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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, 1998
[ ] 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 1, 1999, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $7,859,000 based on the last
transaction price as reported on the American Stock Exchange. This calculation
does not reflect a determination that certain persons are affiliates of the
Registrant for any other purposes.
The number of shares outstanding on March 1, 1999 was 10,129,403.
(This page intentionally left blank.)
PART I
Item 1. Business
General
TENERA, Inc. ("TENERA" or the "Company"), a Delaware corporation, is the
parent company of the subsidiaries described below.
TENERA Rocky Flats, LLC ("Rocky Flats"), a Colorado limited liability
company, was formed in 1995 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").
In 1997, the Company formed TENERA Energy, LLC ("Energy") and TENERA
Technologies, LLC ("Technologies"), both Delaware limited liability companies,
to consolidate its commercial electric power utility business and mass
transportation business, respectively, into separate legal entities.
In November 1997, the Company consummated the sale of all of the assets
("Asset Sale") of its Technologies subsidiary (see Notes 1 and 9 to Financial
Statements).
The Company's two continuing subsidiaries provide a broad range of
professional consulting, management, and technical services to solve complex
management, engineering, environmental, and safety challenges associated with
the operation, asset management, and maintenance of power plants, federal
government properties, and capital intensive industries.
TENERA provides services to assist its commercial electric power industry
clients with respect to nuclear and fossil plant operations, maintenance, and
safety. This includes change management and organizational effectiveness,
strategic business management, risk management, and ecological services. For its
governmental clients, TENERA provides the Department of Energy ("DOE") and DOE
prime contractors with assistance in devising, implementing, and monitoring
strategies to improve performance and cost effectiveness from an operational,
safety, and environmental perspective at DOE-owned nuclear reactor sites and
national research laboratories.
TENERA has developed expertise in providing solutions to complex technical
and regulatory issues facing the commercial electric power industry,
particularly nuclear facilities. Over the past several years, commercial
electric utilities have experienced increased competitive pressure due to
continued deregulation. 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. These include 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 feasible solution that the client believes will be sensitive
to business and public interest constraints, and the ongoing monitoring of that
solution.
1
Background
The Company's principal markets are the commercial electric utility
industry and the DOE-owned nuclear materials production sites and national
research laboratories. The electric utility industry has undergone considerable
change in recent years and faces a complex mix of economic and regulatory
pressures. There is continuing deregulation of the production and distribution
of electricity, accompanied by the desire of utilities to meet demand for
electricity through higher operating efficiency. Some of the Company's largest
commercial clients have responded to a more competitive environment by
implementation of significant cost control measures and activity in the merger
and acquisition arena.
Electric utilities and the DOE-owned nuclear 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 continues to be prompted by publicity and public awareness of
environmental problems and health hazards posed by hazardous materials and toxic
wastes. The dismantlement and cleanup of the aging DOE weapons complex
represents a significant market for the Company's service offerings.
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, utilities apparently are shifting their emphasis to ongoing
performance reviews in making their rate base decisions, related to such
measures as plant capacity factors. These changes in the rate-making process
subject the utilities to substantial economic penalties for extended plant
outages and have stimulated actions by them 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 production and storage
facilities and the partial shutdown of nuclear operations at a number of its
sites.
The markets for electric utility and DOE facility professional services
and software products cover a broad range of activities. Typical markets include
waste management, outage support, operating plant services, licensing support,
safety and health management, maintenance and information services,
decommissioning consulting, risk assessment, quality assurance and control,
organizational effectiveness, engineering support, records management, fuel
related services, employee professional training, plant security, and surplus
asset disposal.
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. This may, in time, result in the expansion
of the market for services and software associated with the efficient and
profitable operation of existing capacity.
Services and Products
The Company provides its services by utilizing its professional skills and
technological resources in an integrated approach which combines strategic
consulting, 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: strategic consulting, management, and technical services and prior to the
Asset Sale, software services, products, and systems.
2
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, 1996 through 1998:
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Consulting, Management, and Technical Services ........................ 100.0% 86.4% 91.8%
Software Services, Products, and Systems* ............................. 0 % 13.6% 8.2%
- ----------------------------------------------------------------------------------------------------------------
* Reflects only 10 months of revenues in 1997 due to the Asset Sale.
Consulting and Management Services. The Company's consulting and
management services involve determining a solution to client problems and
challenges in the design, operation, and management of large facilities. Focus
is also placed on providing expertise in the wide range of disciplines required
to resolve complex legal and regulatory issues and offering executives guidance
in strategic planning and implementing a coordinated, effective response to such
issues. The Company applies its professional skills, software, and specialized
data bases to all aspects of these problems and challenges in the following
general areas:
o Strategic business management
o Organizational effectiveness and change management
o Risk management
o Environmental and ecological issues at DOE and electric
utility facilities
o Operations and maintenance performance improvement
o Plant safety
o Nuclear safety and criticality at DOE facilities
o Engineering design review and verification
o Company/organized labor union consulting
o Technology enhanced training services
o Surplus property management and disposal services
Software Services, Products, and Systems. Until the Asset Sale in November
1997, the Company offered a range of information software services, products,
and systems. The Company continues to utilize proprietary software tools and
systems in connection with the risk management, operations and maintenance
performance improvement, and technology enhanced training service areas.
Marketing and Clients
Marketing. The Company's marketing strategy emphasizes its ability to
offer a broad range of services designed to meet the needs of its clients in a
timely and cost-efficient manner. The Company can undertake not only small tasks
requiring a few professionals but also the management, staffing, design, and
implementation of major projects which may last for several months and involve
large numbers of professionals and subcontractors in several geographic
locations. Characteristic of TENERA's marketing strategy are significant
projects in which initial contracts have been only a fraction of the ultimate
sale.
The Company provides financial incentives to attract senior technical
professionals with extensive utility industry experience and to encourage these
individuals to market the complete range of TENERA's services throughout
existing and potential customer organizations.
TENERA's marketing efforts are facilitated by the technical reputation and
industry recognition often enjoyed by its professional staff. TENERA's
reputation in the electric power industry and as a DOE contractor, often leads
to invitations to participate at an early stage in the conceptualization of a
project. During this phase, the Company assists clients in developing an
3
approach for efficiently and productively solving a problem. If new services or
products are developed for a client, they generally are marketed to other
clients with similar needs.
The Company's reputation also leads to invitations to participate in
large, multi-company teams assembled to bid on large DOE or utility projects.
Clients. During the year ended December 31, 1998, TENERA provided services
to over 35 clients involving over 65 contracts. During the year ended December
31, 1997, TENERA provided services and software to over 60 clients involving
over 100 contracts (included 20 clients and 30 contracts in the Technologies
subsidiary). Over 80% of TENERA's clients during the year ended December 31,
1998, had previously used its services.
During the year ended December 31, 1998, two clients, Kaiser-Hill Company,
LLC ("Kaiser-Hill"), prime contractor of the Rocky Flats Contract, and Safe
Sites of Colorado, LLC ("Safe Sites"), a prime subcontractor of the Rocky Flats
Contract, accounted for approximately 64% of the Company's total revenue
(Kaiser-Hill - 37%; Safe Sites - 27%). During the year ended December 31, 1997,
three clients accounted for approximately 67% of the Company's total revenue
(Kaiser-Hill - 43%; ComEd - 14%; and Pacific Gas and Electric - 10%) and 78% of
non-Technologies revenue. The Company has maintained working relationships with
Kaiser-Hill and Safe Sites for four years, 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 would have a
material adverse effect on the Company (see "Operating Risks").
Operations
The Company primarily contracts for its services in one of three ways:
time and materials ("T & M"), time and materials plus incentive fee ("TMIF"), or
fixed price. T & M and TMIF contracts, which cover 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 hourly labor rate charged to each
project. T & M and TMIF contracts are generally structured to include
"not-to-exceed" ceilings; however, if after initial review or after work has
started, it is noted that additional work is required, the contract normally can
be renegotiated to include such additional work and to increase the contract
ceiling accordingly. Also, prior to the Asset Sale, the Company received license
and annual maintenance fees from contracts involving software products. During
the year ended December 31, 1997, such fees amounted to $600,000 ($283,000 in
1996).
Fixed-price contracts are generally applicable where TENERA has been
requested to deliver services and/or products previously developed by it or
deliverable to multiple customers. At December 31, 1998, of the total
outstanding contracts, less than 10% were fixed-price.
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, or DOE prime contractors, TENERA
historically has experienced a low percentage of losses due to poor credit
risks.
Backlog
As of December 31, 1998, TENERA had contracted a backlog of approximately
$18.5 million, all of which is cancelable by the clients. The Rocky Flats and
Energy subsidiaries account for $17.2 million and $1.3 million, respectively, of
the backlog. Contracted backlog represents the aggregate of the remaining 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 contract.
4
Competition
The market for consulting and management 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 certain of TENERA's competitors are able to
offer similar services at prices that are lower than those offered by TENERA
(see "Operating Risks").
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 1998, TENERA spent under $50,000
on software development related to its consulting services business, in contrast
to expending in excess of $1,531,000 in 1997 ($562,000 in 1996) on software
development related to its Technologies business prior to the Asset Sale.
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 service and license agreements under which
clients acquire certain rights to access and use TENERA's software technology
generally restrict the clients' use of the systems to their own operations and
prohibit disclosure to others.
Personnel
At December 31, 1998, the Company employed a total of 173 consultants,
engineers, and scientists and a supporting administrative staff of 23 employees.
Eight employees hold doctorates and 57 employees hold master's degrees. TENERA
also retains the services of numerous independent contractors in order to
fulfill specific needs for particular projects. None of TENERA's employees are
represented by a labor union.
Item 2. Properties
The Company's headquarters are located in San Francisco, California, and
consist of approximately 13,500 square feet of leased office space, expiring in
2000. TENERA also leases approximately 6,500 square feet in Louisville,
Colorado, expiring in 2000. Additionally, TENERA maintains a 900 square feet
project office in San Luis Obispo, California which expires in 1999 and a
month-to-month lease covering approximately 200 square feet in Richland,
Washington, expiring in 1999. As a result of the Asset Sale, TENERA vacated its
office space in Hartford, Connecticut, and is subleasing the space until lease
expiration in 2000.
The Company believes that its facilities are well maintained and adequate
for its current needs.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Shares of the Company's Common Stock are listed for trading on AMEX under
the symbol TNR. The first trading day on AMEX was June 30, 1995, at which time
10,417,345 shares were outstanding. There were approximately 500 shareholders of
record as of March 1, 1999.
- ----------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
Price Range of Price Range of Price Range of
TENERA, Inc. Shares TENERA, Inc. Shares TENERA, Inc. Shares
------------------------- ------------------------- -------------------------
High Low High Low High Low
- ----------------------------------------------------------------------------------------------------------------
First Quarter ...... $ 0.875 $ 0.50 $ 0.9375 $ 0.625 $ 1.375 $ 0.875
Second Quarter ..... 1.00 0.5625 0.8125 0.50 1.4375 0.875
Third Quarter ...... 1.6875 0.6875 0.625 0.50 1.0625 0.75
Fourth Quarter ..... 2.75 0.75 0.8125 0.50 0.875 0.625
- ----------------------------------------------------------------------------------------------------------------
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 has made
no distributions since 1991. The Company does not anticipate resumption of
dividends in the foreseeable future.
6
Item 6. Selected Financial Data
The following consolidated selected financial data of the Company for the
five prior years should be read in conjunction with the consolidated financial
statements and related notes included elsewhere. The earnings (loss) per share
amounts prior to 1997, have been restated as required to comply with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." For further
discussion of earnings per share and the impact of Statement No. 128, see Notes
2 and 5 to the Consolidated Financial Statements.
TENERA, INC.
FINANCIAL HIGHLIGHTS
(In thousands, except per share and statistical amounts)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS DATA
Revenue ......................................... $ 27,445 $ 21,121 $ 24,003 $ 25,545 $ 23,600
Operating Income (Loss) ......................... 1,874 (2,139) (1,382) 1,203 (1,239)
Net Earnings (Loss) ............................. 1,674 (1,890) (1,080) 898 (1,202)
Earnings (Loss) per Share-- Basic ............... 0.17 (0.19) (0.11) 0.07 (0.13)
Earnings (Loss) per Share-- Diluted ............. 0.16 (0.19) (0.11) 0.07 (0.13)
Weighted Average Shares-- Basic.................. 10,124 10,123 10,248 9,920 9,555
Weighted Average Shares-- Diluted................ 10,450 10,123 10,248 10,014 9,555
CASH FLOW DATA
Net Cash Provided(Used) by Operating Activities.. $ 906 $ (2,681) $ 2,954 $ (286) $ 17
Net Increase(Decrease) in Cash and Cash Equivalents 1,069 (1,672) 2,490 (469) 363
FINANCIAL POSITION AT DECEMBER 31
Cash and Cash Equivalents ....................... 3,361 2,292 3,964 1,474 1,943
Working Capital ................................. 4,474 2,831 4,555 5,836 4,024
Total Assets .................................... 9,206 6,052 7,940 10,087 8,616
Total Liabilities ............................... 4,538 3,065 3,062 3,912 4,069
Shareholders' Equity............................. 4,668 2,987 4,878 6,175 4,547
OTHER INFORMATION
Number of Employees ............................. 196 187 208 270 170
- ----------------------------------------------------------------------------------------------------------------
7
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
TENERA, INC.
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------
Percent of Revenue
-----------------------------------------
Year Ended December 31,
-----------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Revenue ............................................................. 100.0% 100.0% 100.0%
Direct Costs ........................................................ 75.5 61.7 64.7
General and Administrative Expenses ................................. 19.7 38.5 38.7
Software Development Costs........................................... -- 7.2 2.3
Special Items Income (Expense), Net ................................. 1.1 1.7 (0.2)
Litigation Judgment Cost............................................. (0.1) 4.5 --
Other Income ........................................................ 0.8 0.1 0.1
-------- -------- --------
Operating Income (Loss) .......................................... 6.8 (10.1) (5.8)
Interest Income, Net ................................................ 0.5 0.5 0.7
-------- -------- --------
Net Earnings (Loss) Before Income Tax Expense (Benefit).............. 7.3% (9.6)% (5.1)%
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 versus Year Ended December 31, 1997
The Company's increased revenue in its Rocky Flats subsidiary, lower
overall general and administrative expenses, and elimination of significant
ongoing development costs as a result of the Asset Sale in the fourth quarter of
1997, resulted in net earnings, before income tax expense, special item, and
adjustment to litigation judgment costs, of $1,653,000, compared to a loss of
$1,434,000 in 1997 before income tax benefit, special item, and accrual for
litigation judgement costs.
The revenue increase in 1998 is primarily the result of increased Rocky
Flats Contract activity, partially offset by the absence of Technologies revenue
as a result of the Asset Sale. For 1998, the concentration of revenue from the
government sector increased to 78% of total revenue from 53% in 1997.
Approximately one-half of the increase in revenue concentration relates to the
loss of Technologies revenue as a result of the Asset Sale. The other one-half
of the revenue concentration increase is due to higher levels of Rocky Flats
Contract activity versus 1997. The number of clients served during the year
decreased to 35 from 40 (excluding 20 clients associated with the Technologies
business) in 1997.
Direct costs were higher in 1998, primarily as a result of increased
revenue generation opportunities and the related use of subcontractor teams
under the Rocky Flats Contract. Gross margins decreased to 25%, in 1998 from 38%
in 1997, mainly due to an increase in the proportion of revenue derived from
lower margin government projects.
General and administrative costs were lower compared to a year ago,
primarily reflecting increased utilization of employees on billable contracts
and reduced corporate and subsidiary administrative staffs. General and
administrative expenses also decreased, as a percentage of revenue, to 20% in
1998 from 39% in 1997.
Due to the Asset Sale, the Company's software product development
expenditures were not material in 1998, as compared to $1,531,000 in 1997.
8
Effective November 14, 1997, the Company consummated the sale of all of
the assets related to the Technologies business for $1,300,000 in cash, a
promissory note in the amount of $300,000, a warrant to acquire 4% of the then
outstanding shares of the buyer's common stock, exercisable upon the occurrence
of an initial public offering or a change of control (as defined in the
warrant), plus the assumption of all liabilities associated with the
Technologies business. The Technologies subsidiary was not expected to produce
profitable results in the subsequent twelve months due to the anticipated high
level of investment needs to develop its products and for its business
development activities. The special item of $355,000 in 1997 reflects the
realized gain (exclusive of the effect of the note and warrant) from the Asset
Sale (see Notes 1 and 9 to the Consolidated Financial Statements). The note was
repaid in full in February 1998, and an additional gain of $300,000 was reported
in 1998 as a special item. The warrant is deemed to have no value as of December
31, 1998 and December 31, 1997.
On February 10, 1998, the Company was notified by the Superior Court for
Alameda County of the trial judge's decision against the defendants in the
action entitled PLM Financial Services, Inc. v TERA Corporation, et al. (Case
No. 743 439-0, the "PLM Litigation"), in which TENERA and others were named as
defendants. Damages were not specified in the Court's decision, but based on
exposure estimates by the Company's counsel, the Company accrued litigation
judgement expenses of $950,000 in 1997 related to this matter. In May 1998, the
Company settled the case for $950,000 in cash, of which approximately $50,000
was paid by a co-defendant, TERA Corporation Liquidating Trust. The litigation
judgment cost adjustment of $50,000 in 1998 reflects the lower amount paid by
the Company versus the accrual established in 1997 (see Note 8 to Financial
Statements).
Other income in 1998 reflects temporary accounting and administrative
services provided to the buyer in the Asset Sale. These services ceased during
the fourth quarter of 1998. Other income in 1997 reflects gains on the sale of
assets related to facility downsizing.
Net interest income in 1998 and 1997 represents earnings from the
investment of cash balances in short-term, high-quality, government and
corporate debt instruments. The higher net interest income in 1998, as compared
to a year ago, primarily reflects larger average cash balances. The Company had
no borrowings under its line of credit during 1998 and 1997.
Year Ended December 31, 1997 versus Year Ended December 31, 1996
Lower revenue and higher software product and business development
expenses resulted in a pre-tax loss of $1,434,000, before the special item and
litigation judgement costs, compared to a pre-tax loss of $1,167,000 in 1996
before the effect of special items.
The revenue decrease was primarily the result of reduced government sales
during the first nine months of 1997, partially offset by higher software
revenue related to work on the Technologies subsidiary's contract with the
National Railroad Passenger Corporation ("Amtrak") which began in late 1996.
Concentration of revenue from the government sector decreased to 53% of total
revenue for 1997 from 61% in 1996. The number of clients served during the year
decreased to 60 (includes 20 clients in the Technologies subsidiary) from 75 in
1996. Revenue from software license and maintenance fees during 1997 increased
to $600,000 from $283,000 in 1996, primarily due to new software installations.
Direct costs were lower in 1997, primarily as a result of the reduced
revenue generation opportunities. Gross margins increased to 38% in 1997 from
35% in 1996 due to the reduction in the proportion of revenue derived from lower
margin government work, partially offset by the effect of an increased mix of
higher cost subcontracted labor on fixed-price contracts associated with the
Technologies subsidiary.
General and administrative costs were lower in 1997 compared to a year
ago, primarily due to lower administrative costs throughout the Company,
partially offset by increased sales staff and marketing expenditures in the
Technologies subsidiary, which amounted to $908,000 in 1997, compared to
$241,000 in 1996.
9
The level of the Company's internally funded investments in software
product development in the Technologies subsidiary, increased to $1,531,000 in
1997, as compared to $562,000 in 1996. The development expenditures ceased in
November 1997, as a result of the Asset Sale of the Technologies subsidiary
described below (see also Note 1 and Note 9 to the Consolidated Financial
Statements).
Other income for 1997 was the same level as 1996. Other income in 1997
reflects gains on the sale of fixed assets related to facility downsizing. In
1996, other income primarily relates to the liquidation of the Company's
interest in the Individual Plant Evaluation Partnership, a technical services
partnership in which it was an operating participant.
Effective November 14, 1997, the Company consummated the sale of all of
the assets related to the Technologies business for $1,300,000 in cash, a
promissory note in the amount of $300,000, a warrant to acquire 4% of the then
outstanding shares of the buyer's common stock, exercisable upon the occurrence
of an initial public offering or a change of control (as defined in the
warrant), plus the assumption of all liabilities associated with the
Technologies business. The Technologies subsidiary was not expected to produce
profitable results in the subsequent twelve months due to the anticipated high
level of investment needs to develop its products and for its business
development activities. The special item of $355,000 in 1997, reflects the
realized gain (exclusive of the effect of the note and warrant) on sale from the
Asset Sale (see Notes 1 and 9 to the Consolidated Financial Statements). Full
repayment of the note was contingent upon a minimum amount of equity funding of
the buyer, which had not occurred at December 31, 1997. Therefore, the Company
provided an allowance for uncollectability against the total amount of the note
as of December 31, 1997. The note was repaid in full in February 1998, and an
additional gain of $300,000 was reported in 1998. The warrant was deemed to have
no value as of December 31, 1998 and 1997.
In 1996, the special items' net expense of $50,000 is comprised of two
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 was based upon the successful completion of certain
government audits and contract closeouts of prior periods. The second special
adjustment occurred in December 1996, and 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 the Consolidated Financial Statements). 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.
The Company accrued litigation judgement expenses of $950,000 in 1997
related to the PLM Litigation (see Note 8 to the Consolidated Financial
Statements).
Net interest income in 1997 and 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 lower net interest income in 1997, as compared to a year ago, primarily
reflects smaller average cash balances in 1997. The Company had no borrowings
under its line of credit during 1997 and 1996.
Liquidity and Capital Resources
Cash and cash equivalents increased by $1,069,000 during 1998. The
increase was due to cash provided by operations ($906,000), cash proceeds from
the repayment of the Promissory Note ($300,000) and exercise of employee options
($7,000), partially offset by the acquisition of equipment ($146,000).
Receivables increased by $1,999,000 from December 31, 1997, primarily due
to an increase in Rocky Flats services revenue in 1998. The allowance for sales
adjustments decreased by $58,000 reflecting the write-off of disallowed billings
associated with the government sector.
Accounts payable increased by $1,876,000 since the end of 1997, primarily
associated with supporting increased revenues and the higher usage of
subcontractors under the Rocky Flats Contract. Accrued compensation and related
expenses increased by $447,000 during 1998, primarily reflecting an increase in
the number of Energy employees, the accrual of employer matching amounts payable
under the Company's 401(k) Savings Plan, and a higher vacation accrual balance
related to an increase in average employee seniority.
10
The litigation judgment accrual decreased by $950,000 due to the
settlement of the PLM Litigation in May 1998 (see Note 8 to the Consolidated
Financial Statements).
No cash dividend was declared in 1998.
The impact of inflation on project revenue and costs of the Company was
minimal.
At December 31, 1998, the Company had available $2,500,000 of a $3,000,000
revolving loan facility with its lender which expires in May 2000. 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.
Year 2000 Issue
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations. The
Company's technical personnel are in the process of assessing the impact of the
Year 2000 issue on the Company's products and services.
The Company has established a two-phase program to ensure that its
proprietary software and internal computer systems are Year 2000 compliant. The
initial phase, which included planning, inventory and assessment, has been
substantially completed. The final phase, which consists of correction, testing,
deployment and acceptance, is in process and is expected to be completed by
mid-1999. The Company expects that the cost of making its proprietary software
and internal systems compliant will be less than $50,000 and will not have a
material effect on its overall financial position or results of operations.
The Company is also beginning the same two-phase program to assess the
risks to the Company of systems owned and operated by outside parties but used
by the Company in its leased and rented facilities which have embedded
technology, such as elevator and telephone systems, security systems, and other
physical office infrastructure. The Company is examining infrastructure issues
on an office-by-office basis and the initial phase was completed at the end of
1998. No costs have been expended by the Company through 1998. The final phase
is planned to be completed by mid-1999 and the Company expects to develop
contingency plans to address any such embedded technology issues as they are
identified.
The Company is in the process of communicating with its major clients,
subcontractors, banking institution, and payroll vendor to determine whether
they are or will be Year 2000 compliant. By mid-1999, the Company expects to
have identified and develop contingency plans for any such clients and vendors
who will not be Year 2000 ready.
Even with the effort to address the Year 2000 issue made by the Company to
date, there can be no assurance that the systems of other entities on which the
Company relies, including the Company's internal systems and proprietary
software, will be timely remediated, or that a failure to remediate by another
entity and/or the Company, would not have a material effect on the Company's
results of operations.
The Company will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000 modifications. The total
cost associated with the required modifications and conversions is not expected
to exceed $50,000, including infrastructure and embedded technology (see
"Operating Risks").
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.
11
History of Losses; Uncertainty of Future Profitability. Net earnings
(loss) over the period 1990 through 1998 were $7.9 million in 1990, $(6.4
million) in 1991, $0.8 million in 1992, $(0.3 million) in 1993, $(1.2 million)
in 1994, $0.9 million in 1995, $(1.1 million) in 1996, $(1.9 million) in 1997,
and $1.7 million in 1998. There can be no assurance of the level of earnings, if
any, that the Company will be able to derive in the future.
Reliance on Major Customers. During fiscal 1998, two customers,
Kaiser-Hill and Safe Sites, accounted for approximately 64% of the Company's
total revenues, and during 1997, three customers, Kaiser-Hill, ComEd, and PG&E,
accounted for approximately 67% of the Company's total revenues (78% of
non-Technologies revenue). All outstanding customer contracts are cancelable
upon notice by either party, and therefore, there can be no assurance that
relationships with customers will be maintained at existing levels, or at all.
The discontinuation or material reduction of business relations with any of
these customers would have a material adverse impact on TENERA's business (see
Item 1, "Business -- Marketing and Clients").
Uncertainty Regarding Industry Trends and Customer Demand. As a result of
the slowdown in the construction of power plants and the absence of new power
plants scheduled for construction, as well as the gradual deregulation of the
production and distribution of electricity, the market for engineering services
relating to licensing and construction of power plants has contracted, and the
market for services related to efficient and profitable operation of existing
capacity has expanded. There can be no assurance that (i) TENERA will have the
financial and other resources necessary to successfully research, develop,
introduce, and market new products and services, (ii) if, or when, such new
products or services are introduced, they will be favorably accepted by current
or potential customers, or (iii) TENERA will be otherwise able to fully adjust
its services and products to meet the changing needs of the industry (see Item
1, "Business -- Background").
Uncertainty of Access to Capital. 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. 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. Further loss of such officers and technical
personnel, and the inability to recruit sufficient additional qualified
personnel, could have a material adverse effect on the Company.
Government Contracts Audits. The Company's United States government
contracts are subject in all cases to audit by governmental authorities. In
1994, an audit was concluded, which began in 1991, of certain of its government
contracts with the DOE relating to the allowability of certain employee
compensation costs. The Company made a special charge to earnings in 1991 for a
$2.4 million provision for the potential rate adjustments then disputed by the
Company and the government. As a result of resolving certain issues in the
dispute, the Company recognized increases to earnings of $500,000 in 1994 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.
Competition. The market for management and consulting 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.
12
Year 2000 Issue. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000. The Year 2000 issue affects virtually all companies and
organizations. The Company has reviewed the potential problem and believes that
it will not have a material impact on its business operations nor its financial
condition. However, if the Company's major clients have not addressed their own
Year 2000 issues adequately, especially regarding their accounts payable
systems, payment of the Company's invoices could be delayed and its cash flow
materially affected.
13
Item 8. Financial Statements and Supplementary Data
TENERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Revenue .................................................... $ 27,445 $ 21,121 $ 24,003
Direct Costs ............................................... 20,718 13,038 15,527
General and Administrative Expenses ........................ 5,416 8,131 9,281
Software Development Costs ................................. -- 1,531 562
Special Items Income (Expense), Net ........................ 300 355 (50)
Litigation Judgment Cost ................................... (50) 950 --
Other Income ............................................... 213 35 35
------------- ------------ ------------
Operating Income (Loss).................................. 1,874 (2,139) (1,382)
Interest Income, Net ....................................... 129 110 165
------------- ------------ ------------
Net Earnings (Loss) Before Income Tax Expense(Benefit)... 2,003 (2,029) (1,217)
Income Tax Expense (Benefit)............................... 329 (139) (137)
------------- ------------ ------------
Net Earnings (Loss)......................................... $ 1,674 $ (1,890) $ (1,080)
============= ============ ============
Net Earnings (Loss) per Share-- Basic ...................... $ 0.17 $ (0.19) $ (0.11)
============= ============ ============
Net Earnings (Loss) per Share-- Diluted .................... $ 0.16 $ (0.19) $ (0.11)
============= ============ ============
Weighted Average Number of Shares Outstanding-- Basic....... 10,124 10,123 10,248
============= ============ ============
Weighted Average Number of Shares Outstanding-- Diluted..... 10,450 10,123 10,248
============= ============ ============
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes.
14
TENERA, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
- ----------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents ............................................... $ 3,361 $ 2,292
Receivables, less allowances of $1,300 (1997 - $1,358)
Billed ................................................................ 2,692 1,643
Unbilled .............................................................. 2,734 1,726
Other current assets .................................................... 225 235
------------ ------------
Total Current Assets ................................................ 9,012 5,896
Property and Equipment, Net ................................................ 194 156
============ ============
Total Assets ...................................................... $ 9,206 $ 6,052
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable......................................................... $ 2,514 $ 638
Accrued compensation and related expenses ............................... 1,924 1,477
Income taxes payable .................................................... 100 --
Litigation judgment accrual ............................................. -- 950
------------ ------------
Total Current Liabilities ........................................... 4,538 3,065
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 ....................................... 5,699 5,698
Retained earnings (Accumulated deficit).................................. (835) (2,509)
Treasury stock-- 287,942 shares (1997 - 294,192 shares) ................. (300) (306)
------------ ------------
Total Shareholders' Equity .......................................... 4,668 2,987
------------ ------------
Total Liabilities and Shareholders' Equity ........................ $ 9,206 $ 6,052
============ ============
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes.
15
TENERA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
- --------------------------------------------------------------------------------------------------------------
Paid-In Retained
Capital in Earnings
Common Excess (Accumulated Treasury
Stock of Par Deficit) Stock Total
- --------------------------------------------------------------------------------------------------------------
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
Repurchase of 1,694 Shares -- -- -- (1) (1)
Net Loss ............... -- -- (1,890) -- (1,890)
------------- ------------- ------------- -------------- ---------------
December 31, 1997 ...... 104 5,698 (2,509) (306) 2,987
Reissuance of 6,250 Shares -- 1 -- 6 7
Net Earnings ........... -- -- 1,674 -- 1,674
============= ============= ============= ============== ===============
December 31, 1998 ...... $ 104 $ 5,699 $ (835) $ (300) $ 4,668
============= ============= ============= ============== ===============
- --------------------------------------------------------------------------------------------------------------
See accompanying notes.
16
TENERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)...................................... $ 1,674 $ (1,890) $ (1,080)
Adjustments to reconcile net earnings (loss) to
cash provided (used) by operating activities:
Depreciation .......................................... 108 231 272
(Gain) Loss on sale of equipment ...................... (2) (21) (8)
Gain on sale of Technologies business ................. (300) (355) --
Decrease in allowance for sales adjustments ........... (58) (146) (1,262)
Deferred income taxes ................................. -- -- (90)
Changes in assets and liabilities:
Receivables ......................................... (1,999) (1,243) 5,758
Other current assets ................................ 10 222 107
Other assets ........................................ -- -- 17
Accounts payable .................................... 1876 (128) (144)
Accrued compensation and related expenses ........... 447 (301) (382)
Litigation judgment accrual ......................... (950) 950 --
Income taxes payable ................................ 100 -- (216)
Non-Current liabilities ............................. -- -- (18)
------------- ------------ ------------
Net Cash Provided (Used) by Operating Activities .. 906 (2,681) 2,954
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ................... (146) (311) (258)
Proceeds from sale of equipment ......................... 2 21 11
Proceeds from sale of Technologies business ............. 300 1,300 --
------------- ------------ ------------
Net Cash Provided (Used) in Investing Activities .. 156 1,010 (247)
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of equity .................................... -- (1) (217)
Issuance of Common Stock from Treasury................... 7 -- --
------------- ------------ ------------
Net Cash Provided (Used) by Financing Activities .. 7 (1) (217)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 1,069 (1,672) 2,490
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 2,292 3,964 1,474
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 3,361 $ 2,292 $ 3,964
============= ============ ============
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes.
17
TENERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Note 1. Organization
TENERA, Inc. (the "Company"), a Delaware corporation, is the parent company
of the subsidiaries described below.
TENERA Rocky Flats, LLC ("Rocky Flats"), 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. In May 1997, the Company's other government
business was consolidated within the Rocky Flats subsidiary. This business
provides consulting and management services to the DOE directly and through
subcontracts with DOE prime contractors. These services provide assistance to
DOE-owned nuclear facilities in devising, implementing, and monitoring
strategies to upgrade from an operational, safety, and environmental
perspective.
TENERA Energy, LLC ("Energy"), a Delaware limited liability company, was
formed by the Company in May 1997, to consolidate its commercial electric power
utility business into a separate legal structure. The Energy subsidiary provides
consulting, management services, and training programs in organizational
effectiveness and organizational development, environmental outsourcing and
monitoring, risk analysis and modeling, and business process improvement.
TENERA Technologies, LLC ("Technologies"), a Delaware limited liability
company, was formed by the Company in May 1997 to consolidate its mass
transportation business into a separate legal entity. Before the Asset Sale
described below, Technologies provided computerized maintenance management
software and consulting to the mass transit industry. On November 14, 1997, the
Company consummated the sale of all of the assets ("Asset Sale") related to
Technologies' mass transportation business, to Spear Technologies, Inc., a
California corporation newly formed by former members of the Company's
management. The Company received $1,300,000 in cash, a promissory note in the
amount of $300,000, and a warrant to acquire 4% of the buyer's then outstanding
shares of common stock exercisable upon an initial public offering or a change
of control (as defined in the warrant). The buyer also assumed all liabilities
associated with the Technologies business (see also Note 9).
Note 2. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes.
Actual results could differ from these estimates.
Cash and Cash Equivalents. Cash and cash equivalents consist of demand
deposits, money market accounts, 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
($2,382,000 and $2,236,000 at December 31, 1998 and 1997, respectively), net of
accumulated depreciation ($2,188,000 and $2,080,000 at December 31, 1998 and
1997, respectively). Depreciation is calculated using the straight line method
over the estimated useful lives, which range from three to five years.
Revenue. The Company primarily offers its services to the electric power
industry and the DOE. 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).
18
The Company performs credit evaluations of these clients 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 contracts in progress may differ from
management estimates and such differences could be material to the financial
statements.
During 1998, two clients accounted for 37% and 27% of the total revenue.
In 1997, three clients accounted for 43%, 14%, and 10% of the Company's total
revenue, and in 1996, two clients accounted for 56% and 11% of the total
revenue.
Income Taxes. The Company is a C Corporation subject to federal and state
statutory income tax rates for income earned. Due to net losses in 1997 and
1996, an income tax benefit was recorded for each of those years. During 1998, a
provision for income taxes was made after taking into account net operating loss
carryforwards from previous years.
Accounting for Stock-Based Compensation. Statement of Financial Standards
No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") became 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. In 1997, the Financial
Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("FAS
128"). FAS 128 replaced the calculation of primary and fully diluted earnings
(loss) per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings (loss) per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share and includes the effect of dilutive stock options. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the FAS 128 requirements. A reconciliation of the denominators of the
basic and diluted earnings (loss) per share computations required by FAS 128 are
presented in Note 5.
Comprehensive Income (Loss). In 1997, the Financial Accounting Standards
Board issued No. 130, "Reporting Comprehensive Income" ("FAS 130"), which
requires that all items that are required to be recognized under accounting
standards as comprehensive income (revenues, expenses, gains and losses) be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company does not have material components of
other comprehensive income. Therefore, comprehensive income (loss) is equal to
net earnings (loss) reported for all periods presented.
Disclosures about Segments of an Enterprise. In 1997, the Financial
Accounting Standards Board issued No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (FAS 131"), which establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements. The Company has one reportable operating segment
under this statement, which is providing services with respect to operations,
maintenance, safety, strategic business and risk management, and
environmental/ecological issues for electric utility and DOE facilities. The
required disclosures are reflected in the financial statements.
Note 3. Related Party Transactions
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.
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. No
income or losses were reported in 1998 and 1997. In 1996, the Company recorded
income of $17,000 related to the final liquidation of IPEP.
19
Notes Receivable. The Company had no outstanding notes receivables from
executive officers at December 31, 1998, 1997, and 1996. In 1996, certain terms
of a 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 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 of the Predecessor Corporation. The Company did
not recognize any income or expense from the Trust in 1998, 1997, and 1996. As
of May 31, 1998, the Trust was terminated after the total liquidation of its
assets in connection with the settlement of litigation with PLM Financial
Services, Inc. (see Note 8).
Note 4. Employee Benefit Plans
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 15% of salary. Effective January 1, 1996, the Company
matched these amounts with a 100% contribution on 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. Effective January 1,
1998, the Company reinstated the matching contribution equal to 50% of the first
4% of salary deferred. The Company, at its discretion, may also contribute funds
to the plan for the benefit of employees. In 1998, charges to earnings for the
401(k) Savings Plan were $233,000. There were no charges to earnings in 1997 for
the 401(k) Savings Plan and during 1996, charges to earnings amounted to
$397,000. During 1998, 1997, and 1996, no discretionary amounts were contributed
to the plan by the Company.
Stock Option Plans. The Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Under the provisions of the Company's Option Plan, 1,500,000 shares are
reserved for issuance upon the exercise of options granted to key employees and
consultants. During 1998, options were granted for 300,000, 20,000 and 50,000
shares at an exercise price of $0.725, $0.5875 and $0.675, respectively, the
then fair market values, expiring on February 19, 2004, April 20, 2004 and July
1, 2004, respectively. In 1997, options were granted for 370,000 and 50,000
shares at an exercise price of $0.70 and $0.65, respectively, the then fair
market values, expiring on March 12, 2003 and May 1, 2003, respectively. In
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. During 1998, options for
660,750 shares were canceled due to employee terminations (122,500 and 278,500
in 1997 and 1996, respectively). Options for 6,250 shares were exercised in
1998, but no options were exercised in 1997 and 1996. As of December 31, 1998,
options for 1,081,500 shares were outstanding and options for 669,500 shares
were exercisable.
Under the provisions of the 1993 Outside Directors Compensation and Option
Plan, which was approved by the Board of Directors, effective March 1, 1994, as
amended in 1998, 300,000 shares are reserved for issuance upon the exercise of
options granted to non-employee directors. During 1998, options were granted for
37,500 and 25,000 shares at an exercise price of $0.5625 and $0.75,
respectively, the then fair market value, expiring on March 1, 2008 and July 1,
2008, respectively. In 1997, options were granted for 32,000 shares at an
exercise price of $0.6875, the then fair market value, expiring on March 1,
2007. In 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. During 1998,
options for 8,000 shares were canceled due to a director resignation (12,500 in
1997 and none in 1996). No options were exercised in 1998, 1997, and 1996. As of
December 31, 1998, options for 204,000 shares were outstanding and 141,500 were
exercisable.
20
Pro forma information regarding net earnings (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 1998, 1997, and 1996:
risk-free interest rates of 5.0% each for the February, March, April, and July
1998 grants; 6.0% and 5.85%, respectively, for the March and May 1997 grants;
and 5.2% and 5.7%, respectively, for the February and March 1996 grants;
dividend yield of 0% for all years; volatility factors of the expected market
price of the Company's common stock of 0.48, and 0.51, and 0.53, respectively;
and a weighted-average expected life of the option of five years for all
employee grants and seven years for director grants.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, options valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. 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. The
Company has elected to base its initial estimate of compensation expense on the
total number of options granted. Subsequent revisions to reflect actual
forfeitures are made in the period the forfeitures occur through a catch-up
adjustment. Because of the large number of forfeitures in 1998 related to
options granted in prior years, FAS 123 treatment results in negative
compensation expense. Pro forma information regarding the Company's net earnings
(loss) and earnings (loss) per share follows:
(In thousands, except for per share amounts)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Net Earnings (Loss)-- As Reported .......................... $ 1,674 $ (1,890) $ (1,080)
Pro Forma Net Earnings (Loss)--FAS 123 ..................... 1,672 (1,940) (1,133)
Net Earnings (Loss) per Share-- As Reported Basic .......... $ 0.17 $ (0.19) $ (0.11)
============= ============ ============
Net Earnings (Loss) per Share-- As Reported Diluted ........ $ 0.16 $ (0.19) $ (0.11)
============= ============ ============
Pro Forma Net Earnings (Loss) per Share-- FAS 123 Basic .... $ 0.17 $ (0.19) $ (0.11)
============= ============ ============
Pro Forma Net Earnings (Loss) per Share-- FAS 123 Diluted .. $ 0.16 $ (0.19) $ (0.11)
============= ============ ============
- ----------------------------------------------------------------------------------------------------------------
21
A summary of the Company's stock option activity, and related information
follows:
(In thousands, except for per share amounts)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ----------------------------------------------------------------------------------------------------------------
Outstanding --
Beginning of Year .. 1,528 $ 0.98 1,211 $ 1.09 1,048 $ 1.20
0.98 1.09 1.20
Granted ............ 432 0.70 452 0.69 441 1.00
Exercised .......... (6) 1.19 -- -- -- --
Forfeited .......... (669) 0.90 (135) 1.18 (278) 1.36
========== ========== ========== ========== ========== ==========
Outstanding--
End of Year ........ 1,285 $ 0.91 1,528 $ 0.98 1,211 $ 1.09
========== ========== ========== ========== ========== ==========
Exercisable at
End of Year ........ 811 $ 1.01 813 $ 1.09 625 $ 1.16
Weighted-Average Fair
Value of Options
Granted During the
Year ............... $ 0.35 $ 0.36 $ 0.52
- ----------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1998, ranged
from $0.5875 to $1.75. The weighted-average remaining contractual life of those
options is 5.0 years.
22
Note 5. Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted (loss)
earnings per share:
(In thousands, except for per share amounts)
- ----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Numerator:
Net earnings (loss) ..................................... $ 1,674 $ (1,890) $ (1,080)
Denominator:
Denominator for basic earnings per share --
weighted-average shares outstanding....................... 10,124 10,123 10,248
Effect of dilutive securities:
Employee & Director stock options(Treasury stock method) 326 -- --
Denominator for diluted earnings per share --
weighted-average common and common equivalent shares ..... 10,450 10,123 10,248
============= ============ ============
Basic earnings (loss) per share ........................... $ 0.17 $ (0.19) $ (0.11)
============= ============ ============
Diluted earnings (loss) per share ......................... $ 0.16 $ (0.19) $ (0.11)
============= ============ ============
- ----------------------------------------------------------------------------------------------------------------
Due to the loss from operations, earnings (loss) per share for 1997 and
1996 are based on the weighted average number of common shares only, as the
effect of including equivalent shares from stock options would be anti-dilutive.
23
Note 6. 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, 1998 and
1997, are as follows, using the liability method:
- ----------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------
Current Deferred Tax Assets
Contract provisions not currently deductible .......................... $ 466 $ 490
Accrued expenses not currently deductible ............................. 427 618
Net operating loss carryforward ....................................... -- 382
------------ ------------
Total Current Gross Deferred Tax Assets ........................... 893 1,490
Less: Valuation Allowance ............................................ (772) (1,200)
Current Deferred Tax Liabilities
Revenue differences related to timing ................................. 121 290
------------ ------------
Net Current Deferred Tax Liabilities .............................. $ -- $ --
============ ============
- ----------------------------------------------------------------------------------------------------------------
The current and deferred tax provisions for the years ended December 31,
1998, 1997, and 1996, are as follows:
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Current:
Federal ..................................................... $ 256 $ (137) $ (47)
State ....................................................... 73 (2) --
----------- ------------ ------------
329 (139) (47)
----------- ------------ ------------
Deferred:
Federal ..................................................... -- -- (77)
State ....................................................... -- -- (13)
----------- ------------ ------------
-- -- (90)
----------- ------------ ------------
Tax Provision (Benefit) ..................................... $ 329 $ (139) $ (137)
=========== ============ ============
- -----------------------------------------------------------------------------------------------------------------
24
The valuation allowance decreased by $428,000, during the year ended
December 31, 1998, for those deferred tax assets which may not be realized. The
decrease primarily relates to the usage of net operating loss carryforwards for
tax purposes.
The provision (benefit) for income taxes differed from the amount computed
by applying the statutory federal and state income tax rate for the years ended
December 31, 1998, 1997, and 1996, as follows:
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Federal Statutory Rate ........................................... 34% (34)% (35)%
State Taxes, Net of Federal Benefit .............................. 2% (3)% (1)%
Permanent Differences ............................................ 1% (2)% (8)%
Valuation Allowance .............................................. (21)% 39 % 33%
Net Operating Loss Carryback ..................................... -- (7)% --
----------- ------------ ------------
Income Tax (Benefit) Provision ................................... 16% (7)% (11)%
=========== ============ ============
- -----------------------------------------------------------------------------------------------------------------
The Company paid income taxes of $222,000 in 1998 and received net income
tax refunds of $138,000 in 1997.
At December 31, 1998, the Company had no net operating loss carryforwards.
Note 7. 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 $309,000 for the year ended December 31, 1998 ($524,000 in 1997 and
$702,000 in 1996).
Minimum rental commitments under operating leases, principally for real
property, are as follows (in thousands):
(Year Ending December 31)
- ----------------------------------------------------------------------------------------------------------------
1999 ......................................................................................... $ 574
2000 ......................................................................................... 414
============
Total Minimum Payments Required .............................................................. $ 988
============
- ----------------------------------------------------------------------------------------------------------------
Revolving Loan Agreement. A loan agreement with a bank provides for a
revolving line of credit of $3,000,000, through May 2000. At December 31, 1998,
$2,500,000 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. The interest rate under the
agreement is the bank's prime rate (7.75% at December 31, 1998). During 1998,
1997, and 1996, the Company paid no interest expense, as there were no
borrowings.
25
Note 8. Litigation Judgment
On November 4, 1994, PLM Financial Services, Inc. ("PLM") filed an action,
entitled PLM Financial Services, Inc. v. TERA Corporation, et al., Case No. 743
439-0, against TENERA, L.P. (the predecessor of the Company; the "Predecessor
Partnership"), among others, 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 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
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.
TERA Power asserted various defenses to the claims asserted by PLM in the action
and the trial in this matter was concluded in August 1997. In February 1998, the
trial judge issued a minute order rendering his decision against the defendants
in the action. Accordingly, for the year 1997, the Company accrued litigation
judgment expenses of $950,000 related to this matter. In April 1998, the trial
judge entered a judgment in the amount of approximately $830,000 plus costs and
attorney fees, against TERA Power and TENERA, as guarantor. Counsel for PLM had
advised counsel for TENERA that PLM had incurred costs and attorney fees
exceeding $600,000, and, if this matter was not settled, PLM would file a cost
bill and motion for attorney fees in the action for such amounts.
On May 1, 1998, the Company settled the case for $950,000 in cash, which
was less than the Company's total exposure in the litigation. Of this amount,
approximately $50,000 was paid by the Trust (to the extent of its assets) and
the remainder was paid by the Company.
Note 9. Special Items
On November 14, 1997, the Company consummated the sale of all of the
assets related to Technologies' mass transportation business to Spear
Technologies, Inc., a California corporation newly formed by former members of
the Company's management. The Company received $1,300,000 in cash, a promissory
note in the amount of $300,000, and a warrant to acquire 4% of the buyer's then
outstanding shares of common stock exercisable upon an initial public offering
or a change of control (as defined in the warrant). The buyer also assumed all
liabilities associated with the Technologies business. The special item of
$355,000 in 1997, reflects the gain on sale from the Asset Sale, exclusive of
the effect of the note and warrant. Full repayment of the note was contingent
upon a minimum amount of equity funding of the buyer, which had not occurred at
December 31, 1998. Therefore, the Company provided an allowance for the
potential uncollectability of the note in 1997. The note was repaid in full in
February 1998, and the additional gain of $300,000 was reported as a special
item in 1998. The warrant was deemed to have no value as of December 31, 1998
and 1997. The revenues of the Technologies subsidiary were $2.9 million for the
ten-month period ended October 31, 1997.
There were two special items in 1996. One item amounted to $250,000 and
reflects 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 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.
The other special item in 1996, related to the repricing of debt owed by
one of the Company's former executive officers. In December 1996, certain terms
of the note related to the purchase of stock by a now former 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.
26
Note 10. Selected Quarterly Combined Financial Data (Unaudited)
A summary of the Company's quarterly financial results follows. The 1996
and first three quarters of 1997 earnings (loss) per share amounts have been
restated to comply with Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (see also Notes 2 and 5).
(In thousands, except per share or unit amounts)
- ----------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
--------------------------------------------- ---------------------------------------------
12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97
- ----------------------------------------------------------------------------------------------------------------
Revenue ..... $ 7,887 $ 7,014 $ 6,453 $ 6,091 $ 5,789 $ 5,240 $ 4,692 $ 5,400
Direct Costs 6,060 5,363 4,797 4,498 3,646 3,228 2,946 3,218
General and
Administrative
Expenses .... 1,486 1,283 1,345 1,302 1,551 2,209 2,391 1,980
Software
Development
Costs ....... -- -- -- -- 216 662 416 237
Special
Items
Income/
(Expense), -- -- -- 300 355 -- -- --
Net .........
Litigation
Judgment -- -- (50) -- 950 -- -- --
Cost ........
Other Income 32 42 53 86 -- 14 20 1
-------- ------- -------- -------- -------- -------- -------- --------
Operating
Income/(Loss) 373 410 414 677 (219) (845) (1,041) (34)
Interest
Income ...... 33 31 34 31 14 23 34 39
-------- ------- -------- -------- -------- -------- -------- --------
Net Earnings
(Loss)
Before
Income Tax
Expense/
(Benefit) ... 406 441 448 708 (205) (822) (1,007) 5
Income Tax
Expense/
(Benefit) .. 80 20 54 175 -- -- (141) 2
-------- ------- -------- -------- -------- -------- -------- --------
Net
Earnings/
(Loss) ..... $ 326 $ 421 $ 394 $ 533 $ (205) $ (822) $ (866) $ 3
======== ======= ======== ======== ======== ======== ======== ========
Net Earnings/
(Loss) Per
Share-- Basic $ 0.03 $ 0.04 $ 0.04 $ 0.05 $ (0.02) $ (0.08) $ (0.09) $ 0.00
======== ======= ======== ======== ======== ======== ======== ========
Net Earnings/
(Loss) Per
Share--
Diluted ..... $ 0.03 $ 0.04 $ 0.04 $ 0.05 $ (0.02) $ (0.08) $ (0.09) $ 0.00
======== ======= ======== ======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------
27
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
TENERA, Inc.
We have audited the accompanying consolidated balance sheets of TENERA,
Inc. at December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole presents fairly,
in all material respects, the information set forth therein.
ERNST & YOUNG LLP
San Francisco, California
January 22, 1999
28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
The following tables set forth certain information with respect to the
directors and executive officers of the Company.
The directors of the Company are as follows:
William A. Hasler, 57, has served as a Director of the Company
since his election in March 1992 and Chairman of the Board of the Company
since July 1998. Mr. Hasler is Co-Chief Executive Officer of Aphton
Corporation, a bio-technology firm. Previously, Mr. Hasler was 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 Asia Pacific Wire and Cable
Corporation, Ltd., Aphton Corporation, Walker Systems, and TCSI
Corporatin.
Delbert F. Bunch, 56, has served as Director of the Company since his
election in June 1998. He previously served as Senior Vice President of
the Company from 1988 to 1991. Mr. Bunch has been President, since 1992,
of Management Strategies, Inc., a private consulting firm to the
commercial and U.S. government nuclear industry. Mr. Bunch was the
Principal Deputy Secretary for Nuclear Energy, U.S. Department of Energy
from 1983 to 1988.
Jeffrey R. Hazarian, 43, has served as a Director of the Company
since his election in October 1996, and was named its Executive Vice
President in November 1997. He has also served as its Chief Financial
Officer and Corporate Secretary since 1992. Previously, Mr. Hazarian held
the position of Vice President of Finance from 1992 to 1997.
Thomas S. Loo, Esq., 55, was elected as a Director of the Company in
February 1997. He previously served as a Director of the Company from
August 1987 to September 1993. Mr. Loo 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.
Robert C. McKay, 47, has served as a Director of the Company since
his election in June 1997, and was appointed its Chief Executive Officer
and President in November 1997. Previously, Mr. McKay was Chief Operating
Officer of the Company since April 1997. He was elected Senior Vice
President of the Company in December 1992.
Andrea W. O'Riordan, 27, has served as Director of the Company since
her election in June 1998. Ms. O'Riordan is an Applications Marketing
Coordinator for Oracle Corporation. Prior to her joining Oracle
Corporation in 1996, Ms. O'Riordan was Marketing Coordinator, Latin
America, for a Reuters Company, from 1993 to 1995.
George L. Turin, Sc.D., 69, has served as a Director of the Company
since his election in March 1995. Previously, Mr. Turin served as a
Professor of Electrical Engineering and Computer Science at the University
of California at Berkeley from 1960 to 1990. Mr. Turin also served as Vice
President, Technology for Teknekron Corporation from 1988 to 1994.
Officers of the Company hold office at the pleasure of the Board of
Directors. There are no familial relationships between or among any of the
executive officers or directors of the Company.
30
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, 1998, 1997, and
1996.
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------
Annual Compensation Awards
------------------------------ -------------
Securities All Other
Name and Underlying Compensa-
Principal Position Year Salary Bonus(1) Options(2) tion(3)
- ---------------------------------------------------------------------------------------------------------------
Robert C. McKay, Jr. 1998 $ 200,000 $ 152,500 -- $ 3,200
Chief Executive Officer 1997 179,375 2,179 90,000 --
President 1996 145,390 -- 28,000 8,777
Jeffrey R. Hazarian 1998 159,000 50,400 75,000 3,180
Executive 1997 145,875 25,000 -- --
Vice President and 1996 142,500 -- 27,000 8,586
Chief Financial Officer
- ---------------------------------------------------------------------------------------------------------------
(1) Includes $100,000 retention bonus paid to Mr. McKay in 1998 (see "Other
Compensation Arrangements" below) and 1998 accrued bonus of $3,000 for Mr.
Hazarian paid in February 1999.
(2)Reflects the number of options granted under the 1992 Option Plan. The
options expire at the earlier of the end of the option period or three
months after employment termination.
(3)These amounts represent the amounts accrued for the benefit of the named
executives under the Company's 401(k) Plan.
The following table sets forth certain information concerning options
granted during 1998 to the named executives:
OPTIONS GRANTS IN 1998
- ----------------------------------------------------------------------------------------------------------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
---------------------------------------------------- -----------------------
% of
Total
Number of Options
Securities Granted to
Underlying Employees Exercise or
Options in Fiscal Base Price Expiration
Name Granted Year ($/Share) Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------
Robert C. McKay, Jr. ..... -- -- $ -- -- $ -- $ --
Jeffrey R. Hazarian....... 75,000 20.27 0.725 2/19/04 18,493 41,954
- ----------------------------------------------------------------------------------------------------------------
31
Other Compensation Arrangements
The 1992 Option Plan provides that options may become exercisable over
such periods as provided in the agreement evidencing the option award. Options
granted to date, including options granted to executive officers and set forth
in the above tables, generally call for vesting over a four-year period. The
1992 Option Plan provides that a change in control of the Company will result in
immediate vesting of all options granted and not previously vested.
Other than as set forth below for Mr. McKay, the Company has no employment
contracts or arrangements for its executive officers.
Mr. McKay, upon appointment to Chief Operating Officer in 1997, was
granted a retention bonus arrangement, amounting to $100,000, dependent upon his
continued employment through June 30, 1998. The bonus was paid to Mr. McKay in
1998 in accordance with the arrangement.
Directors Compensation
Except as described below, the directors of the Company are paid no
compensation by the Company for their services as directors. Delbert F. Bunch,
William A. Hasler, Thomas S. Loo, Andrea W. O'Riordan, and George L. Turin as
non-employee directors, are paid a retainer of $1,000 per month. These
non-employee directors are also paid a fee of $1,000 for each meeting of the
Board and any Board Committee which they attend. The 1993 Outside Directors
Compensation and Option Plan was approved by the Board effective March 1, 1994,
as amended by the Board in 1998, and reserves up to 300,000 options for issuance
to non-employee directors. In March 1998, 12,500 stock options were granted to
each of Messrs. Hasler, Loo, and Turin. In July 1998, 12,500 stock options were
granted to each of Mr. Bunch and Ms. O'Riordan. During 1997, 8,000 stock options
were issued to each of Messrs. Hasler, Loo, Turin, and Williams (resigned in
December 1997). During 1996, 12,500 stock options were issued to each of Ms.
Cheng (resigned in February 1997) and Messrs. Hasler, Turin, and Williams. The
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. Due
to their resignations, Mr. Williams' 1997 options and Ms. Cheng's 1996 options
did not vest and were forfeited.
Compensation Committee Interlocks and Insider Participation
During 1998, the Compensation Committee was composed of William A. Hasler,
Thomas S. Loo, Andrea W. O'Riordan, and George Turin. Thomas S. Loo is a partner
in the law firm of Bryan Cave LLP, general counsel to the Company and Teknekron
Corporation, and is a director of Teknekron Corporation. Andrea W. O'Riordan, a
director of the Company since June 29, 1998, is the daughter of Harvey E.
Wagner, the Company's largest stockholder by virtue of a limited partnership
interest in Incline Village Investment Group Limited Partnership (see Item 12).
Mr. Wagner is also the sole stockholder and a director of Teknekron Corporation.
32
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as of March 1, 1999,
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 such
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 such partnership by Mr. Wagner's
spouse, Leslie Wagner, in exchange for a 1% general partner interest. Such
partnership has sole voting and investment power with respect to all such
shares. Mr. Wagner subsequently transferred a 14.7% limited partnership
interest in the partnership to Ms. O'Riordan, a director of the Company,
who disclaims beneficial ownership of all the shares held by such
partnership.
(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.
33
(b) Security Ownership of Management
The following table sets forth information as of March 1, 1999, with
respect to current beneficial ownership of shares of Common Stock by (i) each of
the directors of the Company, (ii) each of the named executive officers (see
Item 11. "Executive Compensation"), and (iii) all current directors and
executive officers as a group.
- -------------------------------------------------------------------------------------------------------------------
Shares Shares
Beneficially Acquirable Percentage
Name Owned(1) Within 60 Ownership(2)
Days(3)(4)
- -------------------------------------------------------------------------------------------------------------------
Delbert F. Bunch .............................................. -- --
William A. Hasler ............................................. 20,000 58,000(3) *
Jeffrey R. Hazarian ........................................... 7,186 136,250(4) 1.4%
Thomas S. Loo.................................................. -- 20,500(3) *
Robert C. McKay, Jr............................................ 1,789 181,000(4) 1.8%
Andrea W. O'Riordan (5)........................................ -- -- *
George L. Turin................................................ 45,504 48,000(3) *
------------ ------------- ------------
All Directors and Executive Officers as a Group (7 persons) ... 74,479 443,750 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) Based on the number of shares outstanding at, or acquirable within 60 days
of March 1, 1999. Asterisks represent less than 1% ownership.
(3) Represents options under the Company's 1993 Outside Directors Compensation
and Option Plan which are exercisable on March 1, 1999, or within 60 days
thereafter.
(4) Represents options under the Company's 1992 Option Plan which are
exercisable on March 1, 1999, or within 60 days thereafter. (5) Ms. O'Riordan
is the daughter of Harvey E. Wagner, the Company's largest stockholder (see
Item 12(a), "Security Ownership of
Certain Beneficial Owners").
Beneficial ownership as shown in the tables above has been determined in
accordance with Rule 13d-3 under the 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 shares 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
See "Compensation Committee Interlocks and Insider Participation."
34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following financial statements of the Company are filed with this
report and can be found in Part II, Item 8, on the pages indicated below:
PAGE
Consolidated Statements of Operations--
Year Ended December 31, 1998, 1997, and 1996 ....................... 14
Consolidated Balance Sheets-- December 31, 1998 and 1997 ............15
Consolidated Statements of Shareholders' Equity --
Year Ended December 31, 1998, 1997, and 1996 ........................16
Consolidated Statements of Cash Flows--
Year Ended December 31, 1998, 1997, and 1996 ........................17
Notes to Consolidated Financial Statements ..........................18
Report of Independent Auditors ......................................28
(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 ("SEC") on
June 2, 1995 (the "Registration Statement"), and is
incorporated herein by this reference).
2.2 Asset Acquisition Agreement dated November 14, 1997, between
Registrant and Spear Technologies, Inc. (filed as Exhibit 2.1
to the Registrant's Form 8K filed with the SEC on November 14,
1997 and incorporated by reference herein (the "Form 8-K")).
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).
10.1(1) Second Amendment, dated August 31, 1998, to Registrant's lease on
its properties located in Louisville, Colorado.
* 10.2(1) Amended and Restated 1993 Outside Director Compensation and
Option Plan.
--------------------------------------
(1) Filed herewith.
* Management contract or compensatory plan.
35
11.1 Statement regarding computation of per share earnings: See "Note
5 to Consolidated Financial Statements."
21.1(1) List of Subsidiaries of the Registrant.
23.1(1) Consent of Ernst & Young LLP, Independent Auditors.
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 1998.
(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, 1998.
----------------------------
(1) Filed herewith.
36
SCHEDULE VIII
TENERA, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
- ----------------------------------------------------------------------------------------------------------------
Additions Deductions
------------ ---------------------------
Balance Charged to Balance at
Beginning Costs and Credited to End of
Description of Year Expenses Special Item Other Year
- ----------------------------------------------------------------------------------------------------------------
1996
Reserve for Sales Adjustment
and Credit Losses ............. $ 2,888 $ 289 $ 250 $ 1,301 $ 1,626
1997
Reserve for Sales Adjustment
and Credit Losses ............. 1,626 36 122 182 1,358
1998
Reserve for Sales Adjustment
and Credit Losses ............. 1,358 9 -- 67 1,300
- ----------------------------------------------------------------------------------------------------------------
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 15, 1999
TENERA, INC.
By /s/ JEFFREY R. HAZARIAN
------------------------------------
Jeffrey R. Hazarian
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ DELBERT F. BUNCH Director March 15, 1999
- ---------------------------
(Delbert F. Bunch)
/s/ WILLIAM A. HASLER Director March 15, 1999
- ---------------------------
(William A. Hasler)
Director,
Chief Financial Officer,
Executive Vice President,
and Corporate Secretary
/s/ JEFFREY R. HAZARIAN (Principal Financial Officer) March 15, 1999
- ---------------------------
(Jeffrey R. Hazarian)
/s/ THOMAS S. LOO Director March 15, 1999
- ---------------------------
(Thomas S. Loo)
Director,
Chief Executive Officer,
and President
/s/ ROBERT C. MCKAY (Principal Executive Officer) March 15, 1999
- ---------------------------
(Robert C. McKay)
/s/ ANDREA W. O'RIORDAN Director March 15, 1999
- ---------------------------
(Andrea W. O'Riordan)
Controller and Treasurer
/s/ JAMES A. ROBISON, JR. (Principal Accounting Officer) March 15, 1999
- ---------------------------
(James A. Robison, Jr.)
/s/ GEORGE L. TURIN Director March 15, 1999
- ---------------------------
(George L. Turin)
38
EXHIBIT INDEX
Ex. 10.1 Second Amendment, dated August 31, 1998, to Registrant's lease
on its properties located in Louisville, Colorado
Ex. 21.1 List of Subsidiaries of the Registrant
Ex. 23.1 Consent of Independent Auditors
Ex. 27.1 Financial Data Schedule