrative costs were 12% higher in 2000, compared to 1999, primarily reflecting increased costs associated with the infrastructure and business development of the e-Learning Segment, and the purchase of the Internet-based development and support business of SoBran, Inc. (see Note 1 to Consolidated Financial Statements). General and administrative expenses, as a percentage of revenue, increased to 22% in 2000 from 16% in 1999. Net interest income in 2000 and 1999 related to earnings from the investment of cash balances in short-term, high quality, money market accounts and corporate debt instruments. The higher net interest income in 2000, as compared to a year ago, primarily reflects larger average cash balances and higher interest rates. The Company had no borrowings under its line of credit during 2000 and 1999. Liquidity and Capital Resources Cash and cash equivalents decreased by $1,201,000 during 2001. The decrease was primarily due to cash used by operations ($1,052,000) and acquisition of property and equipment ($151,000). Trade receivables, net of sales allowance, decreased by $2,641,000 from December 31, 2000, primarily due to a decrease in the rate of revenue generation in 2001. The allowance for sales adjustments decreased by $417,000 from December 31, 2000, related to the closure and settlement of old government contracts. Income tax receivable increased by $723,000 during 2001 related to the carryback of 2001 tax losses to 1999. In early February 2002, the Company filed its 2001 federal tax return and application for refund of $884,000 of 1999 taxes paid. The tax refund was received in March 2002. Other current assets decreased $169,000 from December 31, 2000, reflecting a reduced amount of custom development of e-Learning courses for clients in 2001. Other assets increased by $793,000 in 2001, primarily relating to increased development of library training courses and operating system enhancements in the e-Learning Segment (see Note 2 to Consolidated Financial Statements). Accounts payable decreased by $1,117,000 since the end of 2000 primarily resulting from lower direct costs supporting decreased revenues. Accrued compensation and related expenses decreased by $81,000 during the period, primarily reflecting fewer employees than at the end of the prior year. No cash dividend was declared in 2001. The impact of inflation on project revenue and costs of the Company was minimal. In May 2001, the Company's $3,000,000 revolving loan facility expired and was not renewed. To meet and deal with the aggregate liquidity issues of the Company as a whole, the Company implemented a plan in August 2001 to reduce its cash requirements in all business segments through a salary reduction program and furloughing non-essential personnel. The Company also postponed certain planned non-essential infrastructure and marketing costs in its e-Learning segment. 12 At December 31, 2001, the Company has operating lease commitments through 2005 totaling $2,465,000, principally for real property (see Note 5 to Consolidated Financial Statements). Additionally, the Company has other long-term obligations through 2006, totaling $1,302,000, related to an agreement with SmartForce to co-develop and distribute ES&H and regulatory content via the SmartForce internet platform (see Note 6 to Consolidated Financial Statements). The table below schedules these contractual obligations:
- ---------------------------------------------------------------------------------------------------------------- Contractual Obligations Payments Due By Period --------------------------------------------------------- (In thousands) Total Less Than 1 - 3 4 - 5 After 5 1 Year Years Years Years - ---------------------------------------------------------------------------------------------------------------- Capital Lease Obligations ....................... $ 2,465 $ 902 $ 1,181 $ 382 $ -- Other Long-Term Obligations...................... 1,302 274 548 480 -- -------- -------- -------- -------- -------- Total Contractual Cash Obligations .............. $ 3,767 $ 1,176 $ 1,729 $ 862 $ -- - ----------------------------------------------------------------------------------------------------------------
In March 2002, the Company's GoTrain subsidiary sold subordinated convertible debentures to private investors for a total principal amount of $1,500,000. Each debenture bears simple interest at the rate of 8% per annum, with cumulative interest payable only if the debenture is not converted into preferred stock of GoTrain, pursuant to the debenture terms. The maturity date of each debenture is July 31, 2003. The larger debenture, in the amount of $1,000,000, can be converted at any time by the holder into convertible preferred stock of GoTrain. The other debenture, in the amount of $500,000 can be repaid or converted into preferred stock at any time by GoTrain. Otherwise, the debentures will automatically convert into preferred stock at the earlier of the maturity date, or upon an underwritten public offering of GoTrain common stock. At maximum conversion, the holders would own approximately 33% of GoTrain (see Note 9 to Consolidated Financial Statements). Management believes that cash expected to be generated by operations of the Company's Professional and Technical Services Segment, coupled with the tax refund in March 2002, should be sufficient to enable the Company to support its Professional and Technical Services Segment operations as currently structured through the end of 2002. The funds generated by the issuance of the GoTrain convertible debentures can only be used for GoTrain operations pursuant to the terms of the debentures. Management believes this private placement financing will provide necessary support for GoTrain's business development activities based upon its simultaneous conversion to a self-sufficient mode of operation. The Company is currently seeking bank lines of credit for each of its segment operations to provide additional working capital support of their respective business activities. There can be no assurance that such sources of capital will be available in sufficient amounts or on terms favorable to the Company, or at all (see "Risk Factors"). Risk Factors The following risk factors and other information included in this Annual Report should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that management currently deems immaterial, also may impair the business operations. If any of the following risks occur, the Company's business, financial condition, operating results and cash flows could be materially adversely affected. Uncertainty of Access to Capital. Management currently believes that cash expected to be generated from operations and the Company's working capital will not be adequate to support the cash requirements of a desired significant expansion of its e-Learning Segment. The Company is seeking new lines of credit and additional equity financing of its e-Learning business. There can be no guarantee that such sources will be available in sufficient amounts or on terms favorable to TENERA, or at all. Reliance on Major Customers; Concentration of Revenue from the Government Sector. During 2001 and 2000, one customer, Kaiser-Hill, accounted for 71% and 70%, respectively, of the Company's total revenues. Additionally, for 2001 and 2000, the concentration of the Company's total revenue from the government 13 sector was 73% and 85%, respectively. This level of concentration of revenues from the lower margin government sector is expected to continue and possibly increase in the future. However, the new contract awarded to the Company by Kaiser-Hill in the fourth quarter of 2000 was a lower value and margin than the Company's prior contract, reflecting Kaiser-Hill's decision to discontinue use of lower-tier subcontract teams at the Site. Further, all outstanding customer contracts are cancelable upon notice by either party, and therefore, there can be no assurance that relationships with customers will be maintained at existing levels, or at all. The discontinuation or material reduction of business relations with any of these customers would have a material adverse impact on TENERA's business (see Item 1, "Business -- Clients"). History of Losses; Uncertainty of Future Profitability; Market for Shares. The Company recorded a net (loss) of $(2.2 million) in 2001. And although the Company had net earnings of $0.8 million in 1992, $1.7 million in 1998, $1.3 million in 1999, and $0.1 million in 2000, net (losses) over the period 1991 through 1997 were $(6.4 million) in 1991, $(0.3 million) in 1993, $(1.2 million) in 1994, $(0.9 million) in 1995, $(1.1 million) in 1996, and $(1.9 million) in 1997. There can be no assurance of the level of earnings, if any, that the Company will be able to derive in the future, or the effect such losses will have on the Company's ability to meet exchange listing requirements, and the associated creation of a public market for its shares. Competition. The market for professional and technical services, and e-Learning is highly competitive and TENERA competes with several larger firms with significantly greater resources. Significant competitive factors in the market for the Company's offerings are price and the ability to offer new products and services designed to meet changing customer demand. A number of TENERA's competitors are able to offer such services at prices that are lower than those offered by TENERA, and to devote far greater resources toward the development of new products and services. This competition has had, and is expected to continue to have, a material adverse impact on TENERA's business. Reliance on Key Personnel. Due to the nature of the consulting and professional services business, the Company's success depends, to a significant extent, upon the continued services of its officers and key technical personnel and the ability to recruit additional qualified personnel. The Company has experienced a historically high rate of turnover as revenue and earnings have declined. Further loss of such officers and technical personnel, and the inability to recruit sufficient additional qualified personnel, could have a material adverse effect on the Company. Uncertainty Regarding Industry Trends and Customer Demand. As a result of the slowdown in the construction of power plants and the absence of new power plants scheduled for construction, as well as the gradual deregulation of the production and distribution of electricity, the market for engineering services relating to licensing and construction of power plants has contracted, and the market for services related to efficient and profitable operation of existing capacity has expanded. There can be no assurance that (i) TENERA will have the financial and other resources necessary to successfully research, develop, introduce, and market new products and services, (ii) if, or when, such new products or services are introduced, they will be favorably accepted by current or potential customers, or (iii) TENERA will be otherwise able to fully adjust its services and products to meet the changing needs of the industry (see Item 1, "Business -- General"). Government Contracts Audits. The Company's United States government contracts are subject in all cases to audit by governmental authorities. In 1994, an audit was concluded, which began in 1991, of certain of its government contracts with the DOE relating to the allowability of certain employee compensation costs. The Company made a special charge to earnings in 1991 for a $2.4 million provision for the potential rate adjustments then disputed by the Company and the government. As a result of resolving certain issues in the dispute, the Company recognized increases to earnings of $500,000 in 1994, $250,000 in 1996, $150,000 in 2000, and $150,000 in 2001. Remaining cash payments to clients associated with the settlement are estimated to be approximately $300,000, which were accrued for in a prior year, and are expected to be made as government contracts with individual clients are closed out. There can be no assurance that no additional charges to earnings of the Company may result from future audits of the Company's government contracts. Item 7A. Quantitative and Qualitative Disclosure about Market Risk 14 The Company has minimal exposure to market and interest risk as the Company invests its excess cash in instruments, which mature within 90 days from the date of purchase. The Company does not have any derivative instruments. 15 Item 8. Financial Statements and Supplementary Data TENERA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Revenue .................................................... $ 20,065 $ 32,443 $ 37,922 Direct Costs ............................................... 15,697 25,465 29,351 General and Administrative Expenses ........................ 7,487 7,001 6,236 Other Income ............................................... -- 4 1 ------------- ------------ ------------ Operating (Loss) Income.................................. (3,119) (19) 2,336 Interest Income, net ....................................... 19 182 119 ------------- ------------ ------------ Net (Loss) Earnings Before Income Tax Expense ........... (3,100) 163 2,455 Income Tax (Benefit) Expense ............................... (1,070) 63 1,113 ------------- ------------ ------------ Net (Loss) Earnings ........................................ $ (2,030) $ 100 $ 1,342 ============= ============ ============ Net (Loss) Earnings per Share-- Basic ...................... $ (0.20) $ 0.01 $ 0.13 ============= ============ ============ Net (Loss) Earnings per Share-- Diluted .................... $ (0.20) $ 0.01 $ 0.13 ============= ============ ============ Weighted Average Number of Shares Outstanding-- Basic....... 9,984 9,960 10,050 ============= ============ ============ Weighted Average Number of Shares Outstanding-- Diluted..... 9,984 10,195 10,409 ============= ============ ============ - ---------------------------------------------------------------------------------------------------------------- See accompanying notes.
16 TENERA, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
- ---------------------------------------------------------------------------------------------------------------- December 31, ----------------------------- 2001 2000 - ---------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents ............................................... $ 1,286 $ 2,487 Trade receivables, less allowances of $547 (2000 - $964) Billed ................................................................ 1,533 3,290 Unbilled .............................................................. 1,259 2,143 Income tax receivable.................................................... 884 161 Other current assets .................................................... 238 543 ------------ ------------ Total Current Assets ................................................ 5,200 8,624 Property and Equipment, Net ................................................ 546 759 Other Assets ............................................................... 1,232 691 ------------ ------------ Total Assets ...................................................... $ 6,978 $ 10,074 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable......................................................... $ 1,136 $ 2,253 Accrued compensation and related expenses ............................... 1,751 1,832 Deferred revenue ........................................................ 226 96 ------------ ------------ Total Current Liabilities ........................................... 3,113 4,181 Stockholders' Equity Common Stock, $0.01 par value, 25,000,000 authorized, 10,417,345 issued . 104 104 Paid in capital, in excess of par ....................................... 5,677 5,675 Retained earnings (Accumulated deficit) ................................. (1,423) 607 Treasury stock-- 433,086 shares (2000 - 433,086 shares) ................. (493) (493) ------------ ------------ Total Stockholders' Equity .......................................... 3,865 5,893 ------------ ------------ Total Liabilities and Stockholders' Equity ........................ $ 6,978 $ 10,074 ============ ============ - ---------------------------------------------------------------------------------------------------------------- See accompanying notes.
17 TENERA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
- ----------------------------------------------------------------------------------------------------------------------------- Paid-In Retained Common Stock Capital in Earnings ----------------------------- Excess (Accumulated Treasury Shares Amount of Par Deficit) Stock Total - ----------------------------------------------------------------------------------------------------------------------------- December 31, 1998 ...... 10,129 104 5,699 (835) (300) 4,668 Repurchase of Stock .... (195) -- -- -- (250) (250) Net Earnings ........... -- -- -- 1,342 -- 1,342 ------------ -------------- ---------------- --------------- -------------- --------------- December 31, 1999 ...... 9,934 104 5,699 507 (550) 5,760 Exercise of Stock Options 50 -- (24) -- 57 33 Net Earnings ........... -- -- -- 100 -- 100 ------------ -------------- ---------------- --------------- -------------- --------------- December 31, 2000 ...... 9,984 104 5,675 607 (493) 5,893 Capital Contribution ... -- -- 2 -- -- 2 Net (Loss) Earnings .... -- -- -- (2,030) -- (2,030) ------------ -------------- ---------------- --------------- -------------- --------------- December 31, 2001 ...... 9,984 $ 104 $ 5,677 $ (1,423) $ (493) $ 3,865 ============ ============== ================ =============== ============== =============== See accompanying notes.
18 TENERA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) earnings ..................................... $ (2,030) $ 100 $ 1,342 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization ......................... 752 392 151 Gain on sale of assets ................................ -- (4) (1) Changes in assets and liabilities: Trade receivables, net of allowance.................. 2,641 1,122 (1,129) Income tax receivable ............................... (723) (11) -- Other current assets ................................ 169 (396) (144) Other assets ........................................ (793) (598) -- Accounts payable .................................... (1,117) (857) 596 Accrued compensation and related expenses ........... (81) (6) (86) Deferred revenue .................................... 130 94 2 Income taxes payable ................................ -- -- (100) ------------- ------------ ------------ Net Cash (Used) Provided by Operating Activities . (1,052) (164) 631 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment ................... (151) (756) (250) Acquisition of application development software ......... -- (125) -- Proceeds from sale of assets ............................ -- 6 1 ------------- ------------ ------------ Net Cash Used by Investing Activities ............. (151) (875) (249) CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of equity .................................... -- -- (250) Issuance of equity in subsidiary ........................ 2 -- -- Issuance of common stock from Treasury .................. -- 33 -- ------------- ------------ ------------ Net Cash Provided (Used) by Financing Activities .. 2 33 (250) ------------- ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ....... (1,201) (1,006) 132 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 2,487 3,493 3,361 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 1,286 $ 2,487 $ 3,493 ============= ============ ============ - ---------------------------------------------------------------------------------------------------------------- See accompanying notes.
19 TENERA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 Note 1. Organization TENERA, Inc. (including its subsidiaries, "TENERA", or the "Company") provides a broad range of professional and technical services, and web-based e-Learning solutions. The Company's professional and technical services are designed to solve complex management, engineering, environmental, health and safety challenges associated with the management of federal government properties, energy assets, and petrochemical and manufacturing concerns. TENERA's web-based e-Learning products and services, provided through the Company's GoTrain Corp. subsidiary (`GoTrain"), are designed to provide a suite of on-line, interactive, compliance and regulatory-driven training applications for use by clients' employees. The Company is principally organized into two operating segments: Professional and Technical Services and e-Learning (see Note 7 to Consolidated Financial Statements). The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company experienced a consolidated profit of $100,000 in 2000 and a consolidated net loss of approximately $2 million in 2001, with cash balances declining to approximately $1.3 million at December 31, 2001 from $2.5 million at December 31, 2000. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The principal factor for the Company's consolidated profit-and-loss performance in recent years and its reduced cash position has been the dedication of resources to the Company's e-learning subsidiary, GoTrain Corp., and the resultant losses from the start-up phase of this new business segment. In 2001, management explored financing alternatives that could address the reduction of the Company's working capital resulting from this internal investment strategy. Additionally, in 2001, the Company took steps to reduce its cash requirements through a salary reduction program and furloughing personnel. These actions allowed the Company to maintain a higher working capital position at the end of 2001 than would have otherwise been the case. Further, in March 2002, GoTrain Corp. issued convertible debentures in the amount of $1,500,000 to an investment fund to permit it to continue to develop its business without requiring further significant financial resources from the Company, which previously had been the sole source of GoTrain's funding. Subsequent to the close of 2001, GoTrain Corp. is positioning itself to be able to generate sufficient cash flow to fund working capital to the end of 2002 primarily through continuing cost reduction plans, use of the newly invested private venture funding, and expansion of its business. In March 2002, the Company received approximately $900,000 of federal income tax refunds for taxes paid in prior years. Management believes that these resources will be adequate to fund its operating and capital requirements through the end of 2002. For additional liquidity, the Company is currently pursuing individual secured lines of credit for each of its business segments to support the short-term funding requirements associated with meeting working capital needs. However, there can be no assurance that such sources of capital will be available in sufficient amounts or on terms favorable to the Company, or at all. Note 2. Summary of Significant Accounting Policies Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates. 20 Cash and Cash Equivalents. Cash and cash equivalents at December 31, 2001 consist of deposited cash and money market accounts at a banking institution. At the end of the previous year, the Company's cash and cash equivalents included money market accounts and commercial paper issued by companies with strong credit ratings. Cash equivalents are carried at cost, which approximates fair value. The Company includes in cash and cash equivalents, all short-term, highly liquid investments, which mature within three months of acquisition. Concentrations of Credit Risk and Credit Risk Evaluations. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents consist principally of money market accounts. Cash and cash equivalents are held with a domestic financial institution with high credit standing. The Company has not experienced any significant losses on its cash and cash equivalents. The Company conducts business with companies in various industries primarily in the United States. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are maintained for potential credit issues, and such losses to date have been within management's expectations. At December 31, 2001, three clients accounted for 42%, 12%, and 10% of the Company's trade receivables. At December 31, 2000, one client accounted for 75% of trade receivables. All the above concentrations relate to Professional and Technical Services Segment clients. Property and Equipment. Property and equipment are stated at cost ($3,360,000 and $3,265,000 at December 31, 2001 and 2000, respectively), net of accumulated depreciation ($2,814,000 and $2,506,000 at December 31, 2001 and 2000, respectively). Depreciation is calculated using the straight-line method over the estimated useful lives, which range from three to five years. Other Assets. Included in this asset category are the costs of internal-use e-Learning operating system software, both acquired and developed by the Company, and certain costs related to the development of the Company's e-Learning training courses used in its application service provider business. These costs have been capitalized in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". Under the Company's business model, the Company grants a limited license to its clients to access the Company's training system via the internet. The proprietary software resides on the Company's computers and clients have no other rights to the software. All training and maintenance costs are expensed as incurred. The Company capitalized $793,000 of acquired and developed software costs during 2001, compared to $723,000 (included $125,000 of acquired software) in 2000. The estimated useful life of costs capitalized is three years. In 2001 and 2000, the amortization of capitalized costs on the Company's books totaled $252,000 and $88,000, respectively. In the future, the Company expects to continue to capitalize costs relating to new course development, as well as costs associated with material enhancements and functionality of the existing software, as dictated by the marketplace. This is a new business model and segment for the Company and to date, management believes there have been no indicators of impairment for these assets. Revenue. The Company's Professional and Technical Services Segment primarily offers its services to the United States electric power industry and the DOE. Revenue from time-and-material and cost plus fixed-fee contracts is recognized when service is performed and costs are incurred. Revenue from fixed-price contracts is recognized on the basis of percentage of work completed (measured by costs incurred relative to total estimated project costs) under compliance with Statement of Position 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts". The Company's e-Learning Segment's nonrefundable upfront subscription/license fees are recognized ratably over the contractual term, which is typically one year. Revenue recognition commences when delivery of product occurs. Usage fee revenue is recognized on an actual usage basis. Reserves are maintained for potential sales adjustments and credit losses; such losses to date have been within management's expectations. Actual revenue and cost of contracts in progress may differ from management estimates and such differences could be material to the financial statements. 21 During 2001 and 2000, one client accounted for 71% and 70%, respectively, of total revenue. In 1999, three clients accounted for 32%, 26%, and 17% of the Company's total revenue. All the above concentrations relate to Professional and Technical Services Segment clients. Income Taxes. The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting for Stock-Based Compensation. The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25 ("APB 25") and has provided the pro forma disclosures required by Statement of Financial Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") in Note 3. Per Share Computation. Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by adding other common stock equivalents, including stock options, warrants and convertible preferred stock, in the weighted average number of common shares outstanding for a period, if dilutive. The following table sets forth the computation of basic and diluted earnings per share as required by Financial Accounting Standards Board Statement No. 128: (In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Numerator: Net (loss) earnings ..................................... $ (2,030) $ 100 $ 1,342 Denominator: Denominator for basic earnings per share-- weighted-average shares outstanding....................... 9,984 9,960 10,050 Effect of dilutive securities: Employee & Director stock options (Treasury stock method) ............................................... -- 235 359 Denominator for diluted earnings per share-- weighted-average common and common equivalent shares ..... 9,984 10,195 10,409 ============= ============ ============ Basic (loss) earnings per share ........................... $ (0.20) $ 0.01 $ 0.13 ============= ============ ============ Diluted (loss) earnings per share ......................... $ (0.20) $ 0.01 $ 0.13 ============= ============ ============ - ----------------------------------------------------------------------------------------------------------------
Comprehensive Income. The Company does not have any components of comprehensive income. Therefore, comprehensive income is equal to net earnings reported for all periods presented. Disclosures about Segments of an Enterprise. The Company has two reportable operating segments, which are: Professional and Technical Services and e-Learning (see Note 7 to Consolidated Financial Statements). Recent Accounting Pronouncements. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which supersedes FAS No. 121, and Accounting Principles Board No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a 22 Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". FAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements". FAS 144 requires that long-lived assets that are disposed of by sale be measured at the lower of book value or fair value less cost to sell. The statement also significantly changes the criteria required to classify an asset as held-for-sale. Additionally, FAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company is required to adopt FAS 144 for its fiscal year beginning January 1, 2002. The Company does not anticipate that the adoption of FAS 144 will have a material effect on the Company's consolidated financial position, results of operations, or cash flows. Reclassifications. Certain reclassifications of prior year amounts have been made to conform with current presentation. Note 3. Employee Benefit Plans 401(k) Savings Plan. The 401(k) Savings Plan is administered through a trust that covers substantially all employees. During 2001, employees could contribute amounts to the plan up to 15% of salary. The Company matches employee contributions equal to 50% of the first 4% of salary deferred. The Company, at its discretion, may also contribute funds to the plan for the benefit of employees. In 2001, 2000, and 1999, charges to earnings for the 401(k) Savings Plan were $117,000, $143,000, and $164,000, respectively. During 2001, 2000, and 1999, the Company contributed no discretionary amounts to the plan. Stock Option Plans. The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under the provisions of the Company's 1992 Option Plan, 1,500,000 shares are reserved for issuance upon the exercise of options granted to key employees and consultants. In 2001, options were granted for 260,000 shares at an exercise price of $0.48, the then fair market value, expiring August 13, 2007. During 2000, options were granted for 30,000 shares at an exercise price of $1.2625, the then fair market value, expiring on April 18, 2006. In 1999, options were granted for 285,000 shares at an exercise price of $1.3625, the then fair market value, expiring on March 9, 2005. During 2001, options for 38,000 shares were forfeited (70,000 and 94,000 in 2000 and 1999, respectively). No options were exercised in 2001 (15,000 in 2000 and none in 1999). As of December 31, 2001, options for 1,439,500 shares were outstanding and options for 1,302,000 shares were exercisable. Under the provisions of the 1993 Outside Directors Compensation and Option Plan, which was approved by the Board of Directors, effective March 1, 1994, as amended in 1998, 500,000 shares are reserved for issuance upon the exercise of options granted to non-employee directors. In 2001, options were granted for 50,000 shares at an exercise price of $0.57, the then fair market value, expiring on March 1, 2011. During 2000, options were granted for 46,000 shares at an exercise price of $2.125, the then fair market value, expiring on March 1, 2010. In 1999, options were granted for 62,500 shares at an exercise price of $1.375, the then fair market value, expiring on March 1, 2009. During 2001 and 2000, no options were forfeited (12,500 share options were canceled in 1999). No options were exercised in 2001 and 1999 (35,500 share options were exercised in 2000). As of December 31, 2001, options for 314,500 shares were outstanding and 264,500 were exercisable. 23 The combined stock option activity of the Company's two option plans is summarized below: (In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------- ------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price - ---------------------------------------------------------------------------------------------------------------- Outstanding-- Beginning of Year .. 1,482 $ 1.06 1,526 $ 1.00 1,285 $ 0.91 Granted ............ 310 0.49 76 1.78 347 1.36 Exercised .......... -- -- (50) .67 -- -- Forfeited .......... (38) 1.26 (70) .87 (106) 1.05 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding-- End of Year ........ 1,754 $ 0.95 1,482 $ 1.06 1,526 $ 1.00 ========== ========== ========== ========== ========== ========== Exercisable at End of Year ........ 1,567 $ 1.01 1,319 $ 1.02 1,125 $ 0.99 - ----------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 2001, ranged from $0.5625 to $2.125. The weighted-average remaining contractual life of those options is 3.3 years. Proforma Disclosures of the Effect of Stock-Based Compensation. Pro forma information regarding net earnings (loss) and earnings (loss) per share is required by FAS 123 and has been determined as if the Company had accounted for its stock options under the fair value method of FAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2001, 2000, and 1999: risk-free interest rates of 5.5% and 5.0% for March and August 2001 grants,respectively, 6.25% for the March and April 2000 grants, and 5.3% for the March 1999 grants; dividend yield of 0% for all years; volatility factors of the expected market price of the Company's common stock of 0.695, 0.65, and 0.56 for the years 2001, 2000, and 1999, respectively; and a weighted-average expected life of the option of five years for all employee grants and seven years for director grants. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, options valuation models require the input of highly subjective assumptions including the expected stock price volatility. Since the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting periods of the options. The Company has elected to base its initial estimate of compensation expense on the total number of options granted. Subsequent revisions to reflect actual forfeitures are made in the period the forfeitures occur through a catch-up adjustment. 24 Pro forma information regarding the Company's net earnings (loss) and earnings per share follows: (In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Net (Loss) Earnings -- As Reported ......................... $ (2,030) $ 100 $ 1,342 Pro Forma Net (Loss) Earnings--FAS 123 ..................... (2,119) (2) 1,278 Net (Loss) Earnings per Share-- As Reported Basic .......... $ (0.20) $ 0.01 $ 0.13 ============= ============ ============ Net (Loss) Earnings per Share-- As Reported Diluted ........ $ (0.20) $ 0.01 $ 0.13 ============= ============ ============ Pro Forma Net (Loss) Earnings per Share-- FAS 123 Basic .... $ (0.21) $ -- $ 0.13 ============= ============ ============ Pro Forma Net (Loss) Earnings per Share-- FAS 123 Diluted .. $ (0.21) $ -- $ 0.12 ============= ============ ============ - ----------------------------------------------------------------------------------------------------------------
The weighted-average grant-date fair value of options granted, which is the value assigned to the options under FAS 123, was $0.32, $1.20, and $0.75 for grants made during years ended December 31, 2001, 2000, and 1999, respectively. Note 4. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 2001 and 2000 are as follows, using the liability method:
- ---------------------------------------------------------------------------------------------------------------- December 31, ----------------------------- 2001 2000 - ---------------------------------------------------------------------------------------------------------------- Current Deferred Tax Assets Net Operating Loss .................................................... $ 456 $ -- Accrued Expenses Not Currently Deductible ............................. 545 640 Differences Between Book and Tax Depreciation and Amortization ........ 146 74 Other ................................................................. 129 19 ------------ ------------ Total Current Gross Deferred Tax Assets ........................... 1,276 733 ------------ ------------ Less: Valuation Allowance ............................................ (791) (695) Current Deferred Tax Liabilities Software Development Costs............................................. 485 -- Other ................................................................. -- 38 ------------ ------------ Net Current Deferred Tax Liabilities .............................. $ -- $ -- ============ ============ - ----------------------------------------------------------------------------------------------------------------
25 The current tax benefit/provision for the years ended December 31, 2001, 2000, and 1999, are as follows:
- ----------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------- 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Current: Federal ..................................................... $ (1083) $ 42 $ 927 State ....................................................... 13 21 186 ----------- ------------ ------------ Tax (Benefit) Provision ..................................... $ (1,070) $ 63 $ 1,113 =========== ============ ============ - -----------------------------------------------------------------------------------------------------------------
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $96,000 for the year ended December 31, 2001 and decreased by $32,000 during the year ended December 31, 2000 for those deferred tax assets that may not be realized. Utilization of the Company's net operating loss may be subject to substantial annual limitations due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such limitations could result in the expiration of the net operating loss before utilization. The benefit/provision for income taxes differed from the amount computed by applying the statutory federal and state income tax rate for the years ended December 31, 2001, 2000, and 1999, as follows:
- ----------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------- 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Federal Statutory Rate ........................................... 34% 34% 34% State Taxes, Net of Federal Benefit .............................. 0% 8% 5% Permanent Differences ............................................ (1%) 12% 1% Increase in Valuation Allowance .................................. (3%) (20%) (2%) Other ............................................................ 5% 5% 7% ----------- ------------ ------------ Income Tax Benefit/Provision ..................................... 35% 39% 45% =========== ============ ============ - -----------------------------------------------------------------------------------------------------------------
The Company paid no income taxes in 2001 and $64,000 in 2000. 26 Note 5. Commitments and Contingencies Leases. The Company occupies facilities under noncancelable operating leases expiring at various dates through 2005. The leases call for proportionate increases due to property taxes and certain other expenses. Rent expense amounted to $710,000 for the year ended December 31, 2001 ($537,000 in 2000 and $349,000 in 1999). Minimum rental commitments under operating leases, principally for real property, are as follows (in thousands): (Year Ending December 31)
- ---------------------------------------------------------------------------------------------------------------- 2002 ......................................................................................... $ 902 2003 ......................................................................................... 713 2004 ......................................................................................... 468 2005 ......................................................................................... 382 2006 and Thereafter .......................................................................... -- ------------ Total Minimum Payments Required .............................................................. $ 2,465 ============ - ----------------------------------------------------------------------------------------------------------------
Revolving Loan Agreement. A loan agreement with the Company's bank expired in May 2001 and was not renewed. The Company is currently pursuing a new credit facility with its bank and others. During 2001, 2000, and 1999, the Company paid no interest expense, as there were no borrowings. 27 Note 6. Long-Term Obligations In June 2001, GoTrain entered into a five-year agreement with SmartForce to co-develop and distribute ES&H and regulatory content via the SmartForce internet platform. Under the agreement, GoTrain retains the ownership of its proprietary content and GoTrain shares in the revenue of any GoTrain content sold by SmartForce. As part of the agreement, GoTrain was required to make an initial payment of $50,000 to SmartForce at inception and quarterly payments of $68,500 commencing September 30, 2001 (due sixty day thereafter), for platform license and maintenance, and integration of existing GoTrain content. The Company paid $118,500 to SmartForce under the agreement in 2001. Minimum net payments are as follows (in thousands): (Year Ending December 31)
- ---------------------------------------------------------------------------------------------------------------- 2002 ......................................................................................... $ 274 2003 ......................................................................................... 274 2004 ......................................................................................... 274 2005 ......................................................................................... 274 2006 and Thereafter .......................................................................... 206 ------------ Total Minimum Payments Required .............................................................. $ 1,302 ============ - ----------------------------------------------------------------------------------------------------------------
28 Note 7. Segment Information Based on the criteria established by Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131"), the Company operates in two business segments based on product/service differentiation. In accordance with FAS 131, the Company is required to describe its reportable segments and provide data that is consistent with the data made available to the Company's Chief Operating Decision Maker to assess performance and make decisions. The measure of profit or loss used for each reportable segment is net earnings (loss) before the effect of income taxes. The accounting policies for the segments are the same as for the Company taken as a whole. Certain corporate expenses are allocated to these operating segments and are included for performance evaluation. Annual employee bonuses, if any, are recorded at the corporate level. Assets are not allocated to operating segments for reporting to the Company's Chief Operating Decision Maker ("CODM") and the Company does not prepare segmental balance sheets. Depreciation and amortization expenses are allocated to the operating segments based on the fixed assets in the underlying subsidiaries comprising the segments. Depreciation and amortization expenses for the e-Learning segment were combined with the Professional and Technical Services Segment in 1999. There are no intersegment revenues on transactions between reportable segments. Information about the operating segments for the years 2001, 2000, and 1999, and reconciliation to the Consolidated Statements of Operations, are as follows: (In thousands)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- REVENUE Professional and Technical Services...................... $ 18,964 $ 32,013 $ 37,212 e-Learning ............................................... 1,101 430 710 ------------- ------------ ------------ Total ................................................. $ 20,065 $ 32,443 $ 37,922 ============= ============ ============ NET (LOSS) EARNINGS BEFORE INCOME TAX Professional and Technical Services ..................... $ 815 $ 2,981 $ 3,977 e-Learning .............................................. (3,542) (1,827) (109) Corporate and Other ..................................... (373) (991) (1,413) ------------- ------------ ------------ Total ................................................. $ (3,100) $ 163 $ 2,455 ============= ============ ============ DEPRECIATION AND AMORTIZATION EXPENSE Professional and Technical Services ..................... $ 59 $ 88 $ 108 e-Learning .............................................. 671 281 NA Corporate and Other ..................................... 22 19 43 ------------- ------------ ------------ Total ................................................. $ 752 $ 388 $ 151 ============= ============ ============ - ----------------------------------------------------------------------------------------------------------------
Revenues outside of the United States have been less than 1% of total Company revenues in each of the years ended December 31, 2001, 2000, and 1999, respectively. Therefore, no enterprise-wide geographical data has been provided. The Company provides services and products to clients throughout the United States, and the geographical location of the client is not used for decision-making or performance evaluation. 29 Note 8. Selected Quarterly Combined Financial Data (Unaudited) A summary of the Company's quarterly financial results follows. (In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Quarter Ended Quarter Ended --------------------------------------------- --------------------------------------------- 12/31/01 9/30/01 6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00 - ---------------------------------------------------------------------------------------------------------------- Revenue ..... $ 4,450 $ 4,441 $ 5,301 $ 5,873 $ 6,784 $ 7,673 $ 8,339 $ 9,647 Direct Costs 3,512 3,549 4,112 4,524 5,082 5,987 6,675 7,721 General and Administrative Expenses .... 1,512 1,719 2,162 2,094 1,962 1,639 1,619 1,781 Other Income -- -- -- -- -- -- -- 4 -------- ------- -------- -------- -------- -------- -------- -------- Operating (Loss) Income (574) (827) (973) (745) (260) 47 45 149 Interest Income, net . 3 (18) 13 21 45 49 37 51 -------- ------- -------- -------- -------- -------- -------- -------- Net (Loss) Earn Before Inc. Tax (Benefit) Exp (571) (845) (960) (724) (215) 96 82 200 Income Tax (Benefit) Exp (336) (245) (278) (211) (88) 38 33 80 -------- ------- -------- -------- -------- -------- -------- -------- Net (Loss) Earn......... $ (235) $ (600) $ (682) $ (513) $ (127) $ 58 $ 49 $ 120 ======== ======= ======== ======== ======== ======== ======== ======== Net (Loss) Earn Per Share-Basic.. $ (0.02) $ (0.06) $ (0.07) $ (0.05) $ (0.01) $ 0.01 $ 0.01 $ 0.01 ======== ======= ======== ======== ======== ======== ======== ======== Net (Loss) Earn Per Share-Diluted $ (0.02) $ (0.06) $ (0.07) $ (0.05) $ (0.01) $ 0.01 $ 0.01 $ 0.01 ======== ======= ======== ======== ======== ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------
30 Note 9. Subsequent Event Convertible Debt. In March 2002, The Company's GoTrain subsidiary sold subordinated convertible debentures to private investors for a total principal amount of $1,500,000 ("Series 1 Debenture" - $1,000,000; "Series 2 Debenture" - $500,000). Each debenture bears simple interest at the rate of 8% per annum, with cumulative interest payable only if the debenture is not converted into convertible preferred stock of GoTrain, pursuant to the debenture terms. The maturity date of each debenture is July 31, 2003. The holders of the Series 1 Debenture have the option at any time to convert some or all of the debenture principal balance into preferred stock of GoTrain. Otherwise, the debenture will be automatically converted into preferred stock upon the earlier of July 31, 2003, or in the event of an underwritten public offering of GoTrain common stock. At full conversion, the holders will own approximately 22% of GoTrain. GoTrain has the option at any time to repay some or all of the Series 2 Debenture at face value or convert some or all of the debenture into preferred stock. Otherwise, the debenture will automatically convert into preferred stock under the same terms as the Series 1 Debenture. In the event of full conversion, the holders of the Series 2 Debenture would own approximately 11% of GoTrain. 31 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders TENERA, Inc. We have audited the accompanying consolidated balance sheets of TENERA, Inc. at December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TENERA, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole presents fairly, in all material respects, the information set forth therein. The accompanying financial statements have been prepared assuming that TENERA, Inc. will continue as a going concern. As more fully described in Note 1, the Company has experienced declining revenues, a consolidated net loss for the year ended December 31, 2001, and a declining cash balance. The Company has incurred a consolidated net loss and declining cash balance primarily as a result of the Company's e-Learning segment. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP San Francisco, California January 25, 2002 Except for Note 9, as to which the date is March 19, 2002 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 33 PART III Item 10. Directors and Executive Officers of the Registrant The following tables set forth certain information with respect to the directors and executive officers of the Company. The directors of the Company are as follows: William A. Hasler, 60, has served as a Director of the Company since his election in March 1992 and Chairman of the Board of the Company since July 1998. Mr. Hasler is Co-Chief Executive Officer of Aphton Corporation, a international biotechnology firm. Previously, Mr. Hasler was Dean and Department Chair of the Haas School of Business at the University of California, Berkeley. Prior to his appointment as Dean in 1991, Mr. Hasler was Vice Chairman of Management Consulting for KPMG Peat Marwick from 1986 to 1991. Mr. Hasler is also a director of Solectron Corporation, Aphton Corporation, Walker Interactive Systems, Inc., DiTech Corporation, The Schwab Funds, and DMC Stratex Networks. Jeffrey R. Hazarian, 46, has served as a Director of the Company since his election in October 1996, and was named its Executive Vice President in November 1997. He has also served as its Chief Financial Officer and Corporate Secretary since 1992. Previously, Mr. Hazarian held the position of Vice President of Finance from 1992 to 1997. Thomas S. Loo, Esq., 58, was elected as a Director of the Company in February 1997. He previously served as a Director of the Company from August 1987 to September 1993. Mr. Loo is a partner of Greenberg Traurig, LLP, general counsel to the Company since November 2001. Previously, Mr. Loo had been a partner, since 1986, of Bryan Cave LLP, which was general counsel to the Company. Mr. Loo has also served as a director of Teknekron Corporation since March 1989. Robert C. McKay, 50, has served as a Director of the Company since his election in June 1997, and was appointed its Chief Executive Officer and President in November 1997. Previously, Mr. McKay was Chief Operating Officer of the Company since April 1997. He was elected Senior Vice President of the Company in December 1992. Andrea W. O'Riordan, 31, has served as Director of the Company since her election in June 1998. Ms. O'Riordan is Communications Manager of field sales, process and automation, and core technologies training for Oracle Corporation. Prior to her joining Oracle Corporation in 1996, Ms. O'Riordan was Marketing Coordinator, Latin America, for a Reuters Company, from 1993 to 1995. George L. Turin, Sc.D., 72, has served as a Director of the Company since his election in March 1995. Previously, Mr. Turin served as a Professor of Electrical Engineering and Computer Science at the University of California at Berkeley from 1960 to 1990. Mr. Turin also served as Vice President, Technology for Teknekron Corporation from 1988 to 1994. Officers of the Company hold office at the pleasure of the Board of Directors. There are no familial relationships between or among any of the executive officers or directors of the Company. 34 Item 11. Executive Compensation The following tables set forth certain information covering compensation paid by TENERA to the Chief Executive Officer ("CEO") and each of the Company's other executive officers, other than the CEO, whose total annual salary and bonus exceeded $100,000 (the "named executives") for services to TENERA in all their capacities during the fiscal years ended December 31, 2001, 2000, and 1999. SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------- Annual Compensation Awards ------------------------------ ------------- Securities All Other Name and Underlying Compensa- Principal Position Year Salary Bonus Options(1) tion(2) - --------------------------------------------------------------------------------------------------------------- Robert C. McKay, Jr. 2001 $ 215,147 $ -- 30,000 $ 3,400 Chief Executive Officer 2000 231,469 -- -- 3,400 President 1999 223,958 90,000 40,000 3,200 Jeffrey R. Hazarian 2001 167,336 6,000 30,000 3,335 Executive 2000 180,031 7,000 -- 3,400 Vice President and 1999 181,064 67,500 40,000 3,200 Chief Financial Officer - --------------------------------------------------------------------------------------------------------------- (1) Reflects the number of options granted under the Company's 1992 Option Plan. The options expire at the earlier of the end of the option period, generally six years, or three months after employment termination. (2) These amounts represent the amounts accrued for the benefit of the named executives under the Company's 401(k) Plan.
The following table sets forth certain information concerning options granted during 2001 to the named executives: OPTIONS GRANTS IN 2001
- ---------------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ---------------------------------------------------- ----------------------- % of Total Options Number of Granted Name Securities to Exercise Underlying Employees or Base Options in Fiscal Price Expiration Granted Year ($/Share) Date 5% 10% - ---------------------------------------------------------------------------------------------------------------- Robert C. McKay, Jr. ..... 30,000 11.5 $ 0.48 8/13/07 $ 4,897 $ 11,110 Jeffrey R. Hazarian....... 30,000 11.5 0.48 8/13/07 4,897 11,110 - ----------------------------------------------------------------------------------------------------------------
35 Other Compensation Arrangements The Company's 1992 Option Plan provides that options may become exercisable over such periods as provided in the agreement evidencing the option award. Options granted to date, including options granted to executive officers and set forth in the above tables, generally call for vesting over a four-year period. The 1992 Option Plan provides that a change in control of the Company will result in immediate vesting of all options granted and not previously vested. Directors Compensation Except as described below, the directors of the Company are paid no compensation by the Company for their services as directors. William A. Hasler, Thomas S. Loo, Andrea W. O'Riordan, and George L. Turin as non-employee directors, are paid a retainer of $1,000 per month. These non-employee directors are also paid a fee of $1,000 for each meeting of the Board, and any Board Committee meeting not held on the same day as a Board meeting, which they attend. Since March of 2001, the non-employee directors have deferred payment of their fees as part of the Company's working capital preservation program (see "Liquidity and Capital Resources"). The 1993 Outside Directors Compensation and Option Plan was approved by the Board effective March 1, 1994, as amended by the Board in 1998, and reserves up to 500,000 options for issuance to non-employee directors. During 2001, 12,500 stock options were granted to each of Messrs. Hasler, Loo, Turin, and Ms. O'Riordan. In 2000, 11,500 stock options were issued to each of Messrs. Hasler, Loo, Turin, and Ms. O'Riordan. During 1999, 12,500 stock options were issued to each of Messrs. Hasler, Loo, Turin, Bunch (resigned in July 1999), and Ms. O'Riordan. The options expire ten (10) years after the date of the grant, vest one (1) year after the date of grant, and have an exercise price equal to the fair market value of the shares of the Company's Common Stock on the date of grant. Upon exercise of the options, a director may not sell or otherwise transfer more than 50% of the shares until six (6) months after the date on which the director ceases to be a director of the Company. Due to his resignation, Mr. Bunch's 1999 options did not vest and were forfeited. Compensation Committee Interlocks and Insider Participation During 2001, the Compensation Committee was composed of William A. Hasler, Thomas S. Loo, Andrea W. O'Riordan, and George Turin. Thomas S. Loo is a partner in the law firm of Greenberg Traurig, LLP, general counsel to the Company and Teknekron Corporation, and is a director of Teknekron Corporation. Mr. Loo is co-trustee of the Andrea Wagner 1996 Trust, the Nina Wagner 1996 Trust, and the Charles Wagner 1996 Trust (see Item 12, "Security Ownership of Certain Beneficial Owners and Management"). Andrea W. O'Riordan is the daughter of Harvey E. Wagner, who holds a beneficial interest in the Company's largest stockholder, The Wagner Family Trust (see Item 12, "Security Ownership of Certain Beneficial Owners and Management"). Mr. Wagner is also the sole stockholder and a director of Teknekron Corporation. 36 Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners The following table sets forth certain information as of March 1, 2002, with respect to beneficial ownership of the shares of Common Stock of the Company by each person who is known by the Company to own beneficially more than 5% of the shares of Common Stock:
- ---------------------------------------------------------------------------------------------------------------- Approximate Shares Percent Beneficially Beneficially Name and Address Owned Owned - ---------------------------------------------------------------------------------------------------------------- Wagner Family Trust........................................................ 2,052,671 20.6%(1) P.O. Box 7370 Incline Village, NV 89452 Andrea Wagner 1996 Trust................................................... 551,996 5.5%(1)(3) P.O. Box 7370 Incline Village, NV 89452 Nina Wagner 1996 Trust .................................................... 551,996 5.5%(1)(3) P.O. Box 7370 Incline Village, NV 89452 Charles Wagner 1996 Trust ................................................. 551,996 5.5%(1)(3) P.O. Box 7370 Incline Village, NV 89452 Peter S. Lynch............................................................. 782,000 7.8% 82 Devonshire Street, S8A Boston, MA 02109 Dr. Michael John Keaton Trust ............................................. 1,106,887 11.1%(2) C/O Greenberg Traurig, LLP 2450 Colorado Avenue, Suite 400E Santa Monica, CA 90404 - ---------------------------------------------------------------------------------------------------------------- (1) An additional 37,461 shares, as to which Mr. Harvey Wagner disclaims beneficial ownership, are held by The Leslie Kipnis Wagner Separate Property Trust. Leslie Wagner is Mr. Harvey Wagner's spouse. Mr. Wagner disclaims beneficial ownership of all shares held in family member trusts, except shares held by the Wagner Family Trust. Andrea Wagner O'Riordan, a director of the Company, disclaims beneficial ownership of all shares held in family member trusts, except shares held by the Andrea Wagner 1996 Trust. (2) Mr. Keaton has sole voting and investment power with respect to all shares shown as beneficially owned by him, subject to community property laws where applicable. (3) Mr. Thomas S. Loo, a director of the Company, is co-trustee of the trusts created for the children of Mr. Harvey Wagner and Leslie Kipnis Wagner. The other co-trustees are Andrea Wagner of the Andrea Wagner 1996 Trust, Nina Wagner of the Nina Wagner 1996 Trust, and Leslie Kipnis Wagner of the Charles Wagner 1996 Trust (see Item 12(b), "Security Ownership of Management").
37 (b) Security Ownership of Management The following table sets forth information as of March 1, 2002, with respect to current beneficial ownership of shares of Common Stock by (i) each of the directors of the Company, (ii) each of the named executive officers (see Item 11. "Executive Compensation"), and (iii) all current directors and executive officers as a group.
- ------------------------------------------------------------------------------------------------------------------- Shares Shares Beneficially Acquirable Percentage Name Owned(1) Within 60 Ownership(2) Days(3)(4) - ------------------------------------------------------------------------------------------------------------------- William A. Hasler ............................................. 55,500 59,000(3) 1.1% Jeffrey R. Hazarian ........................................... 7,186 170,000(4) 1.7% Thomas S. Loo (5).............................................. 1,655,988 57,000(3) 16.1% Robert C. McKay, Jr............................................ 1,789 235,000(4) 2.2% Andrea W. O'Riordan (6)........................................ 551,996 49,000 5.6% George L. Turin................................................ 45,504 84,500(3) 1.2% ------------ ------------- ------------ All Directors and Executive Officers as a Group (6 persons) ... 2,317,963 654,500 27.9% - ------------------------------------------------------------------------------------------------------------------- (1) The persons named above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. (2) Based on the number of shares outstanding at, or acquirable within 60 days of March 1, 2002. (3) Represents options under the Company's 1993 Outside Directors Compensation and Option Plan, which are exercisable on March 1, 2002, or within 60 days thereafter. (4) Represents options under the Company's 1992 Option Plan which are exercisable on March 1, 2002, or within 60 days thereafter. (5) Mr. Loo is co-trustee of the Andrea Wagner 1996 Trust, the Nina Wagner 1996 Trust, and the Charles Wagner 1996 Trust (see Item 12(a), "Security Ownership of Certain Beneficial Owners") (6) Ms. O'Riordan is the daughter of Harvey E. Wagner, who holds a beneficial interest in the Company's largest stockholder, The Wagner Family Trust (see Item 12(a), "Security Ownership of Certain Beneficial Owners").
Beneficial ownership as shown in the tables above has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. Under this Rule, certain securities may be deemed to be beneficially owned by more than one person (such as where persons share voting power or investment power). In addition, securities are deemed to be beneficially owned by a person if the person has the right to acquire the securities (for example, upon exercise of an option or the conversion of a debenture) within 60 days of the date as of which the information is provided; in computing the percentage of ownership of any person, the amount of securities outstanding is deemed to include the amount of securities beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the preceding tables does not necessarily reflect the person's actual voting power at any particular date. Item 13. Certain Relationships and Related Transactions See "Compensation Committee Interlocks and Insider Participation." 38 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements The following financial statements of the Company are filed with this report and can be found in Part II, Item 8, on the pages indicated below: PAGE Consolidated Statements of Operations-- Years Ended December 31, 2001, 2000, and 1999 ....... 16 Consolidated Balance Sheets-- December 31, 2001 and 2000 .................................... 17 Consolidated Statements of Stockholders' Equity-- Years Ended December 31, 2001, 2000, and 1999 ............................................... 18 Consolidated Statements of Cash Flows-- Years Ended December 31, 2001, 2000, and 1999 ........................................................................................ 19 Notes to Consolidated Financial Statements .................................................. 20 Report of Independent Auditors .............................................................. 31 (a)(2) Financial Statement Schedules The following financial statement schedules with respect to the Company are filed in this report: Schedule II-- Valuation and Qualifying Accounts and Reserves ................................ 40 All other schedules are omitted because they are either not required or not applicable.
(a)(3) Exhibits 2.1 Agreement and Plan of Merger dated as of June 6, 1995 among the Registrant, Teknekron Technology MLP I Corporation, TENERA, L.P., and TENERA Operating Company, L.P. (a form of which is attached as Annex A to the Registrant's Consent Solicitation Statement/Prospectus included in the Registration Statement on Form S-4 (Registration No. 33-58393) declared effective by the Securities and Exchange Commission ("SEC") on June 2, 1995 (the "Registration Statement"), and is incorporated herein by reference). 2.2 Asset Acquisition Agreement dated November 14, 1997, between the Registrant and Spear Technologies, Inc. (filed as Exhibit 2.1 to the Registrant's Form 8-K filed with the SEC on November 14, 1997 and incorporated by reference herein (the "Form 8-K")). 2.3 Series C Preferred Stock Purchase Agreement dated April 6, 2000 between the Registrant and Spear Technologies, Inc. (filed as Exhibit 2.3 to the Registrant's 1999 Form 10-K and incorporated herein by reference). 2.4 Asset Acquisition Agreement dated February 10, 2000 between the Registrant and SoBran, Inc. (filed as Exhibit 2.4 to the Registrant's 1999 Form 10-K and incorporated herein by reference). 3.1 Certificate of Incorporation of the Registrant dated October 27, 1994 (filed by incorporation by reference to Exhibit 3.3 to the Registration Statement). 3.2 By-Laws of the Registrant (filed by incorporation by reference to Exhibit 3.4 to the Registration Statement). 4.1 Form of Certificate of Common Stock of the Registrant (filed by incorporation by reference to Exhibit 4.5 to the Registration Statement) 39 4.2(1) Securities Purchase Agreement dated February 13, 2002 between GoTrain Corp. and Columbia Nova Investments, AVV and Polmeroy Limited. 4.3(1) GoTrain Corp. Series 1 Convertible Subordinated Debenture Issued February 15, 2002 Due July 31, 2003. 4.4(1) GoTrain Corp. Series 2 Convertible Subordinated Debenture Issued February 15, 2002 Due July 31, 2003. 10.1 Registrant's lease, dated May 3, 2000, for its property located in Knoxville, Tennessee (filed as Exhibit 10.1 to the Registrant's June 30, 2000 Form 10-Q and incorporated herein by reference). 10.2 Registrant's lease, dated May 30, 2000, for its headquarters located in San Francisco, California filed as Exhibit 10.2 to the Registrant's June 30, 2000 Form 10-Q and incorporated herein by reference). 11.1 Statement regarding computation of per share earnings: See "Note 5 to Consolidated Financial Statements." 21.1(1) List of Subsidiaries of the Registrant. 23.1(1) Consent of Ernst & Young LLP, Independent Auditors. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the last quarter of 2001. (c) Exhibits (see Item 14(a)(3) above.) (d) Financial Statement Schedules The schedules listed in Item 14(a)(2) above should be used in conjunction with the Consolidated Financial Statements of the Company for the year ended December 31, 2001. _______________________ (1) Filed herewith. 40 SCHEDULE II TENERA, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
- ---------------------------------------------------------------------------------------------------------------- Additions Deductions ------------ --------------------------- Balance Charged to Beginning Costs and Credited to Balance at Description of Year Expenses Special Item Other End of Year - ---------------------------------------------------------------------------------------------------------------- 1999 Reserve for Sales Adjustment and Credit Losses ............. $ 1,300 $ -- $ -- $ 2 $ 1,298 2000 Reserve for Sales Adjustment and Credit Losses ............. 1,298 -- -- 334 964 2001 Reserve for Sales Adjustment and Credit Losses ............. 964 -- -- 417 547 - ----------------------------------------------------------------------------------------------------------------
41 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 29, 2002 TENERA, INC. By /s/ JEFFREY R. HAZARIAN --------------------------------------- Jeffrey R. Hazarian Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ WILLIAM A. HASLER Director March 29, 2002 - -------------------------- (William A. Hasler) Director, Chief Financial Officer, Executive Vice President, and Corporate Secretary /s/ JEFFREY R. HAZARIAN (Principal Financial Officer) March 29, 2002 - -------------------------- (Jeffrey R. Hazarian) /s/ THOMAS S. LOO Director March 29, 2002 - -------------------------- (Thomas S. Loo) Director, Chief Executive Officer, and President /s/ ROBERT C. MCKAY (Principal Executive Officer) March 29, 2002 - -------------------------- (Robert C. McKay) /s/ ANDREA W. O'RIORDAN Director March 29, 2002 - -------------------------- (Andrea W. O'Riordan) Controller and Treasurer /s/ JAMES A. ROBISON, JR. (Principal Accounting Officer) March 29, 2002 - -------------------------- (James A. Robison, Jr.) /s/ GEORGE L. TURIN Director March 29, 2002 - -------------------------- (George L. Turin) 42 EXHIBIT INDEX Ex. 4.2 Securities Purchase Agreement dated February 13, 2002 between GoTrain Corp. and Columbia Nova Investments, AVV and Polmeroy Limited Ex. 4.3 GoTrain Corp. Series 1 Convertible Subordinated Debenture Issued February 15, 2002 Due July 31, 2003 Ex. 4.4 GoTrain Corp. Series 2 Convertible Subordinated Debenture Issued February 15, 2002 Due July 31, 2003 Ex. 21.1 List of Subsidiaries of the Registrant Ex. 23.1 Consent of Ernst & Young LLP, Independent Auditors EX-4 2 ye2001exhibit42.txt 2001 10-K EXHIBIT 4.2 EX-4.2 Securities Purchase Agreement dated February 13, 2002 between GoTrain Corp. and Columbia Nova Investments, AVV and Polmeroy Limited Exhibit 4.2 GOTRAIN, CORP. SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is made as of the 13th day of February 2002 by and among GoTrain Corp., a Delaware corporation ("GoTrain" or the "Company"), and the investors listed on Schedule 1 attached hereto (each an "Investor" and collectively the "Investors"). In consideration of the mutual promises, covenants and other good and valuable consideration herein contained, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Purchase and Sale of Securities. ------------------------------- 1.1 Sale and Issuance of Securities. ------------------------------- (a) Subject to the terms and conditions of this Agreement, the Investors agree to purchase at the Closing (as defined herein), and the Company agrees to sell and issue to the Investors at the Closing an 8% Convertible Debenture in the principal amount of One Million Dollars ($1,000,000.00) ("Series 1 Debenture") and an 8% Convertible Debenture in the principal amount of Five Hundred Thousand Dollars ($500,000.00) ("Series 2 Debenture") for an aggregate purchase price of One Million Five Hundred Thousand Dollars ($1,500,000.00) ("Purchase Price"). The Series 1 Debenture and Series 2 Debenture shall collectively be referred to herein as "Debentures," form of which are attached hereto as Exhibits A and B. (b) The Investors shall pay for the Debentures by certified check or wire at the Closing in the amounts provided in Schedule 1. (c) Each Investor shall purchase the amount of the Series 1 Debenture and Series 2 Debenture set forth opposite such Investor's name on Schedule 1 attached hereto. Series A Preferred Stock into which the Debentures may be converted shall have the designations, dividend rights, voting powers, conversion features, rights on liquidation or dissolution or other rights, qualifications, limitations or restrictions set forth in the Certificate of Designation of Series A Preferred Stock attached hereto as Exhibit C (the "Certificate of Designation"). The Debentures and the Series A Preferred Stock shall together be referred to as the "Securities." 1.2 Closing. ------- (a) The purchase and sale of the Securities shall take place at 10:00 a.m. on February 15, 2002 at 100 Bush Street, Suite 850, San Francisco, California, or at such other time and place as shall be mutually agreed upon between the Investors and the Company (the "Closing"). (b) At the Closing, each Investor shall deliver to the Company the Purchase Price for the Securities they are purchasing, as set forth on Schedule 1 attached hereto, in immediately available funds by certified check or wire transfer to an account of the Company designated by the Company not less than three (3) business days prior to the date of the Closing or such other manner reasonably acceptable to the Company. (c) At the Closing, the Company shall deliver to each Investor the Debenture certificates duly registered in the name of such Investor representing the Debentures such Investor is purchasing as set forth opposite such Investor's name on Schedule 1 attached hereto. 2. Representations and Warranties of the Company. Except as set forth on the Schedule of Exceptions attached hereto and furnished to the Investors, specifically identifying the relevant subparagraph(s) hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder, the Company hereby represents and warrants to each Investor that as of the date of this Agreement: 2.1 Organization; Good Standing; Qualification and Corporate Power. -------------------------------------------------------------- (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on its business or properties. True and correct copies of the Company's Certificate of Incorporation (including all certificates of designation) and Bylaws, as in effect on the date hereof, are attached hereto as Exhibit D and Exhibit E, respectively. (b) The Company has all requisite legal and corporate power and authority to execute and deliver this Agreement, the Investors Rights Agreement of even date herewith among the Company and the Investors in the form attached hereto as Exhibit F (the "Investors Rights Agreement"), and the Voting Agreement of even date herewith among the Company, the Investors and the stockholders of the Company set forth therein, in the form attached hereto at Exhibit G (the "Voting Agreement") (The Investors Rights Agreement and the Voting Agreement shall be referred to herein as "Ancillary Documents.") The Company has all requisite legal and corporate power and authority to issue and sell the Securities and to carry out and perform its obligations under the terms of this Agreement and to consummate the transactions contemplated hereby and thereby. All necessary corporate action has been taken by the Company, and to the extent necessary by its stockholders, with respect to the execution, delivery and performance by the Company of this Agreement and the Ancillary Documents and the consummation of the transactions contemplated hereby and thereby. 2.2 Capitalization and Voting Rights. The authorized --------------------------------- capital of the Company consists of the following: (i) Common Stock. 25,000,000 shares of Common ------------- Stock, $0.0001 par value per share, have been authorized (the "Common Stock"), of which 6,667,000 shares are issued and outstanding immediately prior to the Closing. (ii) Preferred Stock. 5,000,000 shares of ---------------- Preferred Stock, $0.0001 par value per share, have been authorized (the "Preferred Stock"), of which 3,333,000 shares have been designated Series A Preferred Stock, none of which are issued or outstanding. (iii) Derivative Securities; Voting Agreements. ------------------------------------------- There are no outstanding options, warrants, rights (including conversion or preemptive rights or rights of first refusal or of first offer) or agreements or understandings for the purchase or acquisition from the Company of any shares of its capital stock. The Company is not a party or subject to any agreement or understanding of any kind, and, to the best knowledge of the Company, there is no agreement or understanding of any kind with any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof (a "Person"), which affects or relates to the repurchase, redemption or other acquisition, disposition or voting or giving of written consents with respect to any security of the Company. 2.3 Directors; Officers. A true and correct list of the officers and directors of the Company, all of whom have been duly and properly elected to the positions set forth opposite their respective names, is set forth in Section 2.3 of the Schedule of Exceptions. 2.4 Security Holders. A true and correct list of the record and beneficial owners of all issued and outstanding shares of Common Stock, together with the holders of any options, warrants or any other convertible securities setting forth their names and the number and kind of securities held by each, is set forth in Section 2.4 of the Schedule of Exceptions. There is no proxy, voting trust, agreement, or arrangement among any of the record or beneficial owners of Common Stock or other security of the Company affecting the exercise of voting or transfer rights of such stock. The Company has not entered into any agreement with any security holder that grants such security holder the right to require the Company to register any of the Company's securities under the Securities Act of 1933, as amended (the "Securities Act") or to participate in any such registration. 2.5 No Undisclosed Liabilities. Except as disclosed in the Assignment Agreement attached as Exhibit H, there are no liabilities or obligations of the Company of any kind whatsoever, liquidated or unliquidated, whether accrued, direct, contingent, absolute, determined, determinable or otherwise, and, to the Company's knowledge, there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability, other than liabilities disclosed in Section 2.6 of the Schedule of Exceptions. There are no accumulated and unpaid dividends with respect to any of the Company's securities. 2.6 Authorization. This Agreement, the Ancillary Documents and Assignment Agreement have been duly authorized, executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to (i) applicable bankruptcy, insolvency, reorganization and moratorium laws, (ii) other laws of general application affecting the enforcement of creditors' rights generally and general principles of equity, (iii) the discretion of the court before which any proceeding therefor may be brought, and (iv) the limitation by federal or state securities laws or by public policy of rights to indemnification. 2.7 Valid Issuance of Debentures and Preferred Stock. ------------------------------------------------ (a) The Debentures to be purchased hereunder and the Series A Preferred Stock issuable upon exercise of the Debentures (the "Shares"), when issued, sold and delivered in accordance with the terms of this Agreement, for the consideration expressed herein and therein, will be duly and validly issued, fully paid, and nonassessable, will not have been issued in violation of any preemptive right of stockholders or rights of first offer or refusal, and the Investors will have good title to the Shares, free and clear of all liens, security interests, pledges, charges, encumbrances and stockholder agreements (other than those contained in the Ancillary Documents). The shares of Series A Preferred Stock issuable upon conversion of the Debentures have been duly authorized, validly reserved for issuance and, when issued upon conversion of the Debentures in accordance with the Certificate of Designation, will be fully paid, and non-assessable, will not be issued in violation of any preemptive right or rights of first offer or refusal, and the holders of-such shares of Series A Preferred Stock will have good title to such shares, free and clear of all liens, security interests, pledges, charges, encumbrances and stockholder agreements (other than those contained in the Ancillary Documents). (b) The Company's outstanding shares of Common Stock have been duly and validly authorized and issued and are fully paid, and non-assessable and were offered, issued and sold in compliance with all applicable Federal and state securities laws. 2.8 Governmental Consents. Other than filings with Federal and state securities authorities in respect of the sale of the Securities, no consent, approval, order, or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement. The Company has complied (and in carrying out its business the Company will be in compliance) with all laws, ordinances and regulations applicable to it and its business, which the failure to comply with would, either individually or in the aggregate, have a material adverse effect upon the Company. The Company has obtained all Federal, state, local and foreign governmental licenses and permits material to and necessary in the conduct of its business, such licenses and permits are in full force and effect, no material violations are or have been recorded in respect of any such licenses or permits, and no proceeding is pending or, to the Company's knowledge, threatened to revoke or limit any thereof. There are no consents or waivers of others necessary for the consummation of the transactions contemplated by this Agreement and the Ancillary Documents. 2.9 Litigation. (i) There is, and has been, no action, suit, proceeding, or investigation pending against the Company or its officers; (ii) neither the Company nor any of its officers is a party or subject to the provisions of any order, writ, injunction, judgment, or decree of any court or government agency or instrumentality (other than those of general applicability); and (iii) there is no action, suit, proceeding or investigation commenced by the Company or its directors or officers currently pending or which such persons intend to initiate with respect to the Company. 2.10 Compliance with Other Instruments. The Company is not in violation or default of any provisions of its Certificate of Incorporation or Bylaws, as amended, or of any instrument, judgment, order, writ, decree, or contract to which it is a party or by which it is bound or, to the Company's knowledge, of any provision of Federal or state statute, rule or regulation, license, or permit applicable to the Company, the violation or default of which would have a material adverse effect on the Company. The execution, delivery, and performance of this Agreement and the Ancillary Documents and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree, or contract or an event which results in the creation of any lien, charge, or encumbrance upon any assets of the Company. The Company does not have any knowledge of any termination or material breach or anticipated termination or material breach by the other parties to any material contract or commitment to which it is a party or to which any of its assets are subject which would have a material adverse effect on the Company. To the Company's knowledge, there are no warranty claims or other uninsured claims against the Company under completed contracts which might involve a material monetary liability which is not reserved against in its financial statements. 2.11 Finder's Fees. There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of the Company who might be entitled to any fee or commission from the investors, the Company or any of their respective affiliates upon consummation of the transactions contemplated by this Agreement and the Ancillary Documents. 2.12 Environmental Matters. The Company is not in material violation, or operating its business in material violation, of any applicable federal, state, and local laws, ordinances and rules of common law relating to environmental, safety or health matters ("Environmental Laws") and the Company has not received notice or correspondence from any governmental agency that it may be in violation of, or potentially liable with respect to, any Environmental Laws. To the Company's knowledge, it is not (i) the subject of any investigation about Environmental Laws or any state lien environmental law, or (ii) the subject of any Federal or state investigation or administrative proceeding evaluating whether any remedial action is needed to respond to a release or threatened release of any hazardous substance into the environment. 2.13 Employee Relations. No strike, work stoppage, or other labor dispute relating to the Company is pending and no application for certification of a collective bargaining agent is pending. There are no unfair labor practice charges or grievances pending or in process by or on behalf of any employee of the Company, nor any complaints received by the Company, or on file, with any federal, state or local governmental agencies alleging employment discrimination or other violations of laws pertaining to such employees. The Company is not aware that any officer or key employee of the Company or any significant group of employees of the Company has any plans to terminate employment with the Company. Except for agreements between the Company and its present and former employees, neither the Company nor, to the Company's knowledge, any employee of the Company is subject to any noncompete, nondisclosure, confidentiality, employment, consulting, or similar agreement relating to, affecting, or in conflict with the present or proposed business activities of the Company, which limit the ability of the Company to conduct its business in any material respect or prohibit such employee from being employed by the Company. 2.14 Tax and Other Liabilities. All taxes required by law which are due and payable by the Company have been paid, and all taxes the Company is obligated to withhold from amounts owing to any employee or third party have been withheld, and all tax returns and reports required by law to have been filed by the Company have been duly filed and reflect the amounts due and paid. There are in effect no waivers of applicable statues of limitations with respect to any taxes, governmental charges, duties, imports, levies, or fees for any year and the Company has not agreed to any extension of time with respect to any tax assessment or deficiency. The tax returns of the Company have not been and are not now being audited by the Internal Revenue Service for any of the Company's tax periods. No tax liens have been asserted against any of the Company's assets, and any potential assessment or any additional taxes for periods for which returns have been filed is not expected to exceed the recorded liability therefor, except as set forth on Section 2.14 of the Schedule of Exceptions. 2.15 Securities Act. Assuming the accuracy of the representations of Investors set forth herein, neither the registration of any security under the Securities Act or the securities laws of any state, nor the qualification of an indenture in respect thereof under the Trust Indenture Act of 1939, as amended, is required in connection with the issuance, execution and delivery of the Securities in the manner contemplated hereunder. 2.16 Disclosure; Due Diligence. This Agreement and the Exhibits and Schedules hereto, when taken as a whole with other documents and certificates furnished by the Company to the Investors or their counsel, do not contain any untrue statement of material fact or omit any material fact necessary in order to make the statements therein not misleading. All agreements material to the business of the Company, including, but not limited to, all agreements with any third party, which may, inter alia, create additional obligations or impose restrictions on the conduct of business by the Company have been furnished to the Investors and there are no agreements that the Company is aware of that have not been furnished to (or, if not in writing, described to) the Investors. 2.17 Affiliate Transactions. Schedule 2.17 of the Schedule of Exceptions describes each agreement, contract, arrangement, understanding, transfer of assets or liabilities or other commitment or transaction between the Company, on one hand, and any person who is (or, at the time such agreement, contract, arrangement, understanding, transfer, commitment or transaction was entered into or made, was) a shareholder, director or employee of the Company (or other person controlled, directly or indirectly, by any of the foregoing), on the other hand (collectively, "Affiliate Transactions"). All Affiliate Transactions are on terms and conditions at least as favorable to the Company as the Company could have obtained in similar transactions with unaffiliated third parties. 2.18 Subsidiaries. The Company does not own, directly or indirectly any interest or investment (whether equity or debt) in any corporation, firm, partnership, limited liability company, joint venture, business, association, trust, business trust or other entity. 2.19. Company Assets. The Company owns, or otherwise has sufficient and legally enforceable rights to use, all of the properties and assets (real, personal or mixed, tangible or intangible), used or held for use in connection with, for the conduct of, or otherwise material to, the business and operations of the Company (the "Company Assets"). The Company has good, valid and marketable title to, or in the case of leased property has good and valid leasehold interests in, all Company Assets that are material to its business and operations, including but not limited to all such Company Assets (except any that have been disposed of in the ordinary course of business after the date hereof and in accordance with this Agreement), in each case free and clear of any encumbrance. The Company has maintained all tangible Company Assets that are material to its business and operations in good repair, working order and operating condition subject only to ordinary wear and tear, and all such tangible Company Assets are fully adequate and suitable for the purposes for which they are presently being used. 3. Representations and Warranties of the Investors. ------------------------------------------------ Each investor hereby represents and warrants, to the Company that: 3.1 Organization and Existence. As indicated on the signature pages hereto, such Investor is either (i) a limited partnership duly organized and validly existing under the laws of its respective state of formation, (ii) a limited liability company duly organized and validly existing under the laws of its respective state of formation, (iii) a corporation duly organized and validly existing under the laws of its respective state of incorporation or (iv) an individual. Each Investor represents that it was not organized for the purpose of making an investment in the Company. 3.2 Authorization. The execution, delivery and performance by such Investor of this Agreement and the Ancillary Documents to which such Investor is a party and the consummation by such Investor of the transactions contemplated hereby and thereby are within the powers of such Investor and have been duly authorized by all necessary individual, corporate, partnership or limited liability company action, as appropriate, on the part of such Investor. This Agreement and the Ancillary Documents to which such Investor is a party constitute valid and binding agreements of such Investor, enforceable in accordance with their respective terms, subject to (i) applicable bankruptcy, insolvency, reorganization and moratorium laws, (ii) other laws of general application affecting the enforcement of creditors' rights generally and general principles of equity, (iii) the discretion of the court before which any proceeding therefor may be brought, and (iv) by federal or state securities laws or by public policy of rights to indemnification. All action required to be taken by such Investor for the lawful execution and delivery of this Agreement and the Ancillary Documents to which such Investor is a party has been taken. 3.3 Finders' Fees. There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of such investor who might be entitled to any fee or commission from the Company or Investors upon consummation of the transactions contemplated by this Agreement and the Ancillary Documents. 3.4 Purchase Entirely for Own Account. This Agreement is made with such Investor in reliance upon such Investor's representation to the Company, which by such investor's execution of this Agreement such investor hereby confirms, that the Securities to be purchased by such Investor pursuant to the terms hereof will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof. By executing this Agreement, such Investor further represents that such Investor (i) has no present intention of selling, granting any participation in, or otherwise distributing the Securities acquired by such Investor, and (ii) has no contract, undertaking, agreement or arrangement with any Person to sell or transfer, or grant any participation to such Person or to any third Person, with respect to the Securities to be acquired by such investor. 3.5 Investor Address, Access to Information, Experience, Etc. --------------------------------------------------------- (a) The address set forth on the signature pages of this Agreement is such Investor's true and correct business, residence or domicile address. Such Investor has received and read and is familiar with this Agreement. Such Investor has substantial experience in evaluating non-liquid investments such as the Securities and is capable of evaluating the merits and risks of an investment in the Company. Such Investor is an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act. (b) Such Investor has been furnished access to the business records of the Company and such additional information and documents as such Investor has requested and has been afforded an opportunity to ask questions of, and receive answers from, representatives of the Company concerning the terms and conditions of this Agreement, the purchase of the Securities, the business, operations, market potential, capitalization, financial condition and prospects of the Company, and all other matters deemed relevant to such Investor. (c) Such Investor acknowledges that it has had an opportunity to evaluate all information regarding the Company as it has deemed necessary or desirable in connection with the transactions contemplated by this Agreement, has independently evaluated the transactions contemplated by this Agreement and has reached its own decision to enter into this Agreement independent of and without reliance on any third party. 3.6 Restricted Securities. Such Investor understands that the Securities to be acquired by such Investor (including the Series A Preferred Stock issuable upon conversion of the Debentures, and the Common Stock upon exercise and conversion of the Series A Preferred Stock) are characterized as "restricted securities" under the federal securities laws, and that such Securities have not been registered under the Securities Act or the laws of any state and may not be sold or transferred, or otherwise disposed of, without registration under the Securities Act and applicable state securities laws, or pursuant to an exemption therefrom. In the absence of an effective registration statement covering the Securities to be acquired by such Investor and the Series A Preferred Stock issuable upon conversion of the Debentures (and the Common Stock upon exercise and conversion of the Series A Preferred Stock), such Investor will sell or transfer, or otherwise dispose of, the Securities to be acquired by such Investor only in a manner consistent with its representations and agreements set forth herein, the terms and conditions set forth in the Ancillary Documents and any applicable Federal and state securities laws. 3.7 Confidentiality. Such investor agrees to keep in confidence and not to use (other than in connection with this offering) or disclose to any third Person for any reason Confidential Information without the Company's prior written consent. "Confidential Information" includes, but is not necessarily limited to, this Agreement, the Ancillary Documents, the transactions contemplated hereby and thereby, as well as all other information related to the Company, and its past, present and future plans, technology, intellectual property, businesses, activities, customers and suppliers. The Company and each investor agree that information will not be considered "Confidential Information" to the extent that such information: (a) is or becomes publicly known through no wrongful act of the receiving party; (b) is rightfully received from a third party without restriction and without breach of this Agreement or any of the Ancillary Documents; or (c) is required to be disclosed pursuant to a requirement of a governmental agency or law so long as the parties provide each other with timely written prior notice of such requirement. 3.8 Legends. It is understood that the certificates evidencing the Securities (Series A Preferred Stock and the Common Stock issued upon conversion of the Debentures, or upon exercise and conversion of the Debentures) may bear one or all of the following legends: (a) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SECURITIES EVIDENCED BY THIS CERTIFICATE, FILED AND MADE EFFECTIVE UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH APPLICABLE STATE SECURITIES LAWS, OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER SUCH ACT AND SUCH APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED. (b) Any legend required by the Blue Sky laws of any state. The legend referred to in clause (a) above shall be removed by the Company from any certificate at such time as the holder of the securities represented by the certificate delivers an opinion of counsel reasonably satisfactory to the Company to the effect that such legend is not required in order to establish compliance with any provisions of the Securities Act, or at such time as the holder of such shares satisfies the requirements of Rule 144(k) or such other substantially similar rule promulgated under the Securities Act then in effect under the Securities Act; provided, that the Company has received from the holder a written representation that (i) such holder is not an affiliate of the Company and has not been an affiliate during the preceding three (3) months, (ii) such holder has beneficially owned the shares represented by the certificate for a period of at least two (2) years (or the period of time then required by Rule 144(k) or such other substantially similar rule promulgated under the Securities Act then in effect), and (iii) such holder otherwise satisfies the requirements of Rule 144(k) as then in effect with respect to such shares. 4. Conditions of Each Investor's Obligations at Closing. The obligations of each investor under Sections 1.1 and 1.2(b) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which shall not be effective against such Investor unless such investor has consented in writing thereto: 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 herein shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 4.2 Performance. The Company shall have performed and complied with all agreements, obligations, and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 4.3 Compliance Certificate. The Chief Executive Officer of the Company shall deliver to the investors at the Closing a certificate certifying that the relevant conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 Secretary's Certificate. The Secretary of the Company shall deliver to the Investors at the Closing a certificate certifying: (i) that attached thereto is a true and complete copy of the Bylaws of the Company as in effect at the Closing; (ii) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement and the Ancillary Documents and the consummation of the transactions contemplated hereby and thereby and that such resolutions have not been amended or modified and are in full force and effect; and (iii) that attached thereto is a true and complete copy of the Company's Certificate of Incorporation, which has not been amended; 4.5 Certificates. Each Investor shall have received executed Debentures representing the amounts set forth opposite such Investor's name on Schedule 1 attached hereto registered in the name of such Investor. 4.6 Agreements. Each Investor shall have received a ---------- Voting Agreement and Investors Rights Agreement duly executed by the parties thereto. 4.7 Other Documents. Each Investor shall have received all documents reasonably requested by such Investor relating to the Company and its performance of this Agreement and the Ancillary Documents, all in form and substance reasonably satisfactory to the Investor. 4.8 Consents and Waivers. The Company shall have obtained any and all consents and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement and the Ancillary Documents. 5. Conditions of the Company's Obligations at Closing. The --------------------------------------------------- obligations of the Company under Sections 1.1 and 1.2(c) of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 5.1 Representations and Warranties. The representations and warranties of the Investors contained in Section 3 herein shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 5.2 Performance. Each of the investors shall have performed and complied with all agreements, obligations, and conditions contained in this Agreement that are required to be performed or complied with by each of them on or before the Closing. 5.3 Agreements. The Company shall have received a Voting Agreement and Investors Rights Agreement duly executed by the investors and the other parties thereto. 5.4 Other Documents. The Company shall have received ---------------- all documents they may reasonably request relating to the Investors and their performance of this Agreement and the Ancillary Documents. 5.5 Consents and Waivers. The Company shall have obtained any and all consents and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement and the Ancillary Documents. 6. Covenants of the Company. In addition to the covenants --------------------------- set forth in the Certificate of Designation, the Company covenants to the Investors, so long as any Shares remain outstanding, as follows: 6.1 Qualifications. In connection with the Closing, the Company shall obtain all necessary Blue Sky law permits and qualifications, or secure exemptions therefrom, required by any state for the offer and sale of the Debentures. 6.2 Maintenance of Existence. The Company shall at all times (a) preserve, renew and keep in full force and effect its legal existence and rights and franchises with respect thereto; and (b) maintain in full force and effect all permits, licenses, trademarks, trade names, other intellectual property rights, approvals, authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted. 6.3 Accounting. The Company will maintain a system of ---------- accounting established and administered in accordance with U.S. generally accepted accounting principles. 6.4 Financial Statements. The Company shall furnish or --------------------- cause to be furnished to each Investor who holds at least $250,000.00 in Debentures or 250,000 shares of Series A Preferred Stock: (a) as soon as reasonably possible, and in any event within ninety (90) days after the end of each fiscal year of the Company, the audited consolidated balance sheet of the Company as at the end of such fiscal year, and audited consolidated statements of operations and retained earnings and cash flow of the Company for such fiscal year, all in reasonable detail, and prepared in accordance with GAAP, and accompanied by the report thereon of a nationally or regionally recognized, independent certified public accountant firm; (b) as soon as reasonably possible, and in any event within sixty (60) days after the end of each quarter, the unaudited consolidated balance sheet and statements of operations and retained earnings and cash flow of the Company for such quarter, all in reasonable detail, prepared in accordance with GAAP, and certified to be complete and correct in all material respects (subject to year-end adjustments) by the President or Chief Financial Officer of the Company; and (c) not less than thirty (30) days prior to the beginning of each fiscal year, deliver the proposed annual operating budget of the Company to the Investors and the form of such annual operating budget as has been approved by the Board of Directors of the Company; and 6.5 Reservation of Stock. The Company shall at all times duly reserve for issuance the shares of Series A Preferred Stock issuable upon conversion of the Debentures and Common Stock issuable upon conversion of the Series A Preferred Stock, 6.6 Use of Proceeds. The Company shall use the proceeds --------------- received from the sale and issuance of the Securities for general working capital purposes. 6.7 Consents. The Company shall use its best efforts to obtain any and all consents and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement and the Ancillary Documents. 6.8 Confidentiality and Invention Agreements. The ----------------------------------------- Company shall use its best efforts to cause all employees of, and consultants to, the Company to execute confidentiality and invention assignment agreements. 7. Indemnity. --------- (a) The Company shall, with respect to the representations, warranties, covenants and agreements made by the Company herein, indemnify, defend and hold the investors (and their respective shareholders, directors, officers, employees, partners, agents, affiliates and controlling parties) (each, in this Section 7(a), an "Indemnified Party") harmless from and against all liability, loss or damage, together with all reasonable and documented costs and expenses related thereto (including legal and accounting fees and expenses), arising from the untruth, inaccuracy or breach of any such representations, warranties, covenants or agreements of the Company contained in this Agreement or the Ancillary Documents or the assertion of any claims relating to the foregoing. The Company shall indemnify and hold harmless each Indemnified Party against any losses, claims, damages or liabilities, joint or several, to which any of the foregoing persons may become subject, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any violations by the Company of the Securities Act or state securities or "blue sky" laws applicable to the Company relating to action or inaction required of the Company in connection with the Securities Act or registration or qualification under such state securities or blue sky laws; and shall reimburse each such Indemnified Party for any reasonable and documented legal or any other expenses incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that no indemnification shall be required hereunder (i) for the gross negligence or willful misconduct of any Indemnified Party, (ii) for breach by the Investors of any of the representations and warrants set forth in this Agreement, or (iii) for any Indemnified Party that fails to cooperate with the Company's reasonable requests in connection with investigating or defending any such loss, claim, damage, liability or action. In case any such action is brought against an Indemnified Party, the Company will be entitled to participate in and assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party, and after notice from the Company to such Indemnified Party of its election to assume the defense thereof, the Company shall be responsible for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof, provided that if any Indemnified Party shall have reasonably concluded that there may be one or more legal defenses available to such Indemnified Party that conflict in any material respect with those available to the Company, or that such claims or litigation involves or could have an effect upon matters beyond the scope of the indemnity provided by this Section 7, the Company shall not have the right to assume the defense of such action on behalf of such Indemnified Party and the Company shall reimburse each such Indemnified Party and any person controlling such Indemnified Party for that portion of the reasonable and documented fees and expenses of any counsel retained by the Indemnified Party attributable to matters for which the Indemnified Party is entitled to indemnification under this Section 7. The Company shall not make any settlement of any claims indemnified against hereunder without the written consent of the Indemnified Party or Parties, which consent shall not be unreasonably withheld. Any claim for indemnification under this Section 7 with respect to representations and warranties must be made not later than the end of the survival period set forth in Section 8.1. (b) Each Investor shall severally and not jointly with any of the other investors, with respect to the representations, warranties made by such Investor herein, indemnify, defend and hold the Company (and its shareholders, directors, officers, employees, partners, agents, affiliates and controlling parties) (each, in this Section 7(b), an "Indemnified Party") harmless from and against all liability, loss or damage, together with all reasonable and documented costs and expenses related thereto (including legal and accounting fees and expenses), arising from the untruth, inaccuracy or breach of any of the representations or warranties set forth in Section 3 hereof; provided, however, that no indemnification shall be required hereunder for the gross negligence or willful misconduct of any Indemnified Party or breach by the Company of any of its representations, warranties, covenants or agreements of the Company contained in this Agreement or the Ancillary Documents or the assertion of any claims relating to the foregoing. In case any such action is brought against an Indemnified Party, such investor will be entitled to participate therein and assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party, and after notice from such investor to such Indemnified Party of its election to assume the defense thereof, such investor shall be responsible for any reasonable and documented legal or other expenses subsequently incurred by the latter in connection with the defense thereof, provided that if any Indemnified Party shall have reasonable concluded, upon the advice of legal counsel experienced in such matters, that there may be one or more legal defenses available to such Indemnified Party that conflict in any material respect with those available to such investor, or that such claims or litigation involves or could have an effect upon matters beyond the scope of the indemnity provided by this Section 7(b), such Investor shall not have the right to assume the defense of such action on behalf of such Indemnified Party and shall reimburse each such Indemnified Party and any person controlling such Indemnified Party for that portion of the reasonable and documented fees and expenses of any counsel retained by the Indemnified Party to the extent relating to such defense or matters for which the Indemnified Party is entitled to indemnification under this Section 7. Such investor shall not make any settlement of any claims indemnified against hereunder without the written consent of the indemnified Party or Parties, which consent shall not be unreasonably withheld. Any claim for indemnification under this Section 7(b) with respect to representations and warranties must be made not later than the end of the survival period set forth in Section 8.1. 8. Miscellaneous. ------------- 8.1 Survival of Warranties. The warranties, representations, and covenants of the Company and each Investor contained in or made pursuant to this Agreement or the Ancillary Documents shall survive the execution and delivery of this Agreement and the Ancillary Documents and the Closing for a period of 60 days. 8.2 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that the Company may not assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the holders of fifty percent (50%) of the Shares then outstanding. Except as provided under Section 7, neither this Agreement nor any provision hereof is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 8.3 Governing Law. This Agreement shall be governed by -------------- and construed under the laws of the State of Delaware without regard to principles of conflicts of laws and rules of such states. 8.4 Arbitration. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction hereunder. The Company, and the Holder by the acceptance of this Agreement, each hereby irrevocably (i) submit to the jurisdiction of the Circuit Court of Tennessee sitting in Knox County in respect of any suit, action or proceeding arising out of or pertaining to the enforcement of the foregoing arbitration provision or any award thereunder, (ii) accept, generally and unconditionally, jurisdiction of the foregoing court, and (iii) waive, to the fullest extent possible under applicable law, any objection of the laying of venue of any such suit, action or proceeding brought in any such court and any claim that such suit, action or proceeding has been brought in an inconvenient forum. Such arbitration shall be conducted by one (1) arbitrator mutually agreeable to the Company and a majority-in-interest of the Investors, or failing such agreement, an arbitrator experienced in similarly-sized companies appointed by the AAA. There shall be limited discovery prior to the arbitration hearing as follows: (a) exchange of witness lists and copies of documentary evidence and documents relating to or arising out of the issues to be arbitrated, (b) depositions of all party witnesses, and (c) such other depositions as may be allowed by the arbitrator upon a showing of good cause. Depositions shall be conducted in accordance with the Tennessee Code, the arbitrator shall be required to provide in writing to the Parties the basis for the award or order of such arbitrator, and a court reporter shall record all hearings, with such record constituting the official transcript of such proceedings. 8.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 8.7 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) four (4) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid, or (iii) one day after deposit with a reputable overnight courier service and addressed to the party to be notified at the address / indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days advance written notice to the other parties, with a copy for the Company to Greenberg Traurig, LLP, 2450 Colorado Avenue, Suite 400E, Santa Monica, California 90404, Attention: Thomas S. Loo, Esq. 8.8 Entire Agreement Amendments and Waivers. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to the subjects hereof, Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors that represent in the aggregate at least a majority of the outstanding Shares (provided that any such amendment which unfairly discriminates against a particular Investor relative to the other Investors or adversely affects an Investor differently from other Investors shall require the agreement or consent of the investor so affected). Any amendment or waiver effected in accordance with this Section 8.9 shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding, each future holder of all such securities, and the Company. No representations and warranties with respect to the sale of the Securities have been made by the Company, on the one hand, and the Investors, on the other, except as expressly provided in this Agreement. 8.9 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the undersigned has executed this Securities Purchase Agreement as of the date first above written. GOTRAIN CORP. By: /s/ GARY CURTIS Name: Gary Curtis Title: Chief Executive Officer [SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT] IN WITNESS WHEREOF, the undersigned has executed this Securities Purchase Agreement as of the date first above written. INVESTORS: COLUMBUS NOVA INVESTMENTS, AVV By: /s/ BERNIE HALL ------------------------------------------ Name: Bernard Hall ------------------------------------------ Title: Senior Director, CNI ------------------------------------------ Polmeroy Limited By: /s/ BERNIE HALL (POA) ------------------------------------------ Name: Bernard Hall ------------------------------------------ Title: Senior Director, CNI ------------------------------------------ [SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT] SCHEDULE 1 SCHEDULE OF INVESTORS Name of Investor Investment Amount 1. Columbia Nova Investments, AVV $500,000.00 c/o CNI Management LLC 590 Madison, 32nd Floor New York, New York 10022 2. Polmeroy Limited $1,000,000.00 Registered Office of Polmeroy Limited Bison Court Post Office Box 3460 Road Town Tortola, British Virgin Islands cc: Polmeroy Limited Post Office Box 274 Thirty Six Hilgrove Street St. Helier, Jersey JE4 8TR EX-4 3 ye2001exhibit43.txt 2001 10-K EXHIBIT 4.3 EX-4.3 GoTrain Corp. Series 1 Convertible Subordinated Debenture Issued February 15, 2002 Due July 31, 2003 Exhibit 4.3 GOTRAIN CORP. 8% CONVERTIBLE SUBORDINATED DEBENTURE DUE JULY 31, 2003 SERIES 1 DEBENTURE THIS DEBENTURE AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT AND APPLICABLE LAWS, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. THIS INSTRUMENT AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED, IN THE MANNER AND TO THE EXTENT SET FORTH IN A SUBORDINATION AGREEMENT (THE "SUBORDINATION AGREEMENT") WHICH MAY BE EXECUTED BETWEEN THE COMPANY AND SENIOR LENDERS. EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, AGREES (i) TO BE BOUND BY THE TERMS OF ANY SUBORDINATION AGREEMENT REQUIRED BY SENIOR LENDERS OF THE COMPANY AND (ii) IN THE EVENT THAT ANY CONFLICT EXISTS BETWEEN THE TERMS OF THIS INSTRUMENT, ANY DOCUMENT EXECUTED IN CONNECTION WITH THE DELIVERY OF THIS INSTRUMENT AND THE TERMS OF THE SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL GOVERN AND BE CONTROLLING. GOTRAIN CORP. 8% CONVERTIBLE SUBORDINATED DEBENTURE DUE JULY 31, 2003 SERIES 1 $1,000,000.00 February 15, 2002 GOTRAIN CORP., a Delaware corporation (the "Company"), which term includes any successor corporation, ("GoTrain" or "the Company"), for value received, hereby promises to pay to Polmeroy Limited ("Holder"), or subject to Sections 7 and 9 herein, Holder's assigns, the principal sum of Six Hundred Sixty Six Thousand, Six Hundred and Sixty Seven Dollars ($666,667.00) ("Original Amount"), or such lesser amount as shall then be outstanding together with any unpaid accrued interest thereon, on July 31, 2003 (the "Maturity Date"), subject to the terms hereof. Interest shall be calculated based on a three hundred sixty-five (365) day year for actual number of days elapsed. This debenture ("Debenture") is issued in connection with the contemporaneous issuance by the Company of additional debentures (the "Debentures") and shall be designated "Series 1 Debenture". The following is a statement of the rights of the Holder of this Debenture and the conditions to which this Debenture is subject, and to which the Holder, by the acceptance of this Debenture, agrees: 9. Interest. This Debenture shall bear interest at the rate of eight percent (8.00%) per annum on the principal of this Debenture outstanding from the date of issuance hereof until the principal amount of this Debenture has been paid in full, or until this Debenture has been fully converted pursuant to Section 5 hereof, whichever is earlier. Interest will be cumulative, but shall not accumulate interest on unpaid interest. Interest shall only be paid if the Holder and the Company fail to convert the Debenture into Series A Preferred Stock. If any interest of the Original Amount is not paid within fifteen (15) days after the due date hereof, whether by acceleration, upon maturity or otherwise, interest shall accrue on such unpaid amount at a default rate equal to the lesser of (i) 12% per month or (ii) the highest rate permitted under applicable law, until such amount is paid in full (the "Default Rate"). 10. Payments. Except as set forth herein with respect to the -------- conversion of Debentures, interest shall accrue and be payable in lawful money of the United States of America to Holder. 11. Events of Default. If any of the events specified in this Section 3 shall occur (individually an "Event of Default"), the Holder may, and subject to Section 4 and Section 5.6 hereof, declare the entire principal and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company (or, in the case of the occurrence of an Event of Default contemplated by paragraphs (i) or (ii) below, the entire principal and unpaid accrued interest hereon shall automatically be immediately due and payable without the requirement of notice) : (i) The institution by the Company of an Insolvency Proceeding, or the consent by it to the institution of an Insolvency Proceeding or the filing by it of a petition or answer or consent to an action seeking an Insolvency Proceeding, or the taking of corporate action by the Company in furtherance of any such action; or (ii) If, within sixty (60) days after the commencement of an involuntary Insolvency Proceeding, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; or (iii) Any default of the Company under any Senior Indebtedness (as defined below) that results in the acceleration of such Senior Indebtedness (iv) Any declaration in writing that the Company is insolvent, inadequately capitalized, or is unable to pay its debts as they fall due; or (v) the Company shall have materially breached any representation, warranty or covenant contained in the Securities Purchase Agreement of even date herewith between the Company and the Holder. "Insolvency Proceeding" means any case or proceeding (x) under the United States Bankruptcy Code, 11 U.S.C. ss.ss. 101, et seq., or (y) under any other federal law, or under state law, to reorganize, liquidate, appoint a trustee for, a receiver for or an assignee for the benefit of creditors of the Company, or for all or substantially all of the assets of the Company, whether voluntary or involuntary. 12. Subordination. ------------- 12.1. Senior Indebtedness. (a) The Company agrees, and Holder and each subsequent holder of this Debenture by acceptance hereof likewise agrees, that the payment of the principal, interest and any other amounts due under this Debenture will be subordinated to all Senior Indebtedness. "Senior Indebtedness" shall mean all indebtedness and payment obligations of the Company, of whatever nature issued by an institution as defined in Rule 501(a)(1) issued under the 1933 Act (as defined in Section 5.2) and such indebtedness has been designated as "Senior Indebtedness" by the Company and the lender(s), whether now or hereafter outstanding, up to a maximum principal amount of $5,000,000.00. By its acceptance of this Debenture, the Holder of this Debenture agrees to be bound by the terms hereof and agrees to execute and deliver such documents as may be reasonably requested from time to time by the Company or the holder of any Senior Indebtedness in order to implement the provisions of this Section 4. In the event the Holder of this Debenture does not execute and deliver such Subordination Agreement(s), then the Company, at its option, shall have the right to repay the principal sum of this Debenture to Holder and terminate all rights and terms herein. (b) Subject to the payment in full of the Senior Indebtedness contemplated by Section 4.1(a) as aforesaid, the holder of this Debenture shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of any kind or character, whether in cash, property, stock or obligations, which may be payable or deliverable to the holders of such Senior Indebtedness, until the principal of, and interest on, this Debenture shall be paid in full, and, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holder of this Debenture, no such payment or distribution made to the holders of Senior Indebtedness by virtue of this Section 4 which otherwise would have been made to the Holder of this Debenture shall be deemed a payment by the Company on account of such Senior Indebtedness, it being understood that the provisions of this Section 4 are and are intended solely for the purposes of defining the relative rights of the Holder of this Debenture, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Subject to the rights, if any, under this Section 4 of holders of Senior Indebtedness to receive cash, property, stock or obligations otherwise payable or deliverable to the holder of this Debenture, nothing herein shall either impair, as between the Company and the Holder of this Debenture, the obligation of the Company, which is unconditional and absolute, to pay the Holder hereof the principal hereof and interest hereon in accordance with its terms and the provisions of this Debenture or prevent the Holder of this Debenture from exercising all remedies otherwise permitted by applicable law or upon default hereunder. (c) Nothing contained in the subordination provisions of this Debenture is intended to or shall impair, as between the Company, its creditors other than the holder(s) of the Senior Debt, and the Holder, the obligation of the Company, which is absolute and unconditional, to pay to the Holder the principal of, premium, if any, and interest on this Debenture, as and when the same shall become due and payable (except as otherwise provided in this Debenture) in accordance with its terms, or is intended to or shall affect the relative rights of the Holder and other creditors of the Company other than the holder(s) of the Senior Indebtedness (up to $5,000,000 in aggregate principal amount), nor shall anything herein or therein prevent the Holder, subject in all events to the rights of the holder(s) of such Senior Indebtedness set forth in this Debenture, (i) from taking all appropriate actions to preserve its rights under this Debenture or (ii) from exercising all remedies otherwise permitted by applicable law upon default under this Debenture. 12.2. Payments in Event of Liquidation, Dissolution, Bankruptcy, Etc. In the event of any liquidation, dissolution or winding up of the Company or any Insolvency Proceeding, all amounts (whether for principal, interest, premium or otherwise) owing on or in respect of all Senior Indebtedness shall first be paid in full before any payment is made upon the indebtedness evidenced by the Debentures; and in any such event any payment or distribution of any kind or character, whether in cash, property or securities, which shall be made upon or in respect of the Debentures shall be paid over to the holders of such Senior Indebtedness, pro rata, for application in payment thereof unless and until such Senior Indebtedness shall have been paid or satisfied in full. The Holders of the Debentures shall share pro rata, based on the total principal and interest then due to each such Holder, in any assets of the Company distributed to the Holders of the Debentures after payment in full of the Senior Indebtedness, if such assets are insufficient to satisfy the Debentures in their entirety. 12.3. Rights of Holders Superior to Common Stock. The rights of the Holders of the Debentures shall be superior to any obligation due any holder of the common stock of the Company, par value $0.0001 ("Common Stock"), or the preferred stock of the Company if any, arising solely out of the fact that such person is an owner of the such stock. 13. Conversion. ---------- 13.1. Conversion at Option of Holder. The Holder of this Debenture shall have the option at any time to convert some or all of the outstanding principal balance of this Debenture in accordance with the provisions of Section 5.4 hereof, into fully paid and nonassessable shares of Series A Preferred Stock. 13.2. Automatic Conversion. Debentures will be automatically converted into Series A Preferred Stock at the Conversion Price (defined below) on the earlier of: (i) July 31, 2003 at the Original Amount or (ii) in the event of an underwritten public offering of the Common Stock at a minimum price of $4.00 per share and a maximum gross offering of $2,000,000.00 pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act") or similar federal statute then in force ("Qualified Public Offering"), at a price per share equal to or greater than the Conversion Price; provided however that by acceptance of this Debenture the Holder agrees to be bound by the terms and conditions of any lock-up agreement requested by the underwriters restricting the transfer of the Common Stock entered into by the Company or any of the Company's principal shareholders, which obligations shall survive the conversion. 13.3. Conversion Price and Accrued Interest. The number of shares of Series A Preferred Stock into which this Debenture may be converted shall be determined by dividing the aggregate outstanding principal amount of this Debenture to be converted by the Conversion Price (as defined herein) in effect at the time of such conversion. The "Conversion Price" shall be an amount equal to Forty Five Cents ($0.45) per share, subject to adjustment as hereinafter provided. 13.4. Conversion Procedure. -------------------- (a) Surrender of Debentures. In the event ------------------------- the holder desires to convert the Debenture prior to the date provided in Section 5.2 into shares of Series A Preferred Stock under Section 5.1, the Holder shall surrender this Debenture at the office of the Company, together with written notice in the form of the Notice of Conversion attached as Exhibit A to this Debenture, and shall state therein the name(s) in which the certificate(s) for shares of Common Stock is to be issued. After the effective date of any automatic conversion in connection with a Qualified Public Offering under Section 5.2, the Holder shall immediately deliver this Debenture to the Company. (b) Effective Date of Conversion. Any ------------------------------ conversion of this Debenture at the option ofthe Holder under Section 5.1 shall be deemed to have been made immediately before the close of business on the date of the surrender of this Debenture, together with the Notice of Conversion; provided, however, if any conversion of this Debenture is made in connection with a Qualified Public Offering under Section 5.1, the conversion may, at the election of the Holder, be conditioned upon the consummation of such Qualified Public Offering, in which case such conversion shall not be deemed to be effective until the date that the registration statement relating to the Public Offering is declared effective by the Securities and Exchange Commission. Any automatic conversion in connection with a Qualified Public Offering of this Debenture under Section 5.2 shall be deemed effective as of the date that the registration statement relating to the Public Offering is declared effective by the Securities and Exchange Commission. Any conversion of this Debenture at the option of the Company under Section 5.3 shall be deemed effective as of the effective date specified in the notice sent by the Company to the Holder under Section 5.3. The failure to surrender this Debenture to the Company in the event of any conversion under Section 5.2 or 5.3 shall not be a condition to the effectiveness of such conversion and this Debenture shall be deemed canceled to the extent of such conversion on the effect date thereof. (c) Delivery of Stock Certificates and/or new Debenture. ------------------------------------------------------ On and after the effective date of any conversion of this Debenture, the person entitled to receive the shares of Series A Preferred Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares, and the Company shall, at its expense, and subject to Section 9 hereof, as soon as practicable after such effective date and the delivery to the Company of this Debenture, issue and deliver such certificate(s) for the number of shares of Series A Preferred Stock to which the Holder shall be entitled upon such conversion, together with a check payable to the Holder for any cash amounts payable for fractional shares, as described in Section 5.5 below, and for all accrued but unpaid interest on the Debentures so converted which the Company elects to pay in cash. If the Holder converts only part of this Debenture, after delivery to the Company of this Debenture, the Company will issue to the Holder a new Debenture evidencing the amount of the indebtedness not converted. 13.5. No Fractional Shares. No fractional shares of Series A Preferred Stock shall be issued upon conversion of all of the outstanding principal balance of this Debenture. In lieu of fractional shares, the Company shall pay to the Holder the amount of outstanding principal that is not so converted, as provided in Section 5.4. 13.6. No Further Obligations. Upon conversion of all of the outstanding principal balance of this Debenture, together with conversion or payment of all accrued but unpaid interest to the date of conversion, the Company shall be forever released from all its obligations and liabilities under this Debenture. 14. Adjustments 14.1. The conversion price per share at which Series A Preferred Stock shall be issuable upon conversion of the Debentures (the "Conversion Price") shall initially be $0.45 per share, provided that, if adjustment of the Conversion Price is required pursuant to Sections 6.1(a) through 6.1(e) hereof, the Conversion Price shall be such adjusted price. No adjustment in the number of shares of Series A Preferred Stock into which the Debenture is convertible shall be made, by adjustment in the Conversion Price, as applicable, unless the consideration per share for Series A Preferred Stock issued or Series A Preferred Stock issuable upon conversion of Debentures deemed to be issued by the Company is less than the Conversion Price in effect on the date of, and immediately prior to, the issue of such shares or Debentures, as the case may be. a. In case any of the following shall occur: (i) any reclassification or change in the outstanding Series A Preferred Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); or (ii) any consolidation or merger to which the Company is a party (other than a merger in which the Company is the surviving corporation and which does not result in any reclassification of, or change in, the outstanding Series A Preferred Stock), (each of the foregoing, an "Organic Change") then, in each such case, appropriate provision shall be made, prior to the effective date of any such Organic Change whereby the holders of the Debentures then outstanding shall have the right to convert such Debentures into the kind and amount of shares, other securities or property, which would have been receivable upon such Organic Change by a holder of the Debentures which would have been issuable upon conversion of the Debentures immediately prior to such Organic Change. In each such case, the Company shall also make appropriate provisions to insure that the provisions of this Section 6 shall thereafter be applicable to the Debentures. The Company shall not effect any such Organic Change, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument, the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. In connection with any provision made pursuant to the terms of the preceding sentence, provision shall also be made for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6. The above provisions of this Section 6.1(a) shall similarly apply to successive Organic Changes. b. In case the Company shall at any time reverse stock split, subdivide or combine the outstanding Series A Preferred Stock issuable upon conversion of the Debentures, then, in each such case, the Price in effect immediately prior to such subdivision or combination shall, effective as of the effective date of such subdivision or combination, be proportionately decreased in the case of (i) a reverse stock split or (ii) subdivision or proportionately increased in the case of combination. c. In case the Company shall issue rights, warrants or options to subscribe for or purchase Series A Preferred Stock at a price per share less than the Conversion Price on the record date mentioned below, the Conversion Price shall be adjusted so that the same shall equal the price per share for which Series A Preferred Stock may be subscribed for or purchased as described below in this Section 6.1(c). Such adjustment shall be made whenever such rights, warrants or options are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights, warrants or options; and, to the extent that such rights, warrants or options expire unexercised, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made as of the record date for the issuance of such rights, warrants or options been made upon the basis of the issuance of rights, warrants or options to subscribe for or purchase only the number of Series A Preferred Stock as to which such rights, warrants or options were actually exercised. In case the Company shall issue rights, warrants or options to subscribe for or purchase securities convertible into, exchangeable for or carrying a right to purchase Series A Preferred Stock (such securities being referred to herein as "Convertible Securities"), for purposes of this Section 6.1(c), (A) such issuance shall be deemed to be an issuance of rights, warrants or options to such holders entitling them to subscribe for or purchase Series A Preferred Stock at the price per share for which the Series A Preferred Stock are issuable upon conversion, exchange or exercise of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration payable to the Company upon the exercise of such rights, warrants or options, plus the minimum aggregate amount of additional consideration, if any, other than such Convertible Securities, payable upon the conversion, exchange or exercise thereof, by (y) the total maximum number of Series A Preferred Stock issuable upon the conversion, exchange or exercise of such Convertible Securities issuable upon the exercise of such rights, warrants or options), and (B) the total maximum number of Series A Preferred Stock issuable upon conversion, exchange or exercise of such Convertible Securities shall be deemed to be the number of Series A Preferred Stock offered for subscription or purchase. To the extent that such Convertible Securities expire or otherwise terminate without being converted, exercised or exchanged, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made as of the record date for the issuance of such rights, warrants or options been made upon the basis of the issuance of the number of Series A Preferred Stock that were actually issued upon the conversion, exercise or exchange of such Convertible Securities. d. In case the Company shall pay a dividend or make a distribution to all holders of Series A Preferred Stock, as such, of its shares, evidences of its indebtedness, assets or rights, warrants or options (excluding dividends or distributions payable in cash out of current, the prior year's or retained earnings of the Company, distributions relating to sub-divisions and combinations covered by Section 6.1(b) hereof and rights, warrants or options to purchase or subscribe for Series A Preferred Stock or Convertible Securities covered by Section 6.1(c) hereof), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mentioned below by a fraction, the numerator of which shall be the total number of Series A Preferred Stock outstanding immediately prior to such record date multiplied by the Current Market Price per Series A Preferred Stock (as defined in Section 6.1(e) hereof) on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company applying, to the extent appropriate, the requirements for determining the Current Market Price of Series A Preferred Stock as set forth in Section 6.1(e) hereof) as of such record date of the shares, evidences of indebtedness or assets so paid or distributed or of such rights, warrants or options, and the denominator of which shall be the total number of Common Shares outstanding immediately prior to such record date multiplied by the Current Market Price per Series A Preferred Stock (as defined in Section 6.1(e) hereof) on such record date. Such adjustment shall be made whenever any such dividend is paid or such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution. Notwithstanding the foregoing, no adjustment shall be made with respect to any such dividend or distribution if the Current Market Price per Series A Preferred Stock immediately prior to such adjustment is greater than the Conversion Price. e. In case the Company shall issue any Series A Preferred Stock other than Excluded Securities (as defined below), whether directly or indirectly as provided in clause (3) of this Section 6.1(e) below, without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such Series A Preferred Stock, the Conversion Price in effect immediately prior to each such issuance shall forthwith be lowered to a price equal to the quotient obtained by dividing: (i) an amount equal to the sum of (x) the total number of Series A Preferred Stock outstanding (including any Series A Preferred Stock deemed to have been issued pursuant to subdivisions (A) and (B) of Section 6.1(e)(iii) below, it being understood that the Series A Preferred Stock issuable upon conversion of the Debentures immediately prior to such issuance shall be deemed to be outstanding for all purposes of the computation required in this clause (e)), immediately prior to such issuance multiplied by the Conversion Price in effect immediately prior to such issuance, plus (y) the consideration received by the Company upon such issuance, by (B) the total number of Series A Preferred Stock outstanding (including any Series A Preferred Stock deemed to have been issued pursuant to subdivisions (i) and (ii) of Section 6.1 below, it being understood that the Series A Preferred Stock issuable upon conversion of the Debentures immediately prior to such issuance shall be deemed to be outstanding for all purposes of the computation required in this clause (e)) immediately after the issuance of such Series A Preferred Stock. For the purposes of any adjustment of the Conversion Price pursuant to this clause (e) of Section 6.1, the following provisions shall be applicable: (i) In the case of the issuance of Series A Preferred Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor after deducting therefrom any discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. (ii) In the case of the issuance of Series A Preferred Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board, irrespective of any accounting treatment. (iii) In the case of the issuance of (i) options to purchase or rights to subscribe for Series A Preferred Stock, (ii) securities by their terms convertible into or exchangeable for Series A Preferred Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities: (A) the aggregate maximum number of Series A Preferred Stock deliverable upon exercise of such options to purchase or rights to subscribe for Series A Preferred Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subdivisions (i) and (ii) above), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Series A Preferred Stock covered thereby; (B) the aggregate maximum number of Series A Preferred Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subdivisions (i) and (ii) above); (C) on any change in the number of Series A Preferred Stock deliverable upon exercise of any such options or rights or conversions of or exchanges for such convertible or exchangeable securities or any change in the consideration to be received by the Company upon the exercise of any such options or rights or conversions of or exchanges for such convertible or exchangeable securities, other than a change resulting from the antidilution provisions thereof, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (D) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of Series A Preferred Stock actually issued upon exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities and subsequent conversion or exchange thereof. (iv). For purposes of Sections 6.1(c), 6.1(d) and 6.1(e) hereof, the following provisions (A) to (F) shall also be applicable: (A) The number of Series A Preferred Stock outstanding at any given time shall include Series A Preferred Stock owned or held by or for the account of the Company or any of its subsidiaries, and the issuance of rights, warrants or options to purchase or subscribe for such treasury shares (or securities convertible into, exchangeable for or carrying a right to purchase such treasury shares) or the distribution of any such treasury shares shall not be considered an issuance, dividend or distribution for purposes of Sections 6.1(c), 6.1(d) and 6.1(e) hereof. (B) No adjustment of the Conversion Price shall be made unless such adjustment would require an increase or decrease of at least one percent (1%) in such price; provided that any adjustments which by reason of this clause (B) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least one percent in the Conversion Price then in effect hereunder. (C) For the purpose of any computation under Section 6.1(d) hereof, the "Current Market Price" per Common Share on any date shall be deemed to be the average of the daily Closing Prices (as defined below) for the twenty (20) consecutive trading days immediately preceding the date in question. The "Closing Price" for each day shall be the last reported sale price or, in case no such reported sale takes place on such day, the closing bid, in either case on the principal national securities exchange (including, for purposes hereof, The Nasdaq Stock Market) on which the Series A Preferred Stock are listed or admitted to trading or, if the Series A Preferred Stock are not listed or admitted to trading on any national securities exchange, the last sale price for the Series A Preferred Stock as quoted on the OTC Bulletin Board (the "OTCBB"), or if the Series A Preferred Stock are not quoted on the OTCBB, the last sale price as quoted in the "pink sheets" published by the National Quotation Bureau, Inc. (the "Pink Sheets") or, if not available in the Pink Sheets, in a similar publication of national standing. If on any such date the Series A Preferred Stock are not listed or admitted to trading on any national securities exchange, are not quoted on the OTCBB, and are not quoted in the Pink Sheets or any similar publishing of national standing, the Current Market Price per Series A Preferred Stock on such date shall be the fair value of such share on such date, as determined in good faith by the Board of Directors of the Company (subject to the approval of any member of the Board of Directors who has been designated by the holders of the Debentures), whose determination shall be final, binding and conclusive if made in good faith. (D) In any case in which this Section 6.1 shall require that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event issuing to the holder of Debentures converted after such record date and before the occurrence of such event the additional Series A Preferred Stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares issuable upon such conversion before giving effect to such adjustment. (E) Except as otherwise expressly provided in this Section 6.1, no adjustment in the Conversion Price shall be made by reason of the issuance or sale, in exchange for cash, property or services, of Series A Preferred Stock, or any Convertible Securities. (F) The term "Excluded Securities" shall mean: (i) the issuance of up to 2,500,000 shares of Series A Preferred Stock issued to employees, consultants, officers or directors of the Company pursuant to stock option plans or restricted stock plans or agreements approved by the Board of Directors (including options grated prior to issuance of its 8% Subordinated Convertible Debentures); (ii) the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, commercial property lease transactions, or similar transactions; (iii) the issuance of securities pursuant to currently outstanding warrants, notes, or other rights to acquire securities of the Company; (iv) the issue of securities in connection with acquisition transactions; (vi) the issuance of Series A Preferred Stock in a Qualified Public Offering; (vii) the issuance of securities in strategic partnership transactions; or (viii) the issuance of Series A Preferred Stock in any other transaction in which exemption from the antidilution provisions is approved by the affirmative vote of at least majority of the then outstanding shares of Debentures. 6.2 Any determination as to whether an adjustment in the Conversion Price in effect hereunder is required pursuant to Sections 6.1(a) through 6.1(e) hereof, or as to the amount of any such adjustment, if required, shall be final, binding and conclusive if made in good faith by the Board of Directors of the Company. 6.3 Whenever the Conversion Price is adjusted as provided in this Section 6, then, in each such case, the Company shall mail, or cause to be mailed, to the holders of Debentures, of record not more than ten days before the date of mailing, a notice in writing stating the adjusted Conversion Price then and thereafter effective under the provisions hereof, the method of calculating such adjusted Conversion Price shown in reasonable detail, and the facts on which such calculation is based. An affidavit of the Secretary of the Company (or of a transfer agent for the Debentures, if one has been appointed) that any such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 6.4 As used in this Section 6, the term "Series A Preferred Stock" shall mean and include the Company's Series A Preferred Stock authorized on February 12, 2002 and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. 6.5 No fractional Series A Preferred Stock shall be issued upon the conversion of any Debentures. 6.6 Upon any conversion, no adjustment shall be made for interest on the Debentures surrendered for conversion or on the Series A Preferred Stock delivered. 6.7. The Company will at all times reserve and keep available out of its authorized but unissued shares, solely for the purpose of issue upon conversion of the Debentures, as provided in this Section 6, such number of Series A Preferred Stock as shall from time to time be sufficient to effect the conversion of all outstanding Debentures, and, upon the issuance thereof upon conversion, all in accordance with the provisions hereof, such Series A Preferred Stock shall be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such Series A Preferred Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which Series A Preferred Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued Series A Preferred Stock to be less than the number of such shares required to be reserved hereunder for issuance upon conversion of the Debentures. 6.8 Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the Series A Preferred Stock, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and lawfully issue fully paid and nonassessable Series A Preferred Stock at the Conversion Price as so adjusted. 6.9 The issuance of certificates for Series A Preferred Stock shall be made without charge for any tax in respect of such issuance or other cost incurred by the Company in connection with such conversion and the related issuance of Series A Preferred Stock upon conversion of Debentures. Upon conversion of each Debenture, the Company shall take all such actions as are necessary in order to insure that the Series A Preferred Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. However, if any such certificate is to be issued in a name other than that of the holder of the converted Debentures, the Company shall not be required to issue or deliver any share certificate or certificates unless and until the holder has paid to the Company the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Company that such tax has been paid or is not due. 6.10 In the event of (i) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders of such securities who are entitled to receive any dividend (other than a cash dividend) or other distribution on the Series A Preferred Stock or any right, warrant or option to subscribe for or purchase any Series A Preferred Stock or any class of Convertible Securities, or (ii) any reclassification or recapitalization of the stated capital of the Company, any consolidation or merger of the Company with or into another corporation, any transfer of all or substantially all of the assets of the Company to any other corporation, entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to each holder of Debentures at least ten (10) days prior to the date specified in such notice, a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend on, distribution or rights, (B) the date on which any such reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation, or winding up is expected to come effective, and (C) the time, if any is to be fixed, as to when the holders of record of Series A Preferred Stock (or other securities) shall be entitled to exchange their Series A Preferred Stock for securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding up. 6.11 The Company shall not close its books against the transfer of Debentures or of Series A Preferred Stock issued or issuable upon conversion of Debentures in any manner which interferes with the timely conversion of the Debentures. The Company shall assist and cooperate with any holder of Debentures required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Debentures hereunder (including, without limitation, making any filings required to be made by the Company). 6.12 If any event occurs of the type contemplated by the provisions of this Section 6 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features but excluding such rights granted to employees, directors, consultants and vendors), then the Company's Board of Directors shall make an appropriate adjustment in the Conversion Price then in effect so as to protect the rights of the holders of Debentures. 6.13 The Company will not, by amendment of its Certificate of Incorporation or Bylaws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Debentures against impairment. 15. Assignment. Subject to the restrictions on transfer described ---------- in Section 9 below, the rights and obligations of the Company and the Holder shall be binding upon and benefit their respective successors, heirs, administrators and permitted assigns and transferees. 16. Waiver and Amendment. Any provision of this Debenture may be -------------------- amended, waived or modified only upon the written consent of the Company and the Holder. 17. Transfer of this Debenture or Securities Issuable on Conversion Hereof. This Debenture and any Series A Preferred Stock or other securities issuable or acquired on conversion hereof (collectively, the "Securities") have not been registered under the 1933 Act, or any applicable state securities laws (collectively, the "Securities Laws"). They may not be sold, transferred, assigned, pledged, or hypothecated unless and until registered under such Securities Laws, or unless the Company has received an opinion of counsel or other evidence, satisfactory to the Company and its counsel in their sole discretion, that such registration is not required. To ensure compliance with the forgoing, the Holder shall give written notice to the Company of such proposed Transfer, describing such Transfer in reasonable detail, and the written consent of the Company shall be required prior to the consummation of any such Transfer. Any Transfer or attempted Transfer of the Securities is void except to the extent that such Transfer has been made in compliance with the provisions hereof. Each Debenture and/or each certificate representing the Series A Preferred Stock Transferred hereunder shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such Securities Laws, unless in the opinion of counsel for the Company such legend is not required. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 18. Representations of Holder. This Debenture is issued to the Holder in reliance upon the Holder's representations to the Company, which by its acceptance hereof the Holder hereby confirms, that: (i) the Securities are and will be acquired for investment for the Holder's own account, and not with a view to the sale or distribution of any part thereof; (ii) the Holder is an "accredited investor" within the meaning of Rule 501 under the 1933 Act, is experienced in evaluating and investing in companies such as the Company, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of this investment and has the ability to bear the economic risks of this investment; and (iii) the Holder understands that the Securities may not be sold, transferred or otherwise disposed of without registration under the Securities Laws or exemption therefrom, that the Company has no obligation to register the Securities, that in the absence of such registration or exemption, the Securities must be held indefinitely, and that the Securities may not be sold pursuant to Rule 144 under the 1933 Act unless all of the conditions of that Rule are met, which conditions are not currently met. 19. Notices. Unless otherwise provided, all notices and other communications required or permitted under this Debenture shall be in writing and shall be mailed by United States first-class mail, postage prepaid or delivered personally by hand or by a nationally recognized courier addressed to the party to be notified at the address indicated for such person on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties hereto. All such notices and other written communications shall be effective on the date of mailing or delivery. 20. No Stockholder Rights. Nothing contained in this Debenture shall be construed as conferring upon the Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company, and no dividends or interest shall be payable or accrued in respect of this Debenture or the interest represented hereby or the Series A Preferred Stock obtainable hereunder until, and only to the extent that, this Debenture shall have been converted. 13. No Waiver, Etc. (a) It is expressly agreed that any waiver by Holder of any item or provision hereof or of any right, remedy or option under this Debenture shall not be controlling, nor shall it prevent or estop Holder from thereafter enforcing such term, provision, right, remedy or option in any other instance, and neither the failure or refusal of Holder to insist in any one or more instances upon the strict performance of this Debenture, nor the acceptance by Holder of any payment less than the amount then due hereunder, shall be construed as a waiver or relinquishment for the future of any such term or provision or the amount remaining due, but the same shall continue in full force and effect, it being understood and agreed that Holder's rights, remedies and options under this Debenture are and shall be cumulative and are in addition to all of the rights, remedies and options of Holder in law or in equity, or under any other agreement. (b) If any of the terms or provisions of this Debenture are construed as binding or obligating the Company or any other person or entity obligated hereunder to pay interest in excess of that authorized by law, such obligation shall, ipso facto, be reduced to the limit of such validity, with the portion of the excess applied and deemed to have been a payment in reduction of the principal, it being the intent of the Company and Holder that neither the Company nor any other person or entity obligated hereunder shall ever be required or obligated under the terms of this Debenture or otherwise to pay interest in excess of the maximum amount permitted by law. (c) The provisions of this Debenture are severable and if any one provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or unenforceability shall affect only such provision in such jurisdiction. This Debenture expresses the entire understanding of the parties with respect to the transactions contemplated hereby. The Company and every endorser and guarantor of this Debenture regardless of the time, order or place of signing hereby waives presentment, demand, protest and notice of every kind, and assents to any extension or postponement of the time for payment or any other indulgence, to any substitution, exchange or release of collateral, and to the addition or release of any other party or person primarily or secondarily liable. 21. Governing Law; Arbitration. This Debenture shall be governed by and construed in accordance with the laws of the State of Delaware, excluding that body of law relating to conflict of laws. Any controversy or claim arising out of or relating to this Debenture or the breach thereof shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction hereunder. The Company, and the Holder by the acceptance of this Debenture, each hereby irrevocably (i) submit to the jurisdiction of the Circuit Court of Tennessee sitting in Knox County in respect of any suit, action or proceeding arising out of or pertaining to the enforcement of the foregoing arbitration provision or any award thereunder, (ii) accept, generally and unconditionally, jurisdiction of the foregoing court, and (iii) waive, to the fullest extent possible under applicable law, any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that such suit, action or proceeding has been brought in an inconvenient forum. Such arbitration shall be conducted by one (1) arbitrator mutually agreeable to the Company and a majority-in-interest of the Investors, or failing such agreement, an arbitrator experienced in similarly-sized companies appointed by the AAA. There shall be limited discovery prior to the arbitration hearing as follows: (a) exchange of witness lists and copies of documentary evidence and documents relating to or arising out of the issues to be arbitrated, (b) depositions of all party witnesses, and (c) such other depositions as may be allowed by the arbitrator upon a showing of good cause. Depositions shall be conducted in accordance with the Tennessee Code, the arbitrator shall be required to provide in writing to the Parties the basis for the award or order of such arbitrator, and a court reporter shall record all hearings, with such record constituting the official transcript of such proceedings. 22. Headings; References. All headings used herein are used for --------------------- convenience only and shall not be used to construe or interpret this Debenture. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. IN WITNESS WHEREOF, the Company has caused this Debenture to be executed this _13th___ day of February, 2002. GOTRAIN CORP. By: ____/s/ GARY CURTIS___________________________ Gary Curtis, Chief Executive Officer HOLDER: /s/ BERNIE HALL _________________________ Sign Attorney in Fact_______________________________ Polmeroy Limited Address:_Registered Office of Polmeroy Limited _________ Bison Court _________ Post Office Box 3460 _________ Road Town _________ Tortola, British Virgin Islands cc:______Polmeroy Limited _________Post Office Box 274 _________Thirty Six Hilgrove Street _________St. Helier, Jersey JE4 8TR EXHIBIT A NOTICE OF CONVERSION (To Be Signed Upon Conversion of Debenture) GOTRAIN CORP. Attn: Chief Executive Officer Address:______________________ --------------------- The undersigned, the Holder of the foregoing Debenture, hereby surrenders such Debenture for conversion into shares of Series A Preferred Stock of GOTRAIN CORP. an amount of $_____________ principal amount of such Debenture, and requests that the certificates for such shares, together with a check payable as set forth below in the amount of all accrued and unpaid interest on such principal amount of such Debenture through the date of such conversion which the Company elects to pay in cash, if any, be issued in the following name and delivered to the following address: Name: ___________________________________ Address: ___________________________________ ----------------------------------- If the principal amount requested for conversion is less than the full outstanding principal amount of the Debenture, the Holder requests that the Company issue to the Holder a new debenture for the amount not converted with the same terms as the Debenture. Dated: ___________________________________ HOLDER: - ----------------------------------------------------- Sign - ----------------------------------------------------- Print name exactly as is appears on the first page of the Debenture Address: ___________________________________ ----------------------------------- EX-4 4 ye2001exhibit44.txt 2001 10-K EXHIBIT 4.4 EX-4.4 GoTrain Corp. Series 2 Convertible Subordinated Debenture Issued February 15, 2002 Due July 31, 2003 Exhibit 4.4 GOTRAIN CORP. 8% CONVERTIBLE SUBORDINATED DEBENTURE DUE JULY 31, 2003 SERIES 2 DEBENTURE THIS DEBENTURE AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT AND APPLICABLE LAWS, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. THIS INSTRUMENT AND THE OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED, IN THE MANNER AND TO THE EXTENT SET FORTH IN A SUBORDINATION AGREEMENT (THE "SUBORDINATION AGREEMENT") WHICH MAY BE EXECUTED BETWEEN THE COMPANY AND SENIOR LENDERS. EACH HOLDER OF THIS INSTRUMENT, BY ITS ACCEPTANCE HEREOF, AGREES (i) TO BE BOUND BY THE TERMS OF ANY SUBORDINATION AGREEMENT REQUIRED BY SENIOR LENDERS OF THE COMPANY AND (ii) IN THE EVENT THAT ANY CONFLICT EXISTS BETWEEN THE TERMS OF THIS INSTRUMENT, ANY DOCUMENT EXECUTED IN CONNECTION WITH THE DELIVERY OF THIS INSTRUMENT AND THE TERMS OF THE SUBORDINATION AGREEMENT, THE TERMS OF THE SUBORDINATION AGREEMENT SHALL GOVERN AND BE CONTROLLING. GOTRAIN CORP. 8% CONVERTIBLE SUBORDINATED DEBENTURE DUE JULY 31, 2003 SERIES 2 $500,000.00 February 15, 2002 GOTRAIN CORP., a Delaware corporation (the "Company"), which term includes any successor corporation, ("GoTrain" or "the Company"), for value received, hereby promises to pay to Polmeroy Limited ("Holder"), or subject to Sections 8 and 10 herein, Holder's assigns, the principal sum of Three Hundred Thirty Three Thousand Three Hundred and Thirty Three Dollars ($333,333.00) ("Original Amount"), or such lesser amount as shall then be outstanding together with any unpaid accrued interest thereon, on or before July 31, 2003 (the "Maturity Date"), subject to the terms hereof. Interest shall be calculated based on a three hundred sixty-five (365) day year for actual number of days elapsed. This debenture ("Debenture") is issued in connection with the contemporaneous issuance by the Company of additional debentures (the "Debentures") and shall be designated "Series 2 Debenture". The following is a statement of the rights of the Holder of this Debenture and the conditions to which this Debenture is subject, and to which the Holder, by the acceptance of this Debenture, agrees: 23. Interest. This Debenture shall bear interest at the rate of eight percent (8.00%) per annum on the principal of this Debenture outstanding from the date of issuance hereof until the principal amount of this Debenture has been paid in full, or until this Debenture has been fully converted pursuant to Section 5 hereof, whichever is earlier. Interest will be cumulative, but shall not accumulate interest on unpaid interest. Interest shall only be paid if the Holder and the Company fail to convert the Debenture into Series A Preferred Stock. If any interest of the Original Amount is not paid within fifteen (15) days after the due date hereof, whether by acceleration, upon maturity or otherwise, interest shall accrue on such unpaid amount at a default rate equal to the lesser of (i) 12% per month or (ii) the highest rate permitted under applicable law, until such amount is paid in full (the "Default Rate"). 24. Payments. Except as set forth herein with respect to redemption or conversion of Debentures, interest shall accrue and be payable in lawful money of the United States of America to Holder, or at the option of GoTrain, in Series A Preferred Stock of the Company, at the address that appears on this instrument below or at such other addresses as sent by Holder to the Company, on the Maturity Date. If Series A Preferred shares are paid, the amount of such shares shall be based upon the conversion rate then in effect. 25. Events of Default. If any of the events specified in this Section 3 shall occur (individually an "Event of Default"), the Holder may, and subject to Section 4 and Section 5.6 hereof, declare the entire principal and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company (or, in the case of the occurrence of an Event of Default contemplated by paragraphs (i) or (ii) below, the entire principal and unpaid accrued interest hereon shall automatically be immediately due and payable without the requirement of notice) : (i) The institution by the Company of an Insolvency Proceeding, or the consent by it to the institution of an Insolvency Proceeding or the filing by it of a petition or answer or consent to an action seeking an Insolvency Proceeding, or the taking of corporate action by the Company in furtherance of any such action; or (ii) If, within sixty (60) days after the commencement of an involuntary Insolvency Proceeding, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; or (iii) Any default of the Company under any Senior Indebtedness (as defined below) that results in the acceleration of such Senior Indebtedness (iv) Any declaration in writing that the Company is insolvent, inadequately capitalized, or is unable to pay its debts as they fall due; or (v) the Company shall have materially breached any representation, warranty or covenant contained in the Securities Purchase Agreement of even date herewith between the Company and the Holder. "Insolvency Proceeding" means any case or proceeding (x) under the United States Bankruptcy Code, 11 U.S.C. ss.ss. 101, et seq., or (y) under any other federal law, or under state law, to reorganize, liquidate, appoint a trustee for, a receiver for or an assignee for the benefit of creditors of the Company, or for all or substantially all of the assets of the Company, whether voluntary or involuntary. 26. Subordination. ------------- 26.1. Senior Indebtedness. (a) The Company agrees, and Holder and each subsequent holder of this Debenture by acceptance hereof likewise agrees, that the payment of the principal, interest and any other amounts due under this Debenture will be subordinated to all Senior Indebtedness. "Senior Indebtedness" shall mean all indebtedness and payment obligations of the Company, of whatever nature issued by an institution as defined in Rule 501(a)(1) issued under the 1933 Act (as defined in Section 5.2) and such indebtedness has been designated as "Senior Indebtedness" by the Company and the lender(s), whether now or hereafter outstanding, up to a maximum principal amount of $5,000,000.00. By its acceptance of this Debenture, the Holder of this Debenture agrees to be bound by the terms hereof and agrees to execute and deliver such documents as may be reasonably requested from time to time by the Company or the holder of any Senior Indebtedness in order to implement the provisions of this Section 4. In the event the Holder of this Debenture does not execute and deliver such Subordination Agreement(s), then the Company, at its option, shall have the right to repay the principal sum of this Debenture to Holder and terminate all rights and terms herein. (b) Subject to the payment in full of the Senior Indebtedness contemplated by Section 4.1(a) as aforesaid, the holder of this Debenture shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of any kind or character, whether in cash, property, stock or obligations, which may be payable or deliverable to the holders of such Senior Indebtedness, until the principal of, and interest on, this Debenture shall be paid in full, and, as between the Company, its creditors other than the holders of Senior Indebtedness, and the Holder of this Debenture, no such payment or distribution made to the holders of Senior Indebtedness by virtue of this Section 4 which otherwise would have been made to the Holder of this Debenture shall be deemed a payment by the Company on account of such Senior Indebtedness, it being understood that the provisions of this Section 4 are and are intended solely for the purposes of defining the relative rights of the Holder of this Debenture, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Subject to the rights, if any, under this Section 4 of holders of Senior Indebtedness to receive cash, property, stock or obligations otherwise payable or deliverable to the holder of this Debenture, nothing herein shall either impair, as between the Company and the Holder of this Debenture, the obligation of the Company, which is unconditional and absolute, to pay the Holder hereof the principal hereof and interest hereon in accordance with its terms and the provisions of this Debenture or prevent the Holder of this Debenture from exercising all remedies otherwise permitted by applicable law or upon default hereunder. (c) Nothing contained in the subordination provisions of this Debenture is intended to or shall impair, as between the Company, its creditors other than the holder(s) of the Senior Debt, and the Holder, the obligation of the Company, which is absolute and unconditional, to pay to the Holder the principal of, premium, if any, and interest on this Debenture, as and when the same shall become due and payable (except as otherwise provided in this Debenture) in accordance with its terms, or is intended to or shall affect the relative rights of the Holder and other creditors of the Company other than the holder(s) of the Senior Indebtedness (up to $5,000,000 in aggregate principal amount), nor shall anything herein or therein prevent the Holder, subject in all events to the rights of the holder(s) of such Senior Indebtedness set forth in this Debenture, (i) from taking all appropriate actions to preserve its rights under this Debenture or (ii) from exercising all remedies otherwise permitted by applicable law upon default under this Debenture. 26.2. Payments in Event of Liquidation, Dissolution, Bankruptcy, Etc. In the event of any liquidation, dissolution or winding up of the Company or any Insolvency Proceeding, all amounts (whether for principal, interest, premium or otherwise) owing on or in respect of all Senior Indebtedness shall first be paid in full before any payment is made upon the indebtedness evidenced by the Debentures; and in any such event any payment or distribution of any kind or character, whether in cash, property or securities, which shall be made upon or in respect of the Debentures shall be paid over to the holders of such Senior Indebtedness, pro rata, for application in payment thereof unless and until such Senior Indebtedness shall have been paid or satisfied in full. The Holders of the Debentures shall share pro rata, based on the total principal and interest then due to each such Holder, in any assets of the Company distributed to the Holders of the Debentures after payment in full of the Senior Indebtedness, if such assets are insufficient to satisfy the Debentures in their entirety. 26.3. Rights of Holders Superior to Common Stock. The rights of the Holders of the Debentures shall be superior to any obligation due any holder of the common stock of the Company, par value $0.0001 ("Common Stock"), or the preferred stock of the Company if any, arising solely out of the fact that such person is an owner of the such stock. 27. Redemption. On or before July 31, 2003 and upon 7 days prior written notice, the Company may elect to call for redemption some or all of the then outstanding Debentures at a price equal to the face value (or, in the case of a partial redemption, fraction thereof) plus accrued and unpaid interest thereon. In the event of a partial redemption, all Debentures will be redeemed pro-rata. In the event the Debentures are not redeemed, they shall be automatically converted in accordance with Section 6. 28. Conversion. ---------- 28.1. Conversion at Option of Company. The Company shall have the option, at any time and before payment in full of the principal balance and interest of this Debenture, to convert some or all of the outstanding principal balance of this Debenture in accordance with the provisions of Section 6.4 hereof, into fully paid and nonassessable shares of Series A Preferred Stock. 28.2. Automatic Conversion. Debentures will be automatically converted into Series A Preferred Stock at the Conversion Price (defined below) on the earlier of: (i) July 31, 2003 at the unpaid Original Amount or (ii) in the event of an underwritten public offering of the Common Stock at a minimum price of $4.00 per share and a maximum gross offering of $2,000,000.00 pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act") or similar federal statute then in force ("Qualified Public Offering"), at a price per share equal to or greater than the Conversion Price; provided however that by acceptance of this Debenture the Holder agrees to be bound by the terms and conditions of any lock-up agreement requested by the underwriters restricting the transfer of the Common Stock entered into by the Company or any of the Company's principal shareholders, which obligations shall survive the conversion. 28.3. Conversion Price and Accrued Interest. The number of shares of Series A Preferred Stock into which this Debenture may be converted shall be determined by dividing the aggregate outstanding principal amount of this Debenture to be converted by the Conversion Price (as defined herein) in effect at the time of such conversion. The "Conversion Price" shall be an amount equal to Forty Five Cents ($0.45) per share, subject to adjustment as hereinafter provided. 28.4. Conversion Procedure. -------------------- (a) Surrender of Debentures. In the event the ----------------------- Company notifies the holder that it elects to convert this Debenture into shares of Series A Preferred Stock under Section 6.1, the Holder shall surrender this Debenture at the office of the Company, and shall state therein the name(s) in which the certificate(s) for shares of Common Stock is to be issued. After the effective date of any automatic conversion in connection with a Qualified Public Offering under Section 6.2, the Holder shall immediately deliver this Debenture to the Company. (b) Effective Date of Conversion. If any ------------------------------ conversion of this Debenture is made in connection with a Qualified Public Offering under Section 6.1, the conversion may, at the election of the Holder, be conditioned upon the consummation of such Qualified Public Offering, in which case such conversion shall not be deemed to be effective until the date that the registration statement relating to the Public Offering is declared effective by the Securities and Exchange Commission. Any automatic conversion in connection with a Qualified Public Offering of this Debenture under Section 6.2 shall be deemed effective as of the date that the registration statement relating to the Qualified Public Offering is declared effective by the Securities and Exchange Commission. Any conversion of this Debenture at the option of the Company under Section 6.3 shall be deemed effective as of the effective date specified in the notice sent by the Company to the Holder under Section 6.3. The failure to surrender this Debenture to the Company in the event of any conversion under Section 6.2 or 6.3 shall not be a condition to the effectiveness of such conversion and this Debenture shall be deemed canceled to the extent of such conversion on the effect date thereof. (c) Delivery of Stock Certificates and/or new Debenture. ---------------------------------------------------- On and after the effective date of any conversion of this Debenture, the person entitled to receive the shares of Series A Preferred Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares, and the Company shall, at its expense, and subject to Section 10 hereof, as soon as practicable after such effective date and the delivery to the Company of this Debenture, issue and deliver such certificate(s) for the number of shares of Series A Preferred Stock to which the Holder shall be entitled upon such conversion, together with a check payable to the Holder for any cash amounts payable for fractional shares, as described in Section 6.5 below, and for all accrued but unpaid interest on the Debentures so converted which the Company elects to pay in cash. If the Holder converts only part of this Debenture, after delivery to the Company of this Debenture, the Company will issue to the Holder a new Debenture evidencing the amount of the indebtedness not converted. 28.5. No Fractional Shares. No fractional shares of Series A Preferred Stock shall be issued upon conversion of all of the outstanding principal balance of this Debenture. In lieu of fractional shares, the Company shall pay to the Holder the amount of outstanding principal that is not so converted, as provided in Section 6.4. 28.6. No Further Obligations. Upon conversion of all of the outstanding principal balance of this Debenture, together with conversion or payment of all accrued but unpaid interest to the date of conversion, the Company shall be forever released from all its obligations and liabilities under this Debenture. 29. Adjustments 29.1. The conversion price per share at which Series A Preferred Stock shall be issuable upon conversion of the Debentures (the "Conversion Price") shall initially be $0.45 per share, provided that, if adjustment of the Conversion Price is required pursuant to Sections 7.1(a) through 7.1(e) hereof, the Conversion Price shall be such adjusted price. No adjustment in the number of shares of Series A Preferred Stock into which the Debenture is convertible shall be made, by adjustment in the Conversion Price, as applicable, unless the consideration per share for Series A Preferred Stock issued or Series A Preferred Stock issuable upon conversion of Debentures deemed to be issued by the Company is less than the Conversion Price in effect on the date of, and immediately prior to, the issue of such shares or Debentures, as the case may be. a. In case any of the following shall occur: (i) any reclassification or change in the outstanding Series A Preferred Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); or (ii) any consolidation or merger to which the Company is a party (other than a merger in which the Company is the surviving corporation and which does not result in any reclassification of, or change in, the outstanding Series A Preferred Stock), (each of the foregoing, an "Organic Change") then, in each such case, appropriate provision shall be made, prior to the effective date of any such Organic Change whereby the holders of the Debentures then outstanding shall have the right to convert such Debentures into the kind and amount of shares, other securities or property, which would have been receivable upon such Organic Change by a holder of the Debentures which would have been issuable upon conversion of the Debentures immediately prior to such Organic Change. In each such case, the Company shall also make appropriate provisions to insure that the provisions of this Section 7 shall thereafter be applicable to the Debentures. The Company shall not effect any such Organic Change, unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument, the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. In connection with any provision made pursuant to the terms of the preceding sentence, provision shall also be made for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 7. The above provisions of this Section 7.1(a) shall similarly apply to successive Organic Changes. b. In case the Company shall at any time reverse stock split, subdivide or combine the outstanding Series A Preferred Stock issuable upon conversion of the Debentures, then, in each such case, the Price in effect immediately prior to such subdivision or combination shall, effective as of the effective date of such subdivision or combination, be proportionately decreased in the case of (i) a reverse stock split or (ii) subdivision or proportionately increased in the case of combination. c. In case the Company shall issue rights, warrants or options to subscribe for or purchase Series A Preferred Stock at a price per share less than the Conversion Price on the record date mentioned below, the Conversion Price shall be adjusted so that the same shall equal the price per share for which Series A Preferred Stock may be subscribed for or purchased as described below in this Section 7.1(c). Such adjustment shall be made whenever such rights, warrants or options are issued and shall become effective immediately after the record date for the determination of shareholders entitled to receive such rights, warrants or options; and, to the extent that such rights, warrants or options expire unexercised, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made as of the record date for the issuance of such rights, warrants or options been made upon the basis of the issuance of rights, warrants or options to subscribe for or purchase only the number of Series A Preferred Stock as to which such rights, warrants or options were actually exercised. In case the Company shall issue rights, warrants or options to subscribe for or purchase securities convertible into, exchangeable for or carrying a right to purchase Series A Preferred Stock (such securities being referred to herein as "Convertible Securities"), for purposes of this Section 7.1(c), (A) such issuance shall be deemed to be an issuance of rights, warrants or options to such holders entitling them to subscribe for or purchase Series A Preferred Stock at the price per share for which the Series A Preferred Stock are issuable upon conversion, exchange or exercise of such Convertible Securities (determined by dividing (x) the minimum aggregate consideration payable to the Company upon the exercise of such rights, warrants or options, plus the minimum aggregate amount of additional consideration, if any, other than such Convertible Securities, payable upon the conversion, exchange or exercise thereof, by (y) the total maximum number of Series A Preferred Stock issuable upon the conversion, exchange or exercise of such Convertible Securities issuable upon the exercise of such rights, warrants or options), and (B) the total maximum number of Series A Preferred Stock issuable upon conversion, exchange or exercise of such Convertible Securities shall be deemed to be the number of Series A Preferred Stock offered for subscription or purchase. To the extent that such Convertible Securities expire or otherwise terminate without being converted, exercised or exchanged, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made as of the record date for the issuance of such rights, warrants or options been made upon the basis of the issuance of the number of Series A Preferred Stock that were actually issued upon the conversion, exercise or exchange of such Convertible Securities. d. In case the Company shall pay a dividend or make a distribution to all holders of Series A Preferred Stock, as such, of its shares, evidences of its indebtedness, assets or rights, warrants or options (excluding dividends or distributions payable in cash out of current, the prior year's or retained earnings of the Company, distributions relating to sub-divisions and combinations covered by Section 7.1(b) hereof and rights, warrants or options to purchase or subscribe for Series A Preferred Stock or Convertible Securities covered by Section 7.1(c) hereof), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date mentioned below by a fraction, the numerator of which shall be the total number of Series A Preferred Stock outstanding immediately prior to such record date multiplied by the Current Market Price per Series A Preferred Stock (as defined in Section 7.1(e) hereof) on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company applying, to the extent appropriate, the requirements for determining the Current Market Price of Series A Preferred Stock as set forth in Section 7.1(e) hereof) as of such record date of the shares, evidences of indebtedness or assets so paid or distributed or of such rights, warrants or options, and the denominator of which shall be the total number of Common Shares outstanding immediately prior to such record date multiplied by the Current Market Price per Series A Preferred Stock (as defined in Section 7.1(e) hereof) on such record date. Such adjustment shall be made whenever any such dividend is paid or such distribution is made and shall become effective immediately after the record date for the determination of shareholders entitled to receive such dividend or distribution. Notwithstanding the foregoing, no adjustment shall be made with respect to any such dividend or distribution if the Current Market Price per Series A Preferred Stock immediately prior to such adjustment is greater than the Conversion Price. e. In case the Company shall issue any Series A Preferred Stock other than Excluded Securities (as defined below), whether directly or indirectly as provided in clause (3) of this Section 7.1(e) below, without consideration or for a consideration per share less than the Conversion Price in effect immediately prior to the issuance of such Series A Preferred Stock, the Conversion Price in effect immediately prior to each such issuance shall forthwith be lowered to a price equal to the quotient obtained by dividing: (i) an amount equal to the sum of (x) the total number of Series A Preferred Stock outstanding (including any Series A Preferred Stock deemed to have been issued pursuant to subdivisions (A) and (B) of Section 7.1(e)(iii) below, it being understood that the Series A Preferred Stock issuable upon conversion of the Debentures immediately prior to such issuance shall be deemed to be outstanding for all purposes of the computation required in this clause (e)), immediately prior to such issuance multiplied by the Conversion Price in effect immediately prior to such issuance, plus (y) the consideration received by the Company upon suchissuance, by (B) the total number of Series A Preferred Stock outstanding (including any Series A Preferred Stock deemed to have been issued pursuant to subdivisions (i) and (ii) of Section 7.1 below, it being understood that the Series A Preferred Stock issuable upon conversion of the Debentures immediately prior to such issuance shall be deemed to be outstanding for all purposes of the computation required in this clause (e)) immediately after the issuance of such Series A Preferred Stock. For the purposes of any adjustment of the Conversion Price pursuant to this clause (e) of Section 7.1, the following provisions shall be applicable: (i) In the case of the issuance of Series A Preferred Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor after deducting therefrom any discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. (ii) In the case of the issuance of Series A Preferred Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board, irrespective of any accounting treatment. (iii) In the case of the issuance of (i) options to purchase or rights to subscribe for Series A Preferred Stock, (ii) securities by their terms convertible into or exchangeable for Series A Preferred Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities: (A) the aggregate maximum number of Series A Preferred Stock deliverable upon exercise of such options to purchase or rights to subscribe for Series A Preferred Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subdivisions (i) and (ii) above), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Series A Preferred Stock covered thereby; (B) the aggregate maximum number of Series A Preferred Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subdivisions (i) and (ii) above); (C) on any change in the number of Series A Preferred Stock deliverable upon exercise of any such options or rights or conversions of or exchanges for such convertible or exchangeable securities or any change in the consideration to be received by the Company upon the exercise of any such options or rights or conversions of or exchanges for such convertible or exchangeable securities, other than a change resulting from the antidilution provisions thereof, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (D) on the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price shall forthwith be readjusted to such Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of Series A Preferred Stock actually issued upon exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities and subsequent conversion or exchange thereof. (iv) For purposes of Sections 7.1(c), 7.1(d) and 7.1(e) hereof, the following provisions (A) to (F) shall also be applicable: (A) The number of Series A Preferred Stock outstanding at any given time shall include Series A Preferred Stock owned or held by or for the account of the Company or any of its subsidiaries, and the issuance of rights, warrants or options to purchase or subscribe for such treasury shares (or securities convertible into, exchangeable for or carrying a right to purchase such treasury shares) or the distribution of any such treasury shares shall not be considered an issuance, dividend or distribution for purposes of Sections 7.1(c), 7.1(d) and 7.1(e) hereof. (B) No adjustment of the Conversion Price shall be made unless such adjustment would require an increase or decrease of at least one percent (1%) in such price; provided that any adjustments which by reason of this clause (B) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least one percent in the Conversion Price then in effect hereunder. (C) For the purpose of any computation under Section 7.1(d) hereof, the "Current Market Price" per Common Share on any date shall be deemed to be the average of the daily Closing Prices (as defined below) for the twenty (20) consecutive trading days immediately preceding the date in question. The "Closing Price" for each day shall be the last reported sale price or, in case no such reported sale takes place on such day, the closing bid, in either case on the principal national securities exchange (including, for purposes hereof, The Nasdaq Stock Market) on which the Series A Preferred Stock are listed or admitted to trading or, if the Series A Preferred Stock are not listed or admitted to trading on any national securities exchange, the last sale price for the Series A Preferred Stock as quoted on the OTC Bulletin Board (the "OTCBB"), or if the Series A Preferred Stock are not quoted on the OTCBB, the last sale price as quoted in the "pink sheets" published by the National Quotation Bureau, Inc. (the "Pink Sheets") or, if not available in the Pink Sheets, in a similar publication of national standing. If on any such date the Series A Preferred Stock are not listed or admitted to trading on any national securities exchange, are not quoted on the OTCBB, and are not quoted in the Pink Sheets or any similar publishing of national standing, the Current Market Price per Series A Preferred Stock on such date shall be the fair value of such share on such date, as determined in good faith by the Board of Directors of the Company (subject to the approval of any member of the Board of Directors who has been designated by the holders of the Debentures), whose determination shall be final, binding and conclusive if made in good faith. (D) In any case in which this Section 7.1 shall require that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event issuing to the holder of Debentures converted after such record date and before the occurrence of such event the additional Series A Preferred Stock issuable upon such conversion by reason of the adjustment required by such event over and above the shares issuable upon such conversion before giving effect to such adjustment. (E) Except as otherwise expressly provided in this Section 7.1, no adjustment in the Conversion Price shall be made by reason of the issuance or sale, in exchange for cash, property or services, of Series A Preferred Stock, or any Convertible Securities. (F) The term "Excluded Securities" shall mean: (i) the issuance of up to 2,500,000 shares of Series A Preferred Stock issued to employees, consultants, officers or directors of the Company pursuant to stock option plans or restricted stock plans or agreements approved by the Board of Directors (including options grated prior to issuance of its 8% Subordinated Convertible Debentures); (ii) the issuance of securities to financial institutions or lessors in connection with commercial credit arrangements, equipment financings, commercial property lease transactions, or similar transactions; (iii) the issuance of securities pursuant to currently outstanding warrants, notes, or other rights to acquire securities of the Company; (iv) the issue of securities in connection with acquisition transactions; (vi) the issuance of Series A Preferred Stock in a Qualified Public Offering; (vii) the issuance of securities in strategic partnership transactions; or (viii) the issuance of Series A Preferred Stock in any other transaction in which exemption from the antidilution provisions is approved by the affirmative vote of at least majority of the then outstanding shares of Debentures. 7.2 Any determination as to whether an adjustment in the Conversion Price in effect hereunder is required pursuant to Sections 7.1(a) through 7.1(e) hereof, or as to the amount of any such adjustment, if required, shall be final, binding and conclusive if made in good faith by the Board of Directors of the Company. 7.3 Whenever the Conversion Price is adjusted as provided in this Section 7, then, in each such case, the Company shall mail, or cause to be mailed, to the holders of Debentures, of record not more than ten days before the date of mailing, a notice in writing stating the adjusted Conversion Price then and thereafter effective under the provisions hereof, the method of calculating such adjusted Conversion Price shown in reasonable detail, and the facts on which such calculation is based. An affidavit of the Secretary of the Company (or of a transfer agent for the Debentures, if one has been appointed) that any such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 7.4 As used in this Section 7, the term "Series A Preferred Stock" shall mean and include the Company's Series A Preferred Stock authorized on February 12, 2002 and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. 7.5 No fractional Series A Preferred Stock shall be issued upon the conversion of any Debentures. 7.6 Upon any conversion, no adjustment shall be made for interest on the Debentures surrendered for conversion or on the Series A Preferred Stock delivered. 7.7. The Company will at all times reserve and keep available out of its authorized but unissued shares, solely for the purpose of issue upon conversion of the Debentures, as provided in this Section 6, such number of Series A Preferred Stock as shall from time to time be sufficient to effect the conversion of all outstanding Debentures, and, upon the issuance thereof upon conversion, all in accordance with the provisions hereof, such Series A Preferred Stock shall be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such Series A Preferred Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which Series A Preferred Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). The Company shall not take any action which would cause the number of authorized but unissued Series A Preferred Stock to be less than the number of such shares required to be reserved hereunder for issuance upon conversion of the Debentures. 7.8 Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the Series A Preferred Stock, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and lawfully issue fully paid and nonassessable Series A Preferred Stock at the Conversion Price as so adjusted. 7.9 The issuance of certificates for Series A Preferred Stock shall be made without charge for any tax in respect of such issuance or other cost incurred by the Company in connection with such conversion and the related issuance of Series A Preferred Stock upon conversion of Debentures. Upon conversion of each Debenture, the Company shall take all such actions as are necessary in order to insure that the Series A Preferred Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. However, if any such certificate is to be issued in a name other than that of the holder of the converted Debentures, the Company shall not be required to issue or deliver any share certificate or certificates unless and until the holder has paid to the Company the amount of any tax which may be payable in respect of any transfer involved in such issuance or shall establish to the satisfaction of the Company that such tax has been paid or is not due. 7.10 In the event of (i) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders of such securities who are entitled to receive any dividend (other than a cash dividend) or other distribution on the Series A Preferred Stock or any right, warrant or option to subscribe for or purchase any Series A Preferred Stock or any class of Convertible Securities, or (ii) any reclassification or recapitalization of the stated capital of the Company, any consolidation or merger of the Company with or into another corporation, any transfer of all or substantially all of the assets of the Company to any other corporation, entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Company, the Company shall mail to each holder of Debentures at least ten (10) days prior to the date specified in such notice, a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend on, distribution or rights, (B) the date on which any such reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation, or winding up is expected to come effective, and (C) the time, if any is to be fixed, as to when the holders of record of Series A Preferred Stock (or other securities) shall be entitled to exchange their Series A Preferred Stock for securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding up. 7.11 The Company shall not close its books against the transfer of Debentures or of Series A Preferred Stock issued or issuable upon conversion of Debentures in any manner which interferes with the timely conversion of the Debentures. The Company shall assist and cooperate with any holder of Debentures required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Debentures hereunder (including, without limitation, making any filings required to be made by the Company). 7.12 If any event occurs of the type contemplated by the provisions of this Section 6 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features but excluding such rights granted to employees, directors, consultants and vendors), then the Company's Board of Directors shall make an appropriate adjustment in the Conversion Price then in effect so as to protect the rights of the holders of Debentures. 7.13 The Company will not, by amendment of its Certificate of Incorporation or Bylaws or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 7 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Debentures against impairment. 30. Assignment. Subject to the restrictions on transfer described ---------- in Section 10 below, the rights and obligations of the Company and the Holder shall be binding upon and benefit their respective successors, heirs, administrators and permitted assigns and transferees. 31. Waiver and Amendment. Any provision of this Debenture may be --------------------- amended, waived or modified only upon the written consent of the Company and the Holder. 32. Transfer of this Debenture or Securities Issuable on Conversion Hereof. This Debenture and any Series A Preferred Stock or other securities issuable or acquired on conversion hereof (collectively, the "Securities") have not been registered under the 1933 Act, or any applicable state securities laws (collectively, the "Securities Laws"). They may not be sold, transferred, assigned, pledged, or hypothecated unless and until registered under such Securities Laws, or unless the Company has received an opinion of counsel or other evidence, satisfactory to the Company and its counsel in their sole discretion, that such registration is not required. To ensure compliance with the forgoing, the Holder shall give written notice to the Company of such proposed Transfer, describing such Transfer in reasonable detail, and the written consent of the Company shall be required prior to the consummation of any such Transfer. Any Transfer or attempted Transfer of the Securities is void except to the extent that such Transfer has been made in compliance with the provisions hereof. Each Debenture and/or each certificate representing the Series A Preferred Stock Transferred hereunder shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such Securities Laws, unless in the opinion of counsel for the Company such legend is not required. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. 33. Representations of Holder. This Debenture is issued to the Holder in reliance upon the Holder's representations to the Company, which by its acceptance hereof the Holder hereby confirms, that: (i) the Securities are and will be acquired for investment for the Holder's own account, and not with a view to the sale or distribution of any part thereof; (ii) the Holder is an "accredited investor" within the meaning of Rule 501 under the 1933 Act, is experienced in evaluating and investing in companies such as the Company, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of this investment and has the ability to bear the economic risks of this investment; and (iii) the Holder understands that the Securities may not be sold, transferred or otherwise disposed of without registration under the Securities Laws or exemption therefrom, that the Company has no obligation to register the Securities, that in the absence of such registration or exemption, the Securities must be held indefinitely, and that the Securities may not be sold pursuant to Rule 144 under the 1933 Act unless all of the conditions of that Rule are met, which conditions are not currently met. 34. Notices. Unless otherwise provided, all notices and other communications required or permitted under this Debenture shall be in writing and shall be mailed by United States first-class mail, postage prepaid or delivered personally by hand or by a nationally recognized courier addressed to the party to be notified at the address indicated for such person on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties hereto. All such notices and other written communications shall be effective on the date of mailing or delivery. 35. No Stockholder Rights. Nothing contained in this Debenture shall be construed as conferring upon the Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company, and no dividends or interest shall be payable or accrued in respect of this Debenture or the interest represented hereby or the Series A Preferred Stock obtainable hereunder until, and only to the extent that, this Debenture shall have been converted. 14. No Waiver, Etc. (a) It is expressly agreed that any waiver by Holder of any item or provision hereof or of any right, remedy or option under this Debenture shall not be controlling, nor shall it prevent or estop Holder from thereafter enforcing such term, provision, right, remedy or option in any other instance, and neither the failure or refusal of Holder to insist in any one or more instances upon the strict performance of this Debenture, nor the acceptance by Holder of any payment less than the amount then due hereunder, shall be construed as a waiver or relinquishment for the future of any such term or provision or the amount remaining due, but the same shall continue in full force and effect, it being understood and agreed that Holder's rights, remedies and options under this Debenture are and shall be cumulative and are in addition to all of the rights, remedies and options of Holder in law or in equity, or under any other agreement. (b) If any of the terms or provisions of this Debenture are construed as binding or obligating the Company or any other person or entity obligated hereunder to pay interest in excess of that authorized by law, such obligation shall, ipso facto, be reduced to the limit of such validity, with the portion of the excess applied and deemed to have been a payment in reduction of the principal, it being the intent of the Company and Holder that neither the Company nor any other person or entity obligated hereunder shall ever be required or obligated under the terms of this Debenture or otherwise to pay interest in excess of the maximum amount permitted by law. (c) The provisions of this Debenture are severable and if any one provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or unenforceability shall affect only such provision in such jurisdiction. This Debenture expresses the entire understanding of the parties with respect to the transactions contemplated hereby. The Company and every endorser and guarantor of this Debenture regardless of the time, order or place of signing hereby waives presentment, demand, protest and notice of every kind, and assents to any extension or postponement of the time for payment or any other indulgence, to any substitution, exchange or release of collateral, and to the addition or release of any other party or person primarily or secondarily liable. 15. Governing Law; Arbitration. This Debenture shall be governed by and construed in accordance with the laws of the State of Delaware, excluding that body of law relating to conflict of laws. Any controversy or claim arising out of or relating to this Debenture or the breach thereof shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction hereunder. The Company, and the Holder by the acceptance of this Debenture, each hereby irrevocably (i) submit to the jurisdiction of the Circuit Court of Tennessee sitting in Knox County in respect of any suit, action or proceeding arising out of or pertaining to the enforcement of the foregoing arbitration provision or any award thereunder, (ii) accept, generally and unconditionally, jurisdiction of the foregoing court, and (iii) waive, to the fullest extent possible under applicable law, any objection to the laying of venue of any such suit, action or proceeding brought in any such court and any claim that such suit, action or proceeding has been brought in an inconvenient forum. Such arbitration shall be conducted by one (1) arbitrator mutually agreeable to the Company and a majority-in-interest of the Investors, or failing such agreement, an arbitrator experienced in similarly-sized companies appointed by the AAA. There shall be limited discovery prior to the arbitration hearing as follows: (a) exchange of witness lists and copies of documentary evidence and documents relating to or arising out of the issues to be arbitrated, (b) depositions of all party witnesses, and (c) such other depositions as may be allowed by the arbitrator upon a showing of good cause. Depositions shall be conducted in accordance with the Tennessee Code, the arbitrator shall be required to provide in writing to the Parties the basis for the award or order of such arbitrator, and a court reporter shall record all hearings, with such record constituting the official transcript of such proceedings. 16. Headings; References. All headings used herein are used for --------------------- convenience only and shall not be used to construe or interpret this Debenture. Except where otherwise indicated, all references herein to Sections refer to Sections hereof. IN WITNESS WHEREOF, the Company has caused this Debenture to be executed this _13th___ day of February, 2002. GOTRAIN CORP. By: ___/s/ GARY CURTIS____________________________ Gary Curtis, Chief Executive Officer HOLDER: /s/ BERNIE HALL________________________________ Sign Attorney in Fact________________________________ Polmeroy Limited Registered Office of Polmeroy Limited Bison Court Post Office Box 3460 Road Town Tortola, British Virgin Islands cc: Polmeroy Limited Post Office Box 274 Thirty Six Hilgrove Street St. Helier, Jersey JE4 8TR EX-21 5 ye2001exhibit211.txt 2001 10-K EXHIBIT 21.1 EX-21.1 LIST OF SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 TENERA Energy, LLC TENERA Rocky Flats, LLC TENERA Technologies, LLC TENERA Colorado Corp. TENERA GoTrain.Net, LLC Closure Mission Support Services, LLC TENERA-Weiss, LLC GoTrain Corp EX-23 6 ye2001exhibit231.txt 2001 10-K EXHIBIT 23.1 EX-23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-58982) pertaining to the 1992 Option Plan of TENERA, Inc., as amended, and the Registration Statement (Form S-8 No. 333-77413) pertaining to the 1993 Outside Director Compensation and Option Plan, Amended and Restated as of March 1, 1998, of TENERA, Inc., of our report dated January 25, 2002, except for Note 9, as to which the date is March 19, 2002, with respect to the consolidated financial statements and schedule of TENERA, Inc., included in the Annual Report on Form 10-K for the year ended December 31, 2001. /s/ERNST & YOUNG LLP San Francisco, California March 28, 2002 -----END PRIVACY-ENHANCED MESSAGE-----