<PAGE>
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, 1997
[ ] 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 16, 1998, the aggregate market value of the Registrant's Common
Stock held by nonaffiliates of the Registrant was $3,567,100 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 16, 1998, was 10,123,153.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
TENERA, Inc. ("TENERA" or the "Company"), a Delaware corporation, was
formed in connection with the conversion of TENERA, L.P. (the predecessor of
the Company, the "Predecessor Partnership") into corporate form (the "Merger"
or "Conversion"), completed on June 30, 1995. Pursuant to the Merger, the
Company succeeded to the business, assets, and liabilities of the Predecessor
Partnership. Therefore, the Company and the Predecessor Partnership are
sometimes collectively referred to herein as TENERA or the Company. (See Note
1 to Financial Statements.)
During 1995, the Company formed TENERA Rocky Flats, LLC ("Rocky Flats"), a
Colorado limited liability company, to provide consulting and management
services in connection with participation in the Performance Based Integrating
Management Contract ("Rocky Flats Contract") at the DOE's Rocky Flats
Environmental Technology Site ("Site").
In May 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 Technologies (see Notes 1 and 9 to Financial Statements).
Technologies was experiencing a high level of investment needs during its
growth stage of product and business development activities and was not
expected to produce profitable results in the next twelve months.
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. Prior to the Asset
Sale, Technologies provided maintenance and data management software services,
products, and systems to the mass transportation industry.
TENERA provides services to assist its commercial electric power industry
clients with respect to nuclear and fossil plant operations, maintenance, and
safety, including 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 with respect to nuclear facilities. Over the past several years,
commercial electric utilities have experienced increased competitive pressure
due to a continued deregulation of electric power production. For example,
utilities continue to find it more difficult to recover total capital
expenditures through rate increases, as well as facing increased competition
from independent power producers, alternative energy production, and
cogeneration. During the same period, utilities have responded to continued
regulatory pressures to comply with complex safety and environmental
guidelines. Safety problems and environmental issues have also emerged at
government-owned production facilities. A massive program is underway
throughout the DOE complex of nuclear facilities to comply with health,
safety, and environmental requirements similar to those applicable to
commercial facilities, principally in the areas of hazardous wastes,
decontamination, decommissioning, and remediation. Electric utilities, as well
as a variety of other industries, have been subjected to extensive regulation
regarding environmentally safe handling of hazardous materials.
It has been TENERA's strategy to provide solutions to these issues by
providing clients with a high level of professional skills and a broad range
of scientific, technological, and management resources, including software and
data bases which are used either in support of consulting projects or as the
basis for development of stand
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alone software products and systems. The Company assists its clients in the
initial identification and analysis of a problem, the implementation of a
technologically feasible solution that client management believes will be
sensitive to business and public interest constraints, and the ongoing
monitoring of that solution.
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 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 materials production sites
also face close scrutiny resulting from public concern over health, safety,
and the environment. The Company believes that increased enforcement of
environmental laws and regulations at various levels of government continues
to be prompted by publicity and public awareness of environmental problems and
health hazards posed by hazardous materials and toxic wastes.
Economic pressures have resulted in certain changes in the focus of
electric utility management. For example, the rate-making process now
represents a significant area of risk to utilities. This has highlighted the
importance of careful planning and documentation in connection with rate case
preparation. Furthermore, rate base decisions apparently are shifting their
emphasis to ongoing performance reviews related to such measures as plant
capacity factors. This has resulted in substantial penalties for extended
plant outages and has stimulated actions by the utilities to assure more
reliable operations.
The DOE has begun the implementation of programs to address safety problems
and environmental concerns which have emerged at its nuclear facilities. These
programs are designed to bring the operations into compliance with a variety
of health, safety, and environmental requirements, similar to those applicable
to the commercial electric utility industry. The DOE's decontamination,
decommissioning, and remediation programs are also aimed at achieving
significant cleanup of its hazardous waste production and storage facilities
and the partial shutdown of nuclear operations at a number of its sites. The
dismantlement and cleanup of the aging DOE weapons complex represents a
significant market for the Company's service offerings.
The markets for electric utility and DOE facility professional services and
software products covers a broad range of activities. Typical markets include
waste management, outage support, operating plant services, licensing support,
safety and health management, maintenance and information services,
decommissioning consulting, risk assessment, quality assurance and control,
organizational effectiveness, engineering support, records management, fuel
related services, and plant security.
In recent years, the slowdown in construction of commercial power plants
has placed a premium on extending existing plant life and has shifted the
electric utility commercial market emphasis. This has also resulted in greater
attention by utilities to management systems for preventive maintenance and
improved methods of plant operation, which may, in time, result in the
expansion of the market for services and software associated with the
efficient and profitable operation of existing capacity.
The Company's other market prior to the Asset Sale, mass transit systems,
consisted of providing computer-based maintenance management software and
services to public entities that provide ground transportation services to the
general public.
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
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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.
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, 1995 through 1997:
<TABLE>
<CAPTION>
____________________________________________________________________________________
Year Ended December 31,
--------------------------
1997 1996 1995
____________________________________________________________________________________
<S> <C> <C> <C>
Consulting, Management, and Technical Services ......... 86.4% 91.8% 85.5%
Software Services, Products, and Systems* .............. 13.6% 8.2% 14.5%
____________________________________________________________________________________
* Reflects only 10 months of revenues in 1997 due to the Asset Sale.
</TABLE>
Consulting and Management Services. The Company's consulting and management
services involve determining a solution to client problems and challenges
arising in the design, operation, and management of large facilities. 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:
- Strategic business management
- Organizational effectiveness and change management
- Risk management
- Environmental and ecological issues at DOE and electric utility
facilities
- Operations and maintenance performance improvement
- Plant safety
- Nuclear safety and criticality at DOE facilities
- Engineering design review and verification
- Company/organized labor union consulting
Software Services, Products, and Systems. Until the Asset Sale in November
1997, the Company offered a range of information software services, products,
and systems including data bases designed to support mass transit and electric
utility clients in areas such as asset management, regulatory compliance,
facility operations, and equipment maintenance and data management related to
management consulting and operating performance.
The Company continues to utilize proprietary software tools and systems in
connection with the risk management and operations and maintenance performance
improvement service areas for its electric utility clients.
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 has the organization and
capability to undertake not only small tasks requiring a few professionals but
also the management, staffing, design, and implementation of major projects
which may last for several months and involve large numbers of professionals
and subcontractors in several geographic locations. Characteristic of
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TENERA's marketing strategy are significant projects in which initial
contracts have been only a fraction of the ultimate sale.
The Company provides financial incentives to attract senior technical
professionals with extensive utility industry experience and to encourage
these individuals to market the complete range of TENERA's services throughout
existing and potential customer organizations.
TENERA's marketing efforts are facilitated by the technical reputation and
industry recognition often enjoyed by its professional staff. TENERA's
reputation in the electric power industry and as a DOE contractor, often leads
to invitations to participate at an early stage in the conceptualization of a
project. During this phase, the Company assists clients in developing an
approach for efficiently and productively solving a problem. If new services
or products are developed for a client, they generally are marketed to other
clients with similar needs.
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, 1997, TENERA provided services
and software to over 60 clients involving over 100 contracts (including 20
clients and 30 contracts of Technologies). During the year ended December 31,
1996, TENERA provided services and software to over 75 clients involving over
125 contracts. Over 80% of TENERA's clients, during the year ended December
31, 1997, had previously used its services or software.
During the year ended December 31, 1997, three customers, Kaiser-Hill
Company, LLC ("Kaiser-Hill"), prime contractor of the Rocky Flats Contract,
Commonwealth Edison Company ("ComEd"), and Pacific Gas and Electric ("PG&E"),
accounted for approximately 67% of the Company's total revenue (Kaiser-Hill -
43%; ComEd - 14%; and PG&E - 10%) and 78% of non-Technologies revenue. During
the year ended December 31, 1996, these three clients accounted for
approximately 74% of the Company's total revenue (Kaiser-Hill - 56%; ComEd -
11%; and PG&E - 7%) and 81% of non-Technologies revenue. The Company has
maintained working relationships with Kaiser-Hill, ComEd, and PG&E for three
years, eleven years, and twenty years, respectively, during which time various
contracts have been completed and replaced with new or follow-on contracts.
There can be no assurance that these relationships will be maintained at
current levels or beyond the existing contracts, and the loss of any of these
clients would have a material adverse effect on the Company.
OPERATIONS
The Company contracts for the billing of its services in one of four ways:
time and materials ("T & M"), cost plus fixed fee ("CPFF"), cost plus
incentive fee ("CPIF"), or fixed price. T & M, CPFF, and CPIF contracts, which
cover a substantial amount of TENERA's revenues, are generally billed monthly
by applying a multiplier factor to specific labor costs or by use of a fixed
labor rate per hour charged to each project. T & M, CPFF, and CPIF contracts
are generally structured to include "not-to-exceed" ceilings; however, if
after initial review or after work has started, it is noted that additional
work beyond the initial scope of work is required, the contract normally can
be renegotiated to include such additional work and to increase the contract
ceiling accordingly. 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 to instances in which TENERA
has been requested to deliver services and/or products previously developed or
products and/or services deliverable to multiple customers. Prior to the Asset
Sale, certain fixed-price contracts were established where TENERA was
developing software products or transferring the technology to a new platform.
At December 31, 1997, of the total outstanding contracts, less than 1% of
their value was 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.
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BACKLOG
As of December 31, 1997, TENERA had contracted a backlog of approximately
$12.8 million, all of which is cancelable by the clients. Rocky Flats and
Energy account for $11.5 million and $1.3 million, respectively, of the
backlog. Contracted backlog represents the aggregate of the residual (unspent)
value of those active contracts entered into by TENERA for services which are
limited by a contractual amount and does not include any estimates of open-
ended services contracts or unfunded backlog that may result from additions to
existing contracts.
Since all outstanding contracts are cancelable, there is no assurance that
the revenues from these contracts will be realized by the Company. If any
contract is canceled, there is no assurance that the Company will be
successful in replacing such contract.
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.
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 1997 however, TENERA expended
in excess of $1,531,000 ($562,000 in 1996) of its funds on software
development designed to meet Technologies' customers needs for 1997 and
beyond. Concurrent with the Asset Sale in November 1997, the Company ceased
all internally funded software development activities.
PATENTS AND LICENSES
The Company does not hold any patents material to its business. TENERA has
relied upon trade secret laws and contracts to protect its proprietary rights
in software systems and data bases. The license agreements under which
customers acquired the rights to use TENERA's software products generally
restrict the customers' use of the products to their own operations and
prohibit disclosure to others. As part of the Asset Sale, certain software
proprietary rights and related license agreements were transferred to the
purchaser.
PERSONNEL
At December 31, 1997, the Company employed a total of 163 consultants,
engineers, programmers, and scientists and a supporting administrative staff
of 24 employees. Eight employees hold doctorates and 58 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 4,000 square feet in Louisville,
Colorado, expiring in 1998. Additionally, TENERA maintains a project office on
a month-to-month lease covering approximately 200 square feet in Richland,
Washington. The Company vacated its office space in Knoxville, Tennessee in
April 1997 and is subleasing the space until lease expiration in July 1998. As
a
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result of the Asset Sale, TENERA vacated its office space in Hartford,
Connecticut, and is subleasing the space until the lease expiration in 2000.
The Company believes that its facilities are well maintained and adequate
for its current needs.
ITEM 3. LEGAL PROCEEDINGS
On November 4, 1994, PLM Financial Services, Inc. ("PLM") filed an action,
entitled PLM Financial Services, Inc. v. TERA Corporation, et al., Case No.
743 439-0, against 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. Damages were not specified in the Court's decision and it is unclear
from the ruling whether the judgment is against all defendants and, if it is,
whether TENERA's share will be less than the total amount of the judgment.
Based on the Court's decision, however, the judgment ultimately entered by the
Court could aggregate in excess of $1 million. TENERA anticipates that post-
trial proceedings will clarify the extent of its liability. Accordingly, for
the year 1997, the Company accrued litigation judgment expenses of $950,000
related to this matter.
As previously reported by management, if TENERA is ultimately held
responsible for all or a significant portion of the judgment entered by the
Court, such an outcome would have a material adverse impact on the cash flows
of the Company. Moreover, the judgment ultimately entered and the expense of
an appeal of the Court's judgment, if such an appeal is undertaken, could have
a material adverse impact on the financial position, results of operations,
and cash flows of the Company. Further, there can be no assurance that such an
appeal, if undertaken, would be successful. See Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
"Operating Risks," and Note 8 to the Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Common Stock are listed for trading on AMEX under
the symbol TNR. The first trading day on AMEX was June 30, 1995, at which time
10,417,345 shares were outstanding. The Units of the Predecessor Partnership
were listed for trading on AMEX under the symbol TLP. The first and last
trading days on AMEX for the Predecessor Partnership were January 28, 1988,
and June 30, 1995, respectively. There were approximately 500 shareholders of
record as of March 16, 1998.
<TABLE>
<CAPTION>
___________________________________________________________________________________
1997 1996 1995
------------------ ------------------ ------------------
Price Range of
Price Range of Price Range of Predecessor
TENERA, Inc. TENERA, Inc. Partnership
Shares Shares Units(1)
------------------ ------------------ ------------------
High Low High Low High Low
___________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
First Quarter .... $ 0.9375 $ 0.625 $ 1.375 $ 0.875 $ 0.9375 $ 0.50
Second Quarter ... 0.8125 0.50 1.4375 0.875 1.1875 0.75
Third Quarter .... 0.625 0.50 1.0625 0.75 1.875 1.1875
Fourth Quarter ... 0.8125 0.50 0.875 0.625 1.50 0.875
___________________________________________________________________________________
(1) Reflects trading prices of the Predecessor Partnership Units for the period
from January 1, 1995 to June 30, 1995.
</TABLE>
The Board of Directors of the Company determines the amount of cash
dividends which the Company may make to shareholders after consideration of
projected cash requirements and a determination of the amount of retained
funds necessary to provide for growth of the Company's business. The Company
and its Predecessor Partnership have made no distributions since 1991. The
Company does not anticipate resumption of cash distributions in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data of the Company for the
five prior fiscal 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 Financial Statements.
TENERA, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands, except per share/unit and statistical amounts)
_________________________________________________________________________________________________________________
Year Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
_________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA
Revenue .................................................. $ 21,121 $ 24,003 $ 25,545 $ 23,600 $ 29,340
Operating (Loss) Income .................................. (2,139) (1,382) 1,203 (1,239) (315)
Net (Loss) Earnings ...................................... (1,890) (1,080) 898 (1,202) (294)
Earnings (Loss) per Share/Equivalent Unit(1) -- Basic .... (0.19) (0.11) 0.07 (0.13) (0.03)
Earnings (Loss) per Share/Equivalent Unit(1) -- Diluted .. (0.19) (0.11) 0.07 (0.13) (0.03)
Weighted Average Shares/Equivalent Units(1) .............. 10,123 10,248 9,920 9,555 9,646
CASH FLOW DATA
Net Cash (Used) Provided by Operating Activities ......... (2,681) 2,954 (286) 17 1,472
Net (Decrease) Increase in Cash and Cash Equivalents ..... (1,672) 2,490 (469) 363 1,085
FINANCIAL POSITION AT DECEMBER 31
Cash and Cash Equivalents ................................ 2,292 3,964 1,474 1,943 1,580
Working Capital .......................................... 2,831 4,555 5,836 4,024 5,196
Total Assets ............................................. 6,052 7,940 10,087 8,616 9,345
Total Liabilities ........................................ 3,065 3,062 3,912 4,069 3,524
Shareholders' Equity/Partners' Capital ................... 2,987 4,878 6,175 4,547 5,821
OTHER INFORMATION
Number of Employees ...................................... 187 208 270 170 202
_________________________________________________________________________________________________________________
(1) Equivalent Units represent both the general and limited partners' interest in Predecessor Partnership
earnings.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
TENERA, INC.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
________________________________________________________________________________________________________
Year Ended December 31,
--------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------
% Increase % Increase
(Decrease) (Decrease)
% of to Prior % of to Prior % of
Revenue Year Revenue Year Revenue
________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Revenue ................................ 100 (12) 100 (6) 100
Direct Costs ........................... 62 (16) 65 (4) 63
General and Administrative Expenses .... 38 (12) 39 19 32
Software Development Costs ............. 7 172 2 100 --
Special Items Income (Expenses), Net ... 2 N/M -- N/M --
Litigation Judgment Cost ............... 5 100 -- -- --
Other Income ........................... -- -- -- N/M --
---------- ---------- ---------- ---------- ----------
Operating (Loss) Income .............. (10) (55) (6) (215) 5
Interest Income, Net ................... 1 (33) 1 164 --
---------- ---------- ---------- ---------- ----------
Net (Loss) Earnings Before Income
Tax Benefit/Expense .................... (9) (67) (5) (220) 5
========== ========== ========== ========== ==========
________________________________________________________________________________________________________
N/M Not meaningful.
</TABLE>
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 accrual
of litigation judgment costs, compared to a pre-tax loss of $1,167,000 in 1996
before the effect of special items.
The revenue decrease is primarily the result of reduced government sales
during the first nine months of 1997, partially offset by higher software
revenue related to work on Technologies' 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
(including 20 clients of Technologies) 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 lower margin government
work, partially offset by the effect of an increased mix of higher cost
subcontracted labor on fixed-price contracts associated with Technologies.
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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 by Technologies,
which amounted to $908,000 in 1997, compared to $241,000 in 1996. The overall
reduction in general and administrative expenses as a percentage of revenue
for 1997 from 41% in 1996, to 39% in 1997, is primarily due to increased
utilization of Rocky Flats and Energy employees on billable contracts and
lower expenditures for retirement benefits.
The level of the Company's internally funded investments in software
product development by Technologies, 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 described below (see also Note 1 to
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. Technologies was not expected to produce profitable
results in the next twelve months due to the high level of investment needs
that management believed it would experience during its growth stage of
product and business development activities. Technologies' revenue for ten
months of 1997 prior to the Asset Sale was $2,870,000. Its revenue generation
rate in 1998 was expected to be similar to 1997. The special item of $355,000
reflects the realized gain (exclusive of the effect of the note and warrant)
from the Asset Sale (see Notes 1 and 9 to Financial Statements). Full
repayment of the note is contingent upon a minimum amount of equity funding of
the buyer, which had not occurred at year end. 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 the
additional gain will be reported in the first quarter of 1998. The warrant is
deemed to have no value as of December 31, 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 more than offset the first item.
This adjustment related to the repricing of debt owed to the Company by one of
its executive officers (see Note 3 to Financial Statements). The principal
amount of the note was reduced to the then current fair market value of the
stock held as security for the debt, resulting in a charge to earnings of
approximately $300,000.
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), in which TENERA and others were named as defendants. The
action involved a guaranty by a predecessor of TENERA of obligations arising
in connection with wind turbines sold to PLM and leased back to a former
subsidiary of the predecessor by PLM. The trial in this matter was concluded
in August 1997. Damages were not specified in the Court's decision, and it is
unclear from the ruling whether the judgment is against all defendants and, if
it is, whether TENERA's share will be less than the total amount of the
judgment. Based on the Court's decision, however, the judgment ultimately
entered by the Court could aggregate in excess of $1,000,000. TENERA
anticipates that post-trial proceedings will clarify the extent of its
liability. Accordingly, for the year 1997, the Company accrued litigation
judgment expenses of $950,000 related to this matter. If TENERA is ultimately
held responsible for all or a significant portion of the total judgment
entered by the Court, such an outcome would have a material adverse impact on
the cash flows of the Company. Moreover, the judgment ultimately entered and
the expense of an appeal of the Court's judgment, if such an
10
<PAGE>
appeal is undertaken, could have a material adverse impact on the financial
position, results of operations, and cash flows of the Company. Further, there
can be no assurance that such an appeal, if undertaken, would be successful.
Once its total exposure has been clarified, TENERA will determine what future
actions, if any, will be taken in connection with this matter. See Item 3,
"Legal Proceedings," Item 7, "Operating Risks," and Note 8 to the 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.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Lower revenue and higher general and administrative expenses resulted in a
net loss before income tax benefit/expense of $1,217,000, compared to net
earnings before income tax expense of $1,204,000 in 1995.
The revenue decrease was primarily the result of reduced sales of
consulting and management services throughout the year; lower sales activity
of software services until the award of a software contract with Amtrak in
August 1996, valued at approximately $2.9 million; and the reduced
availability of staff reassigned to internal software product development;
partially offset by an increase in revenue related to the Rocky Flats
Contract. Concentration of revenue from the government sector increased to 61%
of total revenue for 1996 from 49% in 1995. This was primarily the result of
the Rocky Flats Contract which was in existence for the entire year of 1996,
but commenced in mid-1995. During 1996, the government sector quarterly
revenue declined approximately 40% from the first quarter to the fourth
quarter, due primarily to site budget constraints on the Rocky Flats Contract.
The number of clients served during the year increased slightly to 75 from 66
in 1995. Revenue from software license and maintenance fees during 1996
decreased to $283,000 from $814,000 in 1995, primarily due to fewer new
software installations.
Direct costs were lower in 1996, primarily as a result of the reduced
revenue generation opportunities. Gross margins decreased to 35% in 1996 from
37% in 1995 due to the full year impact of the lower margin Rocky Flats
Contract. This lower margin contribution was primarily due to the cost-plus
pricing characteristics of the contract. Gross margin contribution from
overall project activity during the year, before consideration for the impact
of the Rocky Flats Contract, was up slightly to 44% in 1996 from 43% in 1995.
General and administrative costs increased by $1.6 million in 1996,
primarily reflecting increased professional staff time spent on overhead and
sales activities, higher severance costs, and increased internally-funded
software development costs. Prior to January 1, 1996, the Company's product
development had been primarily funded by clients as part of the development of
software applications. These cost increases resulted in an increase in general
and administrative expenses as a percentage of revenue from 32% in 1995 to 41%
in 1996.
Other income for 1996 primarily related to the final liquidation, in April
1996, of the Company's interest in the Individual Plant Evaluation Partnership
("IPEP partnership"), a technical services partnership in which it was an
operating participant until its termination in 1995. The Company previously
booked a loss provision of $30,000 in 1995 for estimated closure costs of the
IPEP partnership. Other income also included gains on the sale of assets
related to facility downsizing (approximately $10,000 in 1996 and 1995).
The special items' net expense of $50,000 was comprised of two items (see
Note 9 to Financial Statements). First, in the second quarter of 1996, the
Company recorded a $250,000 adjustment to the reserve related to the
settlement of specific disputed costs on certain government contracts with the
DOE. This positive earnings impact resulted from a further reduction of the
reserve for sales adjustment established in 1991, and is based upon the
successful government audits and contract closeouts of prior periods. The
second special adjustment occurred in December 1996, and more than offset the
first item. This adjustment related to the repricing of debt owed to the
Company by one of its executive officers (see Note 3 to Financial Statements).
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.
11
<PAGE>
Net interest income in 1996 represented earnings from the investment of
cash balances in short-term, high-quality, government and corporate debt
instruments, partially offset by capital lease interest expense. The Company
had no borrowings under its line of credit during 1996. Net interest income in
1995 reflected investment earnings on smaller average cash balances, partially
offset by interest costs associated with short-term borrowing on the Company's
line of credit during the first six months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1,672,000 during 1997. The decrease
was due to cash used by operations ($2,681,000) and the net cash used for the
acquisition of equipment ($290,000), partially offset by proceeds from the
Asset Sale ($1,300,000).
Receivables increased by $1,243,000, excluding the effect of the Asset
Sale, from December 31, 1996, primarily due to an increase in Energy and Rocky
Flats services revenue in the fourth quarter of 1997. The allowance for sales
adjustments decreased by $146,000, excluding the effect of the Asset Sale,
since December 31, 1996, primarily due to the write-off of uncollectable
receivables.
Accounts payable decreased by $128,000, primarily reflecting the reduction
of liabilities resulting from the Asset Sale. Accrued compensation and related
expenses decreased by $301,000, excluding the effect of the Asset Sale, during
1997, primarily reflecting the payment of the Company's 1996 contribution to
the employee retirement plan and elimination of the Company's contribution
accrual for 1997. A litigation judgment cost accrual of $950,000 was
established in the current year related to a court decision rendered in
February 1998, in the action entitled PLM Financial Services, Inc. v. TERA
Corporation, et al., Case No. 743 439-0 (see Note 8 to Financial Statements).
Shareholders' equity decreased by $1,891,000 in 1997 due to net losses
($1,890,000) and the repurchase of stock ($1,000).
No cash dividend was declared in 1997.
The impact of inflation on project revenue and costs of the Company was
minimal.
At December 31, 1997, the Company had available $2,500,000 of a $3,000,000
revolving loan facility with its lender which expires in May 1998. The Company
has no outstanding borrowing against the line; however, $500,000 was assigned
to support standby letters of credit.
Management believes that cash expected to be generated by operations, the
Company's working capital, and its loan facility are adequate to meet its
anticipated liquidity needs through the next twelve months.
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 flows
materially affected.
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.
12
<PAGE>
History of Losses; Uncertainty of Future Profitability. Revenue decreased
each year from 1990 to 1994 ($51.2 million in 1990, $44.1 million in 1991,
$36.6 million in 1992, $29.3 million in 1993, $23.6 million in 1994), and
remained relatively flat from 1994 through 1996. Revenue in 1997 decreased to
$21.1 million, which included $2.9 million of Technologies revenue prior to
the Asset Sale. Net earnings (loss) from operations over the same periods
declined from $7.9 million in 1990, to $(6.2 million) in 1991, $0.8 million in
1992, $(0.3 million) in 1993, $(1.2 million) in 1994, $0.9 million in 1995,
$(1.2 million) in 1996, and $(1.2 million) in 1997. There can be no assurance
of the level of earnings, if any, that the Company will be able to derive in
the future.
Reliance on Major Customers. During fiscal 1997, three customers, Kaiser-
Hill, ComEd, and PG&E, accounted for approximately 67% of the Company's total
revenues (78% of non-Technologies revenue), and during 1996, these three
customers accounted for approximately 74% of the Company's total revenues (81%
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 "Business -- Marketing and Clients."
Litigation. PLM Financial Services, Inc. filed an action in the Superior
Court of California for the County of Alameda, seeking damages in excess of
$4.6 million in unpaid equipment rent and other payments allegedly owing to
PLM under an equipment lease between PLM and TERA Power Corporation, a former
subsidiary of TERA Corporation of the Predecessor Corporation. PLM named the
Company in the action pursuant to a guaranty of the lease obligations made by
the Predecessor Corporation. The trial in this matter was concluded in August
1997, and in February 1998, the trial judge issued a minute order rendering
his decision against the defendants in the action. Damages were not specified
in the Court's decision and it is unclear from the ruling whether the judgment
is against all defendants and, if it is, whether TENERA's share will be less
than the total amount of the judgment. Based on the Court's decision, however,
the judgment ultimately entered by the Court could aggregate in excess of $1
million. TENERA anticipates that post-trial proceedings will clarify the
extent of its liability. If TENERA is ultimately held responsible for all or a
significant portion of the judgment entered by the Court, such an outcome
would have a material adverse impact on the cash flows of the Company.
Moreover, the judgment ultimately entered and the expense of an appeal of the
Court's judgment, if such an appeal is undertaken, could have a material
adverse impact on the financial position, results of operations, and cash
flows of the Company. Further, there can be no assurance that such an appeal,
if undertaken, would be successful. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition," "Legal Proceedings," and
Note 8 to the Financial Statements.
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
TENERA will have the financial and other resources necessary to successfully
research, develop, introduce, and market new products and services, that if,
or when, such new products or services are introduced, they will be favorably
accepted by current or potential customers, or that TENERA will be otherwise
able to fully adjust its services and products to meet the changing needs of
the industry. See "Business -- Background."
Uncertainty of Access to Capital. 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, and the further loss of such
13
<PAGE>
officers and technical personnel, and the inability to recruit sufficient
additional qualified personnel could have material adverse effect on the
Company.
Government Contracts Audits. The Company's United States government
contracts are subject in all cases to audit by governmental authorities. 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 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.
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.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TENERA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
______________________________________________________________________________
Year Ended December 31,
-------------------------------
1997 1996 1995
______________________________________________________________________________
<S> <C> <C> <C>
Revenue .................................... $ 21,121 $ 24,003 $ 25,545
Direct Costs ............................... 13,038 15,527 16,082
General and Administrative Expenses ........ 8,131 9,281 8,240
Software Development Costs ................. 1,531 562 --
Special Items Income (Expenses), Net ....... 355 (50) --
Litigation Judgment Cost ................... 950 -- --
Other Income (Expenses) .................... 35 35 (20)
--------- --------- ---------
Operating (Loss) Income ................ (2,139) (1,382) 1,203
Interest Income, Net ....................... 110 165 1
--------- --------- ---------
Net (Loss) Earnings Before Income
Tax Benefit/Expense ...................... (2,029) (1,217) 1,204
Income Tax (Benefit) Expense ............... (139) (137) 306
--------- --------- ---------
Net (Loss) Earnings ........................ $ (1,890) $ (1,080) $ 898
========= ========= =========
Net (Loss) Earnings per Share -- Basic ..... $ (0.19) $ (0.11) $ 0.07
========= ========= =========
Net (Loss) Earnings per Share -- Diluted ... $ (0.19) $ (0.11) $ 0.07
========= ========= =========
Weighted Average Number of Shares
Outstanding ................................ 10,123 10,248 9,920
========= ========= =========
______________________________________________________________________________
See accompanying notes.
</TABLE>
15
<PAGE>
TENERA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share and unit amounts)
__________________________________________________________________________________________
December 31,
---------------------------
1997 1996
__________________________________________________________________________________________
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .............................. $ 2,292 $ 3,964
Receivables, less allowances of $1,358 (1996 - $1,626)
Billed ............................................... 1,643 1,087
Unbilled ............................................. 1,726 2,032
Other current assets ................................... 235 534
---------- ----------
Total Current Assets ............................... 5,896 7,617
Property and Equipment, Net .............................. 156 323
---------- ----------
Total Assets ..................................... $ 6,052 $ 7,940
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL
Current Liabilities
Accounts payable ....................................... $ 638 $ 1,026
Accrued compensation and related expenses .............. 1,477 2,036
Litigation judgment accrual ............................ 950 --
---------- ----------
Total Current Liabilities .......................... 3,065 3,062
Commitments and Contingencies
Shareholders' Equity
Common Stock, $0.01 par value, 25,000,000 authorized,
10,417,345 issued and outstanding ...................... 104 104
Paid in capital, in excess of par ...................... 5,698 5,698
Retained (deficit) earnings ............................ (2,509) (619)
Treasury stock - 294,192 shares
(1996 - 292,498 shares) ................................ (306) (305)
---------- ----------
Total Shareholders' Equity ....................... 2,987 4,878
---------- ----------
Total Liabilities and Shareholders' Equity ..... $ 6,052 $ 7,940
========== ==========
__________________________________________________________________________________________
See accompanying notes.
</TABLE>
16
<PAGE>
TENERA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (PARTNERS' CAPITAL)
<TABLE>
<CAPTION>
(In thousands, except share and unit amounts)
__________________________________________________________________________________________________________________________________
Shareholders' Equity Partners' Capital
----------------------------------------- ------------------------------------------
Paid In
Capital Notes
in Retained from
Common Excess (Deficit) Treasury General Limited Treasury Limited
Stock of Par Earnings Stock Partner Partners Units Partners Total
__________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 ............. $ -- $ -- $ -- $ -- $ 312 $ 5,376 $ (1,141) $ -- $ 4,547
Repurchase of 242,481 Units ... -- -- -- -- -- -- (182) -- (182)
Net Earnings Through
June 30, 1995 ................. -- -- -- -- 9 428 -- -- 437
Merger of Predecessor
Partnership into
TENERA, Inc. .................. 93 4,709 -- -- (321) (5,804) 1,323 -- --
Common Stock Issued at
$0.89 per Share ............... 11 989 -- -- -- -- -- -- 1,000
Repurchase of 87,402 Shares ... -- -- -- (88) -- -- -- -- (88)
Net Earnings for July 1, 1995
to December 31, 1995 .......... -- -- 461 -- -- -- -- -- 461
-------- --------- --------- --------- --------- --------- --------- --------- ---------
December 31, 1995 ............. 104 5,698 461 (88) -- -- -- -- 6,175
Repurchase of 205,096 Shares .. -- -- -- (217) -- -- -- -- (217)
Net Loss ...................... -- -- (1,080) -- -- -- -- -- (1,080)
-------- --------- --------- --------- --------- --------- --------- --------- ---------
December 31, 1996 ............. 104 5,698 (619) (305) -- -- -- -- 4,878
Repurchase of 1,694 Shares .... -- -- -- (1) -- -- -- -- (1)
Net Loss ...................... -- -- (1,890) -- -- -- -- -- (1,890)
-------- --------- --------- --------- --------- --------- --------- --------- ---------
December 31, 1997 ............. $ 104 $ 5,698 $ (2,509) $ (306) $ -- $ -- $ -- $ -- $ 2,987
========= ========= ========= ========= ========= ========= ========= ========= =========
__________________________________________________________________________________________________________________________________
See accompanying notes.
</TABLE>
17
<PAGE>
TENERA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
_____________________________________________________________________________________________________
Year Ended December 31,
------------------------------------
1997 1996 1995
_____________________________________________________________________________________________________
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) earnings ....................................... $ (1,890) $ (1,080) $ 898
Adjustments to reconcile net (loss) earnings to cash
provided (used) by operating activities:
Depreciation ............................................ 231 272 298
(Gain) Loss on sale of equipment ........................ (21) (8) 1
Gain on sale of Technologies business ................... (355) -- --
Decrease in allowance for sales adjustments ............. (146) (1,262) (9)
Deferred income taxes ................................... -- (90) 90
Changes in assets and liabilities:
Receivables ........................................... (1,243) 5,758 (2,137)
Other current assets .................................. 222 107 40
Other assets .......................................... -- 17 30
Accounts payable ...................................... (128) (144) (495)
Accrued compensation and related expenses ............. (301) (382) 764
Litigation judgment accrual ........................... 950 -- --
Income taxes payable .................................. -- (216) 216
Non-Current liabilities ............................... -- (18) 18
---------- ---------- ----------
Net Cash (Used) Provided by Operating Activities .... (2,681) 2,954 (286)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ..................... (311) (258) (164)
Proceeds from sale of equipment ........................... 21 11 1
Proceeds from sale of Technologies business ............... 1,300 -- --
---------- ---------- ----------
Net Cash Provided (Used) in Investing Activities .... 1,010 (247) (163)
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayment) Borrowings under bank loan agreement .......... -- -- (750)
Repurchase of equity ...................................... (1) (217) (270)
Issuance of Common Stock .................................. -- -- 1,000
---------- ---------- ----------
Net Cash Used by Financing Activities ............... (1) (217) (20)
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........ (1,672) 2,490 (469)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............. 3,964 1,474 1,943
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................... $ 2,292 $ 3,964 $ 1,474
========== ========== ==========
_____________________________________________________________________________________________________
See accompanying notes.
</TABLE>
18
<PAGE>
TENERA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. ORGANIZATION
TENERA, Inc. (the "Company"), a Delaware corporation, was formed in
connection with the conversion of TENERA, L.P. (the predecessor of the
Company; the "Predecessor Partnership") into corporate form (the
"Conversion"). Therefore the Company and the Predecessor Partnership are
sometimes collectively referred to herein as the Company.
On June 30, 1995, the Company completed the Conversion by means of a merger
(the "Merger") of the Predecessor Partnership, its General Partner (Teknekron
Technology MLP I Corporation) and its Operating Partnership (TENERA Operating
Company, L.P.) with, and into, TENERA, Inc. Pursuant to the Merger: (i) the
Company succeeded to the business, assets, and liabilities of the Predecessor
Partnership; (ii) each limited partner Unit previously held by Unitholders in
the Predecessor Partnership, (including 184,946 equivalent Units representing
the interest in the Partnership of the General Partner), automatically
converted to one share of Common Stock of TENERA, Inc.; and (iii) an
additional 1,123,596 shares of Common Stock were issued to the sole
shareholder of the General Partner in consideration of the contribution of
$1,000,000 made to TENERA, Inc. by the General Partner in connection with the
Merger.
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 and management services 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, including the Company's former Chairman of the Board and Chief
Executive Officer, Michael D. Thomas. 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 the 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.
19
<PAGE>
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
($2,236,000 and $2,723,000 at December 31, 1997 and 1996, respectively), net
of accumulated depreciation ($2,080,000 and $2,400,000 at December 31, 1997
and 1996, respectively). Depreciation is calculated using the straight line
method over the estimated useful lives, which range from three to five years.
Revenue. Revenue from time-and-material and cost plus fixed-fee contracts
is recognized when costs are incurred; from fixed-price contracts, on the
basis of percentage of work completed (measured by costs incurred relative to
total estimated project costs); from software license fees at time of customer
acceptance; and from software maintenance agreements, equally over the period
of the maintenance support agreement (usually 12 months). The Company
primarily offers its services and software products (until the Asset Sale) to
the electric power industry, the DOE, and the municipal transit industry in
North America.
The Company performs credit evaluations of these customers and normally
does not require collateral. Reserves are maintained for potential sales
adjustments and credit losses; such losses to date have been within
management's expectations. Actual revenue and cost of contacts in progress may
differ from management estimates and such differences could be material to the
financial statements.
During 1997, three clients accounted for 43%, 14%, and 10% of the Company's
total revenue. During 1996, two clients accounted for 56% and 11% of the total
revenue, and in 1995, a single client accounted for 31% of total revenue.
Income Taxes. As a result of the Conversion, the Company is no longer
subject to partnership tax treatment whereby the Company pays no entity-level
tax on Company income. The Company became a C Corporation subject to federal
and state statutory income tax rates for income earned after the close of
business on June 30, 1995. Due to net losses in 1997 and 1996, an income tax
benefit has been recorded for each of the years ended December 31, 1997 and
1996. During 1995, a provision for income taxes was made for the six months
ended December 31, 1995; however, no provision for income taxes was made by
the Company for the six months ended June 30, 1995.
Accounting for Stock-Based Compensation. Statement of Financial Standards
No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") 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. In accordance
with financial reporting guidelines, pro forma earnings per share information
for 1995 was based on the assumption that the Company was taxed for federal
and state income tax purposes as a C Corporation at a 40% effective tax rate.
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per share computations required by FAS 128 are presented in
Note 5.
NOTE 3. RELATED PARTY TRANSACTIONS
Teknekron. The principal shareholder of Teknekron Corporation ("Teknekron")
beneficially owned approximately 37%, 37%, and 36% of the Company's
outstanding shares of Common Stock/Predecessor Partnership Units at December
31, 1997, 1996, and 1995, respectively. Teknekron provided management and
related services to the Predecessor Partnership under an advisory services
agreement, which expired on June 30, 1995. Charges to earnings for the
services amounted to none in 1997 and 1996, and $125,000 in 1995.
20
<PAGE>
Individual Plant Evaluation Partnership ("IPEP"). The Company was an equal
participant in a partnership, IPEP, with Westinghouse Electric Corporation and
Fauske & Associates, Inc., which provided executive consulting services to
commercial utility companies. IPEP ceased activities in 1995 and dissolved in
April 1996. Revenue recognized for services provided through IPEP amounted to
none in 1997 and 1996, and $390,000 in 1995, representing less than 1% of
total revenue in 1995.
The participants paid a royalty to IPEP, equal to 2% to 4% of billed fees
on certain projects, for administrative services. Royalties paid to IPEP
amounted to none in 1997 and 1996, and $1,000 in 1995.
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 1997. In 1996, the Company recorded income
of $17,000 related to the final liquidation of IPEP. For 1995, the Company
recognized $30,000 as its share of IPEP's 1995 estimated losses.
Notes Receivable. The Company had no outstanding notes receivables from
executive officers at December 31, 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. The Company did not recognize any income
or expense from the Trust in 1997, 1996, and 1995. At December 31, 1997, the
Trust's net assets were approximately $50,000 and are expected to be
completely exhausted to satisfy the PLM litigation judgment (see Note 8).
Toltec Development Corporation ("Toltec"). The Company entered into a lease
for approximately 10,000 square feet of office space during 1993 for its
Berkeley facilities with Toltec, an affiliate of Teknekron. The lease expired
in 1995. Expenses related to lease payments to Toltec totaling $141,000 were
recorded in 1995.
NOTE 4. EMPLOYEE BENEFIT PLANS
Incentive Bonus Plans. The Company has incentive plans based on financial
performance. Bonus awards of cash and shares are discretionary and are
determined annually by the Board of Directors. In 1997, there was $135,000
charged to operations for incentive bonuses (none in 1996 and $150,000 in
1995). Additionally, $90,000 of the 1995 bonus accrual was not paid and was
reversed in 1996.
Profit Sharing Plan ("PSP"). Effective January 1, 1997, the Company
initiated a quarterly profit sharing plan whereby the funding for the plan is
based on profitability as measured by pretax earnings of the subsidiaries. PSP
charges of $384,000 were recorded in 1997 related to the profitability of the
Rocky Flats and Energy subsidiaries.
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. In 1995, the Company matched
these amounts with a 50% contribution on a matching contribution base, not
exceeding 6% of salary. Effective January 1, 1996, the Company's matching
contribution increased to 100% of a matching contribution base, not exceeding
6% of the employee's salary. As of January 1, 1997, the Company amended the
plan to discontinue the matching contribution. 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. During 1997, 1996, and 1995, no
discretionary amounts were contributed to the plan by the Company.
Money Purchase Plan ("MPP"). On December 31, 1995, the MPP was merged with
and into the 401(k) Savings Plan, eliminating the MPP contribution.
Previously, the MPP was administered through a trust that covered
substantially all employees. In 1995, the Company's contribution amount was 3%
of eligible employees annual salaries.
21
<PAGE>
In 1997, there were no charges to earnings for the 401(k) Savings Plan.
During 1996, charges to earnings for the 401(k) Savings Plan amounted to
$397,000 ($720,000 in 1995 for the 401(k) and MPP Plans combined).
Stock Option Plans. The Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
In connection with the Merger, the Company amended its Stock Option Plan to
reflect the fact that options will relate to shares of common stock, instead
of limited partnership units of the Predecessor Partnership. All outstanding
options for units were automatically converted to options to purchase an equal
number of shares of common stock at the original exercise price and on the
same terms and conditions as the original unit options. Under the provisions
of the Company's Stock Option Plan, 1,500,000 shares are reserved for issuance
upon the exercise of options granted to key employees and consultants. During
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. In 1995, options were granted for 130,000 shares
at an exercise price of $1.1875, the then fair market value, expiring on July
1, 2001. During 1997, options for 122,500 shares were canceled due to employee
terminations (278,500 and 28,000 in 1996 and 1995, respectively). No options
were exercised in 1997, 1996, and 1995. As of December 31, 1997, options for
1,378,500 shares were outstanding and options for 695,250 shares were
exercisable. Of the options outstanding on December 31, 1997, 440,000 were
forfeited in early 1998 due to employee terminations in 1997.
Under the provisions of the 1993 Outside Directors Compensation and Stock
Option Plan, which was approved by the Board of Directors, effective March 1,
1994, 150,000 shares are reserved for issuance upon the exercise of options
granted to non-employee directors. During 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. In 1995, options were granted for 60,000 shares at an exercise price of
$0.6875, the then fair market value, expiring on March 1, 2005. During 1997,
options for 12,500 shares were canceled due to a director resignation (none in
1996 and 1995). No options were exercised in 1997, 1996, and 1995. As of
December 31, 1997, 149,500 options were outstanding and 117,500 options were
exercisable.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by FAS 123 for fiscal years beginning after December 31,
1994, and has been determined as if the Company had accounted for its stock
options under the fair value method of FAS 123. The fair value for these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1995, 1996,
and 1997: risk-free interest rates of 7.0% and 6.0%, respectively, for the
March and July 1995 grants, and 5.2% and 5.7%, respectively, for the February
and March 1996 grants; and 6.0% and 5.85%, respectively, for the March and May
1997 grants; dividend yield of 0% for all years; volatility factors of the
expected market price of the Company's common stock of 0.54, 0.53, and 0.51,
respectively; and a weighted-average expected life of the option of five years
for all grants.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, options valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
22
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting periods of the options. Pro
forma information regarding the Company's net income (loss) and earnings
(loss) per share follows:
<TABLE>
<CAPTION>
(In thousands, except for per share amounts)
_______________________________________________________________________________________________________________
Year Ended December 31,
--------------------------------------------
1997 1996 1995
_______________________________________________________________________________________________________________
<S> <C> <C> <C>
Net (Loss) Earnings -- As Reported ........................... $ (1,890) $ (1,080) $ 898
Pro Forma Net (Loss) Earnings -- FAS 123 ..................... (1,940) (1,133) 881
Net (Loss) Earnings per Share -- As Reported Basic ........... $ (0.19) $ (0.11) $ 0.07
========== ========== ==========
Net (Loss) Earnings per Share -- As Reported Diluted ......... $ (0.19) $ (0.11) $ 0.07
========== ========== ==========
Pro Forma Net (Loss) Earnings per Share -- FAS 123 Basic ..... $ (0.19) $ (0.11) $ 0.07
========== ========== ==========
Pro Forma Net (Loss) Earnings per Share -- FAS 123 Diluted ... $ (0.19) $ (0.11) $ 0.07
========== ========== ==========
_______________________________________________________________________________________________________________
</TABLE>
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
(In thousands, except for dollar amounts)
________________________________________________________________________________________________________
Year Ended December 31,
--------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
Beginning of Year ........ 1,211 $ 1.09 1,048 $ 1.20 886 $ 1.24
Granted .................. 452 0.69 441 1.00 190 1.03
Exercised ................ -- -- -- -- -- --
Forfeited ................ (135) 1.18 (278) 1.36 (28) 1.19
---------- ---------- ---------- ---------- ---------- ----------
Outstanding -
End of Year .............. 1,528 $ 0.98 1,211 $ 1.09 1,048 $ 1.20
========== ========== ========== ========== ========== ==========
Exercisable at
End of Year .............. 813 $ 1.09 625 $ 1.16 638 $ 1.34
Weighted-Average
Fair Value of Options
Granted During the Year .. $ 0.36 $ 0.52 $ 0.54
________________________________________________________________________________________________________
</TABLE>
Exercise prices for options outstanding as of December 31, 1997, ranged
from $0.65 to $1.75. The weighted-average remaining contractual life of those
options is 5.4 years.
23
<TABLE>
<CAPTION>
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,
--------------------------------------------
1997 1996 1995
______________________________________________________________________________________________________________
<S> <C> <C> <C>
Numerator:
Net (loss) earnings ....................................... $ (1,890) $ (1,080) $ 898
Denominator:
Denominator for basic earinings per share --
weighted-average shares ................................... 10,123 10,248 9,920
Effect of dilutive securities:
Employee stock options .................................. -- -- 94
Denominator for diluted earnings per share -- adjusted
weighted-average shares and assumed conversions ........... 10,123 10,248 10,014
========== ========== ==========
Basic (loss) earnings per share (Pro forma for 1995) ........ $ (0.19) $ (0.11) $ 0.07
========== ========== ==========
Diluted (loss) earnings per share (Pro forma for 1995) ...... $ (0.19) $ (0.11) $ 0.07
========== ========== ==========
______________________________________________________________________________________________________________
</TABLE>
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.
24
<PAGE>
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, 1997
and 1996, are as follows, using the liability method:
<TABLE>
<CAPTION>
__________________________________________________________________________________________
December 31,
---------------------------
1997 1996
__________________________________________________________________________________________
<S> <C> <C>
Current Deferred Tax Assets
Contract reserves not currently deductible ............. $ 490 $ 551
Accrued expenses not currently deductible .............. 618 231
Net operating loss carryforward ........................ 382 367
Other .................................................. -- 165
---------- ----------
Total Current Gross Deferred Tax Assets .............. 1,490 1,314
Less: Valuation Allowance ............................. (1,200) (401)
Current Deferred Tax Liabilities
Revenue differences related to timing .................. 290 913
---------- ----------
Net Current Deferred Tax Liabilities ................. $ -- $ --
========== ==========
__________________________________________________________________________________________
</TABLE>
The current and deferred tax provisions for the years ended December 31,
1997 and 1996, are as follows:
<TABLE>
<CAPTION>
____________________________________________________________________________
Year Ended December 31,
---------------------------
1997 1996
____________________________________________________________________________
<S> <C> <C>
Current:
Federal .................................. $ (137) $ (47)
State .................................... (2) --
---------- ----------
(139) (47)
---------- ----------
Deferred:
Federal .................................. -- (77)
State .................................... -- (13)
---------- ----------
-- (90)
---------- ----------
Tax Benefit .............................. $ (139) $ (137)
========== ==========
____________________________________________________________________________
</TABLE>
25
<PAGE>
The valuation allowance increased by $799,000, during the year ended
December 31, 1997, for those deferred tax assets which may not be realized.
The provision (benefit) for income taxes differed from the amount computed
by applying the statutory federal income tax rate for the years ended December
31, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
_____________________________________________________________________________
Year Ended December 31,
---------------------------
1997 1996
_____________________________________________________________________________
<S> <C> <C>
Federal Statutory Rate ...................... (34)% (35)%
State Taxes, Net of Federal Benefit ......... (3)% (1)%
Permanent Differences ....................... (2)% (8)%
Valuation Allowance ......................... 39 % 33 %
Net Operating Loss Carryback ................ (7)% -- %
---------- ----------
Income Tax (Benefit) Provision .............. (7)% (11)%
========== ==========
_____________________________________________________________________________
</TABLE>
The Company received net income tax refunds of $138,000 in 1997 and paid
income taxes of $410,000 in 1996.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $1,002,000 for federal and $706,000 for state income tax
purposes. The federal net operating loss carryforwards expire in the years
ended 2011 and 2012. The state net operating loss expires in the years ended
2001 and 2002. Utilization of the Company's net operating losses may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code. The annual limitation may
result in the expiration of net operating losses before utilization.
NOTE 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 $524,000 for the year ended December 31, 1997 ($702,000 in
1996 and $734,000 in 1995).
Minimum rental commitments under operating leases, principally for real
property, are as follows (in thousands):
<TABLE>
<CAPTION>
(Year Ending December 31)
___________________________________________________________________________
<S> <C>
1998 ....................................................... $ 576
1999 ....................................................... 487
2000 ....................................................... 366
2001 ....................................................... --
2002 and Thereafter ........................................ --
------------
Total Minimum Payments Required ............................ $ 1,429
============
___________________________________________________________________________
</TABLE>
Revolving Loan Agreement. A loan agreement with a bank provides for a
revolving line of credit of $3,000,000, through May 1998. At December 31,
1996, $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
26
<PAGE>
comply with certain covenants related to equity, quick ratio, debt/equity
ratio, and profits. At December 31, 1997, the Company obtained a waiver from
the lender with respect to certain financial covenants in the loan agreement
concerning tangible net worth and profitability. Certain financial covenants
of the loan agreement were subsequently modified in February 1998. The
interest rate under the agreement is the bank's prime rate (8.50% at December
31, 1997). During 1997 and 1996, the Company paid no interest expense ($39,000
in 1995).
Contingent Liabilities. In December 1986, the Predecessor Partnership
received a substantial portion of its Predecessor Corporation's net assets and
operations in connection with a restructuring plan approved by the
shareholders. The balance of the Predecessor Corporation's assets and
liabilities were transferred to the Trust for the benefit of the shareholders,
to facilitate the orderly sale or other disposition of the remaining assets,
and satisfaction of all remaining debts and liabilities. The Company has
assumed such contingent liabilities of the Trust to the extent they exceed the
assets of the Trust. At December 31, 1997, the Trust's net assets were
approximately $50,000 and are expected to be completely exhausted to satisfy
the PLM litigation judgment (see Note 8). The Company's contingent liability
exposure related to this matter is estimated to be $950,000.
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 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 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. Damages were not specified in the
Court's decision and it is unclear from the ruling whether the judgment is
against all defendants and, if it is, whether TENERA's share will be less than
the total amount of the judgment. Based on the Court's decision, however, the
judgment ultimately entered by the Court could aggregate in excess of $1
million. TENERA anticipates that post-trial proceedings will clarify the
extent of its liability. If TENERA is ultimately held responsible for all or a
significant portion of the judgment entered by the Court, such an outcome
would have a material adverse impact on the cash flows of the Company.
Moreover, the judgment ultimately entered and the expense of an appeal of the
Court's judgment, if such an appeal is undertaken, could have a material
adverse impact on the financial position, results of operations, and cash
flows of the Company. Further, there can be no assurance that such an appeal,
if undertaken, would be successful.
As of December 31, 1997, the Company's litigation judgment accrual related
to this matter amounted to $950,000.
NOTE 9. SPECIAL ITEMS
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, including the Company's former Chairman of the Board
and Chief Executive Officer, Michael D. Thomas. 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, reflects the gain on sale
from the Asset Sale, exclusive of the effect of the note and warrant. Full
repayment of the note is contingent upon a minimum amount of equity funding of
the buyer, which had not occurred at year end. Therefore, the Company has
provided an allowance against the uncollectability of the note. The note was
repaid
27
<PAGE>
in full in February 1998, and the additional gain will be reported in the
first quarter of 1998. The warrant is deemed to have no value as of December
31, 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.
28
<PAGE>
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).
<TABLE>
<CAPTION>
(In thousands, except per share or unit amounts)
___________________________________________________________________________________________________________________________
Quarter Ended Quarter Ended
-------------------------------------- --------------------------------------
12/31/97 9/30/97 6/30/97 3/31/97 12/31/96 9/30/96 6/30/96 3/31/96
___________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue ............................... $ 5,789 $ 5,240 $ 4,692 $ 5,400 $ 5,125 $ 5,586 $ 6,036 $ 7,256
Direct Costs .......................... 3,646 3,228 2,946 3,218 3,297 3,651 3,678 4,901
General and Administrative Expenses ... 1,551 2,209 2,391 1,980 2,076 2,595 2,502 2,108
Software Development Costs ............ 216 662 416 237 165 139 161 97
Special Items Income (Expenses), Net .. 355 -- -- -- (300) -- 250 --
Litigation Judgment Cost .............. 950 -- -- -- -- -- -- --
Other Income .......................... -- 14 20 1 14 -- 17 4
-------- -------- -------- -------- -------- -------- -------- --------
Operating (Loss) Income ............... (219) (845) (1,041) (34) (699) (799) (38) 154
Interest Income ....................... 14 23 34 39 47 43 43 32
-------- -------- -------- -------- -------- -------- -------- --------
Net (Loss) Earnings Before Income
Tax Benefit/Expense ................... (205) (822) (1,007) 5 (652) (756) 5 186
Income Tax (Benefit) Expense .......... -- -- (141) 2 (137) (76) 2 74
-------- -------- -------- -------- -------- -------- -------- --------
Net (Loss) Earnings ................... $ (205) $ (822) $ (866) $ 3 $ (515) $ (680) $ 3 $ 112
======== ======== ======== ======== ======== ======== ======== ========
Net (Loss) Earnings Per Share --
Basic ................................. $ (0.02) $ (0.08) $ (0.09) $ 0.00 $ (0.05) $ (0.07) $ 0.00 $ 0.01
======== ======== ======== ======== ======== ======== ======== ========
Net (Loss) Earnings Per Share --
Diluted ............................... $ (0.02) $ (0.08) $ (0.09) $ 0.00 $ (0.05) $ (0.07) $ 0.00 $ 0.01
======== ======== ======== ======== ======== ======== ======== ========
___________________________________________________________________________________________________________________________
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
TENERA, Inc.
We have audited the accompanying consolidated balance sheets of TENERA,
Inc. at December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (partners' capital), and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole presents fairly, in all material respects, the information set
forth therein.
ERNST & YOUNG LLP
San Francisco, California
January 26, 1998
Except for Note 8, as to
which the date is February 10, 1998
30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
31
<PAGE>
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 and executive officers of the Company are as follows:
William A. Hasler, 56, has served as a Director of the Company since
his election in March 1992. Mr. Hasler is dean of the Walter A. Haas
School of Business at the University of California, Berkeley. Prior to his
appointment as dean in 1991, Mr. Hasler was Vice Chairman of Management
Consulting for KPMG Peat Marwick from 1986 to 1991. Mr. Hasler is also a
director of The Gap, Inc., Asia Pacific Wire and Cable Corporation, Ltd.,
Aphton Corporation, Walker Systems, and TCSI Corporation.
Jeffrey R. Hazarian, 42, 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., 54, was elected as a Director of the Company in
February 1997. He previously served as a Director of the Predecessor
Partnership from August 1987 to September 1993. Mr. Loo has been a
partner, since 1986, of Bryan Cave LLP, general counsel to the Company.
Mr. Loo has also served as a director of Teknekron Corporation since
March 1989.
Robert C. McKay, 46, 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.
George L. Turin, Sc.D., 68, 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.
32
<PAGE>
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,
1997, 1996, and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
---------------------- ---------- ----------
Securities All Other
Underlying LTIP Compensa-
Name and Principal Position Year Salary Bonus Options(1) Payouts(2) tion(3)
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Robert C. McKay, Jr. ........ 1997 $ 179,375 2,179 90,000 $ -- $ --
Chief Executive Officer 1996 145,390 -- 28,000 -- 8,777
1995 169,030 -- 20,000 -- 9,000
Michael D. Thomas(4) ........ 1997 204,417 -- -- -- --
Chief Executive Officer 1996 220,915 -- 55,000 -- 9,000
1995 214,000 -- 25,000 -- 8,602
Joe C. Turnage(4) ........... 1997 171,650 5,007 25,000 -- --
Senior Vice President 1996 169,295 -- 45,000 -- 105,351(5)
1995 170,000 -- 20,000 55,750 8,703
Jeffrey R. Hazarian ......... 1997 145,875 25,000 -- -- --
Executive Vice President and 1996 142,500 -- 27,000 -- 8,586
Chief Financial Officer 1995 142,192 -- 13,000 -- 8,058
Kenneth S. Voss(4) .......... 1997 123,750 60,000(6) 50,000 -- --
Vice President 1996 70,096 -- -- -- 3,375
1995 -- -- -- -- --
____________________________________________________________________________________________________________
(1) Reflects the number of options granted under the 1992 Stock Option Plan. The options expire at the
earlier of the end of the option period or three months after employment termination.
(2) These amounts reflect forgiveness of certain indebtedness pursuant to notes executed by the
individual in payment for partnership units acquired pursuant to the Entrepreneurial Equity Incentive
Plan ("EEIP"). The EEIP was discontinued in March 1992.
(3) Except as indicated in Note 5, these amounts represent the amounts accrued for the Company's Profit
Sharing/401(k) Plan for 1996 and 1995, respectively, and allocated to the named executive officers.
(4) Mssrs. Thomas, Voss, and Turnage resigned from the Company in November 1997.
(5) This amount includes forgiveness of interest from the repricing of indebtedness to the Company
incurred in connection with the purchase of company stock ($96,351) (see Notes 3 and 9 to Financial
Statements).
(6) Amount reflects sales commissions paid in 1997.
</TABLE>
33
<PAGE>
The following table sets forth certain information concerning options
granted during 1997 to the named executives:
OPTIONS GRANTS IN 1997
<TABLE>
<CAPTION>
_______________________________________________________________________________________________
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term
--------------------------------------------- --------------------
% of Total
Number of Options
Securities Granted to Exercise
Underlying Employees or Base
Options in Fiscal Price Expiration
Name Granted Year ($/Share) Date 5% 10%
_______________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Robert C. McKay, Jr. .. 40,000 9.52 $ 0.70 3/12/2003 $ 9,523 $ 21,604
50,000 11.90 0.65 5/1/2003 11,053 25,076
Michael D. Thomas ..... -- -- -- -- -- --
Joe C. Turnage ........ 25,000 5.95 0.70 2/14/1998(1) 802 1,604
Jeffrey R. Hazarian ... -- -- -- -- -- --
Kenneth S. Voss ....... 50,000 11.90 0.70 2/14/1998(1) 1,604 3,208
_______________________________________________________________________________________________
(1) Options generally vest over a four-year period and expire at the earlier of the end of
the option period or three months after employment termination.
</TABLE>
OTHER COMPENSATION ARRANGEMENTS
The 1992 Stock Option Plan provides that options may become exercisable
over such periods as provided in the agreement evidencing the option award.
Options granted to date, including options granted to executive officers and
set forth in the above tables, generally call for vesting over a four-year
period. The 1992 Stock Option Plan provides that a change in control of the
Company will result in immediate vesting of all options granted and not
previously vested.
Joe C. Turnage, Senior Vice President, executed an employment agreement
upon joining the Company in 1988. The employment agreement provided for
purchases of limited partnership units of the Predecessor Partnership by Mr.
Turnage at the fair market value upon the date of issuance, dependent upon
meeting various objectives set forth in the agreement. Pursuant to the
Agreement and the EEIP, Mr. Turnage purchased an aggregate of 289,371 limited
partnership units, the purchase price of which was payable by notes, which
notes were to be forgiven over specified periods, provided Mr. Turnage
remained in the employ of the Company. In late 1991, the terms of the EEIP
awards made to Mr. Turnage and others with similar arrangements, were modified
and the period over which the remaining balance of the notes was extended and
the conditions for future forgiveness modified. In 1996, these notes were
repriced to the then current fair market value of the stock held as security,
resulting in a special item charge (see Notes 3 and 9 to the Financial
Statements). The amount of indebtedness forgiven is included in the Summary
Compensation Table under the captions "LTIP Payouts." Mr. Turnage resigned
from the Company in November 1997.
DIRECTORS COMPENSATION
Except as described below, the directors of the Company are paid no
compensation by the Company for their services as directors. Thomas S. Loo,
William A. Hasler, 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 Stock Option Plan was
approved by the Board effective March 1, 1994, which provides for the annual
issuance of options for non-employee directors. During 1997, 8,000 stock
options were issued to each of Messrs. Loo, Hasler, Turin, and Williams
(resigned in December 1997). During 1996 and 1995, 12,500 and 15,000 stock
34
<PAGE>
options, respectively, 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 1997, the Compensation Committee was composed of Thomas S. Loo,
William A. Hasler, and Barry L. Williams. Thomas S. Loo, a director of the
Company since February 7, 1997, is a partner in the law firm of Bryan Cave
LLP, general counsel to the Company and Teknekron Corporation, and is a
director of Teknekron Corporation. Mr. Wagner, the Company's largest
stockholder, is the sole stockholder and a director of Teknekron Corporation.
EFFECT OF MERGER ON OPTION PLANS
In connection with the Conversion, the Company amended the Predecessor
Partnership's 1992 Unit Option Plan and 1993 Outside Director Compensation and
Unit Option Plan to reflect the fact that options now relate to shares of
Common Stock instead of Units. Except for the changes from Units to Common
Stock and minor conforming changes, the amended 1992 Stock Option Plan and the
1993 Outside Director Compensation and Stock Option Plan are identical to the
previous plans and all outstanding options for Units were automatically
converted to options for Common Stock at the original exercise price and on
the same terms and conditions as the original Unit options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of March 16, 1998,
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:
<TABLE>
<CAPTION>
_____________________________________________________________________________
Approximate
Shares Percent
Beneficially Beneficially
Name and Address Owned Owned
_____________________________________________________________________________
<S> <C> <C>
Harvey E. Wagner ............................... 3,708,658 36.6%(1)
P.O. Box 7463
Incline Village, NV 89450
Dr. Michael John Keaton Trust .................. 1,106,887 10.9%(2)
P.O. Box 400
Orinda, CA 94563-0400
_____________________________________________________________________________
(1) Such shares are held of record by Incline Village Investment Group
Limited Partnership, a Georgia limited partnership, and were
contributed to the Incline Village Investment Group Limited
Partnership by Mr. Wagner in exchange for a 99% limited partnership
interest. An additional 37,462 shares, as to which Mr. Wagner
disclaims beneficial ownership, were contributed to the Incline
Village Investment Group Limited Partnership by Mr. Wagner's spouse,
Leslie Wagner, in exchange for a 1% general partner interest. The
Incline Village Investment Group Limited Partnership has sole voting
and investment power with respect to all such shares.
(2) Mr. Keaton has sole voting and investment power with respect to all
shares shown as beneficially owned by him, subject to community
property laws where applicable.
</TABLE>
35
<PAGE>
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of March 16, 1998, 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.
<TABLE>
<CAPTION>
_____________________________________________________________________________
Shares
Beneficially Percentage
Name Owned(1) Ownership(2)
_____________________________________________________________________________
<S> <C> <C>
William A. Hasler .............................. 65,500(3) *
Jeffrey R. Hazarian ............................ 85,936(4) *
Thomas S. Loo .................................. 8,000(3) *
Robert C. McKay, Jr. ........................... 138,289(4) 1.4%
Michael D. Thomas(5) ........................... 121,400 1.2%
George L. Turin ................................ 81,004(3) *
Joe C. Turnage(5) .............................. 78,237(4) *
Kenneth S. Voss(5) ............................. 0 *
------------ ------------
All Directors and Executive Officers as a
Group (8 persons) .............................. 578,366(3)(4) 5.7%
_____________________________________________________________________________
(1) The persons named above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable.
(2) Asterisks represent less than 1% ownership.
(3) Includes options under the Company's 1993 Outside Directors
Compensation and Stock Option Plan which are exercisable on March 16,
1998, or within 60 days thereafter.
(4) Includes options under the Company's 1992 Stock Option Plan which are
exercisable on March 16, 1998, or within 60 days thereafter.
(5) Mssrs. Thomas, Voss, and Turnage resigned from the Company in
November 1997.
</TABLE>
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."
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a)(1) FINANCIAL STATEMENTS
The following financial statements of the Company are filed with this
report and can be found in Part II, Item 8, on the pages indicated below:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Statements of Operations - Year Ended December 31,
1997, 1996, and 1995 ............................................ 15
Consolidated Balance Sheets - December 31, 1997 and 1996 ........ 16
Consolidated Statements of Shareholders' Equity (Partners'
Capital) - Year Ended December 31, 1997, 1996, and 1995 ......... 17
Consolidated Statements of Cash Flows - Year Ended December 31,
1997, 1996, and 1995 ............................................ 18
Notes to Consolidated Financial Statements ...................... 19
Report of Independent Auditors .................................. 30
(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 .. 39
All other schedules are omitted because they are either not
required or not applicable.
</TABLE>
(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 8-K 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 March 27, 1997, to Registrant's lease on
its headquarters located in San Francisco, California.
10.2 $300,000 Promissory Note dated November 14, 1997 (filed as
Exhibit 10.1 to the Form 8-K and incorporated by reference
herein).
- ------------------------------
(1) Filed herewith.
37
<PAGE>
10.3 Warrant to Purchase Common Stock of Spear Technologies, Inc. dated
November 14, 1997 (filed as Exhibit 10.2 to the Form 8-K and
incorporated by reference herein).
10.4 Trademark License Agreement dated November 14, 1997 between TENERA,
Inc. and Spear Technologies, Inc. (filed as Exhibit 10.3 to the
Form 8-K and incorporated by reference herein).
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 Independent Auditors.
27.1(1) Financial Data Schedule.
(b) REPORTS ON FORM 8-K
A Form 8-K, dated November 14, 1997, was filed with the SEC on November 25,
1997, reporting on the Asset Acquisition Agreement entered into on November
14, 1997, whereby the Company sold all of the assets and transferred the
liabilities of its Technologies business to Spear Technologies, Inc.
(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, 1997.
- ------------------------------
(1) Filed herewith.
38
<PAGE>
SCHEDULE VIII
TENERA, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
(In thousands)
______________________________________________________________________________________________________
Additions Deductions
----------- ------------------------
Balance Charged to Credited to Balance
Beginning Costs and Special at End
Description of Year Expenses Item Other of Year
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
1995
Reserve for Sales Adjustment
and Credit Losses ............ $ 2,897 $ 131 $ -- $ 140 $ 2,888
1996
Reserve for Sales Adjustment
and Credit Losses ............ 2,888 289 250 1,301 1,626
1997
Reserve for Sales Adjustment
and Credit Losses ............ 1,626 36 122 182 1,358
______________________________________________________________________________________________________
</TABLE>
39
<PAGE>
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 30, 1998
TENERA, INC.
By: /s/ JEFFREY R. HAZARIAN
--------------------------------------
Jeffrey R. Hazarian
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
/s/ WILLIAM A. HASLER Director March 30, 1998
- ---------------------------
(William A. Hasler)
Director,
Chief Financial Officer,
Executive Vice President,
Finance, and Corporate
Secretary
/s/ JEFFREY R. HAZARIAN (Principal Financial Officer) March 30, 1998
- ---------------------------
(Jeffrey R. Hazarian)
/s/ THOMAS S. LOO Director March 30, 1998
- ---------------------------
(Thomas S. Loo)
Director, Chief Executive
Officer, and President
/s/ ROBERT C. MCKAY (Principal Executive Officer) March 30, 1998
- ---------------------------
(Robert C. McKay)
Controller & Treasurer
/s/ JAMES A. ROBISON, JR. (Principal Accounting Officer) March 30, 1998
- ---------------------------
(James A. Robison, Jr.)
/s/ GEORGE L. TURIN Director March 30, 1998
- ---------------------------
(George L. Turin)
40
<PAGE>
EXHIBIT INDEX
Ex. 10.1 Second Amendment, dated March 27, 1997, to Registrant's lease on
its headquarters located in San Francisco, California
Ex. 21.1 List of Subsidiaries of the Registrant
Ex. 23.1 Consent of Independent Auditors
Ex. 27.1 Financial Data Schedule
<PAGE>
Exhibit 10.1
Tenant Extension Amendment
SECOND AMENDMENT
This Second Amendment (the "Amendment") is made and entered into as of
the 24 day of March, 1997, by and between ZML-ONE MARKET LIMITED PARTNERSHIP,
a Delaware limited partnership ("Landlord") by its agent, Equity Office
Holdings, LLC, a Delaware limited liability company, and TENERA, INC., a
Delaware corporation ("Tenant").
WITNESSETH
A. WHEREAS, Landlord and Tenant are parties to that certain lease dated
August 2, 1995, currently containing approximately 13,496 rentable square feet
of space described as Suite No. 1850 on the eighteenth floor of the building
commonly known as Spear Tower and the address of which is One Market, San
Francisco, CA (the "Building"), which Lease has been previously amended by the
First Amendment dated March 28, 1996 (collectively, the "Lease"); and
B. WHEREAS, the Lease by its terms shall expire on October 31, 1997 ("Prior
Termination Date"), and the parties desire to extend the Lease, all on the
terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant agree as
follows:
I. Extension. The Lease Term is hereby extended from two years and
two months to five years and two months and the Termination Date is
accordingly amended from the Prior Termination Date to October 31, 2000
("Extended Termination Date"), unless sooner terminated in accordance with the
terms of the Lease. That portion of the Lease Term commencing the day
immediately following the Prior Termination Date ("Extension Date") and ending
on the Extended Termination Date shall be referred to herein as the "Extended
Term". In any and all events, the schedule of monthly installments of Base
Rental contained in Paragraph 11 of this Amendment shall not be postponed or
delayed if any improvements to the Premises are incomplete on the day
following the Prior Termination Date for any reason whatsoever. Any delay in
the completion of improvements to the Premises, if any, or inconvenience
suffered by Tenant during the performance of any improvements shall not
subject Landlord to any liability for any loss or damage resulting therefrom
or entitle Tenant to any credit, abatement or adjustment of Rent.
II. Monthly Base Rental. As of the date hereof, the schedule of
monthly installments of Base Rental contained in Exhibit B-1 to the Lease and
in Article 11 of the First Amendment is amended by adding the following as
applicable to the Extended Term:
Tenant shall pay Landlord the sum of One Million One Hundred Seventy Four
Thousand One Hundred Fifty One and 88/100 Dollars ($1,174,151.88) as Base
Rental for the Extended Term in thirty six (36) monthly installments as
follows:
A. Thirty six (36) equal installments of $32,615.33 each payable
on or before the first day of each month during the period beginning November
1, 1997 and ending October 31, 2000.
All such Base Rental shall be payable by Tenant in accordance with
the terms of Article V of the Lease.
III. Base Year. For the period commencing with the Extension Date and
ending on the Extended Termination Date, the Base Year for the computation of
Tenant's Pro Rata Share of Taxes and Expenses is amended from 1995 to 1997.
IV. Improvements to Premises.
A. Tenant is in possession of the Premises and accepts the same
"as is" without any agreements, representations, understandings or obligations
on the part of Landlord to perform any alterations, repairs or improvements,
except as may be expressly provided otherwise in this Amendment.
W:\WPDOCS\GENERAL\LEASE.21\1MARKET\TENERA1.DOC
February 11, 1997
1
<PAGE>
B. Cost of Improvements to Premises.
(i) Provided Tenant is not in default, Tenant shall be
entitled to receive an improvement allowance (the "Extension Improvement
Allowance") in an amount not to exceed Thirteen Thousand Four Hundred Ninety
Six and no/100 Dollars ($13,496.00) to be applied toward the cost of
performing construction, alteration or improvement of the Premises, including
but not limited to the cost of space planning, design and related
architectural and engineering services. In the event the total cost of the
improvements to the Premises exceeds the Extension Improvement Allowance,
Tenant shall pay for such excess upon demand. The entire unused balance of
the Extension Improvement Allowance, if any, shall be applied as a credit
towards Base Rental for the Extended Term beginning with the Base Rental due
for January 1998 and continuing thereafter until the entire unused balance has
been applied. Landlord shall pay such Extension Improvement Allowance
directly to the contractors retained to perform the construction, design or
related improvement work to the Premises.
C. Responsibility for Improvements to Premises.
Work Performed By or On Behalf of Landlord Pursuant to Plans
Yet to Be Prepared. Landlord shall enter into a direct contract for the
improvements to the Premises with a general contractor selected by Landlord.
Tenant shall devote such time in consultation with Landlord or Landlord's
architect as may be required to provide all information Landlord deems
necessary in order to enable Landlord to complete, and obtain Tenant's written
approval of, the plans for the improvements to the Premises in a timely
manner. All plans for the improvements to the Premises shall be subject to
Landlord's consent, which consent shall not be unreasonably withheld. If the
cost of such improvements exceeds the Extension Improvement Allowance, then
prior to commencing any construction of improvements to the Premises, Landlord
shall submit to Tenant a written estimate setting forth the anticipated cost,
including but not limited to the cost of space planning, design and related
architectural and engineering services, labor and materials, contractor's
fees, and permit fees. Within a reasonable time thereafter, Tenant shall
either notify Landlord in writing of its approval of the cost estimate or
specify its objections thereto and any desired changes to the proposed
improvements. In the event Tenant notifies Landlord of such objections and
desired changes, Tenant shall work with Landlord to reach a mutually
acceptable alternative cost estimate.
V. Other Pertinent Provisions. The Lease shall also be amended in that
Tenant acknowledges that all Landlord's obligations have been fulfilled
pursuant to Paragraph VIII.A of the First Amendment, Exhibit B of the First
Amendment, and Exhibit C of the Lease, and accordingly all those provisions
are null, void and of no further force and effect. The parties further agree
that Exhibit E of the Lease is deleted in its entirety and is of no further
force and effect.
VI. Miscellaneous.
A. This Amendment sets forth the entire agreement between the
parties with respect to the matters set forth herein. There have been no
additional oral or written representations or agreements. Under no
circumstances shall Tenant be entitled to any Rent abatement, improvement
allowance, leasehold improvements, or other work to the Premises, or any
similar economic incentives that may have been provided Tenant in connection
with entering into the Lease, unless specifically set forth in this Amendment.
B. Except as herein modified or amended, the provisions,
conditions and terms of the Lease shall remain unchanged and in full force and
effect.
C. In the case of any inconsistency between the provisions of the
Lease and this Amendment, the provisions of this Amendment shall govern and
control. Under no circumstances shall this Amendment be deemed to grant
Tenant any further right to extend the Lease; provided, however any additional
or further right to extend explicitly provided in the Lease is not hereby
deleted or waived.
D. Submission of this Amendment by Landlord is not an offer to
enter into this Amendment but rather is a solicitation for such an offer by
Tenant. Landlord shall not be bound by this Amendment until Landlord has
executed and delivered the same to Tenant.
E. The capitalized terms used in this Amendment shall have the
same definitions as set forth in the Lease to the extent that such capitalized
terms are defined therein and not redefined in this Amendment.
W:\WPDOCS\GENERAL\LEASE.21\1MARKET\TENERA1.DOC
February 11, 1997
2
<PAGE>
F. This Amendment shall be of no force and effect unless and until
accepted by any guarantors of the Lease, who by signing below shall agree that
their guarantee shall apply to the Lease as extended and otherwise amended
herein, unless such requirement is waived by Landlord in writing.
G. Tenant hereby represents to Landlord that Tenant has dealt with
no broker in connection with this Amendment. Tenant agrees to indemnify and
hold Landlord and the Landlord Related Parties harmless from all claims of any
brokers claiming to have represented Tenant in connection with this Amendment.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment
as of the day and year first above written.
WITNESSES; ATTESTATION LANDLORD: ZML-ONE MARKET LIMITED
PARTNERSHIP, a Delaware limited partnership
BY: EQUITY OFFICE HOLDINGS, LLC, as Agent
By: /s/ PETER H. ADAMS
-------------------------------------
Name: Peter H. Adams
/s/ ANDREW MCCONNELL -----------------------------------
- -----------------------------
Title: Vice President
Andrew McConnell ----------------------------------
- -----------------------------
/s/ JAMES A. ROBISON, JR. TENANT: Tenera, Inc., a Delaware corporation
- -----------------------------
By: /s/ JEFFREY R. HAZARIAN
James A. Robison, Jr. -------------------------------------
- -----------------------------
Its: Chief Financial Officer
------------------------------------
W:\WPDOCS\GENERAL\LEASE.21\1MARKET\TENERA1.DOC
February 11, 1997
3
Exhibit 21.1
TENERA Energy, LLC
TENERA Rocky Flats, LLC
TENERA Technologies, LLC
TENERA Colorado Corp.
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-58982) pertaining to the 1992 Stock Option Plan of TENERA,
Inc., as amended, of our report dated January 26, 1998, with respect to the
consolidated financial statements and schedule of TENERA, Inc., included in
the Form 10-K for the year ended December 31, 1997.
ERNST & YOUNG LLP
San Francisco, California
March 23, 1998
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