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, 2002
[ ] 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 ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X .
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As of March 1, 2003, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $812,579 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, 2003 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 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 2000, the Company purchased certain Internet-based
development assets of SoBran, Inc., including SoBran's minority interest in
TENERA GoTrain.Net, 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. 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 8 to Consolidated
Financial Statements for additional information regarding Company segments).
In early 2003, the Board of Directors determined that the Company's
limited financial resources, as well as the increasingly more costly regulatory
climate to operate as a public company, require it to actively seek to dispose
of its operating segments or permit its operating units to dispose of their
assets in order to preserve shareholder value. Therefore, the Company is
exploring alternatives for reducing negative cash flow from operations,
including the possible sale or shutdown of certain operating units. There can be
no assurance that adequate liquidity will materialize in quantities or
timeframes, or sustainable in the current economic slowdown projected by
management.
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, which assist its
commercial clients with respect to their nuclear and fossil plant operations and
compliance with environmental regulations. 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 began 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.
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.
2
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 Learning
Management System ("LMS") 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, 2000 through 2002:
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Year Ended December 31,
--------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Professional and Technical Services ................................... 90.3% 94.5% 98.7%
e-Learning ............................................................ 9.7% 5.5% 1.3%
- ----------------------------------------------------------------------------------------------------------------
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:
Environmental and ecological issues at DOE and electric utility facilities
3
Risk management
Operations and maintenance performance improvement
Plant safety
Nuclear safety and criticality at DOE facilities
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:
Learning Management System (Web-based delivery platform)
Library of ES&H Web-based e-Learning
Custom Web-based e-Learning
Courseware tools
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.
Characteristic of TENERA's marketing strategy are significant projects in which
initial contracts have been only a fraction of the ultimate sale.
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.
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. To sell its products and services, the Company
employs field salespeople and utilizes third-party partners. Additionally, a
large portion of new sales from existing clients originates from the Company's
account managers assigned to manage the ongoing relationships with clients.
Through the middle of 2002, the majority of sales originated from field
salespeople and account managers. However, since that time, most of the new
sales have been generated from third-party partners, such as SkillSoft (formerly
known as SmartForce), a leader in e-Learning solutions and content with whom the
Company has a long-term agreement (see Note 6 to Consolidated Financial
Statements). The Company also markets its products and services through direct
advertising, publication interviews and reviews, trade shows, and industry and
trade associations.
Clients
During the year ended December 31, 2002, TENERA provided services to
approximately 65 clients involving over 75 contracts. During the year ended
December 31, 2001, TENERA provided services to over 60 clients involving over 70
contracts. Over 60% of TENERA's clients during the year ended December 31, 2002,
had previously used its services. Less than 1% of all revenues were from clients
outside of the United States.
4
Professional and Technical Services Segment. During the year ended
December 31, 2002, one Professional and Technical Services Segment client,
Kaiser-Hill Company, LLC ("Kaiser-Hill"), prime contractor of the Rocky Flats
Contract, accounted for 63% of the Company's total revenue. During the year
ended December 31, 2001, Kaiser-Hill accounted for 71% of the Company's total
revenue. The Company has maintained a working relationship with Kaiser-Hill for
seven 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 twenty-five
e-Learning Segment clients during 2002 versus fifteen clients during 2001. At
December 31, 2002, over twenty 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
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.
Typical fixed-price contracts are less than six months in duration and are
billed at project completion. At December 31, 2002, of the total outstanding
contracts, less than 10% were fixed-price.
e-Learning Segment. The typical business contract for GoTrain products is
a subscription agreement with volume price breaks and annual renewal options.
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 LMS.
Backlog
As of December 31, 2002, TENERA had contracted a backlog of approximately
$12.3 million, all of which is cancelable by the clients. The Professional and
Technical Services and e-Learning segments account for $9.4 million and $2.9
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").
5
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 2002, TENERA spent approximately $264,000 in
developing products related to its e-Learning business. In 2001 and 2000, the
Company spent approximately $800,000 and $700,000, respectively, on development
for similar activities. The majority of these costs were capitalized as Other
Assets and are being amortized over the estimated life of the developed
products. These development efforts were key in the Company's successful
operation and access to its Web-based LMS and accompanying training course
library.
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, 2002, the Company employed a total of 114 consultants,
engineers, scientists and software developers, and a supporting administrative
staff of 15 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, 2,400 square feet in Louisville, Colorado,
expiring in October 2003, and approximately 5,300 square feet in San Luis
Obispo, California, with 26% of the space expiring in December 2003 and 74%
expiring in December 2004.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
6
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, 2003.
- ----------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------- ------------------------- -------------------------
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 ...... $ 0.60 $ 0.22 $ 0.875 $ 0.250 $ 2.250 $ 0.8125
Second Quarter ..... 0.50 0.29 0.490 0.355 1.625 0.875
Third Quarter ...... 0.35 0.08 0.590 0.300 1.250 0.750
Fourth Quarter ..... 0.26 0.05 0.440 0.210 0.875 0.500
- ----------------------------------------------------------------------------------------------------------------
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.
7
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,
---------------------------------------------------------
2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS DATA
Revenue ......................................... $ 13,823 $ 20,065 $ 32,443 $ 37,922 $ 27,445
Operating (Loss) Income.......................... (4,870) (3,119) (19) 2,336 1,874
Net (Loss) Earnings.............................. (4,806) (2,030) 100 1,342 1,674
(Loss) Earnings per Share-- Basic ............... (0.48) (0.20) 0.01 0.13 0.17
(Loss) Earnings per Share-- Diluted ............. (0.48) (0.20) 0.01 0.13 0.16
Weighted Average Shares-- Basic.................. 9,984 9,984 9,960 10,050 10,124
Weighted Average Shares-- Diluted................ 9,984 9,984 10,195 10,409 10,450
CASH FLOW DATA
Net Cash (Used) Provided by Operating Activities $ (1,488) $ (1,052) $ (164) $ 631 $ 906
Net (Decrease) Increase in Cash and Cash
Equivalents ..................................... (9) (1,201) (1,006) 132 1,069
FINANCIAL POSITION AT DECEMBER 31
Cash and Cash Equivalents ....................... 1,277 1,286 2,487 3,493 3,361
Working Capital ................................. (1,744) 2,037 4,443 5,467 4,474
Total Assets .................................... 3,536 6,978 10,074 10,710 9,206
Total Liabilities ............................... 4,461 3,113 4,181 4,950 4,538
Stockholders' (Deficit) Equity................... (925) 3,865 5,893 5,760 4,668
OTHER INFORMATION
Number of Employees ............................. 129 162 192 187 196
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8
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, in the third quarter of 2002, the Company began offering
non-hosted e-Learning licensing arrangements to distributors and clients. These
types of sales are accounted for under the AICPA Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2). Prior to this change in the business
model, the Company capitalized costs related to the development of the
e-Learning training sources under SOP 98-1. In accordance with that statement,
before revenue can be recognized from any non-hosted sales of e-Learning
training courses for which the development costs have been capitalized, the
carrying value of the training course capitalized costs must be reduced to zero
by the value of the licensed sales. The capitalized costs were reduced by
$15,000 from the sale of a non-hosted courseware license during 2002 and at
December 31, 2002, the remaining net capitalized costs of the e-Learning courses
were $117,000. Because the Company to date has had very limited activity in
non-hosted license sales, it is unable to predict when the Company will be able
to recognize revenue from this type of sales.
Furthermore, 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
9
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.
Approval for Non-Audit Services
The Company currently engages Ernst & Young as its independent auditors.
In addition to the audit services they provide with respect to the Company's
audited consolidated financial statements included in its Annual Reports on Form
10-K and certain filings with the Securities and Exchange Commission, Ernst &
Young has provided the Company in the past and may provide in the future certain
non-audit services, such as tax services (tax compliance and tax related
consultations) and audit related assistance, such as services in connection with
accounting issues and SEC reporting matters. Effective as of July 30, 2002, the
Sarbanes-Oxley Act of 2002 requires that all non-auditing services provided to
an issuer by the auditor of the issuer be pre-approved by the audit committee of
the issuer. Accordingly, the Company's audit committee has approved the audit
and tax service fees applicable to services currently being provided to the
Company by Ernst & Young. Tax service fees relate to services for tax compliance
and tax planning. The Company's audit committee of its board of directors
currently consists of Messrs. Thomas S. Loo, William A. Hasler, and George L.
Turin.
TENERA, INC.
RESULTS OF OPERATIONS
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Percent of Revenue
-----------------------------------------
Year Ended December 31,
-----------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Revenue ............................................................. 100.0% 100.0% 100.0%
Direct Costs ........................................................ 89.6 78.2 78.5
General and Administrative Expenses ................................. 43.1 37.3 21.6
Other Income ........................................................ * -- *
-------- --------- ----------
Operating Loss.................................................... (35.2) (15.5) (0.1)
Interest (Expense) Income, net ...................................... (0.7) 0.1 0.6
-------- --------- ----------
Net (Loss) Earnings Before Income Tax (Benefit) Expense ............. (35.9%) (15.4%) 0.5%
======== ========= ==========
- -----------------------------------------------------------------------------------------------------------------
* Less than 0.05%
Year Ended December 31, 2002 versus Year Ended December 31, 2001
Net loss before income tax benefit for the year ended December 31, 2002
was $4,962,000, compared to net loss before income tax benefit of $3,100,000 for
the same period in 2001. The increase in loss primarily results from lower
Professional and Technical Services Segment revenue. Specifically, a combination
of a reduced number of federal government projects and lower labor billing rates
for work at the DOE's Rocky Flats site (the "Rocky Flats Contract") were the
main reasons for the increased loss.
Professional and Technical Services Segment revenue for the year ended
December 31, 2002 decreased 34% ($6.5 million) from 2001, primarily due to a
lower allocation of work to the Company at the Rocky Flats site. For 2002, the
concentration of revenue from government projects was 71% of total Company
revenue compared to 73% in 2001.
A greater number of new clients in the e-Learning Segment is primarily
responsible for the 21% ($0.2 million) increase in e-Learning revenue in 2002.
10
Direct costs were lower in 2002, compared to a year ago, primarily as a
result of fewer Professional and Technical Services Segment projects. Gross
margin decreased to 10% in 2002 from 22% in 2001, mainly due to client-mandated
lowered labor billing rates for the ongoing Rocky Flats Contract activity,
increased integration expenditures related to the SkillSoft (formerly
SmartForce) e-Learning agreement, and higher employee healthcare costs.
General and administrative costs were 21% lower in 2002, compared to a
year ago, primarily reflecting furloughing non-essential personnel under a plan
implemented in August 2001. Included in general and administrative expenses for
2002 is $16,000 of stock option compensation to a former officer of GoTrain, who
provided and will provide e-Learning consulting services (see Note 3 to
Consolidated Financial Statements).
In the third quarter of 2002, the Company recorded an impairment charge of
$350,000 related to the write-off of certain internally developed training
course assets in its e-Learning Segment deemed to be obsolete (see Note 2 to
Consolidated Financial Statements). The Company determined that many of the
library courses it had developed had little or no future utility or economic
benefit based on historical sales and management projections.
Net interest expense in 2002 represents accrued interest on the
convertible debentures sold in March 2002 by the Company's GoTrain subsidiary
(see Note 7 to Consolidated Financial Statements), partially offset by earnings
from the investment of cash balances in money market accounts and short-term
corporate debt instruments. Net interest income in 2001 represents earnings from
the investment of cash balances in money market accounts and short-term
corporate debt instruments and was higher than 2002 due to higher average cash
balances and higher interest rates during 2001.
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 resulted 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 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 the year before, 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 the year before, 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 the year before, was
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 related
to an electric utility client in the Company's Professional and Technical
Services Segment, which 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.
11
Liquidity and Capital Resources
Cash and cash equivalents decreased by $9,000 during 2002. The decrease
was due to cash used by operations ($1,488,000) and net acquisition of property
and equipment ($21,000), mostly offset by the sale of convertible debentures
($1,500,000).
Trade receivables, net of sales allowance, decreased by $1,537,000 from
December 31, 2001, primarily due to lower revenues and increased collections
during the period. The allowance for sales adjustments decreased by $8,000 from
December 31, 2001, related to the closure and settlement of old government
contracts.
Income tax receivable decreased by $884,000 from December 31, 2001 due to
the receipt in March 2002 of a federal tax refund of 1999 taxes paid.
Additionally, the Company received federal tax refunds totaling $174,000 in June
2002 related to years 1999 and 1998 due to enactment in 2002 of the Economic
Growth and Tax Relief Reconciliation Act.
Other current assets increased by $123,000 from the end of 2001,
reflecting increased prepaid expenses associated with insurance renewals.
Other assets increased by $89,000 from December 31, 2001, primarily
relating to training course and operating system development in the e-Learning
Segment (see Note 2 to Consolidated Financial Statements).
Accounts payable decreased by $68,000 since the end of 2001 primarily
resulting from lower direct costs supporting decreased revenues. Accrued
compensation and related expenses decreased by $354,000 during 2002, primarily
reflecting the reduction in accruals for payroll, vacation, and other employee
benefits due to the termination of employees during the year and a smaller
workforce at December 31, 2002, as compared to December 31, 2001.
Deferred revenue increased by $165,000 from December 31, 2001 due to a
higher level of upfront billing in the e-Learning Segment related to library
course subscription fees and custom course fees.
Accrued interest expense increased by $105,000 from December 31, 2001 due
to the sale of convertible debentures in March 2002 (see Note 7 to Consolidated
Financial Statements).
No cash dividend was declared in 2002.
The impact of inflation on project revenue and costs of the Company was
minimal.
At December 31, 2002, the Company had operating lease commitments through
2005 totaling $1,595,000, principally for real property (see Note 5 to
Consolidated Financial Statements). Additionally, the Company had other
long-term obligations through 2006, totaling $1,233,000, related to an agreement
with SkillSoft (formerly SmartForce) to co-develop and distribute ES&H and
regulatory content via their 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 1 - 3 4 - 5 After 5
Year Years Years Years
- ----------------------------------------------------------------------------------------------------------------
Operating Lease Obligations ..................... $ 1,595 $ 744 $ 851 $ -- $ --
Other Long-Term Obligations...................... 1,233 480 548 205 --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations .............. $ 2,828 $ 1,224 $ 1,399 $ 205 $ --
- ----------------------------------------------------------------------------------------------------------------
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
12
preferred stock of GoTrain. The other debenture, in the amount of $500,000 can
be repaid or converted into convertible preferred stock at any time by GoTrain.
Otherwise, the debentures will automatically convert into convertible 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, subject to potential dilution from Subsidiary
Stock options and Subsidiary Stock purchase rights granted under the GoTrain
Plan. At December 31, 2002, upon full conversion of the debentures and the
outstanding Subsidiary Stock options, the holders of the debentures would own
approximately 29% of GoTrain (see Note 7 to Consolidated Financial Statements).
Management now anticipates that in light of the current business
environment, the Company will experience further reduction in revenues expected
to be recognized in its Professional and Technical Services Segment during 2003.
As a result, management believes that cash, which is expected to be generated by
operations of the Company's Professional and Technical Services Segment, will
not be sufficient to enable the Company to support those segments and to provide
funding necessary for further development of its e-Learning Segment. Although
management believes that the e-Learning segment has significant future
potential, it is unable to identify funding sources beyond what it has
previously raised in capital for that segment.
Accordingly, in early 2003, the Company determined it is in the best
interest of the Company to either sell or dispose of its operating segments as
quick as possible this year or permit its operating units to dispose of their
assets. Management has undertaken efforts to accomplish this. The Company has
reached agreement in 2003 to transfer the ownership and operations of TENERA
Energy, LLC, part of the Professional and Technical Services segment, to the
former employees of that subsidiary. This transfer has been made by an
assumption of certain liabilities by the new owners for which the Company would
otherwise be obligated. The Company retains certain receivables. The future net
cash proceeds to the Company as a result of this transfer will not be
significant. Additionally, the Company is in discussion to possibly dispose of
its remaining business operations and it is anticipated that any transaction
involving these units will be consummated in the second quarter of 2003.
At the present time, the Company is unable to determine the level the net
proceeds, if any, from the disposition of its remaining businesses after
settlement of the Company's obligations to third parties creditors, for taxes
and the cost of winding down its operations. Accordingly, the Company is unable
to determine whether funds will be available for distribution to shareholders.
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.
Plan to Dispose of Operating Segments. The Board of Directors has
determined that the Company's limited financial resources, as well as the
increasingly more costly regulatory climate to operate as a public company,
require it during 2003 to actively seek to dispose of its remaining operating
segments or permit its operating units to dispose of their assets. Accordingly,
the Company is exploring alternatives to transfer, sell, or close its various
remaining operating units and to cease operations during the 2003 calendar year.
No assurance can be given that the Company's plan will result in any proceeds to
shareholders subsequent to such winding down of its operations.
Economic Slowdown. Our businesses have been adversely affected by the
general economic downturn in the United States over the past two years, The
economic slowdown has reduced the demand for electricity, resulting in less need
for new and existing power plant capacity, which has had a direct effect on the
our environmental consulting business. Additionally, the pressure of corporate
cost-cutting by many U.S. corporations has resulted in reduced training
opportunities for our e-Learning activities. Many of our clients and potential
clients have not expanded their training activities to the levels originally
expected because of reduced manpower and/or lower funding for training. We are
uncertain how long the current downturn will last and when a sustained recovery
may occur. Any further decline in our clients' markets or in general economic
conditions would likely result in a further reduction in demand for our products
13
and services. Additionally, we may have difficulty in collecting outstanding
trade receivables from cash constrained clients, causing our cash flow to be
adversely affected. Also, in such an environment, pricing pressures could
continue, negatively impacting our gross margins.
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's efforts to seek new lines of
credit have been unsuccessful to date. The Company is seeking 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 2002 and 2001, one customer, Kaiser-Hill, accounted for 63% and
71%, respectively, of the Company's total revenues. Additionally, for 2002 and
2001, the concentration of the Company's total revenue from the government
sector was 71% and 73%, 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 net (losses) of $(4.8 million) and $(2.0 million) in 2002
and 2001, respectively. 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").
14
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
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,
----------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Revenue .................................................... $ 13,823 $ 20,065 $ 32,443
Direct Costs ............................................... 12,388 15,697 25,465
General and Administrative Expenses ........................ 5,953 7,487 7,001
Impairment Loss ............................................ 350 -- --
Other Income (Expense)...................................... (2) -- 4
------------- ------------ ------------
Operating Loss........................................... (4,870) (3,119) (19)
Interest (Expense) Income, net ............................. (92) 19 182
------------- ------------ ------------
Net (Loss) Earnings Before Income Tax (Benefit) Expense (4,962) (3,100) 163
Income Tax (Benefit) Expense ............................... (156) (1,070) 63
------------- ------------ ------------
Net (Loss) Earnings ........................................ $ (4,806) $ (2,030) $ 100
============= ============ ============
Net (Loss) Earnings per Share-- Basic ...................... $ (0.48) $ (0.20) $ 0.01
============= ============ ============
Net (Loss) Earnings per Share-- Diluted .................... $ (0.48) $ (0.20) $ 0.01
============= ============ ============
Weighted Average Number of Shares Outstanding-- Basic....... 9,984 9,984 9,960
============= ============ ============
Weighted Average Number of Shares Outstanding-- Diluted..... 9,984 9,984 10,195
============= ============ ============
See accompanying notes.
16
TENERA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
- ----------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents ............................................... $ 1,277 $ 1,286
Trade receivables, less allowances of $539 (2001 - $547)
Billed ................................................................ 620 1,533
Unbilled .............................................................. 635 1,259
Income tax receivable.................................................... -- 884
Other current assets .................................................... 185 188
------------ ------------
Total Current Assets ................................................ 2,717 5,150
Property and Equipment, Net ................................................ 243 546
Other Assets ............................................................... 576 1,282
------------ ------------
Total Assets ...................................................... $ 3,536 $ 6,978
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities
Accounts payable......................................................... $ 1,068 $ 1,136
Accrued compensation and related expenses ............................... 1,397 1,751
Deferred revenue ........................................................ 391 226
Convertible debt and accrued interest ................................... 1,605 --
------------ ------------
Total Current Liabilities ........................................... 4,461 3,113
Stockholders' (Deficit) Equity
Common Stock, $0.01 par value, 25,000,000 authorized, 10,417,345 issued,
and 9,984,259 outstanding at December 31, 2002 and 2001, respectively .... 104 104
Paid in capital, in excess of par ....................................... 5,693 5,677
Accumulated deficit ..................................................... (6,229) (1,423)
Treasury stock--433,086 shares at December 31, 2002 and 2001, respectively (493) (493)
------------ ------------
Total Stockholders' (Deficit) Equity ................................ (925) 3,865
------------ ------------
Total Liabilities and Stockholders' (Deficit) Equity .............. $ 3,536 $ 6,978
============ ============
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes.
17
TENERA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Paid-In Retained
Common Stock Capital in Earnings
----------------------------- Excess (Accumulated Treasury
of Par Deficit) Stock Total
Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------
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 ............... -- -- -- (2,030) -- (2,030)
------------ -------------- ---------------- --------------- -------------- ---------------
December 31, 2001 ...... 9,984 $ 104 $ 5,677 $ (1,423) $ (493) $ 3,865
Fair Value of Stock
Compensation to Consultant -- -- 16 -- -- 16
Net Loss ............... -- -- -- (4,806) -- (4,806)
------------ -------------- ---------------- --------------- -------------- ---------------
December 31, 2002 ...... 9,984 $ 104 $ 5,693 $ (6,229) $ (493) $ (925)
============ ============== ================ =============== ============== ===============
See accompanying notes.
18
TENERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings ..................................... $ (4,806) $ (2,030) $ 100
Adjustments to reconcile net (loss) earnings to cash used
by operating activities:
Depreciation and amortization ......................... 893 752 392
Impairment loss ....................................... 350 -- --
Net loss (gain) on disposal of assets ................. 2 -- (4)
Stock compensation to consultant ...................... 16 -- --
Changes in assets and liabilities:
Trade receivables, net of allowance.................. 1,537 2,641 1,122
Income tax receivable ............................... 884 (723) (11)
Other current assets ................................ (123) 169 (396)
Other assets ........................................ (89) (793) (598)
Accounts payable .................................... (68) (1,117) (857)
Accrued compensation and related expenses ........... (354) (81) (6)
Deferred revenue .................................... 165 130 94
Accrued interest expense ............................ 105 -- --
------------- ------------ ------------
Net Cash Used by Operating Activities ............. (1,488) (1,052) (164)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ................... (22) (151) (756)
Acquisition of application development software ......... -- -- (125)
Proceeds from sale of assets ............................ 1 -- 6
------------- ------------ ------------
Net Cash Used by Investing Activities ............. (21) (151) (875)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of convertible debentures .......................... 1,500 -- --
Issuance of equity in subsidiary ........................ -- 2 --
Issuance of common stock from Treasury .................. -- -- 33
------------- ------------ ------------
Net Cash Provided by Financing Activities ......... 1,500 2 33
------------- ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................. (9) (1,201) (1,006)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............
1,286 2,487 3,493
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 1,277 $ 1,286 $ 2,487
============= ============ ============
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes.
19
TENERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
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 8 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
consolidated net losses of approximately $4.8 million in 2002 and $2.0 million
in 2001. Cash balances at December 31, 2002 were about the same as December 31,
2001 at $1.3 million. 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 loss performance and
strain on cash in recent years 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,
which carried into 2002. 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.
In 2003, the Board of Directors has determined that the Company's limited
financial resources, as well as the increasingly more costly regulatory climate
to operate as a public company, require it to actively seek to dispose of its
operating segments or permit its operating units to dispose of their assets in
order to preserve shareholder value. Therefore, the Company is exploring
alternatives for reducing negative cash flow from operations, including the
possible sale or shutdown of certain operating units. There can be no assurance
that adequate liquidity will materialize in quantities or timeframes, or
sustainable in the current economic slowdown projected by management.
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.
Cash and Cash Equivalents. Cash and cash equivalents at December 31, 2002
and December 31, 2001 consisted of deposited cash and money market accounts at a
banking institution. Additionally, throughout the referenced fiscal years, the
Company has invested in commercial paper issued by companies with strong credit
20
ratings. There were no such investments at the end of 2002 and 2001. 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. Included in accounts receivable are
certain trade receivables related to U.S. government contracts and included in
the net balance of accounts receivable are allowances of $539,000 for doubtful
accounts, which includes approximately $400,000 for disputed amounts arising
from government audits related to the government contract receivables. At
December 31, 2002, three clients accounted for 19%, 17% and 13% of trade
receivables. At December 31, 2001, three clients accounted for 42%, 12%, and 10%
of the Company's trade receivables. During 2002 and 2001, one client accounted
for 63% and 71%, respectively, of total Company revenue. All the above
concentrations relate to Professional and Technical Services Segment clients.
Property and Equipment. Property and equipment are stated at cost
($3,368,000 and $3,360,000 at December 31, 2002 and 2001, respectively), net of
accumulated depreciation ($3,125,000 and $2,814,000 at December 31, 2002 and
2001, respectively). Depreciation is calculated using the straight-line method
over the estimated useful lives, which range from three to five years.
Other Assets and Impairment. 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 internet-based 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
through the second quarter of 2002, a limited license was granted to our clients
to access the Company's training system via the internet. The proprietary
software resides on the Company's computers and prior to the third quarter of
2002, clients had no other rights to the software. All training and maintenance
costs are expensed as incurred. For the year ended December 31, 2002, the
Company capitalized $104,000 of developed software costs, compared to $793,000
for the same period in 2001. At December 31, 2002 and December 31, 2001, the
Company had $526,000 and $1,232,000, respectively, of capitalized software
costs, net of accumulated amortization of $785,000 and $340,000, respectively,
and, at December 31, 2002, net of the $350,000 impairment charge previously
reported and discussed below. The estimated remaining useful life of costs
capitalized is 17 months. For 2002 and 2001, the amortization of capitalized
software costs totaled $445,000 and $252,000, respectively.
In the third quarter of 2002, the Company modified its business model in
response to changes in the e-Learning marketplace. In addition to hosting
training courses on its internal e-Learning operating system, the Company began
offering content only and perpetual licenses to its customers, whereby courses
can be run on third-party operating systems. Because of this change, any new
development costs associated with this product offering must be accounted for
under the guidelines of Statement of Financial Accounting Standards (SFAS) No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. Under SFAS No. 86, software development costs subsequent to
the decision to allow certain products to be licensed and run on third-party
operating systems, generally will be expensed as incurred, as the time between
achieving technological feasibility and general release of the product is not
significant. For 2002, the Company expensed $160,000 of software development
costs.
Due to historical and projected losses in its e-Learning Segment, the
Company reassessed the carrying values of its long-lived assets , including
capitalized software development costs, in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets ( see "Recent
Accounting Pronouncements"). Based on a variety of factors, including actual
revenues and/or usage attributable to individual library courses and the
identification of software no longer to be used or supported by the Company,
21
certain software with a carrying value of approximately $350,000 was determined
to have no future utility or value. Accordingly, in the third quarter of 2002 as
previously reported, the Company recorded an impairment charge to fully
write-off the carrying value of these capitalized software costs.
In accordance with the provisions of FASB Statement 144, the Company has
estimated the sum of undiscounted net operating cash flows of its business
segments over the expected useful lives of the remaining long-lived assets and
determined that they exceeded the net carrying value of these assets.
Accordingly, no further asset impairment is evident at December 31, 2002. Given
the history of losses, the Company will perform an assessment of potential
long-lived asset impairment each quarter.
Revenue. The Company's Professional and Technical Services Segment
primarily offers its services to the United States electric power industry and
the Department of Energy ("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). The Company's fixed-price contracts are typically less
than six months in duration and are billed at project completion.
The Company's e-Learning Segment's nonrefundable upfront
subscription/license fees are recognized ratably over the contractual term,
which is typically one year. License and subscription revenue recognition
commences when delivery of initial access to the Company's learning management
system and course(s) occurs in accordance with Staff Accounting Bulletin 101
(SAB 101). In addition, usage fee revenue is recognized on an actual usage
basis.
For perpetual license sales of courses to customers, whereby the Company
may not be the application service provider, the Company must recognize revenue
in accordance with Statement of Position (SOP) 97-2, as amended by SOP 98-4 and
SOP 98-9. As noted above, prior to the change in the business model, the Company
capitalized costs related to the development of the e-Learning training courses
under SOP 98-1. In accordance with that statement, before revenue can be
recognized from any non-hosted sales of e-Learning training courses for which
the development costs have been capitalized, the carrying value of the training
course capitalized costs must be reduced to zero by the value of the non-hosted
sales. At December 31, 2002, the remaining net capitalized costs of the
e-Learning courses was $117,000, net of $15,000 of non-hosted sales recorded as
a contra-asset in the fourth quarter of 2002.
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.
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.
For the year ended December 31, 2002, the net tax benefit of $156,000
reflects federal tax refunds received for years 1999 and 1998 due to enactment
in 2002 of the Economic Growth and Tax Relief Reconciliation Act.
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 and
convertible debentures, in the weighted average number of common shares
outstanding for a period, if dilutive. The determination of fully diluted
earnings per share excludes the impact of 1,449,500 additional shares of TENERA
common stock, issuable upon the exercise of outstanding stock options, because
they are antidilutive. Also excluded from the computation of fully diluted
earnings per share as antidilutive are the potential impact of the conversion of
GoTrain convertible debentures (see Note 5 to Consolidated Financial Statements)
and GoTrain Subsidiary Stock options of 3,333,000 shares and 1,902,387 shares,
respectively, to GoTrain common stock.
22
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,
----------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Numerator:
Net (loss) earnings ..................................... $ (4,806) $ (2,030) $ 100
Denominator:
Denominator for basic earnings per share--
weighted-average shares outstanding....................... 9,984 9,984 9,960
Effect of dilutive securities:
Employee & Director stock options (Treasury stock
method) ............................................... -- -- 235
Denominator for diluted earnings per share--
weighted-average common and common equivalent shares ..... 9,984 9,984 10,195
============= ============ ============
Basic (loss) earnings per share ........................... $ (0.48) $ (0.20) $ 0.01
============= ============ ============
Diluted (loss) earnings per share ......................... $ (0.48) $ (0.20) $ 0.01
============= ============ ============
- ----------------------------------------------------------------------------------------------------------------
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.
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 the
TENERA options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 2002, 2001,
and 2000: risk-free interest rates of 4.0% for the March 2002 grant, 5.5% and
5.0% for March and August 2001 grants, respectively, and 6.25% for the March and
April 2000 grants; dividend yield of 0% for all years; volatility factors of the
expected market price of the Company's common stock of 0.817, 0.695, and 0.65
for the years 2002, 2001, and 2000, respectively; and a weighted-average
expected life of the option of five years for all employee grants and seven
years for director grants. The fair value for the GoTrain options was estimated
at the date of grant in 2002 using the Black-Scholes option pricing model with
the following weighted-average assumptions: risk-free interest rate of 4.0%;
dividend yield of 0%; volatility factor of 0.82; and a weighted-average expected
life of the option of seven years.
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
23
total number of options granted. Subsequent revisions to reflect actual
forfeitures are made in the period the forfeitures occur through a catch-up
adjustment.
Pro forma information regarding the Company's net (loss) earnings and
(loss) earnings per share follows:
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Net (Loss) Earnings -- As Reported ......................... $ (4,806) $ (2,030) $ 100
Pro Forma Net Loss -- FAS 123 .............................. $ (4,862) $ (2,119) $ (2)
Net (Loss) Earnings per Share-- As Reported Basic .......... $ (0.48) $ (0.20) $ 0.01
============= ============ ============
Net (Loss) Earnings per Share-- As Reported Diluted ........ $ (0.48) $ (0.20) $ 0.01
============= ============ ============
Pro Forma Net Loss per Share-- FAS 123 Basic ............... $ (0.49) $ (0.21) $ --
============= ============ ============
Pro Forma Net Loss per Share-- FAS 123 Diluted ............. $ (0.49) $ (0.21) $ --
============= ============ ============
- ----------------------------------------------------------------------------------------------------------------
The weighted-average grant-date fair value of TENERA options granted,
which is the value assigned to the options under FAS 123, was $0.37, $0.32, and
$1.20 for grants made during years ended December 31, 2002, 2001, and 2000,
respectively. The weighted-average grant-date fair value of GoTrain options
granted, which is the value assigned to the options under FAS 123, was $0.18 for
grants made in 2002.
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 8 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
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 adopted FAS 144 for its fiscal year on January 1, 2002.
The Company recorded an impairment loss of $350,000 in 2002 (see Note 2 to
Consolidated Financial Statements) and will continue to assess the impact of FAS
144 on the carrying value of its long-lived assets.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure, or SFAS 148. This statement amends FASB Statement No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This statement also amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
provisions of this statement relating to alternative transition methods and
annual disclosure requirements are effective for fiscal years ending after
24
December 15, 2002. The provisions of this statement relating to interim
financial information are effective for the quarter ending March 31, 2003. The
transitional provisions will not have an impact on our financial statements
unless we elect to change from the intrinsic value method to the fair value
method. We have adopted SFAS 148 as of December 31, 2002 and we believe that the
provisions relating to annual and interim disclosures have changed the manner in
which we disclose information regarding stock-based compensation.
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 2002, 2001, and 2000, charges to earnings for the 401(k) Savings
Plan were $92,000, $117,000, and $143,000, respectively. During 2002, 2001, and
2000, the Company contributed no discretionary amounts to the plan.
Stock Option Plans. Under the provisions of the Company's 1992 Option
Plan, 1,500,000 TENERA shares are reserved for issuance upon the exercise of
options granted to key employees and consultants. The options generally vest
over a three year period and expire six years from date of grant. There were no
options granted in 2002 under the plan. 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. During 2002, options for 354,500 shares were forfeited (38,000 and 70,000
in 2001 and 2000, respectively). No options were exercised in 2002 and 2001
(15,000 in 2000). As of December 31, 2002, options for 1,085,500 shares were
outstanding and options for 1,032,500 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 TENERA shares are reserved for issuance upon the
exercise of options granted to non-employee directors. These options vest over a
one year period and expire ten years from date of grant. In 2002, options were
granted for 50,000 shares at an exercise price of $0.49, the then fair market
value, expiring on March 1, 2012. 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.
During 2002, 2001, and 2000, no options were forfeited. No options were
exercised in 2002 and 2001 (35,500 share options were exercised in 2000). As of
December 31, 2002, options for 364,500 shares were outstanding and 314,500 were
exercisable.
25
The combined stock option activity of the Company's two TENERA option
plans is summarized below:
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------
2002 2001 2000
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ----------------------------------------------------------------------------------------------------------------
Outstanding --
Beginning of Year .. 1,754 $ 0.95 1,482 $ 1.06 1,526 $ 1.00
Granted ............ 50 0.49 310 0.49 76 1.78
Exercised .......... -- -- -- -- (50) .67
Forfeited .......... (354) 1.18 (38) 1.26 (70) .87
---------- ---------- ---------- ---------- ---------- ----------
Outstanding --
End of Year ........ 1,450 $ 0.88 1,754 $ 0.95 1,482 $ 1.06
========== ========== ========== ========== ========== ==========
Exercisable at
End of Year ........ 1,347 $ 0.91 1,567 $ 1.01 1,319 $ 1.02
- ----------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 2002, ranged
from $0.48 to $2.125. The weighted-average remaining contractual life of those
options is 2.4 years.
In April 2002, GoTrain adopted the GoTrain Corp. 2002 Stock Option and
Stock Plan ("GoTrain Plan") to provide additional incentive to GoTrain
employees, directors, and consultants. Under the provisions of the GoTrain Plan,
2,500,000 shares of GoTrain Corp. common stock ("Subsidiary Stock") are reserved
for issuance upon exercise of Subsidiary Stock options and Subsidiary Stock
purchase rights granted. The Subsidiary Stock options generally vest over a four
year period and expire ten years from date of grant. In 2002, GoTrain's board of
directors granted Subsidiary Stock options to employees and directors to acquire
1,800,557 shares of Subsidiary Stock at $0.31 per share. GoTrain management
believes the exercise price per share of Subsidiary Stock options approximated
the fair value per share, or above fair value, on the dates of the grants, and
accordingly, no compensation expense was recorded.
During the second quarter of 2002, GoTrain also granted 250,000 Subsidiary
Stock options to a former officer of, and now consultant to, GoTrain at an
exercise price of $0.36 per share. These Subsidiary Stock options were granted
in exchange for services through April 16, 2004 and cliff vest on that date. The
Subsidiary Stock options were revalued, subsequently, under the guidance of
Statement of Financial Standards No. 123 ("FAS 123") using a Black-Scholes
option pricing model with the following assumptions: market price of $.14 per
share, risk-free interest rate of 4.0%, dividend yield of 0%, volatility factor
of .8, and a 10 year contractual term. Under FAS 123, these options will be
revalued at the end of each reporting period and stock compensation expense will
be recognized ratably over the vesting term. In 2002, $9,000 of stock
compensation expense was recognized and charged to general and administrative
expenses.
During 2002, no Subsidiary Stock options were exercised and 148,170
options were forfeited. As of December 31, 2002, options for 1,902,387 GoTrain
shares were outstanding and options for 330,477 shares were exercisable.
Additionally, as part of the consulting arrangement entered into with the
same former GoTrain officer mentioned above, this consultant was allowed to
retain 45,000 vested TENERA stock options under the same terms as originally
granted, rather than be subject to the forfeiture provisions of the plan related
to employee terminations. The 45,000 TENERA stock options are comprised of two
grants: 25,000 options expiring March 2005 with an exercise price of $1.36 and
20,000 options expiring April 2006 with an exercise price of $1.26. Because the
26
terms of the grants were modified upon the change from employee to consultant,
the modified stock options were accounted for as new grants and the fair value
method (FAS 123) was used to determine the values. The valuations of the 25,000
and 20,000 option grants were calculated using the Black-Scholes option pricing
model with the following assumptions: market price of $0.49 per share for both
grants, risk-free interest rate of 3.0% and 3.5%, respectively, dividend yield
of 0% for both grants, volatility factor of .8 for both grants, and 3 years and
4 years contractual terms, respectively. The combined value of these modified
grants was $7,000 and was charged to TENERA's general and administrative
expenses in the quarter ended June 30, 2002. Because these options were fully
vested at the time of the employee's termination, they are not subject to
revaluation.
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, 2002 and
2001 are as follows, using the liability method:
- ----------------------------------------------------------------------------------------------------------------
(In thousands) December 31,
-----------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------
Current Deferred Tax Assets
Net Operating Loss .................................................... $ 1,276 $ 456
Accrued Expenses Not Currently Deductible ............................. 1,025 545
Differences Between Book and Tax Depreciation and Amortization ........ 329 146
Other ................................................................. 178 129
------------ ------------
Total Current Gross Deferred Tax Assets ........................... 2,808 1,276
------------ ------------
Less: Valuation Allowance ............................................ (2,419) (791)
Current Deferred Tax Liabilities
Software Development Costs............................................. 389 485
Other ................................................................. -- --
------------ ------------
Net Current Deferred Tax Liabilities .............................. $ -- $ --
============ ============
- ----------------------------------------------------------------------------------------------------------------
The current tax benefit/provision for the years ended December 31, 2002,
2001, and 2000, are as follows:
- -----------------------------------------------------------------------------------------------------------------
(In thousands) Year Ended December 31,
---------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Current:
Federal ..................................................... $ (174) $ (1,083) $ 42
State ....................................................... 18 13 21
----------- ------------ ------------
Tax (Benefit) Provision ..................................... $ (156) $ (1,070) $ 63
=========== ============ ============
- -----------------------------------------------------------------------------------------------------------------
27
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 $1,624,000 for the year ended December 31, 2002 for those
deferred tax assets that may not be realized. As of December 31, 2002, the
Company had net operating loss carryforwards for federal income tax purposes of
approximately $3,756,000 which expire in the years 2021 and 2022, and for state
income tax purposes of approximately $7,916,000 which expire in the years 2009
through 2023. 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, 2002, 2001, and 2000, as follows:
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Federal Statutory Rate ........................................... (34%) (34%) 34%
State Effective Rate ............................................. (6%) (6%) 6%
State Taxes Payable, Net of Federal Benefit ...................... 0% 0% 8%
Permanent Differences ............................................ 3% 1% 12%
Increase in Valuation Allowance .................................. 33% 3% (20%)
Other ............................................................ 1% 1% (1%)
----------- ------------ ------------
Income Tax (Benefit)/Provision ................................... (3%) (35%) 39%
=========== ============ ============
- -----------------------------------------------------------------------------------------------------------------
The Company paid no federal income taxes in 2002 and 2001.
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 $711,000 for the year ended December 31, 2002 ($710,000 in 2001 and
$537,000 in 2000).
Minimum rental commitments under operating leases, principally for real
property, are as follows (in thousands):
(Year Ending December 31)
- ----------------------------------------------------------------------------------------------------------------
2003 ......................................................................................... $ 744
2004 ......................................................................................... 469
2005 ......................................................................................... 382
2006 and Thereafter .......................................................................... --
------------
Total Minimum Payments Required .............................................................. $ 1,595
============
- ----------------------------------------------------------------------------------------------------------------
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 and 2000, the Company paid no
cash for interest expense.
28
Note 6. Long-Term Obligations
In June 2001, GoTrain entered into a five-year agreement with SkillSoft
(formerly 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 days
thereafter), for platform license and maintenance, and integration of existing
GoTrain content. The Company has paid $68,500 to SmartForce under the agreement
in 2002.
In June 2002, SmartForce announced that it had entered into an agreement
to merge with SkillSoft, another e-Learning company, which was completed in
September 2002. The surviving entity, known as SkillSoft, assumed GoTrain's
agreement with SmartForce. GoTrain is currently in negotiations with SkillSoft
to restructure the SmartForce agreement.
As of December 31, 2002, minimum net payments, which are being accrued
when due, are as follows (in thousands):
(Year Ending December 31)
- ----------------------------------------------------------------------------------------------------------------
2003 ......................................................................................... $ 480
2004 ......................................................................................... 274
2005 ......................................................................................... 274
2006 and Thereafter .......................................................................... 205
------------
Total Minimum Payments Required .............................................................. $ 1,233
============
- ----------------------------------------------------------------------------------------------------------------
29
Note 7. 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 convertible
preferred stock of GoTrain at a conversion price of $0.45 per share. Otherwise,
the debenture will be automatically converted into convertible 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 would own
approximately 22% of GoTrain's outstanding capital stock, subject to potential
dilution from Subsidiary Stock options and Subsidiary Stock purchase rights
granted under the GoTrain Plan.
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
convertible preferred stock at a conversion price of $0.45 per share. Otherwise,
the debenture will automatically convert into convertible 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's
outstanding capital stock, subject to potential dilution from Subsidiary Stock
options and Subsidiary Stock purchase rights granted under the GoTrain Plan.
On December 31, 2002, upon full conversion of the Series 1 and Series 2
debentures and the outstanding Subsidiary Stock options, the holders of the
debentures would own approximately 29% of GoTrain.
The Company accrued $105,000 of interest expense in 2002 related to these
debentures.
30
Note 8. 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 2002, 2001, and
2000, and reconciliation to the Consolidated Statements of Operations, are as
follows:
(In thousands)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
REVENUE
Professional and Technical Services...................... $ 12,490 $ 18,964 $ 32,013
e-Learning .............................................. 1,333 1,101 430
------------- ------------ ------------
Total ................................................. $ 13,823 $ 20,065 $ 32,443
============= ============ ============
NET (LOSS) EARNINGS BEFORE INCOME TAX
Professional and Technical Services ..................... $ (544) $ 815 $ 2,981
e-Learning .............................................. (3,779) (3,542) (1,827)
Corporate and Other ..................................... (639) (373) (991)
------------- ------------ ------------
Total ................................................. $ (4,962) $ (3,100) $ 163
============= ============ ============
DEPRECIATION AND AMORTIZATION EXPENSE
Professional and Technical Services ..................... $ 45 $ 59 $ 88
e-Learning .............................................. 833 671 281
Corporate and Other ..................................... 15 22 23
------------- ------------ ------------
Total ................................................. $ 893 $ 752 $ 392
============= ============ ============
- -----------------------------------------------------------------------------------------------------------------
Revenues outside of the United States have been less than 1% of total
Company revenues in each of the years ended December 31, 2002, 2001, and 2000,
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.
31
Note 9. Selected Quarterly Consolidated Financial Data (Unaudited)
A summary of the Company's quarterly financial results follows.
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
--------------------------------------------- ---------------------------------------------
12/31/02 9/30/02 6/30/02 3/31/02 12/31/01 9/30/01 6/30/01 3/31/01
- ----------------------------------------------------------------------------------------------------------------
Revenue ..... $ 3,020 $ 3,182 $ 3,489 $ 4,132 $ 4,450 $ 4,441 $ 5,301 $ 5,873
Direct Costs 2,517 2,938 3,301 3,633 3,512 3,549 4,112 4,524
General and
Administrative
Expenses .... 1,259 1,449 1,637 1,607 1,512 1,719 2,162 2,094
Impairment
Loss......... -- 350 -- -- -- -- -- --
Other Inc
(Exp) ....... -- -- 1 (3) -- -- -- --
-------- ------- -------- -------- -------- -------- -------- --------
Operating
Loss......... (756) (1,555) (1,448) (1,111) (574) (827) (973) (745)
Interest
(Exp)
Income, net . (27) (26) (25) (14) 3 (18) 13 21
-------- ------- -------- -------- -------- -------- -------- --------
Net Loss
Before Inc.
Tax Exp
(Benefit).... (783) (1,581) (1,473) (1,125) (571) (845) (960) (724)
Income Tax
Exp (Benefit) -- 3 (174) 15 (336) (245) (278) (211)
-------- ------- -------- -------- -------- -------- -------- --------
Net Loss..... $ (783) $(1,584) $(1,299) $(1,140) $ (235) $ (600) $ (682) $ (513)
======== ======= ======== ======== ======== ======== ======== ========
Net Loss Per
Share-Basic.. $ (0.08) $ (0.16) $ (0.13) $ (0.11) $ (0.02) $ (0.06) $ (0.07) $ (0.05)
======== ======= ======== ======== ======== ======== ======== ========
Net Loss Per
Share-Diluted $ (0.08) $ (0.16) $ (0.13) $ (0.11) $ (0.02) $ (0.06) $ (0.07) $ (0.05)
======== ======= ======== ======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------
32
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, 2002 and 2001, and the related consolidated statements of
operations, stockholders' (deficit) equity, and cash flows for each of the three
years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, 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 and a consolidated net loss
for the year ended December 31, 2002 and 2001. 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 Jose, California
February 25, 2003
33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
34
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, 61, 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, an 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, Elevon, DiTech
Communications Corporation, The Schwab Funds, and DMC Stratex Networks.
Additionally, Mr. Hasler has served as chairman of the board of Solectron
Corporation since January 2003.
Jeffrey R. Hazarian, 47, 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., 59, 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, 51, 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, 32, 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., 73, 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.
35
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, 2002, 2001, and
2000.
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....... 2002 $ 217,012 $ -- -- $ 4,000
Chief Executive Officer 2001 215,147 -- 30,000 3,400
President 2000 231,469 -- -- 3,400
Jeffrey R. Hazarian....... 2002 194,317 -- -- 3,875
Executive 2001 167,336 6,000 30,000 3,335
Vice President and 2000 180,031 7,000 -- 3,400
Chief Financial Officer
- ---------------------------------------------------------------------------------------------------------------
(1) Reflects the number of TENERA 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.
Additionally, Mr. McKay, acting as CEO of the Company's GoTrain
subsidiary, and Mr. Hazarian, acting as a director of GoTrain, were
granted 331,250 and 30,000, respectively, of Subsidiary Stock options in
2002 by the GoTrain board of directors under the GoTrain Plan (see Note 3
to Consolidated Financial Statements).
(2) These amounts represent the amounts accrued for the benefit of the named
executives under the Company's 401(k) Plan.
There were no TENERA stock options granted to the named executives during
2002. However, the named executives were granted Subsidiary Stock options for
shares of GoTrain, relative to their roles in the management of this non-public
subsidiary. Mr. McKay is the Chief Executive Officer and President of GoTrain
Corp. and Mr. Hazarian is one of three members of the board of directors of
GoTrain Corp. In 2002, Messrs. McKay and Hazarian were granted 331,250 and
30,000, respectively, of Subsidiary Stock options at an exercise price of $.31
per share, which was estimated by management to be the fair value, or higher
than fair value, at the time of the grants. The options vested 20% at the time
of the grants, with the remaining 80% vesting annually in 20% increments over
four years. The Subsidiary Stock options granted to Messrs. McKay and Hazarian
represent 16% and 1% of the total Subsidiary Stock options granted in 2002.
36
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. 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 2002 and
2001, 12,500 stock options were granted in each year 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. 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.
Compensation Committee Interlocks and Insider Participation
During 2002, 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.
37
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, 2003,
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").
38
(b) Security Ownership of Management
The following table sets forth information as of March 1, 2003, 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 71,500(3) 1.2%
Jeffrey R. Hazarian ........................................... 7,186 157,500(4) 1.5%
Thomas S. Loo (5).............................................. 1,655,988 69,500(3) 16.2%
Robert C. McKay, Jr............................................ 1,789 222,500(4) 2.1%
Andrea W. O'Riordan (6)........................................ 551,996 61,500(3) 5.8%
George L. Turin................................................ 45,504 97,000(3) 1.3%
-------------- ------------- ------------
All Directors and Executive Officers as a Group (6 persons) ... 2,317,963 679,500 28.1%
- ---------------------------------------------------------------------------------------------------------------------
(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, 2003.
(3) Represents options under the Company's 1993 Outside Directors Compensation
and Option Plan, which are exercisable on March 1, 2003, or within 60 days
thereafter.
(4) Represents options under the Company's 1992 Option Plan which are
exercisable on March 1, 2003, 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."
39
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our chief executive officer and our chief financial officer, after
evaluating our "disclosure controls and procedures" (as defined in Securities
Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and 15-d-14(c)) as of
a date (the "Evaluation Date") within 90 days before the filing date of this
Annual Report on Form 10-K have concluded that as of the Evaluation Date, our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) Changes in internal controls.
Subsequent to the Evaluation Date, there were no significant changes in
our internal controls or in other factors that could significantly affect our
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
40
PART IV
Item 15. 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, 2002, 2001, and 2000 ....... 16
Consolidated Balance Sheets-- December 31, 2002 and 2001 .................................... 17
Consolidated Statements of Stockholders' (Deficit) Equity--
Years Ended December 31, 2002, 2001, and 2000 ............................................... 18
Consolidated Statements of Cash Flows-- Years Ended December 31, 2002, 2001, and
2000 ........................................................................................ 19
Notes to Consolidated Financial Statements .................................................. 20
Report of Independent Auditors .............................................................. 33
(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 ................................ 43
All other schedules are omitted because they are either not required or not applicable.
(a)(3) Certifications
The following certifications are filed in this report:
Certification of Robert C. McKay, Chief Executive Officer and President...................... 45
Certification of Jeffrey R. Hazarian, Chief Financial Officer and Executive Vice President .. 46
(a)(4) 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).
41
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)
4.2 Securities Purchase Agreement dated February 13, 2002 between
GoTrain Corp. and Columbia Nova Investments, AVV and Polmeroy
Limited.
4.3 GoTrain Corp. Series 1 Convertible Subordinated Debenture Issued
February 15, 2002 Due July 31, 2003.
4.4 GoTrain Corp. Series 2 Convertible Subordinated Debenture Issued
February 15, 2002 Due July 31, 2003.
4.5 GoTrain Corp. 2002 Stock Option and Stock Plan
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.
99.1(1) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002
(Robert C. McKay - Chief Executive Officer and President).
99.2(1) Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act of 2002
(Jeffrey R. Hazarian - Chief Financial Officer and Executive Vice
President).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of 2002.
(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, 2002.
___________________________
(1) Filed herewith
42
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
- ----------------------------------------------------------------------------------------------------------------
2000
Reserve for Sales Adjustment
and Credit Losses ............. $ 1,298 $ -- $ -- $ 334 $ 964
2001
Reserve for Sales Adjustment
and Credit Losses ............. 964 -- -- 417 547
2002
Reserve for Sales Adjustment
and Credit Losses ............. 547 -- -- 8 539
- ----------------------------------------------------------------------------------------------------------------
43
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: April 14, 2003
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 April 14, 2003
- --------------------------
(William A. Hasler)
Director, Chief Financial Officer,
Executive Vice President, and
Corporate Secretary
/s/ JEFFREY R. HAZARIAN (Principal Financial Officer) April 14, 2003
- --------------------------
(Jeffrey R. Hazarian)
/s/ THOMAS S. LOO Director April 14, 2003
- --------------------------
(Thomas S. Loo)
Director, Chief Executive Officer
and President
/s/ ROBERT C. MCKAY (Principal Executive Officer) April 14, 2003
- --------------------------
(Robert C. McKay)
/s/ ANDREA W. O'RIORDAN Director April 14, 2003
- --------------------------
(Andrea W. O'Riordan)
Controller and Treasurer
/s/ JAMES A. ROBISON, JR. (Principal Accounting Officer) April 14, 2003
- --------------------------
(James A. Robison, Jr.)
/s/ GEORGE L. TURIN Director April 14, 2003
- --------------------------
(George L. Turin)
44
CERTIFICATION
I, Robert C. McKay, certify that:
1. I have reviewed this annual report on Form 10-K of TENERA, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: April 14, 2003 /s/ ROBERT C. McKAY
--------------------------------------
Robert C. McKay
Chief Executive Officer and President
45
CERTIFICATION
I, Jeffrey R. Hazarian, certify that:
1. I have reviewed this annual report on Form 10-K of TENERA, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: April 14, 2003 /s/ JEFFREY R. HAZARIAN
----------------------------------------------------
Jeffrey R. Hazarian
Executive Vice President and Chief Financial Officer
46
EXHIBIT INDEX
Ex. 21.1 List of Subsidiaries of the Registrant
Ex. 23.1 Consent of Ernst & Young LLP, Independent Auditors
Ex. 99.1 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act
of 2002 (Robert C. McKay - Chief Executive Officer and
President)
Ex. 99.2 Certification Pursuant To 18 U.S.C. Section 1350, As
Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act
of 2002 (Jeffrey R. Hazarian - Chief Financial Officer
and Executive Vice President)