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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, 1996
[ ] 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.)
One Market, Spear Tower, Suite 1850, San Francisco, California 94105-1018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 536-4744
_________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy as information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of March 17, 1997, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $4,215,650 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 17, 1997, was 10,123,153.
PART I
ITEM 1. BUSINESS
GENERAL
TENERA, Inc. ("TENERA" or the "Company"), a Delaware corporation, was
formed in connection with the conversion of TENERA, L.P. (the predecessor of
the Company, the "Predecessor Partnership") into corporate form (the "Merger"
or "Conversion"), completed on June 30, 1995. Pursuant to the Merger, the
Company succeeded to the business, assets, and liabilities of the Predecessor
Partnership. Therefore, the Company and the Predecessor Partnership are
sometimes collectively referred to herein as TENERA or the Company. (See Note
1 to Financial Statements. Organization)
The Company provides a broad range of professional services and software
products to solve complex management, engineering, environmental, and safety
challenges associated with the licensing, operation, asset management, and
maintenance of power plants and mass transit systems. Its services and
products cover the following general areas: consulting and management
services and software services, products, and systems.
In the area of consulting and management services, TENERA provides services
to assist its commercial electric power industry clients with respect to
nuclear and fossil plant operations and maintenance, nuclear safety and
licensing, organizational effectiveness, management audits, utility and
project management, risk management, and certain environmental engineering
tasks, and also provides expert witness and analysis support for regulatory
and legal proceedings. For its governmental clients, TENERA provides the
Department of Energy ("DOE") and DOE prime contractors with assistance in
devising, implementing, and monitoring strategies to upgrade from an
operational, safety, and environmental perspective at DOE-owned nuclear
reactor sites. For the mass transit area, TENERA provides its clients with
consulting services associated with the maintenance of their rolling stock,
right-of-way, and facilities. The software services, products, and systems
area complements the management and consulting services areas providing
software services and information management products, specialized data bases,
and systems which support electric power generation and mass transit systems
in areas such as regulatory compliance, facility operations, maintenance, and
data management.
TENERA has developed expertise in providing solutions to the complex
technical and regulatory issues facing the commercial electric power industry,
particularly with respect to nuclear facilities. Over the past several years,
commercial electric utilities have experienced increased competitive pressure
due to a continued deregulation of electric power production. For example,
utilities continue to find it more difficult to recover total capital
expenditures through rate increases, as well as facing increased competition
from independent power producers, alternative energy production, and
cogeneration. During the same period, utilities 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 production facilities. A massive program is underway
throughout the DOE complex of nuclear facilities to comply 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 utilities, as well
as a variety of other industries, have been subjected to extensive regulation
regarding environmentally safe handling of hazardous materials. 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, including software and data bases
which are used either in support of consulting projects or as the basis for
development of stand alone software products and systems. The Company assists
its clients in the initial identification and analysis of a problem, the
implementation of a technologically feasible solution that client management
believes will be sensitive to business and public interest constraints, and
the ongoing monitoring of that solution.
During 1995, the Company formed TENERA Rocky Flats, LLC ("LLC"), a Colorado
limited liability company, to provide consulting and management services in
connection with participation in the Performance Based Integrating Management
Contract ("Rocky Flats Contract") at the DOE's Rocky Flats Environmental
Technology Site ("Site").
1
BACKGROUND
The Company's principal markets are the commercial electric utility
industry and the DOE-owned nuclear reactor sites. The electric utility
industry has undergone considerable change in recent years and faces a complex
mix of economic and regulatory pressures. There has been gradual deregulation
of the production and distribution of electricity, and the associated desire
by utilities to meet demand for electricity through higher operating
efficiency. Some of the Company's largest commercial clients have responded to
a more competitive environment by implementation of significant cost control
measures.
Electric utilities and the DOE-owned nuclear reactor sites also face close
scrutiny resulting from public concern over health, safety, and the
environment. The Company believes that increased enforcement of environmental
laws and regulations at various levels of government continues to be prompted
by publicity and public awareness of environmental problems and health hazards
posed by hazardous materials and toxic wastes.
Economic pressures have resulted in certain changes in the focus of
electric utility management. For example, the rate-making process now
represents a significant area of risk to utilities. This has highlighted the
importance of careful planning and documentation in connection with rate case
preparation. Furthermore, rate base decisions apparently are shifting their
emphasis to ongoing performance reviews related to such measures as plant
capacity factors. This has resulted in substantial penalties for extended
plant outages and has stimulated actions by the utilities to assure more
reliable operations.
The DOE has begun the implementation of 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 storage facilities and the partial
shutdown of nuclear operations at certain of its sites.
The markets for electric utility and DOE facility professional services and
software products covers 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, and plant security.
In recent years, the slowdown in construction of commercial power plants
has placed a premium on extending existing plant life and has shifted the
electric utility commercial market emphasis. This has also resulted in greater
attention by utilities to management systems for preventive maintenance and
improved methods of plant operation, which may, in time, result in the
expansion of the market for services and software associated with the
efficient and profitable operation of existing capacity.
The Company's other market, mass transit systems, consists of public
entities that provide ground transportation services to the general public.
The properties are typically characterized as either bus or rail operators,
with rail and large bus operators comprising approximately 75% of the budgeted
mass transit funds for maintenance and capital assets. The transit industry
consists primarily of government or quasi-government agencies, which are
subject to swings in government subsidy levels, and operate in a political
arena. A significant portion of this funding is spent by the operators on
asset operation and maintenance. In several sectors of the country, transit
infrastructure and fleets are aging and may require extensive maintenance or
replacement to the extent that capital budgets will allow.
The industrial association, American Public Transit Association ("APTA") is
a strong representative of the transit industry, with a membership comprised
of over 96% of the transit organizations. TENERA has established close and
active ties with APTA in order to maintain a clear understanding of the issues
facing this industry. The Company has sold total solution systems and services
to some of the most prestigious operators in the industry (i.e., New York
Metropolitan Transit Authority and Amtrak). The experience gained during these
engagements has provided the Company's transit consultants with additional
insight into the day-to-day, on-the-line problems which must be solved by the
operator's maintenance organizations.
2
SERVICES AND PRODUCTS
The Company provides its services by utilizing its professional skills and
technological resources in an integrated approach which combines technical and
project management capabilities with software systems and data bases. 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 operates in one
business segment providing services which cover these general areas:
consulting and management services and software services, products, and
systems.
The following table reflects the percentage of revenues derived for each of
these areas for the period indicated during the fiscal years ended December
31, 1994 through 1996:
________________________________________________________________________
Year Ended December 31,
--------------------------
1996 1995 1994
________________________________________________________________________
Consulting and Management Services ......... 91.8% 85.5% 83.6%
Software Services, Products, and Systems ... 8.2% 14.5% 16.4%
________________________________________________________________________
Consulting and Management Services. The Company's consulting and management
services involve determining a solution to client problems and challenges
arising in the design, operation, and management of large facilities and mass
transit systems. 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 planning and implementing a coordinated,
effective response to such issues. The Company applies its professional
skills, software, and specialized data bases to all aspects of these problems
and challenges in the following general areas:
- Operations and maintenance
- Engineering design review and verification
- Nuclear safety and licensing
- Organizational effectiveness
- Management audits
- Project management
- Nuclear safety and criticality at DOE facilities
- Environmental engineering issues at DOE and electric utility facilities
Software Services, Products, and Systems. To complement its professional
services, the Company offers a range of information software services,
products, and systems including data bases designed to support mass transit
and electric utility clients in areas such as asset management, regulatory
compliance, facility operations, and equipment maintenance and data management
related to management consulting, operating performance, and environmental
engineering requirements. The principal proprietary aspect of the software
business lies in the ability to utilize it to solve client problems and to
market this capability. Software applications for a variety of industrial
sectors and requirements have been developed for PC, mini, and mainframe
hardware installations. The Company offers interactive software applications
for mass transit systems or large facility information management
requirements, which are designed for use with IBM mainframe and networked
personal computer environments. Major core products which are customized to
the client's specifications include:
- An on-line interactive system for coordinating and controlling all
aspects of maintenance for large mass transit systems and electric
utility facilities
3
- Networked PC software to manage nuclear safety-related data bases and
engineering processes in conformance with rigorous software quality
assurance requirements
MARKETING AND CLIENTS
Marketing. The Company's marketing strategy emphasizes its ability to offer
a broad range of services and software designed to meet the needs of its
clients in a timely and cost-efficient manner. The Company has the
organization and capability to undertake not only small tasks requiring a few
professionals but also the management, staffing, design, and implementation of
major projects which may last for several months and involve large numbers of
professionals in several geographic locations. Characteristic of TENERA's
marketing strategy are significant projects in which initial contracts have
been only a fraction of the ultimate sale.
The Company provides financial incentives to attract senior technical
professionals with extensive utility and transit industry experience and to
encourage these individuals to market the complete range of TENERA's services
and software throughout existing and potential customer organizations.
TENERA's marketing efforts are facilitated by the technical reputation and
industry recognition often enjoyed by its professional staff. TENERA's
reputation in the electric power and mass transit industries 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. This assistance
can lead, in turn, to a request for TENERA to use existing software or to
develop software systems to solve the problem. If new services or products are
developed for a client, they generally are marketed to other clients with
similar needs.
Clients. During the year ended December 31, 1996, TENERA provided services
and software to over 75 clients involving over 125 contracts. During the year
ended December 31, 1995, TENERA provided services and software to over 66
clients involving over 150 contracts. Over 80% of TENERA's clients during the
year ended December 31, 1996, had previously used its services or software.
During the year ended December 31, 1996, two customers, Kaiser-Hill
Company, LLC ("Kaiser-Hill"), prime contractor of the Rocky Flats Contract,
and Commonwealth Edison Company ("ComEd"), accounted for approximately 68% of
the Company's total revenue. Kaiser-Hill and ComEd represented approximately
56% and 12%, respectively. During the year ended December 31, 1995, these two
clients accounted for approximately 38% of the Company's total revenue
(Kaiser-Hill - 31%; ComEd - 7%). The Company has maintained working
relationships with Kaiser-Hill and ComEd for two years and ten years,
respectively, during which time various contracts have been completed and
replaced with new or follow-on contracts. There can be no assurance that these
relationships will be maintained at current levels or beyond the existing
contracts, and the loss of these clients could have a material adverse effect
on the Company.
OPERATIONS
The Company contracts for the billing of its services in one of four ways:
time and materials ("T & M"), cost plus fixed fee ("CPFF"), cost plus
incentive fee ("CPIF"), or fixed price. T & M, CPFF, and CPIF contracts, which
cover a substantial amount of TENERA's revenues, are generally billed monthly
by applying a multiplier factor to specific labor costs or by use of a fixed
labor rate per hour charged to each project. T & M, CPFF, and CPIF 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 beyond the initial scope of work is required, the contract normally can
be renegotiated to include such additional work and to increase the contract
ceiling accordingly. The Company also receives license and annual maintenance
fees from contracts involving software products. During the year ended
December 31, 1996, such fees amounted to $283,000 ($814,000 in 1995).
Fixed-price contracts are generally applicable to instances in which TENERA
has been requested to deliver services and/or products previously developed or
products and/or services deliverable to multiple customers. Certain fixed
price contracts are established where TENERA is developing software products
or transferring the technology to a new platform.
4
TENERA generally receives payments on amounts billed 30 to 90 days after
billing, except for retention under contracts. Since the majority of TENERA's
clients are utility companies, DOE, DOE prime contractors, or major mass
transit systems, TENERA historically has experienced a low percentage of
losses due to poor credit risks.
BACKLOG
As of December 31, 1996, TENERA had contracted a backlog of approximately
$6.7 million, all of which is cancelable by the clients. Contracted backlog
represents the aggregate of the residual (unspent) value of those active
contracts entered into by TENERA for services which 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 revenues from these contracts will be realized by the Company. If any
contract is canceled, there is no assurance that the Company will be
successful in replacing such contracts.
COMPETITION
The market for consulting and management services and related software
products and services is highly competitive and TENERA competes with several
larger firms with significantly greater resources. The primary competitive
factor in the market for consulting and management services is price, and a
number of TENERA's competitors are able to offer such services at prices that
are lower than those offered by TENERA.
RESEARCH AND DEVELOPMENT
It has been TENERA's policy to undertake development projects of software,
systems, and data bases only if they can be expected to lead directly to
proprietary products that may be generally marketable. A portion of TENERA's
research and development effort may be funded through customer-sponsored
projects, although the rights to the systems and data bases generally remain
with TENERA. Because TENERA's research and 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 research and development costs. In 1996 however, TENERA expended
in excess of $562,000 ($68,000 in 1995) of its funds on software development
designed to meet customers needs for 1996 and beyond.
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 data bases. The license agreements under which
customers acquire the rights to use TENERA's products generally restrict the
customers' use of the products to their own operations and prohibit disclosure
to others.
PERSONNEL
At December 31, 1996, the Company employed a total of 176 consultants,
engineers, programmers, and scientists and a supporting administrative staff
of over 30 employees. Nine employees hold doctorates and 71 employees hold
master's degrees. TENERA also retains the services of 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 13,500 square feet of leased office space. TENERA
also leases approximately 5,000 square feet of office space in Hartford,
Connecticut. These leases expire in 1997 and 2000, respectively. Additionally,
TENERA maintains leases covering approximately 8,000 square feet in total in
Louisville, Colorado; Knoxville, Tennessee; and Richland, Washington which
expire at various dates through 1998.
5
The Company believes that its facilities are well maintained and adequate
for its current needs.
ITEM 3. LEGAL PROCEEDINGS
On November 4, 1994, PLM Financial Services, Inc. ("PLM") filed an action
against the Predecessor Partnership, among others, in the Superior Court of
California for the County of Alameda. The action entitled PLM Financial
Services, Inc. v. TERA Corporation, et al., Case No. 743 439-0, seeks damages
in excess of $4.6 million in unpaid equipment rent and other unspecified
damages allegedly owing to PLM under an equipment lease dated September 29,
1984 between PLM and TERA Power Corporation ("TERA Power"), a former
subsidiary of TERA Corporation (the "Predecessor Corporation"). PLM has named
the Predecessor Partnership in the action pursuant to a Guaranty dated
September 24, 1984 of the lease obligations of TERA Power made by the
Predecessor Corporation. Upon the liquidation of the Predecessor Corporation
in late 1986, the stock of TERA Power was transferred to the TERA Corporation
Liquidating Trust (the "Trust") and was thereafter sold to Delta Energy
Projects Phases II, IV, and VI pursuant to a stock purchase agreement dated
May 31, 1991. Management understands that TERA Power has asserted various
defenses to the claims asserted by PLM in the action. Moreover, management
believes that, even if there is liability under the lease, the Guaranty has
been exonerated and the Company will be able to defend this action
successfully. Management does not believe that eventual resolution of this
matter will have a material effect on the Company's financial position;
however, an adverse outcome could have a material adverse impact on the
financial position, results of operations, and cash flows of the Company.
On October 13, 1995, the League for Coastal Protection ("League") filed an
action on behalf of the League and the general public against the Company,
among others, in the Superior Court of California for the County of San
Francisco. The action entitled League for Coastal Protection v. Pacific Gas &
Electric Company ("PG&E"), et al., Case No. 973182, seeks injunctive relief
and disgorgement of unspecified profits under the California Business and
Professions Code, Section 17200, et seq. The plaintiff contends that certain
studies performed by the Company and its predecessors respecting the
requirements of 316(b) of the Clean Water Act, that ultimately were submitted
by PG&E to the Regional Water Quality Control Board ("RWQCB") in 1988 in
connection with the Diablo Canyon Nuclear Power facility at Diablo Canyon,
California, were deficient in various respects, and that the Company and PG&E
covered up those deficiencies from the RWQCB and other state agencies. On
October 13, 1995, the League filed an action against the Company among others,
in the United States District Court for the Northern District of California,
entitled League for Coastal Protection v. Pacific Gas & Electric Company, et
al., Case No. C96-1393DLJ, seeking injunctive and other relief under the
United States Clean Water Act related to the same studies and reporting
described above. On February 5, 1996, John W. Carter filed an action against
the Company and others in the United States District Court for the Northern
District of California entitled United States of America, ex rel. and State of
California, ex rel., John W. Carter v. Pacific Gas & Electric Company, et al.,
Case No. C-95-2843-MHP, under the False Claims Act. This action, which is
based on the same studies and reports described above, seeks unspecified
damages and penalties. An agreement has been reached in principal for a global
settlement with the League, Carter, the California Attorney General, and the
Environmental Protection Agency. While the settlement is being documented, all
matters have been stayed, and/or held in abeyance, pending consummation of the
settlement. As a result of the settlement, all of the actions will be
dismissed. The Company is not required to make any payment or other
contribution to the settlement.
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. The Units of the Predecessor Partnership
were listed for trading on AMEX under the symbol TLP. The first and last
trading days on AMEX for the Predecessor Partnership was January 28, 1988, and
June 30, 1995, respectively. There were approximately 500 shareholders of
record as of March 17, 1997.
___________________________________________________________________________________
1996 1995 1994
------------------ ------------------ ------------------
Price Range of Price Range of Price Range of
TENERA, Inc. TENERA, Inc. Predecessor
Shares Shares (1) Partnership Units
------------------ ------------------ ------------------
High Low High Low High Low
___________________________________________________________________________________
First Quarter .... $ 1.375 $ 0.875 $ 0.9375 $ 0.50 $ 1.6875 $ 1.25
Second Quarter ... 1.4375 0.875 1.1875 0.75 1.4375 1.0625
Third Quarter .... 1.0625 0.75 1.875 1.1875 1.1875 0.50
Fourth Quarter ... 0.875 0.625 1.50 0.875 1.3125 0.625
___________________________________________________________________________________
(1) Reflects trading prices of the Predecessor Partnership Units for the period
from January 1, 1995 to June 30, 1995.
The Board of Directors of the Company determines the amount of cash
dividends which 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
and its Predecessor Partnership have made no distributions since 1991. The
Company does not anticipate resumption of cash distributions in the
foreseeable future.
7
ITEM 6. SELECTED FINANCIAL DATA
The following combined selected financial data of the Company for the five
prior fiscal years should be read in conjunction with the combined financial
statements and related notes included elsewhere.
TENERA, INC.
FINANCIAL HIGHLIGHTS
(In thousands, except per unit and statistical amounts)
_______________________________________________________________________________________________________________
Year Ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
_______________________________________________________________________________________________________________
OPERATIONS DATA
Revenue ................................................ $ 24,003 $ 25,545 $ 23,600 $ 29,340 $ 36,648
Operating (Loss) Income ................................ (1,382) 1,203 (1,239) (315) 826
Net (Loss) Earnings .................................... (1,080) 898 (1,202) (294) 795
Earnings (Loss) per Share/Equivalent Unit(1) ........... (0.11) 0.07 (0.13) (0.03) 0.08
Weighted Average Shares/Equivalent Units(1) ............ 10,248 10,014 9,555 9,646 9,710
CASH FLOW DATA
Net Cash Provided (Used) by Operating Activities ....... 2,954 (286) 17 1,472 (626)
Net Increase (Decrease) in Cash and Cash Equivalents ... 2,490 (469) 363 1,085 (1,418)
FINANCIAL POSITION AT DECEMBER 31
Cash and Cash Equivalents .............................. 3,964 1,474 1,943 1,580 495
Working Capital ........................................ 4,555 5,836 4,024 5,196 5,383
Total Assets ........................................... 7,940 10,087 8,616 9,345 11,111
Total Liabilities ...................................... 3,062 3,912 4,069 3,524 4,932
Shareholders' Equity/Partners' Capital ................. 4,878 6,175 4,547 5,821 6,179
Book Value per Share/Equivalent Unit(1)(2) ............. 0.48 0.60 0.48 0.60 0.64
OTHER INFORMATION
Number of Employees .................................... 208 270 170 202 263
_______________________________________________________________________________________________________________
(1) Equivalent Units represent both the general and limited partners' interest in Predecessor Partnership
earnings.
(2) Calculated as Shareholders' Equity divided by shares of Common Stock outstanding at December 31, 1996 and
December 31, 1995, and as the Predecessor Partnership's Partners' Capital divided by Equivalent Units
outstanding at December 31, for the years 1992 to 1994, respectively.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
TENERA, INC.
RESULTS OF OPERATIONS
______________________________________________________________________________________________________
Year Ended December 31,
--------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------
% Increase % Increase
(Decrease) (Decrease)
% of to Prior % of to Prior % of
Revenue Year Revenue Year Revenue
______________________________________________________________________________________________________
Revenue .............................. 100 (6) 100 8 100
Direct Costs ......................... 65 (4) 63 10 62
General and Administrative Expenses .. 41 19 32 (23) 45
Other Income (Expenses) .............. 0 275 0 (69) 0
Special Items, Net ................... 0 N/M -- (100) 2
---------- ---------- ---------- ---------- ----------
Operating (Loss) Income ............ (6) (215) 5 N/M (5)
Interest Income, Net ................. 1 164 0 (97) 0
---------- ---------- ---------- ---------- ----------
Net (Loss) Earnings Before Income
Tax Benefit/Expense .................. (5) (220) 5 N/M (5)
========== ========== ========== ========== ==========
______________________________________________________________________________________________________
N/M Not meaningful.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Lower revenue and higher general and administrative expenses resulted in a
net loss before income tax benefit/expense of $1,217,000, compared to net
earnings before income tax expense of $1,204,000 in 1995.
The revenue decrease is primarily the result of reduced sales of consulting
and management services throughout the year; lower sales activity of software
services until the award of a software contract in August 1996, valued at
approximately $2.9 million, with the National Railroad Passenger Corporation
("Amtrak"); and the reduced availability of staff reassigned to internal
software product development; partially offset by an increase in revenue
related to the Rocky Flats Contract at DOE's Site. Concentration of revenue
from the government sector increased to 61% of total revenue for 1996 from 49%
in 1995. This is primarily the result of the Rocky Flats Contract which was in
existence for the entire year of 1996, but commenced in mid-1995. During 1996,
the government sector quarterly revenue declined approximately 40% from the
first quarter to the fourth quarter, due primarily to site budget constraints
on the Rocky Flats Contract. The Company is unable to determine whether future
budgetary actions at Rocky Flats will further reduce revenue from the Rocky
Flats Contract. The number of clients served during the year increased
slightly to 75 from 66 in 1995. Revenue from software license and maintenance
fees during 1996 decreased to $283,000 from $814,000 in 1995, primarily due to
fewer new software installations.
Direct costs were lower in 1996, primarily as a result of the reduced
revenue generation opportunities. Gross margins decreased to 35% in 1996 from
37% in 1995 due to the full year impact of the lower margin Rocky Flats
Contract. This lower margin contribution is primarily due to the cost-plus
pricing characteristics of
9
the contract. Gross margin contribution from overall project activity during
the year, before consideration for the impact of the Rocky Flats Contract, was
up slightly to 44% in 1996 from 43% in 1995.
General and administrative costs increased by $1.6 million in 1996,
primarily reflecting increased professional staff time spent on overhead and
sales activities, higher severance costs, and increased internally-funded
software development costs. Prior to January 1, 1996, the Company's product
development had been primarily funded by clients as part of the development of
software applications. These cost increases resulted in an increase in general
and administrative expenses as a percentage of revenue from 32% in 1995 to 41%
in 1996.
Other income for 1996 primarily relates to the final liquidation, in April
1996, of the Company's interest in the Individual Plant Evaluation Partnership
("IPEP partnership"), a technical services partnership in which it was an
operating participant until its termination in 1995. The Company previously
booked a loss provision of $30,000 in 1995 for estimated closure costs of the
IPEP partnership. Other income also includes gains on the sale of assets
related to facility downsizing (approximately $10,000 in 1996 and 1995).
The special items' net expense of $50,000 is comprised of two items (see
Note 8 to Financial Statements. Special Items). First, in the second quarter
of 1996, the Company recorded a $250,000 adjustment to the reserve related to
the settlement of specific disputed costs on certain government contracts with
the DOE. This positive earnings impact resulted from a further reduction of
the reserve for sales adjustment established in 1991, and is based upon the
successful government audits and contract closeouts of prior periods. The
second special adjustment occurred in December 1996, and more than offset the
first item. This adjustment related to the repricing of debt owed to the
Company by one of its executive officers (see Note 3 to Financial Statements.
Related Party Transactions). The principal amount of the note was reduced to
the then current fair market value of the stock held as security, resulting in
a charge to earnings of approximately $300,000.
Net interest income in 1996 represents earnings from the investment of cash
balances in short-term, high-quality, government and corporate debt
instruments, partially offset by capital lease interest expense. The Company
had no borrowings under its line of credit during 1996. Net interest income in
1995 reflects investment earnings on smaller average cash balances, partially
offset by interest costs associated with short-term borrowing on the Company's
line of credit during the first six months of 1995.
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994
Higher revenue and lower general and administrative expenses resulted in
net earnings before income tax expense for 1995 of $1,204,000 versus a pre-tax
loss of $1,702,000 in 1994 before the special item for settlement with the
DOE.
The revenue increase was primarily a result of the impact of beginning the
Rocky Flats Contract at the Site on July 1, 1995. This contract is a cost-plus
incentive agreement with estimated revenue for direct and overhead cost
recovery exceeding $16 million and an incentive fee percentage comprised of a
1% base and 4.5% maximum performance-based award over a two-year base period.
The total period of performance for the Rocky Flats Contract includes options
to extend the contract beyond the two-year initial base period, upon the
request of Kaiser-Hill, through June 30, 2000. The Rocky Flats Contract, as
with all TENERA contracts, is cancelable by the clients (see Item 1.
"Business"). The Rocky Flats Contract's impact on revenue for 1995 was
partially offset by the impact of reduced technical services sales to electric
utility clients and related staffing when compared to 1994.
Concentration of revenue from the government sector increased to 49% of
total revenue for 1995 from 36% in 1994. This was primarily due to the Rocky
Flats Contract activity which represented 45% of total revenue in the final
six months of 1995 and 31% of total revenue for the entire year. The number of
clients served during the year decreased slightly to 66 from 73 in 1994.
Revenue from software license and maintenance fees during 1995 rose to
$814,000 from $393,000 in 1994, primarily due to the recognition of license
fees associated with achieving certain milestones in the ongoing New York
Metropolitan Transit Authority and Long Island Rail Road installations.
10
Direct costs were higher in 1995, primarily reflecting the increased
staffing for the Rocky Flats Contract. Gross margin contribution from overall
project activity during the year, before consideration for the impact of the
Rocky Flats Contract, was up from 38% in 1994 to 43% in 1995. The 1995 margins
reflected improved pricing in services to electric utility clients and
achievement of milestones under software contracts. The gross margin
contribution for the Rocky Flats Contract was only 19%. This lower gross
margin contribution was primarily due to the cost-plus pricing characteristics
of the contract.
General and administrative expenses decreased by $2,422,000 in 1995 as
compared to 1994, primarily due to overall reduced staff size during the first
half of the year, improved technical staff productivity on client projects,
and lower professional service, facilities, travel, and office equipment costs
in 1995, partially offset by costs associated with the Conversion incurred in
1995 and incentive compensation awards. These net cost reductions resulted in
a drop in general and administrative expenses as a percentage of revenue from
45% in 1994 to 32% in 1995.
Other expense for 1995 primarily related to the Company's interest
($30,000) in the estimated loss of the Individual Plant Evaluation Partnership
("IPEP"), a technical services partnership in which it was an operating
participant, partially offset by a gain on the sale of assets related to
facility downsizing ($10,000).
The special item of $500,000 in 1994, reflected the estimated settlement of
specific disputed costs on certain U.S. Government contracts with the DOE.
This positive earnings adjustment resulted from a partial reduction of the
reserve for sales adjustment established in 1991. The reserve was established
to provide for a dispute between the Company and the DOE with respect to the
allowability and amount of potential rate adjustments on U.S. Government
contracts for certain employee compensation costs.
Net interest income represented earnings from the investment of cash
balances in short-term, high-quality, corporate debt instruments, offset by
the interest costs associated with short-term borrowing on the Company's line
of credit during the first six months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $2,490,000 during 1996. The increase
was due to cash provided by operations ($2,954,000), offset by cash used in
net acquisition of equipment ($247,000), and in financing activities
($217,000).
Receivables decreased by $5,758,000 from December 31, 1995, primarily due
to an increase in collections and a reduction in revenue during 1996. The
allowance for sales adjustments decreased by $1,262,000 since December 31,
1995, primarily due to contract closeouts of various government contracts from
prior periods.
Accounts payable decreased by $144,000 since the end of 1995, primarily due
to the net reduction of prepaid fixed-price project commitments. Accrued
compensation and related expenses decreased by $382,000 during the period
primarily reflecting staff reductions.
Income taxes payable and deferred income taxes decreased by $216,000 and
$90,000, respectively, during the period resulting from payment of 1995 income
taxes and reduced tax liability associated with 1996 net losses.
Equity decreased by $1,297,000 in 1996, due to net losses ($1,080,000) and
the repurchase of stock ($217,000).
No cash dividend was declared in 1996.
The impact of inflation on revenue and projects of the Company was minimal.
At December 31, 1996, the Company had available $4,500,000 of a $5,000,000
revolving loan facility with its lender which expires in May 1998. The Company
has no outstanding borrowing against the line; however, $500,000 was assigned
to support standby letters of credit.
Management believes that cash expected to be generated by operations, the
Company's working capital, and its loan facility are adequate to meet its
anticipated liquidity needs through the next twelve months.
11
OPERATING RISKS
Statements contained in this report which are not historical facts, are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
the risks and uncertainties which could cause actual results to differ
materially from those projected, including those risks and uncertainties
discussed below.
History of Losses; Uncertainty of Future Profitability. Revenue decreased
each year from 1990 to 1994 ($51.2 million in 1990, $44.1 million in 1991,
$36.6 million in 1992, $29.3 million in 1993, $23.6 million in 1994), and has
remained relatively flat from 1994 through 1996, while net earnings (loss)
from operations over the same periods declined from $7.9 million in 1990, to
$(6.2 million) in 1991, $0.8 million in 1992, $(0.3 million) in 1993, $(1.2
million) in 1994, $0.9 million in 1995, and $(1.2 million) in 1996. There can
be no assurance of the level of earnings, if any, that the Company will be
able to derive in the future.
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 and software relating to licensing and construction of power plants
has contracted, and the market for services and software related to efficient
and profitable operation of existing capacity has expanded. This trend has
caused some electric utilities to close power plants and to curtail certain
other activities traditionally supported by TENERA. This reduced demand for
TENERA's traditional engineering services and software, which has caused
TENERA to discontinue certain business units and related facilities, and to
downsize and realign engineering staff, has had, and may continue to have, a
material adverse impact on operating results. TENERA's profitability depends
on its ability to successfully adjust to these industry changes through
additional downsizing or realignment of professional staff and through the
successful development and marketing of new services and software. There can
be no assurance that TENERA will have the financial and other resources
necessary to successfully research, develop, introduce, and market new
products and services, that if, or when, such new products or services are
introduced, they will be favorably accepted by current or potential customers,
or that TENERA will be otherwise able to fully adjust its services and
products to meet the changing needs of the industry. See "Business -
Background."
Uncertainty of Access to Capital; Research and Development. Management
currently believes that cash expected to be generated from operations, the
Company's working capital, and its available loan facility, are adequate to
meet its anticipated near-term needs. If cash from operations is less than
currently anticipated, TENERA may need to seek other sources of capital.
Moreover, additional amounts will be required to adequately fund research and
development of new products and services necessary to meet changing industry
trends and customer demand. 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 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 experienced a historically high rate of turnover as revenue and
earnings began to decline in 1991 and thereafter, and the further loss of such
officers and technical personnel, and the inability to recruit sufficient
additional qualified personnel could have material adverse effect on the
Company.
Government Contracts Audits. The Company's United States government
contracts are subject in all cases to audit by governmental authorities. The
Company earlier in 1994 concluded an audit begun 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 the
dispute, the Company recognized increases to earnings of $500,000 in 1994 and
$250,000 in 1996. Cash payments to clients associated with the settlement,
which are estimated to be between $400,000 and $500,000, which were accrued
for in the 1991 Special Charge to earnings, 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.
12
Litigation. PLM Financial Services, Inc. has filed an action, in the
Superior Court of California for the County of Alameda, seeking damages in
excess of $4.6 million in unpaid equipment rent and other payments allegedly
owing to PLM under an equipment lease between PLM and TERA Power Corporation,
a former subsidiary of TERA Corporation of the Predecessor Corporation. PLM
has named the Company in the action pursuant to a guaranty of the lease
obligations made by the Predecessor Corporation. Management believes that,
even if there is liability under the lease, the guaranty has been exonerated
and the Company will be able to defend this action successfully. Management
does not believe that eventual resolution of this matter will have a material
effect on the Company's financial position; however, an adverse outcome could
have a material adverse impact on the financial position, results of
operations, and cash flows of the Company. See "Legal Proceedings."
Competition. The market for engineering and management services and related
software products and services is highly competitive and TENERA competes with
several larger firms with significantly greater resources. Significant
competitive factors in the market for engineering and management services 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 Major Customers. During fiscal 1996, two customers, Kaiser-Hill
and ComEd, accounted for approximately 68% of the Company's total revenues,
and during 1995, these two customers accounted for approximately 38% of the
Company's total revenues. 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.
Budgetary constraints at the Rocky Flats Site resulted in a decline in revenue
attributable to Kaiser-Hill, and a 40% decline in revenue from the government
sector, generally from the first quarter to the fourth quarter of 1996, and if
continued, such budgetary constraints could result in further declines in
revenue in the future. The discontinuation or material reduction of business
relations with these customers could have a material adverse impact on
TENERA's business. See "Business - Marketing and Clients."
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TENERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
___________________________________________________________________________
Year Ended December 31,
-------------------------------
1996 1995 1994
___________________________________________________________________________
Revenue .................................. $ 24,003 $ 25,545 $ 23,600
Direct Costs ............................. 15,527 16,082 14,612
General and Administrative Expenses ...... 9,843 8,240 10,662
Other Income (Expenses) .................. 35 (20) (65)
Special Items, Net ....................... (50) -- 500
--------- --------- ---------
Operating (Loss) Income .............. (1,382) 1,203 (1,239)
Interest Income, Net ..................... 165 1 37
--------- --------- ---------
Net (Loss) Earnings Before Income
Tax Benefit/Expense .................... (1,217) 1,204 $ (1,202)
=========
Income Tax (Benefit) Expense ............. (137) 306
--------- ---------
Net (Loss) Earnings ...................... $ (1,080) $ 898
========= =========
Net (Loss) Earnings per Share
(Pro Forma for 1995) ..................... $ (0.11) $ 0.07
========= =========
Weighted Average Number of Shares
Outstanding .............................. 10,248 10,014
========= =========
___________________________________________________________________________
See accompanying notes.
14
TENERA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and unit amounts)
__________________________________________________________________________________________
December 31,
---------------------------
1996 1995
__________________________________________________________________________________________
ASSETS
Current Assets
Cash and cash equivalents .............................. $ 3,964 $ 1,474
Receivables, less allowances of $1,626 (1995 - $2,888)
Billed ............................................... 1,087 4,857
Unbilled ............................................. 2,032 2,758
Other current assets ................................... 534 641
---------- ----------
Total Current Assets ............................... 7,617 9,730
Property and Equipment, Net .............................. 323 340
Other Assets ............................................. -- 17
---------- ----------
Total Assets ..................................... $ 7,940 $ 10,087
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL
Current Liabilities
Accounts payable ....................................... $ 1,026 $ 1,170
Accrued compensation and related expenses .............. 2,036 2,418
Income taxes payable ................................... -- 216
Deferred income taxes .................................. -- 90
---------- ----------
Total Current Liabilities .......................... 3,062 3,894
Non-Current Liabilities .................................. -- 18
---------- ----------
Total Liabilities ................................ 3,062 3,912
Commitments and Contingencies
Shareholders' Equity
Common Stock, $0.01 par value, 25,000,000 authorized,
10,417,345 issued and outstanding ...................... 104 104
Paid in capital, in excess of par ...................... 5,698 5,698
Retained (deficit) earnings ............................ (619) 461
Treasury stock - 292,498 shares
(1995 - 87,402 shares) ................................. (305) (88)
---------- ----------
Total Shareholders' Equity ....................... 4,878 6,175
---------- ----------
Total Liabilities and Shareholders' Equity ..... $ 7,940 $ 10,087
========== ==========
__________________________________________________________________________________________
See accompanying notes.
15
TENERA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (PARTNERS' CAPITAL)
(In thousands, except share and unit amounts)
_________________________________________________________________________________________________________________________________
Shareholders' Equity Partners' Capital
----------------------------------------- ------------------------------------------
Paid In
Capital Notes
In Retained from
Common Excess (Deficit) Treasury General Limited Treasury Limited
Stock of Par Earnings Stock Partner Partners Units Partners Total
_________________________________________________________________________________________________________________________________
December 31, 1993 ............ $ -- $ -- $ -- $ -- $ 335 $ 6,555 $ (1,065) $ (4) $ 5,821
Repurchase of 51,507 Units ... -- -- -- -- -- -- (76) -- (76)
Amortization of Notes ........ -- -- -- -- -- -- -- 4 4
Net Loss ..................... -- -- -- -- (23) (1,179) -- -- (1,202)
-------- --------- --------- --------- --------- --------- --------- --------- ---------
December 31, 1994 ............ -- -- -- -- 312 5,376 (1,141) -- 4,547
Repurchase of 242,481 Units .. -- -- -- -- -- -- (182) -- (182)
Net Earnings Through
June 30, 1995 ................ -- -- -- -- 9 428 -- -- 437
Merger of Predecessor
Partnership into
TENERA, Inc. ................. 93 4,709 -- -- (321) (5,804) 1,323 -- --
Common Stock Issued at
$0.89 per Share .............. 11 989 -- -- -- -- -- -- 1,000
Repurchase of 87,402 Shares .. -- -- -- (88) -- -- -- -- (88)
Net Earnings for July 1, 1995
to December 31, 1995 ......... -- -- 461 -- -- -- -- -- 461
-------- --------- --------- --------- --------- --------- --------- --------- ---------
December 31, 1995 ............ 104 5,698 461 (88) -- -- -- -- 6,175
Repurchase of 205,096 Shares . -- -- -- (217) -- -- -- -- (217)
Net Loss ..................... -- -- (1,080) -- -- -- -- -- (1,080)
-------- --------- --------- --------- --------- --------- --------- --------- ---------
December 31, 1996 ............ $ 104 $ 5,698 $ (619) $ (305) $ -- $ -- $ -- $ -- $ 4,878
========= ========= ========= ========= ========= ========= ========= ========= =========
_________________________________________________________________________________________________________________________________
See accompanying notes.
16
TENERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
_________________________________________________________________________________________________
Year Ended December 31,
----------------------------------
1996 1995 1994
_________________________________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings ....................................... $ (1,080) $ 898 $ (1,202)
Adjustments to reconcile net (loss) earnings to cash
provided (used) by operating activities:
Depreciation ............................................ 272 298 383
(Gain) Loss on sale of equipment ........................ (8) 1 24
Decrease in allowance for sales adjustments ............. (1,262) (9) (820)
Amortization of Limited Partners' notes ................. -- -- 4
Deferred income taxes ................................... (90) 90 --
Changes in assets and liabilities:
Receivables ........................................... 5,758 (2,137) 1,919
Other current assets .................................. 107 40 (109)
Other assets .......................................... 17 30 23
Accounts payable ...................................... (144) (495) 286
Accrued compensation and related expenses ............. (382) 764 (491)
Income taxes payable ............................... (216) 216 --
Non-Current liabilities ............................... (18) 18 --
---------- ---------- ----------
Net Cash Provided (Used) by Operating Activities .... 2,954 (286) 17
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ..................... (258) (164) (361)
Proceeds from sale of equipment ........................... 11 1 33
---------- ---------- ----------
Net Cash Used in Investing Activities ............... (247) (163) (328)
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment) Borrowings under bank loan agreement .......... -- (750) 750
Repurchase of equity ...................................... (217) (270) (76)
Issuance of Common Stock .................................. -- 1,000 --
---------- ---------- ----------
Net Cash (Used) Provided by Financing Activities .... (217) (20) 674
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ 2,490 (469) 363
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............. 1,474 1,943 1,580
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................... $ 3,964 $ 1,474 $ 1,943
========== ========== ==========
_________________________________________________________________________________________________
See accompanying notes.
17
TENERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. ORGANIZATION
Company. TENERA, Inc. (the "Company"), a Delaware corporation, was formed
in connection with the conversion of TENERA, L.P. (the predecessor of the
Company; the "Predecessor Partnership") into corporate form (the
"Conversion"). Therefore the Company and the Predecessor Partnership are
sometimes collectively referred to herein as the Company.
On June 30, 1995, the Company completed the Conversion by means of a merger
(the "Merger") of the Predecessor Partnership, its General Partner (Teknekron
Technology MLP I Corporation) and its Operating Partnership (TENERA Operating
Company, L.P.) with, and into, TENERA, Inc. Pursuant to the Merger: (i) the
Company succeeded to the business, assets, and liabilities of the Predecessor
Partnership; (ii) each limited partner Unit previously held by Unitholders in
the Predecessor Partnership, (including 184,946 equivalent Units representing
the interest in the Partnership of the General Partner), automatically
converted to one share of Common Stock of TENERA, Inc.; and (iii) an
additional 1,123,596 shares of Common Stock were issued to the sole
shareholder of the General Partner in consideration of the contribution of
$1,000,000 made to TENERA, Inc. by the General Partner in connection with the
Merger. The Merger was approved by the Unitholders of the Predecessor
Partnership pursuant to the Consent Solicitation Statement/Prospectus dated
June 6, 1995, included in the Company's Registration Statement on Form S-4
(Registration Number 33-58393; the "Form S-4").
TENERA Rocky Flats, LLC ("LLC"), a Colorado limited liability company, was
formed by the Company in 1995 to provide consulting 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").
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and the LLC. 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 from these
estimates.
Cash and Cash Equivalents. Cash and cash equivalents consist of demand
deposits, certificates of deposit, bank acceptances or repurchase agreements
of major banks having strong credit ratings, and commercial paper issued by
companies with strong credit ratings. The Company includes in cash and cash
equivalents, all short-term, highly liquid investments which mature within
three months of acquisition.
Property and Equipment. Property and equipment are stated at cost
($2,723,000 and $2,518,000 at December 31, 1996 and 1995, respectively), net
of accumulated depreciation ($2,400,000 and $2,178,000 at December 31, 1996
and 1995, respectively). Depreciation is calculated using the straight line
method over the estimated useful lives, which range from three to five years.
Revenue. Revenue from time-and-material and cost plus fixed-fee contracts
is recognized when costs are incurred; from fixed-price contracts, on the
basis of percentage of work completed (measured by costs incurred relative to
total estimated project costs); from software license fees at time of customer
acceptance; and from software maintenance agreements, equally over the period
of the maintenance support agreement (usually 12 months). The Company's
revenue recognition policy for its software contracts is in compliance with
the American Institute of Certified Public Accounts' Statement of Position 91-
1, "Software Revenue Recognition." The Company primarily offers its services
and software products to the electric power industry, the DOE, and the
municipal transit industry in North America.
18
The Company performs credit evaluations of these customers and normally
does not require collateral. 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 contacts in progress may
differ from management estimates and such differences could be material to the
financial statements.
During 1996, two clients accounted for 56% and 12% of the Company's total
revenue. During 1995 and 1994, a single client accounted for 31% and a
different client accounted for 29% of total revenue, respectively.
Income Taxes. As a result of the Conversion, the Company is no longer
subject to partnership tax treatment whereby the Company pays no entity-level
tax on Company income. The Company became a C Corporation subject to federal
and state statutory income tax rates for income earned after the close of
business on June 30, 1995. Due to the net loss in 1996, an income tax benefit
has been recorded for the twelve-month period ended December 31, 1996. During
1995, a provision for income taxes was made for the six months ended December
31, 1995; however, no provision for income taxes was made by the Company for
the six months ended June 30, 1995.
Accounting for Stock-Based Compensation. Statement of Financial Standards
No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") is effective
for the Company's 1996 year. The Company continues to account for employee
stock options in accordance with Accounting Principles Board Opinion No. 25
("APB 25") and has provided the pro forma disclosures required by FAS 123 in
Note 4.
Per Share and Pro Forma Per Share Information. Per share data for 1996 is
computed based on weighted average number of shares of common stock
outstanding and common stock equivalents using the treasury stock method. In
accordance with financial reporting guidelines, pro forma earnings per share
information for 1995 was based on the assumption that the Company was taxed
for federal and state income tax purposes as a C Corporation at a 40%
effective tax rate, and was computed based on weighted average number of
shares of common stock outstanding and the effect of common stock equivalents
from outstanding stock options, using the treasury stock method. Historical
earnings (loss) per share information for 1995 and 1994 has been omitted from
the face of the historical statements of operations because this data is not
indicative of the Company's ongoing operations as a result of the change in
tax treatment.
NOTE 3. RELATED PARTY TRANSACTIONS
Teknekron. The principal shareholder of Teknekron Corporation ("Teknekron")
beneficially owned approximately 37%, 36%, and 26% of the Company's
outstanding shares of Common Stock/Predecessor Partnership Units at December
31, 1996, 1995, and 1994, respectively. Teknekron provided management and
related services to the Predecessor Partnership under an advisory services
agreement, which expired on June 30, 1995. Charges to earnings for the
services amounted to none in 1996, $125,000 in 1995, and $600,000 in 1994.
Individual Plant Evaluation Partnership ("IPEP"). The Company was an equal
participant in a partnership, IPEP, with Westinghouse Electric Corporation and
Fauske & Associates, Inc., which provided executive consulting services to
commercial utility companies. IPEP ceased activities in 1995 and dissolved in
April 1996. Revenue recognized for services provided through IPEP amounted to
none in 1996, $390,000 in 1995, and $173,000 in 1994, and represented less
than 1% of total revenue in 1995 and 1994.
The participants paid a royalty to IPEP, equal to 2% to 4% of billed fees
on certain projects, for administrative services. Royalties paid to IPEP
amounted to none in 1996, $1,000 in 1995, and $4,000 in 1994.
The Company's interest in IPEP was accounted for under the equity method.
Each of the participants shared equally in the earnings and losses of IPEP. In
1996, the Company recorded income of $17,000 related to the final liquidation
of IPEP. For 1995, the Company recognized $30,000 as its share of IPEP's 1995
estimated losses ($34,000 in 1994).
Notes Receivable. The Company included in other current assets, notes
receivables from executive officers which amounted to none and $347,639 at
December 31, 1996 and 1995, respectively. In 1996, certain terms of the note
made by an executive officer, related to the purchase of stock by such officer
in 1988, were renegotiated to provide for a purchase price adjustment on the
stock securing the note balance, and the remaining balance of
19
the note was reduced to the then fair market value of the stock held as
security, resulting in a charge to operations of $300,419 in 1996.
TERA Corporation Liquidating Trust ("Trust"). The Trust was established by
TERA Corporation ("Predecessor Corporation") in 1986, to facilitate the
orderly sale or other disposition of the remaining assets and satisfaction of
all remaining debts and liabilities. The Company did not recognize any income
or expense from the Trust in 1996, 1995, and 1994.
Toltec Development Corporation ("Toltec"). The Company entered into a lease
for approximately 10,000 square feet of office space during 1993 for its
Berkeley facilities with Toltec, an affiliate of Teknekron. The lease expired
in 1995. Expenses related to lease payments to Toltec totaling $141,000 and
$224,000 were recorded in 1995 and 1994, respectively.
NOTE 4. EMPLOYEE BENEFIT PLANS
Incentive Bonus Plans. The Company has incentive plans based on financial
performance. Bonus awards of cash and shares are discretionary and are
determined annually by the Board of Directors. In 1996, there were no charges
to earnings for incentive bonuses ($150,000 in 1995 and none in 1994).
Additionally, $90,000 of the 1995 bonus accrual was not paid and was reversed
in 1996.
Profit Sharing Plan ("PSP"). Effective January 1, 1997, the Company
initiated a profit sharing plan whereby the funding for the plan is based on
overall company profitability as measured by pretax earnings. Twenty percent
of pretax earnings will be distributed quarterly to eligible employees on an
equal percentage of salary basis.
401(k) Savings Plan. The 401(k) Savings Plan is administered through a
trust that covers substantially all employees. Employees can contribute
amounts to the plan, not exceeding 10% of salary. In 1995 and 1994, the
Company matched these amounts with a 50% contribution on a matching
contribution base, not exceeding 6% of salary. Effective January 1, 1996, the
Company's matching contribution increased to 100% of a matching contribution
base, not exceeding 6% of the employee's salary. As of January 1, 1997, the
Company amended the plan to discontinue the matching contribution, but allow
employees to contribute up to 15% of salary. The Company, at its discretion,
may also contribute funds to the plan for the benefit of employees. During
1996, 1995, and 1994, no discretionary amounts were contributed to the plan by
the company.
Money Purchase Plan ("MPP"). On December 31, 1995, the MPP was merged with
and into the 401(k) Savings Plan, eliminating the MPP contribution.
Previously, the MPP was administered through a trust that covered
substantially all employees. In 1995 and 1994, the Company's contribution
amount was 3% of eligible employees annual salaries.
During 1996, charges to earnings for the 401(k) Savings Plan amounted to
$397,000 ($720,000 in 1995 and $492,000 in 1994 for the 401(k) and MPP Plans
combined).
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.
In connection with the Merger, the Company amended its Stock Option Plan to
reflect the fact that options will relate to shares of common stock, instead
of limited partnership units of the Predecessor Partnership. All outstanding
options for units were automatically converted to options to purchase an equal
number of shares of common stock at the original exercise price and on the
same terms and conditions as the original unit options. Under the provisions
of the Company's Stock Option Plan, 1,500,000 shares were reserved for
issuance upon the exercise of options granted to key employees and
consultants. During 1996, options were granted for 391,500 shares at an
exercise price of $1.00, the then fair market value, expiring on February 1,
2002. In 1995, options were granted for 130,000 shares at an exercise price of
$1.1875, the then fair market value, expiring on July 1, 2001. In 1994,
options were granted for 315,000 shares at an exercise price of $1.3125, and
20
290,000 shares at an exercise price of $0.6875, the then fair market values,
expiring on February 7, 2004, and December 30, 2004, respectively. During
1996, options for 278,500 shares were canceled due to employee terminations
($28,000 and $362,000 in 1995 and 1994, respectively). No options were
exercised in 1996, 1995, and 1994. As of December 31, 1996, options for
1,081,000 shares were outstanding and options for 545,000 shares were
exercisable.
Under the provisions of the 1993 Outside Directors Compensation and Stock
Option Plan, which was approved by the Board of Directors, effective March 1,
1994, 150,000 shares were reserved for issuance upon the exercise of options
granted to non-employee directors. During 1996, options were granted for
50,000 shares at an exercise price of $1.00, the then fair market value,
expiring on March 1, 2006. In 1995, options were granted for 60,000 shares at
an exercise price of $0.6875, the then fair market value, expiring on March 1,
2005. In 1994, options were granted for 20,000 shares at an exercise price of
$1.3125, the then fair market value, expiring on March 1, 2004. No options
were exercised in 1996, 1995, and 1994. As of December 31, 1996, 130,000
options were outstanding and 80,000 options were exercisable.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123 for fiscal years beginning after December 31,
1994, and has been determined as if the Company had accounted for its stock
options under the fair value method of FAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1995 and
1996: risk-free interest rates of 7.0% and 6.0%, respectively, for the March
and July 1995 grants, and 5.2% and 5.7%, respectively, for the February and
March 1996 grants; dividend yield of 0% for both years; volatility factors of
the expected market price of the Company's common stock of 0.54 and 0.53,
respectively; and a weighted-average expected life of the option of five years
for all grants.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, options valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because 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. Pro
forma information regarding the Company's net income (loss) and earnings
(loss) per share follows:
(In thousands, except for per share amounts)
__________________________________________________________________________________________
Year Ended December 31,
---------------------------
1996 1995
__________________________________________________________________________________________
Net (Loss) Earnings - As Reported ........................ $ (1,080) $ 898
Pro Forma Net (Loss) Earnings - FAS 123 .................. (1,133) 881
Net (Loss) Earnings per Share - As Reported .............. (0.11) 0.07
Pro Forma Net (Loss) Earnings per Share - FAS 123 ........ (0.11) 0.07
__________________________________________________________________________________________
21
A summary of the Company's stock option activity, and related information
follows:
(In thousands, except for dollar amounts)
________________________________________________________________________________________________________
Year Ended December 31,
--------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
________________________________________________________________________________________________________
Outstanding -
Beginning of Year ........ 1,048 $ 1.20 886 $ 1.24 623 $ 1.75
Granted .................. 441 1.00 190 1.03 625 1.02
Exercised ................ -- -- -- -- -- --
Forfeited ................ (278) 1.36 (28) 1.19 (362) 1.75
---------- ---------- ---------- ---------- ---------- ----------
Outstanding -
End of Year .............. 1,211 $ 1.09 1,048 $ 1.20 886 $ 1.24
========== ========== ========== ========== ========== ==========
Exercisable at
End of Year .............. 625 $ 1.16 638 $ 1.34 426 $ 1.41
Weighted-Average
Fair Value of Options
Granted During the Year .. $ 0.52 $ 0.54 N/A
________________________________________________________________________________________________________
N/A Not applicable under FAS 123.
Exercise prices for options outstanding as of December 31, 1996, ranged
from $0.6875 to $1.75. The weighted-average remaining contractual life of
those options is 6.4 years.
22
NOTE 5. 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, 1996
and 1995, are as follows, using the liability method:
__________________________________________________________________________________________
December 31,
---------------------------
1996 1995
__________________________________________________________________________________________
Current Deferred Tax Assets
Contract reserves not currently deductible ............. $ 551 $ 663
Accrued expenses not currently deductible .............. 231 246
Net operating loss carryforward ........................ 367 --
Other .................................................. 165 214
---------- ----------
Total Current Gross Deferred Tax Assets .............. 1,314 1,123
Less: Valuation Allowance ............................. (401) --
Current Deferred Tax Liabilities
Revenue differences related to timing .................. 913 1,213
---------- ----------
Net Current Deferred Tax Liabilities ................. $ -- $ 90
========== ==========
__________________________________________________________________________________________
The current and deferred tax provisions for the years ended December 31,
1996 and 1995, are as follows:
____________________________________________________________________________
Year Ended December 31,
---------------------------
1996 1995
____________________________________________________________________________
Current:
Federal .................................. $ (47) $ 202
State .................................... -- 14
---------- ----------
(47) 216
---------- ----------
Deferred:
Federal .................................. (77) 77
State .................................... (13) 13
---------- ----------
(90) 90
---------- ----------
Tax (Benefit) Provision .................. $ (137) $ 306
========== ==========
____________________________________________________________________________
23
A valuation allowance of $401,000 was established for the year ended
December 31, 1996, for those deferred tax assets which may not be realized.
There was no valuation allowance at December 31, 1995.
The provision (benefit) for income taxes differed from the amount computed
by applying the statutory federal income tax rate for the years ended December
31, 1996 and 1995, as follows:
_____________________________________________________________________________
Year Ended December 31,
---------------------------
1996 1995
_____________________________________________________________________________
Federal Statutory Rate ...................... (35)% 34 %
State Taxes, Net of Federal Benefit ......... (1)% 6 %
Permanent Differences ....................... (8)% --
Valuation Allowance ......................... 33 % --
Non-Taxable Partnership Earnings ............ -- (15)%
---------- ----------
Income Tax (Benefit) Provision .............. (11)% $ 25 %
========== ==========
_____________________________________________________________________________
The Company paid income taxes of $410,000 in 1996. No income taxes were
paid in 1995.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $970,000 for federal and $700,000 for state income tax purposes.
The federal net operating loss carryforwards expire in the year 2011. The
state net operating loss expires in 2001. Utilization of the Company's net
operating losses may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code. The annual
limitation may result in the expiration of net operating losses before
utilization.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Leases. The Company occupies facilities under noncancelable operating
leases expiring at various dates through 2000. The leases call for
proportionate increases due to property taxes and certain other expenses. Rent
expense amounted to $702,000 for the year ended December 31, 1996 ($734,000 in
1995 and $850,000 in 1994).
Minimum rental commitments under operating leases, principally for real
property, are as follows:
(Year Ending December 31)
___________________________________________________________________________
1997 ....................................................... $ 511,000
1998 ....................................................... 124,000
1999 ....................................................... 96,000
2000 ....................................................... 40,000
2001 and Thereafter ........................................ --
------------
Total Minimum Payments Required ............................ $ 771,000
============
___________________________________________________________________________
Revolving Loan Agreement. A loan agreement with a bank provides for a
revolving line of credit of $5,000,000, through May 1998. At December 31,
1996, $4,500,000 was available under the credit line, and in addition,
$500,000 was assigned to support standby letters of credit. Amounts advanced
under the line of credit are secured by the Company's eligible accounts
receivable. Under the agreement, the Company is obligated to comply with
certain covenants related to equity, quick ratio, debt/equity ratio, and
profits. At December 31, 1996, the Company obtained a waiver from the lender
with respect to a certain financial covenant in the loan agreement concerning
tangible net worth. The waiver extends to the next review date, March 31,
1997. The
24
interest rate under the agreement is the bank's prime rate (8.25% at December
31, 1996). During 1996, the Company paid no interest expense ($39,000 in 1995
and $9,000 in 1994).
Contingent Liabilities. In December 1986, the Predecessor Partnership
received a substantial portion of its Predecessor Corporation's net assets and
operations in connection with a restructuring plan approved by the
shareholders. The balance of the Predecessor Corporation's assets and
liabilities were transferred to the Trust for the benefit of the shareholders,
to facilitate the orderly sale or other disposition of the remaining assets,
and satisfaction of all remaining debts and liabilities. The Company has
assumed such contingent liabilities of the Trust to the extent they exceed the
assets of the Trust. Management believes that adequate assets exist to satisfy
all liabilities of the Trust, contingent or otherwise, not specifically
transferred to the Company.
NOTE 7. LEGAL PROCEEDINGS
PLM Financial Services, Inc. ("PLM") filed an action on November 4, 1994,
in the Superior Court of California for the County of Alameda seeking damages
in excess of $4.6 million in unpaid equipment rent and other payments
allegedly owing to PLM under an equipment lease between PLM and TERA Power
Corporation, a former subsidiary of the Predecessor Corporation. PLM has named
the Predecessor Partnership in the action pursuant to a guaranty of the lease
obligations made by the Predecessor Corporation. Management believes that the
guaranty has been exonerated and will be able to defend this action
successfully. Management does not believe that eventual resolution of this
matter will have a material effect on the Company's financial position,
however, an adverse outcome could have a material adverse impact on the
financial position, results of operations, and cash flows of the Company.
On October 13, 1995, the League for Coastal Protection ("League") filed an
action on behalf of the League and the general public against the Company,
among others, in the Superior Court of California for the County of San
Francisco. The action entitled League for Coastal Protection v. Pacific Gas &
Electric Company ("PG&E"), et al., Case No. 973182, seeks injunctive relief
and disgorgement of unspecified profits under the California Business and
Professions Code, Section 17200, et seq. The plaintiff contends that certain
studies performed by the Company and its predecessors respecting the
requirements of 316(b) of the Clean Water Act, that ultimately were submitted
by PG&E to the Regional Water Quality Control Board ("RWQCB") in 1988 in
connection with the Diablo Canyon Nuclear Power facility at Diablo Canyon,
California, were deficient in various respects, and that the Company and PG&E
covered up those deficiencies from the RWQCB and other state agencies. On
October 13, 1995, the League filed an action against the Company among others,
in the United States District Court for the Northern District of California,
entitled League for Coastal Protection v. Pacific Gas & Electric Company, et
al., Case No. C96-1393DLJ, seeking injunctive and other relief under the
United States Clean Water Act related to the same studies and reporting
described above. On February 5, 1996, John W. Carter filed an action against
the Company and others in the United States District Court for the Northern
District of California entitled United States of America, ex rel. and State of
California, ex rel., John W. Carter v. Pacific Gas & Electric Company, et al.,
Case No. C-95-2843-MHP, under the False Claims Act. This action, which is
based on the same studies and reports described above, seeks unspecified
damages and penalties. An agreement has been reached in principal for a global
settlement with the League, Carter, the California Attorney General, and the
Environmental Protection Agency. While the settlement is being documented, all
matters have been stayed, and/or held in abeyance, pending consummation of the
settlement. As a result of the settlement, all of the actions will be
dismissed. The Company is not required to make any payment or other
contribution to the settlement.
NOTE 8. SPECIAL ITEMS
There were two special items in 1996, one of which also occurred in 1994.
This item amounted to $250,000 and $500,000 in 1996 and 1994 respectively, and
reflects the estimated settlement of specific disputed costs on certain U.S.
Government contracts with the DOE. These positive earnings adjustments
resulted from partial reductions of the reserve for sales adjustment
established in 1991. The reserve related to a dispute between the Company and
the DOE with respect to the allowability and amount of potential rate
adjustments on U.S. Government contracts for certain employee compensation
costs.
25
The other special item in 1996, related to the repricing of debt owed by
one of the Company's executive officers. In December 1996, certain terms of
the note related to the purchase of stock by an executive officer in 1988,
were renegotiated to provide for a purchase price adjustment on the stock
securing the note balance and a corresponding reduction in the note balance.
The remaining balance of the note was paid off, by the transfer to the Company
of the stock purchased by the executive officer in 1988, at the fair market
value of the stock. As a result, a charge of approximately $300,000 was made
in 1996 to adjust the price of the stock to the then current fair market
value.
NOTE 9. SELECTED QUARTERLY COMBINED FINANCIAL DATA (UNAUDITED)
A summary of the Company's quarterly financial results follows:
(In thousands, except per share or unit amounts)
__________________________________________________________________________________________________________________________
Quarter Ended Quarter Ended
-------------------------------------- --------------------------------------
12/31/96 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
__________________________________________________________________________________________________________________________
Revenue ............................... $ 5,125 $ 5,586 $ 6,036 $ 7,256 $ 7,288 $ 7,249 $ 5,664 $ 5,344
Direct Costs .......................... 3,297 3,651 3,678 4,901 4,585 5,033 3,265 3,199
General and Administrative Expenses ... 2,241 2,734 2,663 2,205 2,264 1,866 2,154 1,956
Other Income (Expenses) ............... 14 -- 17 4 (30) 1 2 7
Special Item .......................... (300) -- 250 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Operating (Loss) Income ............... (699) (799) (38) 154 409 351 247 196
Interest Income (Expense) ............. 47 43 43 32 6 1 (6) --
-------- -------- -------- -------- -------- -------- -------- --------
Net (Loss) Earnings Before Income
Tax Benefit/Expense ................... (652) (756) 5 186 415 352 $ 241 $ 196
======== ========
Income Tax (Benefit) Expense .......... (137) (76) 2 74 165 141
-------- -------- -------- -------- -------- --------
Net (Loss) Earnings ................... $ (515) $ (680) $ 3 $ 112 $ 250 $ 211
======== ======== ======== ======== ======== ========
Net (Loss) Earnings Per Share
(Pro Forma First Half 1995) ........... $ (0.05) $ (0.07) $ 0.00 $ 0.01 $ 0.02 $ 0.02 $ 0.02 $ 0.01
======== ======== ======== ======== ======== ======== ======== ========
__________________________________________________________________________________________________________________________
26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
TENERA, Inc.
We have audited the accompanying consolidated balance sheets of TENERA,
Inc. at December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (partners' capital), and cash flows for each
of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated 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.
ERNST & YOUNG LLP
San Francisco, California
January 24, 1997
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
28
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:
Michael D. Thomas, 48, has served as Chairman of the Board of the
Company since his election in August 1991, and was named its Chief
Executive Officer in September 1994. He was President of Teknekron
Corporation from 1991 until December 31, 1994, and was Vice President of
Marketing and Corporate Business Development for Teknekron Corporation from
1989 to 1991.
William A. Hasler, 55, has served as a Director of the Company since his
election in March 1992. Mr. Hasler is dean of the Walter A. 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 The Gap, Inc., ESCAgenetics Corporation, Aphton Corporation,
Walker Systems, and TCSI Corporation.
Jeffrey R. Hazarian, 41, has served as a Director of the Company since
his election in October 1996, and was named its Chief Financial Officer,
Vice President of Finance, and Corporate Secretary of the Company in 1992.
Previously, Mr. Hazarian held the position of Vice President, Planning and
Analysis of the Company from 1990 to 1992.
Thomas S. Loo, Esq., 53, was elected as a Director of the Company in
February 1997. He previously served as a Director of the Predecessor
Partnership from August 1987 to September 1993. Mr. Loo has been a partner,
since 1986, of Bryan Cave LLP, general counsel to the Company. Mr. Loo has
also served as a director of Teknekron Corporation since March 1989.
George L. Turin, Sc.D., 67, 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.
Barry L. Williams, J.D., 52, has served as a Director of the Company
since his election in September 1993. Mr. Williams has been President of
Williams Pacific Venture, Inc., a venture capital consulting company, since
1987. From 1988 until its sale in 1992, Mr. Williams was also President of
C.N. Flagg Power, Inc., a company that provides construction services
primarily to the electric utility industry. Mr. Williams is also a director
of American President Companies, PG&E, and Simpson Manufacturing Co., Inc.
In addition to Messrs. Thomas and Hazarian, the executive officers of the
Company are as follows:
Raymond A. Allen III, 37, has served as Vice President of the Company
since his arrival at the Company in July 1996. Previously, Mr. Allen was
Vice President of Commercial Operations for ABB Environmental Services,
Inc. and was employed by ABB in various positions since 1984.
Robert C. McKay, 45, was elected Senior Vice President of the Company in
December 1992. Previously, Mr. McKay was a Vice President of the Company
from 1991 to 1992, and a senior technical manager of the Company from 1990
to 1991. Formerly, Mr. McKay was Manager, Management Systems for the
Tennessee Valley Authority from 1988 to 1990.
Joe C. Turnage, Ph.D., 51, has served as Senior Vice President of the
Company since his arrival at the Company in 1988.
Kenneth S. Voss, 46, has served as Vice President of Business
Development since his arrival at the Company in June 1996. Previously,
Mr. Voss was Vice President of Sales and Service at Software
29
Professionals, Inc. from 1992 to 1996, and General Manager for SHL
Systemhouse, Inc. from 1981 to 1992.
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.
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,
1996, 1995, and 1994.
SUMMARY COMPENSATION TABLE
____________________________________________________________________________________________________________
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
---------------------- ---------- ----------
Securities
Underlying All Other
Options/ LTIP Compensa-
Name and Principal Position Year Salary Bonus SARs(1) Payouts(2) tion(3)
____________________________________________________________________________________________________________
Michael D. Thomas(4) ........ 1996 $ 220,915 -- 55,000 $ -- $ 8,602
Chief Executive Officer 1995 214,000 -- 25,000 -- 8,602
1994 -- -- 100,000 -- --
Joe C. Turnage .............. 1996 169,295 -- 45,000 -- 105,054(5)
Senior Vice President 1995 170,000 -- 20,000 55,750 8,703
1994 158,100 -- 35,000 55,751 8,452
Robert C. McKay, Jr. ........ 1996 145,390 -- 28,000 -- 9,000
Senior Vice President 1995 169,030 -- 20,000 -- 9,000
1994 135,000 -- 70,000 -- 3,531
Jeffrey R. Hazarian ......... 1996 142,500 -- 27,000 -- 8,058
Chief Financial Officer 1995 142,192 -- 13,000 -- 8,058
1994 126,046 -- 20,000 -- 7,563
____________________________________________________________________________________________________________
(1) Reflects the number of options granted under the 1992 Stock Option Plan; no SARs have been issued.
(2) These amounts reflect forgiveness of certain indebtedness pursuant to notes executed by the
individual in payment for partnership units acquired pursuant to the Entrepreneurial Equity Incentive
Plan ("EEIP"). The EEIP was discontinued in March 1992.
(3) These amounts represent the amounts accrued for the Company's Profit Sharing/401(k) Plan for 1996,
1995, and 1994, respectively, and allocated to the named executive officers.
(4) Mr. Thomas was President of Teknekron Corporation until December 31, 1994. He assumed the position of
Chief Executive Officer of the Company in September 1994, for which he received no compensation.
(5) This amount includes forgiveness of interest from the repricing of indebtedness to the Company
incurred in connection with the purchase of company stock ($96,351) (see Item 13. "Certain
Relationships and Related Transactions," and Notes 3 and 8 to Financial Statements).
30
The following table sets forth certain information concerning options/SARs
granted during 1996 to the named executives:
OPTIONS/SAR GRANTS IN 1996
_______________________________________________________________________________________________
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
--------------------------------------------- --------------------
% of Total
Number of Options/
Securities SARs
Underlying Granted to Exercise
Options/ Employees or Base
SARs in Fiscal Price Expiration
Name Granted Year ($/Share) Date 5% 10%
_______________________________________________________________________________________________
Michael D. Thomas ..... 55,000 14.05 $ 1.00 2/1/2002 $ 18,700 $ 42,400
Joe C. Turnage ........ 45,000 11.49 1.00 2/1/2002 15,300 34,700
Robert C. McKay, Jr. .. 28,000 7.20 1.00 2/1/2002 9,500 21,600
Jeffrey R. Hazarian ... 27,000 6.90 1.00 2/1/2002 9,200 20,800
_______________________________________________________________________________________________
N/A Not applicable.
OTHER COMPENSATION ARRANGEMENTS
Joe C. Turnage, Senior Vice President, executed an employment agreement
upon joining the Company in 1988. The employment agreement provided for
purchases of limited partnership units of the Predecessor Partnership by Mr.
Turnage at the fair market value upon the date of issuance, dependent upon
meeting various objectives set forth in the agreement. Pursuant to the
Agreement and the EEIP, Mr. Turnage purchased an aggregate of 289,371 limited
partnership units, the purchase price of which was payable by notes, which
notes were to be forgiven over specified periods, provided Mr. Turnage
remained in the employ of the Company. In late 1991, the terms of the EEIP
awards made to Mr. Turnage and others with similar arrangements, were modified
and the period over which the remaining balance of the notes was extended and
the conditions for future forgiveness modified. In 1996, these notes were
repriced to the then current fair market value of the stock held as security,
resulting in a special item charge (see Item 13. "Certain Relationships and
Related Transactions"). The amount of indebtedness forgiven is included in the
Summary Compensation Table under the captions "LTIP Payouts." Mr. Turnage's
employment may be terminated at any time by the Company under the terms of the
employment agreement.
The 1992 Stock 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 Stock 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. Thomas S. Loo,
William A. Hasler, George L. Turin, and Barry L. Williams 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 which they attend. The 1993 Outside Directors Compensation and
Stock Option Plan was approved by the Board effective March 1, 1994, which
provides for the annual issuance of options for non-employee directors. During
1994, 10,000 stock options were issued to each of Messrs. Hasler and Williams.
During 1996 and 1995, 12,500 and 15,000 stock options, respectively, were
issued to each of Ms. Cheng (resigned in February 1997) and Messrs. Hasler,
Turin, and Williams. The
31
options expire ten (10) years after, vest one (1) year after the date of
grant, and have an exercise price equal to the fair market value of the shares
of 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 1996, the Compensation Committee was composed of Susan T. Cheng,
William A. Hasler, and Barry L. Williams. Susan T. Cheng was Treasurer and
Vice President of Teknekron Corporation until February 1, 1997. (See Item 13.
"Certain Relationships and Related Transactions")
EFFECT OF MERGER ON OPTION PLANS
In connection with the Conversion, the Company amended the Predecessor
Partnership's 1992 Unit Option Plan and 1993 Outside Director Compensation and
Unit Option Plan to reflect the fact that options now relate to shares of
Common Stock instead of Units. Except for the changes from Units to Common
Stock and minor conforming changes, the amended 1992 Stock Option Plan and the
1993 Outside Director Compensation and Stock Option Plan are identical to the
previous plans and all outstanding options for Units were automatically
converted to options for Common Stock at the original exercise price and on
the same terms and conditions as the original Unit options.
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 17, 1997,
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
_____________________________________________________________________________
Harvey E. Wagner ............................... 3,708,658 36.6%(1)
P.O. Box 7463
Incline Village, NV 89450
Dr. Michael John Keaton Trust .................. 1,106,887 10.9%(2)
P.O. Box 400
Orinda, CA 94563-0400
_____________________________________________________________________________
(1) Such shares are held of record by Incline Village Investment Group
Limited Partnership, a Georgia limited partnership, and were
contributed to the Incline Village Investment Group Limited
Partnership by Mr. Wagner in exchange for a 99% limited partnership
interest. An additional 37,462 shares, as to which Mr. Wagner
disclaims beneficial ownership, were contributed to the Incline
Village Investment Group Limited Partnership by Mr. Wagner's spouse,
Leslie Wagner, in exchange for a 1% general partner interest. The
Incline Village Investment Group Limited Partnership has sole voting
and investment power with respect to all such shares.
(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.
32
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of March 17, 1997, 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
Beneficially Percentage
Name Owned(1) Ownership(2)
_____________________________________________________________________________
William A. Hasler .............................. 57,500(3) *
Jeffrey R. Hazarian ............................ 52,186(4) *
Thomas S. Loo .................................. 0 0
Robert C. McKay, Jr. ........................... 97,539(4) 1.0%
Michael D. Thomas .............................. 116,400(4) 1.1%
George L. Turin ................................ 73,004(3) *
Joe C. Turnage ................................. 85,737(4) *
Barry L. Williams .............................. 37,500(3) *
------------ ------------
All Current Directors and Executive Officers
as a Group (10 persons) ........................ 519,866(3)(4) 5.1%
_____________________________________________________________________________
(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) Asterisks represent less than 1% ownership.
(3) Includes options under the Company's 1993 Outside Directors
Compensation and Stock Option Plan which are exercisable on March 17,
1997, or within 60 days thereafter.
(4) Includes options under the Company's 1992 Stock Option Plan which are
exercisable on March 17, 1997, or within 60 days thereafter.
Beneficial ownership as shown in the tables above has been determined in
accordance with Rule 13d-3 under the Exchange Act. 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
Units of any person as shown in the preceding tables do not necessarily
reflect the person's actual voting power at any particular date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain members of management or shareholders of the Company have certain
direct or indirect interests in certain transactions involving the Company,
separate from their interests as shareholders, as follows:
(i) The Company had made certain loans to various employees, including
officers, generally pursuant to employee benefit plan(s) and generally in
connection with the purchase of stock or units. In making loans to
officers, the Company held the stock as collateral securing the repayment
for such loans. In December 1996, certain terms of the note related to the
purchase of stock by an executive officer (Mr. Turnage) in 1988 were
renegotiated to provide for a purchase price adjustment on the stock
securing the note balance and a corresponding reduction in the note
balance. The remaining balance of the note was
33
paid off by the transfer to the Company of the stock purchased by
Mr. Turnage in 1988 at the fair market value of the stock as reported on
AMEX at the date of the transfer. As a result, a charge of approximately
$300,000 was made in 1996 to adjust the price of the stock to the then
current fair market value. As of December 31, 1996, the Company had no
notes receivables from its executive officers. The largest amount
outstanding during 1996 was $347,639.
(ii) Susan T. Cheng, a director of the Company until her resignation in
February 1997, was Treasurer and Vice President of Teknekron Corporation
until February 1, 1997. Mr. Wagner, the Company's largest stockholder, is
the sole stockholder and a director of Teknekron Corporation.
(iii) Thomas S. Loo, a director of the Company since February 7, 1997,
is a partner in the law firm of Bryan Cave LLP, general counsel to the
Company and Teknekron Corporation, and is a director of Teknekron
Corporation.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(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 - Year Ended December 31,
1996, 1995, and 1994 ............................................ 14
Consolidated Balance Sheets - December 31, 1996 and 1995 ........ 15
Consolidated Statements of Shareholders' Equity (Partners'
Capital) - Year Ended December 31, 1996, 1995, and 1994 ......... 16
Consolidated Statements of Cash Flows - Year Ended December 31,
1996, 1995, and 1994 ............................................ 17
Notes to Consolidated Financial Statements ...................... 18
Report of Independent Auditors .................................. 27
(a)(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules with respect to the
Company are filed in this report:
Schedule VIII - Valuation and Qualifying Accounts and Reserves .. 37
All other schedules are omitted because they are either not
required or not applicable.
(a)(3) EXHIBITS
2.1 Agreement and Plan of Merger dated as of June 6, 1995 among the
Registrant, Teknekron Technology MLP I Corporation, TENERA, L.P.,
and TENERA Operating Company, L.P. (a form of which is attached as
Annex A to the Registrant's Consent Solicitation
Statement/Prospectus included in the Registration Statement on
Form S-4 (Registration No. 33-58393) declared effective by the
Securities and Exchange Commission on June 2, 1995 (the
"Registration Statement"), and is incorporated herein by this
reference).
3.1 Certificate of Incorporation of the Registrant dated October 27,
1994 (filed by incorporation by reference to Exhibit 3.3 to the
Registration Statement).
3.2 By-Laws of the Registrant (filed by incorporation by reference to
Exhibit 3.4 to the Registration Statement).
4.1 Form of Certificate of Common Stock of Registrant (filed by
incorporation by reference to Exhibit 4.5 to the Registration
Statement).
10.2 Registrant's lease on its Rockville, Maryland properties (filed as
Exhibit 10.2 to the Predecessor Partnership's Form 10-K filed with
the SEC on March 29, 1995, and incorporated by reference herein).
10.3 Registrants' lease on its Knoxville, Tennessee properties (filed as
Exhibit 10.4 to Form 10-K filed with the SEC on March 25, 1994,
and incorporated by reference herein).
10.4 Registrant's lease on its headquarters located in San Francisco,
California (filed as Exhibit 10.12 to Form 10-Q filed with the
SEC on November 14, 1995, and incorporated by reference herein).
35
10.5(1) Registrant's lease on its Hartford, Connecticut properties.
11.1 Statement regarding computation of per share earnings: See "Notes
to Consolidated Financial Statements."
21.2 List of Subsidiaries of the Registrant (filed as Exhibit 21.2 to
Form 10-K filed with the SEC on March 27, 1996, and incorporated
by reference herein).
23.1(1) Consent of Independent Auditors.
27.1(1) Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the last quarter
of 1996.
(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, 1996.
- ------------------------------
(1) Filed herewith.
36
SCHEDULE VIII
TENERA, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
______________________________________________________________________________________________________
Additions Deductions
----------- ------------------------
Balance Charged to Credited to Balance
Beginning Costs and Special at End
Description of Year Expenses Item Other of Year
______________________________________________________________________________________________________
1994
Reserve for Sales Adjustment
and Credit Losses ............ $ 3,717 $ 271 $ 500 $ 591 $ 2,897
1995
Reserve for Sales Adjustment
and Credit Losses ............ 2,897 131 -- 140 2,888
1996
Reserve for Sales Adjustment
and Credit Losses ............ 2,888 289 250 1,301 1,626
______________________________________________________________________________________________________
37
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Dated: March 27, 1997
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
Chairman of the Board and
Chief Executive Officer
/s/ MICHAEL D. THOMAS (Principal Executive Officer) March 27, 1997
- ---------------------------
(Michael D. Thomas)
/s/ WILLIAM A. HASLER Director March 27, 1997
- ---------------------------
(William A. Hasler)
Director,
Chief Financial Officer,
Corporate Secretary, and
Vice President, Finance
(Principal Financial and
/s/ JEFFREY R. HAZARIAN Accounting Officer) March 27, 1997
- ---------------------------
(Jeffrey R. Hazarian)
/s/ THOMAS S. LOO Director March 27, 1997
- ---------------------------
(Thomas S. Loo)
/s/ GEORGE L. TURIN Director March 27, 1997
- ---------------------------
(George L. Turin)
/s/ BARRY L. WILLIAMS Director March 27, 1997
- ---------------------------
(Barry L. Williams)
38
EXHIBIT INDEX
Ex. 10.5 Registrant's Lease on its Hartford, Connecticut Properties
Ex. 23.1 Consent of Independent Auditors
Ex. 27.1 Financial Data Schedule