-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SaQmZ0hiNul261aj43OjOBfgXMSL1B/fmkeuTW1WveJaOBkefmsvpdFiy3nidBoM AiBjkYWCfb4j9F8j+/OT/A== 0000804731-99-000002.txt : 19990316 0000804731-99-000002.hdr.sgml : 19990316 ACCESSION NUMBER: 0000804731-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENERA INC CENTRAL INDEX KEY: 0000804731 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 943213541 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09812 FILM NUMBER: 99565086 BUSINESS ADDRESS: STREET 1: ONE MARKET, SPEAR TOWER STREET 2: SUITE 1850 CITY: SAN FRANCISCO STATE: CA ZIP: 94105-1018 BUSINESS PHONE: 4155364744 MAIL ADDRESS: STREET 1: ONE MARKET, SPEAR TOWER STREET 2: SUITE 1850 CITY: SAN FRANCISCO STATE: CA ZIP: 94105-1018 FORMER COMPANY: FORMER CONFORMED NAME: TENERA LP DATE OF NAME CHANGE: 19920703 10-K 1 ANNUAL REPORT FOR YEAR ENDED DECEMBER 31, 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 1-9812 TENERA, INC. (Exact name of registrant as specified in its charter) Delaware 94-3213541 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Market, Spear Tower, Suite 1850, San Francisco, California 94105-1018 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 536-4744 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy as information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 1, 1999, the aggregate market value of the Registrant's Common Stock held by nonaffiliates of the Registrant was $7,859,000 based on the last transaction price as reported on the American Stock Exchange. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purposes. The number of shares outstanding on March 1, 1999 was 10,129,403. (This page intentionally left blank.) PART I Item 1. Business General TENERA, Inc. ("TENERA" or the "Company"), a Delaware corporation, is the parent company of the subsidiaries described below. TENERA Rocky Flats, LLC ("Rocky Flats"), a Colorado limited liability company, was formed in 1995 to provide consulting and management services in connection with participation in the Performance Based Integrating Management Contract ("Rocky Flats Contract") at the DOE's Rocky Flats Environmental Technology Site ("Site"). In 1997, the Company formed TENERA Energy, LLC ("Energy") and TENERA Technologies, LLC ("Technologies"), both Delaware limited liability companies, to consolidate its commercial electric power utility business and mass transportation business, respectively, into separate legal entities. In November 1997, the Company consummated the sale of all of the assets ("Asset Sale") of its Technologies subsidiary (see Notes 1 and 9 to Financial Statements). The Company's two continuing subsidiaries provide a broad range of professional consulting, management, and technical services to solve complex management, engineering, environmental, and safety challenges associated with the operation, asset management, and maintenance of power plants, federal government properties, and capital intensive industries. TENERA provides services to assist its commercial electric power industry clients with respect to nuclear and fossil plant operations, maintenance, and safety. This includes change management and organizational effectiveness, strategic business management, risk management, and ecological services. For its governmental clients, TENERA provides the Department of Energy ("DOE") and DOE prime contractors with assistance in devising, implementing, and monitoring strategies to improve performance and cost effectiveness from an operational, safety, and environmental perspective at DOE-owned nuclear reactor sites and national research laboratories. TENERA has developed expertise in providing solutions to complex technical and regulatory issues facing the commercial electric power industry, particularly nuclear facilities. Over the past several years, commercial electric utilities have experienced increased competitive pressure due to continued deregulation. For example, utilities continue to find it more difficult to recover total capital expenditures through rate increases, as well as facing increased competition from independent power producers, alternative energy production, and cogeneration. During the same period, utilities have responded to continued regulatory pressures to comply with complex safety and environmental guidelines. Safety problems and environmental issues have also emerged at government-owned production facilities. A massive program is underway throughout the DOE complex of nuclear facilities to comply with health, safety, and environmental requirements similar to those applicable to commercial facilities, principally in the areas of hazardous wastes, decontamination, decommissioning, and remediation. Electric utilities, as well as a variety of other industries, have been subjected to extensive regulation regarding environmentally safe handling of hazardous materials. It has been TENERA's strategy to provide solutions to these issues by providing clients with a high level of professional skills and a broad range of scientific, technological, and management resources. These include software and data bases which are used either in support of consulting projects or as the basis for development of stand alone software products and systems. The Company assists its clients in the initial identification and analysis of a problem, the implementation of a feasible solution that the client believes will be sensitive to business and public interest constraints, and the ongoing monitoring of that solution. 1 Background The Company's principal markets are the commercial electric utility industry and the DOE-owned nuclear materials production sites and national research laboratories. The electric utility industry has undergone considerable change in recent years and faces a complex mix of economic and regulatory pressures. There is continuing deregulation of the production and distribution of electricity, accompanied by the desire of utilities to meet demand for electricity through higher operating efficiency. Some of the Company's largest commercial clients have responded to a more competitive environment by implementation of significant cost control measures and activity in the merger and acquisition arena. Electric utilities and the DOE-owned nuclear sites also face close scrutiny resulting from public concern over health, safety, and the environment. The Company believes that increased enforcement of environmental laws and regulations continues to be prompted by publicity and public awareness of environmental problems and health hazards posed by hazardous materials and toxic wastes. The dismantlement and cleanup of the aging DOE weapons complex represents a significant market for the Company's service offerings. Economic pressures have resulted in certain changes in the focus of electric utility management. For example, the rate-making process now represents a significant area of risk to utilities. This has highlighted the importance of careful planning and documentation in connection with rate case preparation. Furthermore, utilities apparently are shifting their emphasis to ongoing performance reviews in making their rate base decisions, related to such measures as plant capacity factors. These changes in the rate-making process subject the utilities to substantial economic penalties for extended plant outages and have stimulated actions by them to assure more reliable operations. The DOE has begun the implementation of programs to address safety problems and environmental concerns which have emerged at its nuclear facilities. These programs are designed to bring the operations into compliance with a variety of health, safety, and environmental requirements, similar to those applicable to the commercial electric utility industry. The DOE's decontamination, decommissioning, and remediation programs are also aimed at achieving significant cleanup of its hazardous waste production and storage facilities and the partial shutdown of nuclear operations at a number of its sites. The markets for electric utility and DOE facility professional services and software products cover a broad range of activities. Typical markets include waste management, outage support, operating plant services, licensing support, safety and health management, maintenance and information services, decommissioning consulting, risk assessment, quality assurance and control, organizational effectiveness, engineering support, records management, fuel related services, employee professional training, plant security, and surplus asset disposal. In recent years, the slowdown in construction of commercial power plants has placed a premium on extending existing plant life and has shifted the electric utility commercial market emphasis. This has also resulted in greater attention by utilities to management systems for preventive maintenance and improved methods of plant operation. This may, in time, result in the expansion of the market for services and software associated with the efficient and profitable operation of existing capacity. Services and Products The Company provides its services by utilizing its professional skills and technological resources in an integrated approach which combines strategic consulting, technical, and project management capabilities with software systems and data bases. Services performed by the Company typically include one or more of the following: consultation with the client to determine the nature and scope of the problem, identification and evaluation of the problem and its impact, development and design of a process for correcting the problem, preparation of business plans, preparation of reports for obtaining regulatory agency permits, and analysis in support of regulatory and legal proceedings. The Company operates in one business segment providing services which cover these general areas: strategic consulting, management, and technical services and prior to the Asset Sale, software services, products, and systems. 2 The following table reflects the percentage of revenues derived for each of these areas for the period indicated during the fiscal years ended December 31, 1996 through 1998:
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Consulting, Management, and Technical Services ........................ 100.0% 86.4% 91.8% Software Services, Products, and Systems* ............................. 0 % 13.6% 8.2% - ----------------------------------------------------------------------------------------------------------------
* Reflects only 10 months of revenues in 1997 due to the Asset Sale. Consulting and Management Services. The Company's consulting and management services involve determining a solution to client problems and challenges in the design, operation, and management of large facilities. Focus is also placed on providing expertise in the wide range of disciplines required to resolve complex legal and regulatory issues and offering executives guidance in strategic planning and implementing a coordinated, effective response to such issues. The Company applies its professional skills, software, and specialized data bases to all aspects of these problems and challenges in the following general areas: o Strategic business management o Organizational effectiveness and change management o Risk management o Environmental and ecological issues at DOE and electric utility facilities o Operations and maintenance performance improvement o Plant safety o Nuclear safety and criticality at DOE facilities o Engineering design review and verification o Company/organized labor union consulting o Technology enhanced training services o Surplus property management and disposal services Software Services, Products, and Systems. Until the Asset Sale in November 1997, the Company offered a range of information software services, products, and systems. The Company continues to utilize proprietary software tools and systems in connection with the risk management, operations and maintenance performance improvement, and technology enhanced training service areas. Marketing and Clients Marketing. The Company's marketing strategy emphasizes its ability to offer a broad range of services designed to meet the needs of its clients in a timely and cost-efficient manner. The Company can undertake not only small tasks requiring a few professionals but also the management, staffing, design, and implementation of major projects which may last for several months and involve large numbers of professionals and subcontractors in several geographic locations. Characteristic of TENERA's marketing strategy are significant projects in which initial contracts have been only a fraction of the ultimate sale. The Company provides financial incentives to attract senior technical professionals with extensive utility industry experience and to encourage these individuals to market the complete range of TENERA's services throughout existing and potential customer organizations. TENERA's marketing efforts are facilitated by the technical reputation and industry recognition often enjoyed by its professional staff. TENERA's reputation in the electric power industry and as a DOE contractor, often leads to invitations to participate at an early stage in the conceptualization of a project. During this phase, the Company assists clients in developing an 3 approach for efficiently and productively solving a problem. If new services or products are developed for a client, they generally are marketed to other clients with similar needs. The Company's reputation also leads to invitations to participate in large, multi-company teams assembled to bid on large DOE or utility projects. Clients. During the year ended December 31, 1998, TENERA provided services to over 35 clients involving over 65 contracts. During the year ended December 31, 1997, TENERA provided services and software to over 60 clients involving over 100 contracts (included 20 clients and 30 contracts in the Technologies subsidiary). Over 80% of TENERA's clients during the year ended December 31, 1998, had previously used its services. During the year ended December 31, 1998, two clients, Kaiser-Hill Company, LLC ("Kaiser-Hill"), prime contractor of the Rocky Flats Contract, and Safe Sites of Colorado, LLC ("Safe Sites"), a prime subcontractor of the Rocky Flats Contract, accounted for approximately 64% of the Company's total revenue (Kaiser-Hill - 37%; Safe Sites - 27%). During the year ended December 31, 1997, three clients accounted for approximately 67% of the Company's total revenue (Kaiser-Hill - 43%; ComEd - 14%; and Pacific Gas and Electric - 10%) and 78% of non-Technologies revenue. The Company has maintained working relationships with Kaiser-Hill and Safe Sites for four years, during which time various contracts have been completed and replaced with new or follow-on contracts. There can be no assurance that these relationships will be maintained at current levels or beyond the existing contracts, and the loss of these clients would have a material adverse effect on the Company (see "Operating Risks"). Operations The Company primarily contracts for its services in one of three ways: time and materials ("T & M"), time and materials plus incentive fee ("TMIF"), or fixed price. T & M and TMIF contracts, which cover a substantial amount of TENERA's revenues, are generally billed monthly by applying a multiplier factor to specific labor costs or by use of a fixed hourly labor rate charged to each project. T & M and TMIF contracts are generally structured to include "not-to-exceed" ceilings; however, if after initial review or after work has started, it is noted that additional work is required, the contract normally can be renegotiated to include such additional work and to increase the contract ceiling accordingly. Also, prior to the Asset Sale, the Company received license and annual maintenance fees from contracts involving software products. During the year ended December 31, 1997, such fees amounted to $600,000 ($283,000 in 1996). Fixed-price contracts are generally applicable where TENERA has been requested to deliver services and/or products previously developed by it or deliverable to multiple customers. At December 31, 1998, of the total outstanding contracts, less than 10% were fixed-price. TENERA generally receives payments on amounts billed 30 to 90 days after billing, except for retention under contracts. Since the majority of TENERA's clients are utility companies, DOE, or DOE prime contractors, TENERA historically has experienced a low percentage of losses due to poor credit risks. Backlog As of December 31, 1998, TENERA had contracted a backlog of approximately $18.5 million, all of which is cancelable by the clients. The Rocky Flats and Energy subsidiaries account for $17.2 million and $1.3 million, respectively, of the backlog. Contracted backlog represents the aggregate of the remaining value of those active contracts entered into by TENERA for services which are limited by a contractual amount and does not include any estimates of open-ended services contracts or unfunded backlog that may result from additions to existing contracts. Since all outstanding contracts are cancelable, there is no assurance that the revenues from these contracts will be realized by the Company. If any contract is canceled, there is no assurance that the Company will be successful in replacing such contract. 4 Competition The market for consulting and management services is highly competitive and TENERA competes with several larger firms with significantly greater resources. The primary competitive factor in the market for consulting and management services is price, and certain of TENERA's competitors are able to offer similar services at prices that are lower than those offered by TENERA (see "Operating Risks"). Research and Development It has been TENERA's policy to undertake development projects of software, systems, and data bases only if they can be expected to lead directly to proprietary products that may be generally marketable. A portion of TENERA's research and development effort may be funded through customer-sponsored projects, although the rights to the systems and data bases generally remain with TENERA. Because TENERA's research and development activities involve the integration of customer-funded, cost sharing, and TENERA-funded projects, it is not possible to segregate on a historical basis all of the specific costs allocable as research and development costs. In 1998, TENERA spent under $50,000 on software development related to its consulting services business, in contrast to expending in excess of $1,531,000 in 1997 ($562,000 in 1996) on software development related to its Technologies business prior to the Asset Sale. Patents and Licenses The Company does not hold any patents material to its business. TENERA relies upon trade secret laws and contracts to protect its proprietary rights in software systems and data bases. The service and license agreements under which clients acquire certain rights to access and use TENERA's software technology generally restrict the clients' use of the systems to their own operations and prohibit disclosure to others. Personnel At December 31, 1998, the Company employed a total of 173 consultants, engineers, and scientists and a supporting administrative staff of 23 employees. Eight employees hold doctorates and 57 employees hold master's degrees. TENERA also retains the services of numerous independent contractors in order to fulfill specific needs for particular projects. None of TENERA's employees are represented by a labor union. Item 2. Properties The Company's headquarters are located in San Francisco, California, and consist of approximately 13,500 square feet of leased office space, expiring in 2000. TENERA also leases approximately 6,500 square feet in Louisville, Colorado, expiring in 2000. Additionally, TENERA maintains a 900 square feet project office in San Luis Obispo, California which expires in 1999 and a month-to-month lease covering approximately 200 square feet in Richland, Washington, expiring in 1999. As a result of the Asset Sale, TENERA vacated its office space in Hartford, Connecticut, and is subleasing the space until lease expiration in 2000. The Company believes that its facilities are well maintained and adequate for its current needs. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Shares of the Company's Common Stock are listed for trading on AMEX under the symbol TNR. The first trading day on AMEX was June 30, 1995, at which time 10,417,345 shares were outstanding. There were approximately 500 shareholders of record as of March 1, 1999.
- ---------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- ------------------------- ------------------------- Price Range of Price Range of Price Range of TENERA, Inc. Shares TENERA, Inc. Shares TENERA, Inc. Shares ------------------------- ------------------------- ------------------------- High Low High Low High Low - ---------------------------------------------------------------------------------------------------------------- First Quarter ...... $ 0.875 $ 0.50 $ 0.9375 $ 0.625 $ 1.375 $ 0.875 Second Quarter ..... 1.00 0.5625 0.8125 0.50 1.4375 0.875 Third Quarter ...... 1.6875 0.6875 0.625 0.50 1.0625 0.75 Fourth Quarter ..... 2.75 0.75 0.8125 0.50 0.875 0.625 - ----------------------------------------------------------------------------------------------------------------
The Board of Directors of the Company determines the amount of cash dividends which the Company may make to shareholders after consideration of projected cash requirements and a determination of the amount of retained funds necessary to provide for growth of the Company's business. The Company has made no distributions since 1991. The Company does not anticipate resumption of dividends in the foreseeable future. 6 Item 6. Selected Financial Data The following consolidated selected financial data of the Company for the five prior years should be read in conjunction with the consolidated financial statements and related notes included elsewhere. The earnings (loss) per share amounts prior to 1997, have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For further discussion of earnings per share and the impact of Statement No. 128, see Notes 2 and 5 to the Consolidated Financial Statements. TENERA, INC. FINANCIAL HIGHLIGHTS (In thousands, except per share and statistical amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------- 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- OPERATIONS DATA Revenue ......................................... $ 27,445 $ 21,121 $ 24,003 $ 25,545 $ 23,600 Operating Income (Loss) ......................... 1,874 (2,139) (1,382) 1,203 (1,239) Net Earnings (Loss) ............................. 1,674 (1,890) (1,080) 898 (1,202) Earnings (Loss) per Share-- Basic ............... 0.17 (0.19) (0.11) 0.07 (0.13) Earnings (Loss) per Share-- Diluted ............. 0.16 (0.19) (0.11) 0.07 (0.13) Weighted Average Shares-- Basic.................. 10,124 10,123 10,248 9,920 9,555 Weighted Average Shares-- Diluted................ 10,450 10,123 10,248 10,014 9,555 CASH FLOW DATA Net Cash Provided(Used) by Operating Activities.. $ 906 $ (2,681) $ 2,954 $ (286) $ 17 Net Increase(Decrease) in Cash and Cash Equivalents 1,069 (1,672) 2,490 (469) 363 FINANCIAL POSITION AT DECEMBER 31 Cash and Cash Equivalents ....................... 3,361 2,292 3,964 1,474 1,943 Working Capital ................................. 4,474 2,831 4,555 5,836 4,024 Total Assets .................................... 9,206 6,052 7,940 10,087 8,616 Total Liabilities ............................... 4,538 3,065 3,062 3,912 4,069 Shareholders' Equity............................. 4,668 2,987 4,878 6,175 4,547 OTHER INFORMATION Number of Employees ............................. 196 187 208 270 170 - ----------------------------------------------------------------------------------------------------------------
7 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition TENERA, INC. RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------- Percent of Revenue ----------------------------------------- Year Ended December 31, ----------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Revenue ............................................................. 100.0% 100.0% 100.0% Direct Costs ........................................................ 75.5 61.7 64.7 General and Administrative Expenses ................................. 19.7 38.5 38.7 Software Development Costs........................................... -- 7.2 2.3 Special Items Income (Expense), Net ................................. 1.1 1.7 (0.2) Litigation Judgment Cost............................................. (0.1) 4.5 -- Other Income ........................................................ 0.8 0.1 0.1 -------- -------- -------- Operating Income (Loss) .......................................... 6.8 (10.1) (5.8) Interest Income, Net ................................................ 0.5 0.5 0.7 -------- -------- -------- Net Earnings (Loss) Before Income Tax Expense (Benefit).............. 7.3% (9.6)% (5.1)% ======== ======== ======== - -----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 versus Year Ended December 31, 1997 The Company's increased revenue in its Rocky Flats subsidiary, lower overall general and administrative expenses, and elimination of significant ongoing development costs as a result of the Asset Sale in the fourth quarter of 1997, resulted in net earnings, before income tax expense, special item, and adjustment to litigation judgment costs, of $1,653,000, compared to a loss of $1,434,000 in 1997 before income tax benefit, special item, and accrual for litigation judgement costs. The revenue increase in 1998 is primarily the result of increased Rocky Flats Contract activity, partially offset by the absence of Technologies revenue as a result of the Asset Sale. For 1998, the concentration of revenue from the government sector increased to 78% of total revenue from 53% in 1997. Approximately one-half of the increase in revenue concentration relates to the loss of Technologies revenue as a result of the Asset Sale. The other one-half of the revenue concentration increase is due to higher levels of Rocky Flats Contract activity versus 1997. The number of clients served during the year decreased to 35 from 40 (excluding 20 clients associated with the Technologies business) in 1997. Direct costs were higher in 1998, primarily as a result of increased revenue generation opportunities and the related use of subcontractor teams under the Rocky Flats Contract. Gross margins decreased to 25%, in 1998 from 38% in 1997, mainly due to an increase in the proportion of revenue derived from lower margin government projects. General and administrative costs were lower compared to a year ago, primarily reflecting increased utilization of employees on billable contracts and reduced corporate and subsidiary administrative staffs. General and administrative expenses also decreased, as a percentage of revenue, to 20% in 1998 from 39% in 1997. Due to the Asset Sale, the Company's software product development expenditures were not material in 1998, as compared to $1,531,000 in 1997. 8 Effective November 14, 1997, the Company consummated the sale of all of the assets related to the Technologies business for $1,300,000 in cash, a promissory note in the amount of $300,000, a warrant to acquire 4% of the then outstanding shares of the buyer's common stock, exercisable upon the occurrence of an initial public offering or a change of control (as defined in the warrant), plus the assumption of all liabilities associated with the Technologies business. The Technologies subsidiary was not expected to produce profitable results in the subsequent twelve months due to the anticipated high level of investment needs to develop its products and for its business development activities. The special item of $355,000 in 1997 reflects the realized gain (exclusive of the effect of the note and warrant) from the Asset Sale (see Notes 1 and 9 to the Consolidated Financial Statements). The note was repaid in full in February 1998, and an additional gain of $300,000 was reported in 1998 as a special item. The warrant is deemed to have no value as of December 31, 1998 and December 31, 1997. On February 10, 1998, the Company was notified by the Superior Court for Alameda County of the trial judge's decision against the defendants in the action entitled PLM Financial Services, Inc. v TERA Corporation, et al. (Case No. 743 439-0, the "PLM Litigation"), in which TENERA and others were named as defendants. Damages were not specified in the Court's decision, but based on exposure estimates by the Company's counsel, the Company accrued litigation judgement expenses of $950,000 in 1997 related to this matter. In May 1998, the Company settled the case for $950,000 in cash, of which approximately $50,000 was paid by a co-defendant, TERA Corporation Liquidating Trust. The litigation judgment cost adjustment of $50,000 in 1998 reflects the lower amount paid by the Company versus the accrual established in 1997 (see Note 8 to Financial Statements). Other income in 1998 reflects temporary accounting and administrative services provided to the buyer in the Asset Sale. These services ceased during the fourth quarter of 1998. Other income in 1997 reflects gains on the sale of assets related to facility downsizing. Net interest income in 1998 and 1997 represents earnings from the investment of cash balances in short-term, high-quality, government and corporate debt instruments. The higher net interest income in 1998, as compared to a year ago, primarily reflects larger average cash balances. The Company had no borrowings under its line of credit during 1998 and 1997. Year Ended December 31, 1997 versus Year Ended December 31, 1996 Lower revenue and higher software product and business development expenses resulted in a pre-tax loss of $1,434,000, before the special item and litigation judgement costs, compared to a pre-tax loss of $1,167,000 in 1996 before the effect of special items. The revenue decrease was primarily the result of reduced government sales during the first nine months of 1997, partially offset by higher software revenue related to work on the Technologies subsidiary's contract with the National Railroad Passenger Corporation ("Amtrak") which began in late 1996. Concentration of revenue from the government sector decreased to 53% of total revenue for 1997 from 61% in 1996. The number of clients served during the year decreased to 60 (includes 20 clients in the Technologies subsidiary) from 75 in 1996. Revenue from software license and maintenance fees during 1997 increased to $600,000 from $283,000 in 1996, primarily due to new software installations. Direct costs were lower in 1997, primarily as a result of the reduced revenue generation opportunities. Gross margins increased to 38% in 1997 from 35% in 1996 due to the reduction in the proportion of revenue derived from lower margin government work, partially offset by the effect of an increased mix of higher cost subcontracted labor on fixed-price contracts associated with the Technologies subsidiary. General and administrative costs were lower in 1997 compared to a year ago, primarily due to lower administrative costs throughout the Company, partially offset by increased sales staff and marketing expenditures in the Technologies subsidiary, which amounted to $908,000 in 1997, compared to $241,000 in 1996. 9 The level of the Company's internally funded investments in software product development in the Technologies subsidiary, increased to $1,531,000 in 1997, as compared to $562,000 in 1996. The development expenditures ceased in November 1997, as a result of the Asset Sale of the Technologies subsidiary described below (see also Note 1 and Note 9 to the Consolidated Financial Statements). Other income for 1997 was the same level as 1996. Other income in 1997 reflects gains on the sale of fixed assets related to facility downsizing. In 1996, other income primarily relates to the liquidation of the Company's interest in the Individual Plant Evaluation Partnership, a technical services partnership in which it was an operating participant. Effective November 14, 1997, the Company consummated the sale of all of the assets related to the Technologies business for $1,300,000 in cash, a promissory note in the amount of $300,000, a warrant to acquire 4% of the then outstanding shares of the buyer's common stock, exercisable upon the occurrence of an initial public offering or a change of control (as defined in the warrant), plus the assumption of all liabilities associated with the Technologies business. The Technologies subsidiary was not expected to produce profitable results in the subsequent twelve months due to the anticipated high level of investment needs to develop its products and for its business development activities. The special item of $355,000 in 1997, reflects the realized gain (exclusive of the effect of the note and warrant) on sale from the Asset Sale (see Notes 1 and 9 to the Consolidated Financial Statements). Full repayment of the note was contingent upon a minimum amount of equity funding of the buyer, which had not occurred at December 31, 1997. Therefore, the Company provided an allowance for uncollectability against the total amount of the note as of December 31, 1997. The note was repaid in full in February 1998, and an additional gain of $300,000 was reported in 1998. The warrant was deemed to have no value as of December 31, 1998 and 1997. In 1996, the special items' net expense of $50,000 is comprised of two items. First, in the second quarter of 1996, the Company recorded a $250,000 adjustment to the reserve related to the settlement of specific disputed costs on certain government contracts with the DOE. This positive earnings impact resulted from a further reduction of the reserve for sales adjustment established in 1991, and was based upon the successful completion of certain government audits and contract closeouts of prior periods. The second special adjustment occurred in December 1996, and offset the first item. This adjustment related to the repricing of debt owed to the Company by one of its executive officers (see Note 3 to the Consolidated Financial Statements). The principal amount of the note was reduced to the then current fair market value of the stock held as security, resulting in a charge to earnings of approximately $300,000. The Company accrued litigation judgement expenses of $950,000 in 1997 related to the PLM Litigation (see Note 8 to the Consolidated Financial Statements). Net interest income in 1997 and 1996 represents earnings from the investment of cash balances in short-term, high-quality, government and corporate debt instruments, partially offset by capital lease interest expense. The lower net interest income in 1997, as compared to a year ago, primarily reflects smaller average cash balances in 1997. The Company had no borrowings under its line of credit during 1997 and 1996. Liquidity and Capital Resources Cash and cash equivalents increased by $1,069,000 during 1998. The increase was due to cash provided by operations ($906,000), cash proceeds from the repayment of the Promissory Note ($300,000) and exercise of employee options ($7,000), partially offset by the acquisition of equipment ($146,000). Receivables increased by $1,999,000 from December 31, 1997, primarily due to an increase in Rocky Flats services revenue in 1998. The allowance for sales adjustments decreased by $58,000 reflecting the write-off of disallowed billings associated with the government sector. Accounts payable increased by $1,876,000 since the end of 1997, primarily associated with supporting increased revenues and the higher usage of subcontractors under the Rocky Flats Contract. Accrued compensation and related expenses increased by $447,000 during 1998, primarily reflecting an increase in the number of Energy employees, the accrual of employer matching amounts payable under the Company's 401(k) Savings Plan, and a higher vacation accrual balance related to an increase in average employee seniority. 10 The litigation judgment accrual decreased by $950,000 due to the settlement of the PLM Litigation in May 1998 (see Note 8 to the Consolidated Financial Statements). No cash dividend was declared in 1998. The impact of inflation on project revenue and costs of the Company was minimal. At December 31, 1998, the Company had available $2,500,000 of a $3,000,000 revolving loan facility with its lender which expires in May 2000. The Company has no outstanding borrowing against the line; however, $500,000 was assigned to support standby letters of credit. Management believes that cash expected to be generated by operations, the Company's working capital, and its loan facility are adequate to meet its anticipated liquidity needs through the next twelve months. Year 2000 Issue Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. The Company's technical personnel are in the process of assessing the impact of the Year 2000 issue on the Company's products and services. The Company has established a two-phase program to ensure that its proprietary software and internal computer systems are Year 2000 compliant. The initial phase, which included planning, inventory and assessment, has been substantially completed. The final phase, which consists of correction, testing, deployment and acceptance, is in process and is expected to be completed by mid-1999. The Company expects that the cost of making its proprietary software and internal systems compliant will be less than $50,000 and will not have a material effect on its overall financial position or results of operations. The Company is also beginning the same two-phase program to assess the risks to the Company of systems owned and operated by outside parties but used by the Company in its leased and rented facilities which have embedded technology, such as elevator and telephone systems, security systems, and other physical office infrastructure. The Company is examining infrastructure issues on an office-by-office basis and the initial phase was completed at the end of 1998. No costs have been expended by the Company through 1998. The final phase is planned to be completed by mid-1999 and the Company expects to develop contingency plans to address any such embedded technology issues as they are identified. The Company is in the process of communicating with its major clients, subcontractors, banking institution, and payroll vendor to determine whether they are or will be Year 2000 compliant. By mid-1999, the Company expects to have identified and develop contingency plans for any such clients and vendors who will not be Year 2000 ready. Even with the effort to address the Year 2000 issue made by the Company to date, there can be no assurance that the systems of other entities on which the Company relies, including the Company's internal systems and proprietary software, will be timely remediated, or that a failure to remediate by another entity and/or the Company, would not have a material effect on the Company's results of operations. The Company will utilize both internal and external resources to reprogram, or replace, and test software for Year 2000 modifications. The total cost associated with the required modifications and conversions is not expected to exceed $50,000, including infrastructure and embedded technology (see "Operating Risks"). Operating Risks Statements contained in this report which are not historical facts, are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to the risks and uncertainties which could cause actual results to differ materially from those projected, including those risks and uncertainties discussed below. 11 History of Losses; Uncertainty of Future Profitability. Net earnings (loss) over the period 1990 through 1998 were $7.9 million in 1990, $(6.4 million) in 1991, $0.8 million in 1992, $(0.3 million) in 1993, $(1.2 million) in 1994, $0.9 million in 1995, $(1.1 million) in 1996, $(1.9 million) in 1997, and $1.7 million in 1998. There can be no assurance of the level of earnings, if any, that the Company will be able to derive in the future. Reliance on Major Customers. During fiscal 1998, two customers, Kaiser-Hill and Safe Sites, accounted for approximately 64% of the Company's total revenues, and during 1997, three customers, Kaiser-Hill, ComEd, and PG&E, accounted for approximately 67% of the Company's total revenues (78% of non-Technologies revenue). All outstanding customer contracts are cancelable upon notice by either party, and therefore, there can be no assurance that relationships with customers will be maintained at existing levels, or at all. The discontinuation or material reduction of business relations with any of these customers would have a material adverse impact on TENERA's business (see Item 1, "Business -- Marketing and Clients"). Uncertainty Regarding Industry Trends and Customer Demand. As a result of the slowdown in the construction of power plants and the absence of new power plants scheduled for construction, as well as the gradual deregulation of the production and distribution of electricity, the market for engineering services relating to licensing and construction of power plants has contracted, and the market for services related to efficient and profitable operation of existing capacity has expanded. There can be no assurance that (i) TENERA will have the financial and other resources necessary to successfully research, develop, introduce, and market new products and services, (ii) if, or when, such new products or services are introduced, they will be favorably accepted by current or potential customers, or (iii) TENERA will be otherwise able to fully adjust its services and products to meet the changing needs of the industry (see Item 1, "Business -- Background"). Uncertainty of Access to Capital. Management currently believes that cash expected to be generated from operations, the Company's working capital, and its available loan facility, are adequate to meet its anticipated near-term needs. If cash from operations is less than currently anticipated, TENERA may need to seek other sources of capital. There can be no guarantee that such sources will be available in sufficient amounts or on terms favorable to TENERA, or at all. Reliance on Key Personnel. Due to the nature of the consulting and professional services business, the Company's success depends, to a significant extent, upon the continued services of its officers and key technical personnel and the ability to recruit additional qualified personnel. The Company experienced a historically high rate of turnover as revenue and earnings began to decline in 1991 and thereafter. Further loss of such officers and technical personnel, and the inability to recruit sufficient additional qualified personnel, could have a material adverse effect on the Company. Government Contracts Audits. The Company's United States government contracts are subject in all cases to audit by governmental authorities. In 1994, an audit was concluded, which began in 1991, of certain of its government contracts with the DOE relating to the allowability of certain employee compensation costs. The Company made a special charge to earnings in 1991 for a $2.4 million provision for the potential rate adjustments then disputed by the Company and the government. As a result of resolving certain issues in the dispute, the Company recognized increases to earnings of $500,000 in 1994 and $250,000 in 1996. Cash payments to clients associated with the settlement, which are estimated to be between $400,000 and $500,000, which were accrued for in the 1991 Special Charge to earnings, are expected to be made as government contracts with individual clients are closed out. There can be no assurance that no additional charges to earnings of the Company may result from future audits of the Company's government contracts. Competition. The market for management and consulting services is highly competitive and TENERA competes with several larger firms with significantly greater resources. Significant competitive factors in the market for engineering and management services are price and the ability to offer new products and services designed to meet changing customer demand. A number of TENERA's competitors are able to offer such services at prices that are lower than those offered by TENERA, and to devote far greater resources toward the development of new products and services. This competition has had, and is expected to continue to have, a material adverse impact on TENERA's business. 12 Year 2000 Issue. Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. The Company has reviewed the potential problem and believes that it will not have a material impact on its business operations nor its financial condition. However, if the Company's major clients have not addressed their own Year 2000 issues adequately, especially regarding their accounts payable systems, payment of the Company's invoices could be delayed and its cash flow materially affected. 13 Item 8. Financial Statements and Supplementary Data TENERA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Revenue .................................................... $ 27,445 $ 21,121 $ 24,003 Direct Costs ............................................... 20,718 13,038 15,527 General and Administrative Expenses ........................ 5,416 8,131 9,281 Software Development Costs ................................. -- 1,531 562 Special Items Income (Expense), Net ........................ 300 355 (50) Litigation Judgment Cost ................................... (50) 950 -- Other Income ............................................... 213 35 35 ------------- ------------ ------------ Operating Income (Loss).................................. 1,874 (2,139) (1,382) Interest Income, Net ....................................... 129 110 165 ------------- ------------ ------------ Net Earnings (Loss) Before Income Tax Expense(Benefit)... 2,003 (2,029) (1,217) Income Tax Expense (Benefit)............................... 329 (139) (137) ------------- ------------ ------------ Net Earnings (Loss)......................................... $ 1,674 $ (1,890) $ (1,080) ============= ============ ============ Net Earnings (Loss) per Share-- Basic ...................... $ 0.17 $ (0.19) $ (0.11) ============= ============ ============ Net Earnings (Loss) per Share-- Diluted .................... $ 0.16 $ (0.19) $ (0.11) ============= ============ ============ Weighted Average Number of Shares Outstanding-- Basic....... 10,124 10,123 10,248 ============= ============ ============ Weighted Average Number of Shares Outstanding-- Diluted..... 10,450 10,123 10,248 ============= ============ ============ - ----------------------------------------------------------------------------------------------------------------
See accompanying notes. 14 TENERA, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
- ---------------------------------------------------------------------------------------------------------------- December 31, ----------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents ............................................... $ 3,361 $ 2,292 Receivables, less allowances of $1,300 (1997 - $1,358) Billed ................................................................ 2,692 1,643 Unbilled .............................................................. 2,734 1,726 Other current assets .................................................... 225 235 ------------ ------------ Total Current Assets ................................................ 9,012 5,896 Property and Equipment, Net ................................................ 194 156 ============ ============ Total Assets ...................................................... $ 9,206 $ 6,052 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable......................................................... $ 2,514 $ 638 Accrued compensation and related expenses ............................... 1,924 1,477 Income taxes payable .................................................... 100 -- Litigation judgment accrual ............................................. -- 950 ------------ ------------ Total Current Liabilities ........................................... 4,538 3,065 Commitments and Contingencies Shareholders' Equity Common Stock, $0.01 par value, 25,000,000 authorized, 10,417,345 issued and outstanding ............................................................. 104 104 Paid in capital, in excess of par ....................................... 5,699 5,698 Retained earnings (Accumulated deficit).................................. (835) (2,509) Treasury stock-- 287,942 shares (1997 - 294,192 shares) ................. (300) (306) ------------ ------------ Total Shareholders' Equity .......................................... 4,668 2,987 ------------ ------------ Total Liabilities and Shareholders' Equity ........................ $ 9,206 $ 6,052 ============ ============ - ----------------------------------------------------------------------------------------------------------------
See accompanying notes. 15 TENERA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share amounts)
- -------------------------------------------------------------------------------------------------------------- Paid-In Retained Capital in Earnings Common Excess (Accumulated Treasury Stock of Par Deficit) Stock Total - -------------------------------------------------------------------------------------------------------------- December 31, 1995 ...... $ 104 $ 5,698 $ 461 $ (88) $ 6,175 Repurchase of 205,096 Shares -- -- -- (217) (217) Net Loss ............... -- -- (1,080) -- (1,080) ------------- ------------- ------------- -------------- --------------- December 31, 1996 ...... 104 5,698 (619) (305) 4,878 Repurchase of 1,694 Shares -- -- -- (1) (1) Net Loss ............... -- -- (1,890) -- (1,890) ------------- ------------- ------------- -------------- --------------- December 31, 1997 ...... 104 5,698 (2,509) (306) 2,987 Reissuance of 6,250 Shares -- 1 -- 6 7 Net Earnings ........... -- -- 1,674 -- 1,674 ============= ============= ============= ============== =============== December 31, 1998 ...... $ 104 $ 5,699 $ (835) $ (300) $ 4,668 ============= ============= ============= ============== =============== - --------------------------------------------------------------------------------------------------------------
See accompanying notes. 16 TENERA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss)...................................... $ 1,674 $ (1,890) $ (1,080) Adjustments to reconcile net earnings (loss) to cash provided (used) by operating activities: Depreciation .......................................... 108 231 272 (Gain) Loss on sale of equipment ...................... (2) (21) (8) Gain on sale of Technologies business ................. (300) (355) -- Decrease in allowance for sales adjustments ........... (58) (146) (1,262) Deferred income taxes ................................. -- -- (90) Changes in assets and liabilities: Receivables ......................................... (1,999) (1,243) 5,758 Other current assets ................................ 10 222 107 Other assets ........................................ -- -- 17 Accounts payable .................................... 1876 (128) (144) Accrued compensation and related expenses ........... 447 (301) (382) Litigation judgment accrual ......................... (950) 950 -- Income taxes payable ................................ 100 -- (216) Non-Current liabilities ............................. -- -- (18) ------------- ------------ ------------ Net Cash Provided (Used) by Operating Activities .. 906 (2,681) 2,954 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment ................... (146) (311) (258) Proceeds from sale of equipment ......................... 2 21 11 Proceeds from sale of Technologies business ............. 300 1,300 -- ------------- ------------ ------------ Net Cash Provided (Used) in Investing Activities .. 156 1,010 (247) CASH FLOWS FROM FINANCING ACTIVITIES Repurchase of equity .................................... -- (1) (217) Issuance of Common Stock from Treasury................... 7 -- -- ------------- ------------ ------------ Net Cash Provided (Used) by Financing Activities .. 7 (1) (217) ------------- ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 1,069 (1,672) 2,490 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 2,292 3,964 1,474 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 3,361 $ 2,292 $ 3,964 ============= ============ ============ - ----------------------------------------------------------------------------------------------------------------
See accompanying notes. 17 TENERA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 Note 1. Organization TENERA, Inc. (the "Company"), a Delaware corporation, is the parent company of the subsidiaries described below. TENERA Rocky Flats, LLC ("Rocky Flats"), a Colorado limited liability company, was formed by the Company in 1995, to provide consulting services in connection with participation in the Performance Based Integrating Management Contract ("Rocky Flats Contract") at the Department of Energy's ("DOE") Rocky Flats Environmental Technology Site. In May 1997, the Company's other government business was consolidated within the Rocky Flats subsidiary. This business provides consulting and management services to the DOE directly and through subcontracts with DOE prime contractors. These services provide assistance to DOE-owned nuclear facilities in devising, implementing, and monitoring strategies to upgrade from an operational, safety, and environmental perspective. TENERA Energy, LLC ("Energy"), a Delaware limited liability company, was formed by the Company in May 1997, to consolidate its commercial electric power utility business into a separate legal structure. The Energy subsidiary provides consulting, management services, and training programs in organizational effectiveness and organizational development, environmental outsourcing and monitoring, risk analysis and modeling, and business process improvement. TENERA Technologies, LLC ("Technologies"), a Delaware limited liability company, was formed by the Company in May 1997 to consolidate its mass transportation business into a separate legal entity. Before the Asset Sale described below, Technologies provided computerized maintenance management software and consulting to the mass transit industry. On November 14, 1997, the Company consummated the sale of all of the assets ("Asset Sale") related to Technologies' mass transportation business, to Spear Technologies, Inc., a California corporation newly formed by former members of the Company's management. The Company received $1,300,000 in cash, a promissory note in the amount of $300,000, and a warrant to acquire 4% of the buyer's then outstanding shares of common stock exercisable upon an initial public offering or a change of control (as defined in the warrant). The buyer also assumed all liabilities associated with the Technologies business (see also Note 9). Note 2. Summary of Significant Accounting Policies Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Cash and Cash Equivalents. Cash and cash equivalents consist of demand deposits, money market accounts, and commercial paper issued by companies with strong credit ratings. The Company includes in cash and cash equivalents, all short-term, highly liquid investments which mature within three months of acquisition. Property and Equipment. Property and equipment are stated at cost ($2,382,000 and $2,236,000 at December 31, 1998 and 1997, respectively), net of accumulated depreciation ($2,188,000 and $2,080,000 at December 31, 1998 and 1997, respectively). Depreciation is calculated using the straight line method over the estimated useful lives, which range from three to five years. Revenue. The Company primarily offers its services to the electric power industry and the DOE. Revenue from time-and-material and cost plus fixed-fee contracts is recognized when costs are incurred; from fixed-price contracts, on the basis of percentage of work completed (measured by costs incurred relative to total estimated project costs). 18 The Company performs credit evaluations of these clients and normally does not require collateral. Reserves are maintained for potential sales adjustments and credit losses; such losses to date have been within management's expectations. Actual revenue and cost of contracts in progress may differ from management estimates and such differences could be material to the financial statements. During 1998, two clients accounted for 37% and 27% of the total revenue. In 1997, three clients accounted for 43%, 14%, and 10% of the Company's total revenue, and in 1996, two clients accounted for 56% and 11% of the total revenue. Income Taxes. The Company is a C Corporation subject to federal and state statutory income tax rates for income earned. Due to net losses in 1997 and 1996, an income tax benefit was recorded for each of those years. During 1998, a provision for income taxes was made after taking into account net operating loss carryforwards from previous years. Accounting for Stock-Based Compensation. Statement of Financial Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") became effective for the Company's 1996 year. The Company continues to account for employee stock options in accordance with Accounting Principles Board Opinion No. 25 ("APB 25") and has provided the pro forma disclosures required by FAS 123 in Note 4. Per Share and Pro Forma Per Share Information. In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("FAS 128"). FAS 128 replaced the calculation of primary and fully diluted earnings (loss) per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings (loss) per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share and includes the effect of dilutive stock options. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the FAS 128 requirements. A reconciliation of the denominators of the basic and diluted earnings (loss) per share computations required by FAS 128 are presented in Note 5. Comprehensive Income (Loss). In 1997, the Financial Accounting Standards Board issued No. 130, "Reporting Comprehensive Income" ("FAS 130"), which requires that all items that are required to be recognized under accounting standards as comprehensive income (revenues, expenses, gains and losses) be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company does not have material components of other comprehensive income. Therefore, comprehensive income (loss) is equal to net earnings (loss) reported for all periods presented. Disclosures about Segments of an Enterprise. In 1997, the Financial Accounting Standards Board issued No. 131, "Disclosures about Segments of an Enterprise and Related Information," (FAS 131"), which establishes standards for the way public business enterprises report information about operating segments in annual financial statements. The Company has one reportable operating segment under this statement, which is providing services with respect to operations, maintenance, safety, strategic business and risk management, and environmental/ecological issues for electric utility and DOE facilities. The required disclosures are reflected in the financial statements. Note 3. Related Party Transactions Individual Plant Evaluation Partnership ("IPEP"). The Company was an equal participant in a partnership, IPEP, with Westinghouse Electric Corporation and Fauske & Associates, Inc., which provided executive consulting services to commercial utility companies. IPEP ceased activities in 1995 and dissolved in April 1996. The Company's interest in IPEP was accounted for under the equity method. Each of the participants shared equally in the earnings and losses of IPEP. No income or losses were reported in 1998 and 1997. In 1996, the Company recorded income of $17,000 related to the final liquidation of IPEP. 19 Notes Receivable. The Company had no outstanding notes receivables from executive officers at December 31, 1998, 1997, and 1996. In 1996, certain terms of a note made by an executive officer, related to the purchase of stock by such officer in 1988, were renegotiated to provide for a purchase price adjustment on the stock securing the note balance, and the remaining balance of the note was reduced to the then fair market value of the stock held as security, resulting in a charge to operations of $300,419 in 1996. TERA Corporation Liquidating Trust ("Trust"). The Trust was established by TERA Corporation ("Predecessor Corporation") in 1986, to facilitate the orderly sale or other disposition of the remaining assets and satisfaction of all remaining debts and liabilities of the Predecessor Corporation. The Company did not recognize any income or expense from the Trust in 1998, 1997, and 1996. As of May 31, 1998, the Trust was terminated after the total liquidation of its assets in connection with the settlement of litigation with PLM Financial Services, Inc. (see Note 8). Note 4. Employee Benefit Plans 401(k) Savings Plan. The 401(k) Savings Plan is administered through a trust that covers substantially all employees. Employees can contribute amounts to the plan, not exceeding 15% of salary. Effective January 1, 1996, the Company matched these amounts with a 100% contribution on a matching contribution base, not exceeding 6% of the employee's salary. As of January 1, 1997, the Company amended the plan to discontinue the matching contribution. Effective January 1, 1998, the Company reinstated the matching contribution equal to 50% of the first 4% of salary deferred. The Company, at its discretion, may also contribute funds to the plan for the benefit of employees. In 1998, charges to earnings for the 401(k) Savings Plan were $233,000. There were no charges to earnings in 1997 for the 401(k) Savings Plan and during 1996, charges to earnings amounted to $397,000. During 1998, 1997, and 1996, no discretionary amounts were contributed to the plan by the Company. Stock Option Plans. The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Under the provisions of the Company's Option Plan, 1,500,000 shares are reserved for issuance upon the exercise of options granted to key employees and consultants. During 1998, options were granted for 300,000, 20,000 and 50,000 shares at an exercise price of $0.725, $0.5875 and $0.675, respectively, the then fair market values, expiring on February 19, 2004, April 20, 2004 and July 1, 2004, respectively. In 1997, options were granted for 370,000 and 50,000 shares at an exercise price of $0.70 and $0.65, respectively, the then fair market values, expiring on March 12, 2003 and May 1, 2003, respectively. In 1996, options were granted for 391,500 shares at an exercise price of $1.00, the then fair market value, expiring on February 1, 2002. During 1998, options for 660,750 shares were canceled due to employee terminations (122,500 and 278,500 in 1997 and 1996, respectively). Options for 6,250 shares were exercised in 1998, but no options were exercised in 1997 and 1996. As of December 31, 1998, options for 1,081,500 shares were outstanding and options for 669,500 shares were exercisable. Under the provisions of the 1993 Outside Directors Compensation and Option Plan, which was approved by the Board of Directors, effective March 1, 1994, as amended in 1998, 300,000 shares are reserved for issuance upon the exercise of options granted to non-employee directors. During 1998, options were granted for 37,500 and 25,000 shares at an exercise price of $0.5625 and $0.75, respectively, the then fair market value, expiring on March 1, 2008 and July 1, 2008, respectively. In 1997, options were granted for 32,000 shares at an exercise price of $0.6875, the then fair market value, expiring on March 1, 2007. In 1996, options were granted for 50,000 shares at an exercise price of $1.00, the then fair market value, expiring on March 1, 2006. During 1998, options for 8,000 shares were canceled due to a director resignation (12,500 in 1997 and none in 1996). No options were exercised in 1998, 1997, and 1996. As of December 31, 1998, options for 204,000 shares were outstanding and 141,500 were exercisable. 20 Pro forma information regarding net earnings (loss) and earnings (loss) per share is required by FAS 123 for fiscal years beginning after December 31, 1994, and has been determined as if the Company had accounted for its stock options under the fair value method of FAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997, and 1996: risk-free interest rates of 5.0% each for the February, March, April, and July 1998 grants; 6.0% and 5.85%, respectively, for the March and May 1997 grants; and 5.2% and 5.7%, respectively, for the February and March 1996 grants; dividend yield of 0% for all years; volatility factors of the expected market price of the Company's common stock of 0.48, and 0.51, and 0.53, respectively; and a weighted-average expected life of the option of five years for all employee grants and seven years for director grants. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, options valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting periods of the options. The Company has elected to base its initial estimate of compensation expense on the total number of options granted. Subsequent revisions to reflect actual forfeitures are made in the period the forfeitures occur through a catch-up adjustment. Because of the large number of forfeitures in 1998 related to options granted in prior years, FAS 123 treatment results in negative compensation expense. Pro forma information regarding the Company's net earnings (loss) and earnings (loss) per share follows: (In thousands, except for per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Net Earnings (Loss)-- As Reported .......................... $ 1,674 $ (1,890) $ (1,080) Pro Forma Net Earnings (Loss)--FAS 123 ..................... 1,672 (1,940) (1,133) Net Earnings (Loss) per Share-- As Reported Basic .......... $ 0.17 $ (0.19) $ (0.11) ============= ============ ============ Net Earnings (Loss) per Share-- As Reported Diluted ........ $ 0.16 $ (0.19) $ (0.11) ============= ============ ============ Pro Forma Net Earnings (Loss) per Share-- FAS 123 Basic .... $ 0.17 $ (0.19) $ (0.11) ============= ============ ============ Pro Forma Net Earnings (Loss) per Share-- FAS 123 Diluted .. $ 0.16 $ (0.19) $ (0.11) ============= ============ ============ - ----------------------------------------------------------------------------------------------------------------
21 A summary of the Company's stock option activity, and related information follows: (In thousands, except for per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- ------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price - ---------------------------------------------------------------------------------------------------------------- Outstanding -- Beginning of Year .. 1,528 $ 0.98 1,211 $ 1.09 1,048 $ 1.20 0.98 1.09 1.20 Granted ............ 432 0.70 452 0.69 441 1.00 Exercised .......... (6) 1.19 -- -- -- -- Forfeited .......... (669) 0.90 (135) 1.18 (278) 1.36 ========== ========== ========== ========== ========== ========== Outstanding-- End of Year ........ 1,285 $ 0.91 1,528 $ 0.98 1,211 $ 1.09 ========== ========== ========== ========== ========== ========== Exercisable at End of Year ........ 811 $ 1.01 813 $ 1.09 625 $ 1.16 Weighted-Average Fair Value of Options Granted During the Year ............... $ 0.35 $ 0.36 $ 0.52 - ----------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1998, ranged from $0.5875 to $1.75. The weighted-average remaining contractual life of those options is 5.0 years. 22 Note 5. Earnings (Loss) per Share The following table sets forth the computation of basic and diluted (loss) earnings per share: (In thousands, except for per share amounts)
- ---------------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Numerator: Net earnings (loss) ..................................... $ 1,674 $ (1,890) $ (1,080) Denominator: Denominator for basic earnings per share -- weighted-average shares outstanding....................... 10,124 10,123 10,248 Effect of dilutive securities: Employee & Director stock options(Treasury stock method) 326 -- -- Denominator for diluted earnings per share -- weighted-average common and common equivalent shares ..... 10,450 10,123 10,248 ============= ============ ============ Basic earnings (loss) per share ........................... $ 0.17 $ (0.19) $ (0.11) ============= ============ ============ Diluted earnings (loss) per share ......................... $ 0.16 $ (0.19) $ (0.11) ============= ============ ============ - ----------------------------------------------------------------------------------------------------------------
Due to the loss from operations, earnings (loss) per share for 1997 and 1996 are based on the weighted average number of common shares only, as the effect of including equivalent shares from stock options would be anti-dilutive. 23 Note 6. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1998 and 1997, are as follows, using the liability method:
- ---------------------------------------------------------------------------------------------------------------- December 31, ----------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Current Deferred Tax Assets Contract provisions not currently deductible .......................... $ 466 $ 490 Accrued expenses not currently deductible ............................. 427 618 Net operating loss carryforward ....................................... -- 382 ------------ ------------ Total Current Gross Deferred Tax Assets ........................... 893 1,490 Less: Valuation Allowance ............................................ (772) (1,200) Current Deferred Tax Liabilities Revenue differences related to timing ................................. 121 290 ------------ ------------ Net Current Deferred Tax Liabilities .............................. $ -- $ -- ============ ============ - ----------------------------------------------------------------------------------------------------------------
The current and deferred tax provisions for the years ended December 31, 1998, 1997, and 1996, are as follows:
- ----------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Current: Federal ..................................................... $ 256 $ (137) $ (47) State ....................................................... 73 (2) -- ----------- ------------ ------------ 329 (139) (47) ----------- ------------ ------------ Deferred: Federal ..................................................... -- -- (77) State ....................................................... -- -- (13) ----------- ------------ ------------ -- -- (90) ----------- ------------ ------------ Tax Provision (Benefit) ..................................... $ 329 $ (139) $ (137) =========== ============ ============ - -----------------------------------------------------------------------------------------------------------------
24 The valuation allowance decreased by $428,000, during the year ended December 31, 1998, for those deferred tax assets which may not be realized. The decrease primarily relates to the usage of net operating loss carryforwards for tax purposes. The provision (benefit) for income taxes differed from the amount computed by applying the statutory federal and state income tax rate for the years ended December 31, 1998, 1997, and 1996, as follows:
- ----------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Federal Statutory Rate ........................................... 34% (34)% (35)% State Taxes, Net of Federal Benefit .............................. 2% (3)% (1)% Permanent Differences ............................................ 1% (2)% (8)% Valuation Allowance .............................................. (21)% 39 % 33% Net Operating Loss Carryback ..................................... -- (7)% -- ----------- ------------ ------------ Income Tax (Benefit) Provision ................................... 16% (7)% (11)% =========== ============ ============ - -----------------------------------------------------------------------------------------------------------------
The Company paid income taxes of $222,000 in 1998 and received net income tax refunds of $138,000 in 1997. At December 31, 1998, the Company had no net operating loss carryforwards. Note 7. Commitments and Contingencies Leases. The Company occupies facilities under noncancelable operating leases expiring at various dates through 2000. The leases call for proportionate increases due to property taxes and certain other expenses. Rent expense amounted to $309,000 for the year ended December 31, 1998 ($524,000 in 1997 and $702,000 in 1996). Minimum rental commitments under operating leases, principally for real property, are as follows (in thousands): (Year Ending December 31)
- ---------------------------------------------------------------------------------------------------------------- 1999 ......................................................................................... $ 574 2000 ......................................................................................... 414 ============ Total Minimum Payments Required .............................................................. $ 988 ============ - ----------------------------------------------------------------------------------------------------------------
Revolving Loan Agreement. A loan agreement with a bank provides for a revolving line of credit of $3,000,000, through May 2000. At December 31, 1998, $2,500,000 was available under the credit line, and in addition, $500,000 was assigned to support standby letters of credit. Amounts advanced under the line of credit are secured by the Company's eligible accounts receivable. Under the agreement, the Company is obligated to comply with certain covenants related to equity, quick ratio, debt/equity ratio, and profits. The interest rate under the agreement is the bank's prime rate (7.75% at December 31, 1998). During 1998, 1997, and 1996, the Company paid no interest expense, as there were no borrowings. 25 Note 8. Litigation Judgment On November 4, 1994, PLM Financial Services, Inc. ("PLM") filed an action, entitled PLM Financial Services, Inc. v. TERA Corporation, et al., Case No. 743 439-0, against TENERA, L.P. (the predecessor of the Company; the "Predecessor Partnership"), among others, in the Superior Court of California for the County of Alameda, seeking damages in excess of $4.6 million in unpaid equipment rent and other unspecified damages allegedly owing to PLM under an equipment lease dated September 29, 1984 between PLM and TERA Power Corporation ("TERA Power"), a former subsidiary of TERA Corporation (the "Predecessor Corporation"). PLM named the Predecessor Partnership in the action pursuant to a Guaranty dated September 24, 1984 of the lease obligations of TERA Power made by the Predecessor Corporation. Upon the liquidation of the Predecessor Corporation in late 1986, the stock of TERA Power was transferred to the TERA Corporation Liquidating Trust (the "Trust") and was thereafter sold to Delta Energy Projects Phases II, IV, and VI pursuant to a stock purchase agreement dated May 31, 1991. TERA Power asserted various defenses to the claims asserted by PLM in the action and the trial in this matter was concluded in August 1997. In February 1998, the trial judge issued a minute order rendering his decision against the defendants in the action. Accordingly, for the year 1997, the Company accrued litigation judgment expenses of $950,000 related to this matter. In April 1998, the trial judge entered a judgment in the amount of approximately $830,000 plus costs and attorney fees, against TERA Power and TENERA, as guarantor. Counsel for PLM had advised counsel for TENERA that PLM had incurred costs and attorney fees exceeding $600,000, and, if this matter was not settled, PLM would file a cost bill and motion for attorney fees in the action for such amounts. On May 1, 1998, the Company settled the case for $950,000 in cash, which was less than the Company's total exposure in the litigation. Of this amount, approximately $50,000 was paid by the Trust (to the extent of its assets) and the remainder was paid by the Company. Note 9. Special Items On November 14, 1997, the Company consummated the sale of all of the assets related to Technologies' mass transportation business to Spear Technologies, Inc., a California corporation newly formed by former members of the Company's management. The Company received $1,300,000 in cash, a promissory note in the amount of $300,000, and a warrant to acquire 4% of the buyer's then outstanding shares of common stock exercisable upon an initial public offering or a change of control (as defined in the warrant). The buyer also assumed all liabilities associated with the Technologies business. The special item of $355,000 in 1997, reflects the gain on sale from the Asset Sale, exclusive of the effect of the note and warrant. Full repayment of the note was contingent upon a minimum amount of equity funding of the buyer, which had not occurred at December 31, 1998. Therefore, the Company provided an allowance for the potential uncollectability of the note in 1997. The note was repaid in full in February 1998, and the additional gain of $300,000 was reported as a special item in 1998. The warrant was deemed to have no value as of December 31, 1998 and 1997. The revenues of the Technologies subsidiary were $2.9 million for the ten-month period ended October 31, 1997. There were two special items in 1996. One item amounted to $250,000 and reflects the estimated settlement of specific disputed costs on certain U.S. Government contracts with the DOE. This positive earnings adjustment resulted from a partial reduction of the reserve for sales adjustment established in 1991. The reserve related to a dispute between the Company and the DOE with respect to the allowability and amount of potential rate adjustments on U.S. Government contracts for certain employee compensation costs. The other special item in 1996, related to the repricing of debt owed by one of the Company's former executive officers. In December 1996, certain terms of the note related to the purchase of stock by a now former executive officer in 1988, were renegotiated to provide for a purchase price adjustment on the stock securing the note balance and a corresponding reduction in the note balance. The remaining balance of the note was paid off, by the transfer to the Company of the stock purchased by the executive officer in 1988, at the fair market value of the stock. As a result, a charge of approximately $300,000 was made in 1996 to adjust the price of the stock to the then current fair market value. 26 Note 10. Selected Quarterly Combined Financial Data (Unaudited) A summary of the Company's quarterly financial results follows. The 1996 and first three quarters of 1997 earnings (loss) per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share" (see also Notes 2 and 5). (In thousands, except per share or unit amounts)
- ---------------------------------------------------------------------------------------------------------------- Quarter Ended Quarter Ended --------------------------------------------- --------------------------------------------- 12/31/98 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 - ---------------------------------------------------------------------------------------------------------------- Revenue ..... $ 7,887 $ 7,014 $ 6,453 $ 6,091 $ 5,789 $ 5,240 $ 4,692 $ 5,400 Direct Costs 6,060 5,363 4,797 4,498 3,646 3,228 2,946 3,218 General and Administrative Expenses .... 1,486 1,283 1,345 1,302 1,551 2,209 2,391 1,980 Software Development Costs ....... -- -- -- -- 216 662 416 237 Special Items Income/ (Expense), -- -- -- 300 355 -- -- -- Net ......... Litigation Judgment -- -- (50) -- 950 -- -- -- Cost ........ Other Income 32 42 53 86 -- 14 20 1 -------- ------- -------- -------- -------- -------- -------- -------- Operating Income/(Loss) 373 410 414 677 (219) (845) (1,041) (34) Interest Income ...... 33 31 34 31 14 23 34 39 -------- ------- -------- -------- -------- -------- -------- -------- Net Earnings (Loss) Before Income Tax Expense/ (Benefit) ... 406 441 448 708 (205) (822) (1,007) 5 Income Tax Expense/ (Benefit) .. 80 20 54 175 -- -- (141) 2 -------- ------- -------- -------- -------- -------- -------- -------- Net Earnings/ (Loss) ..... $ 326 $ 421 $ 394 $ 533 $ (205) $ (822) $ (866) $ 3 ======== ======= ======== ======== ======== ======== ======== ======== Net Earnings/ (Loss) Per Share-- Basic $ 0.03 $ 0.04 $ 0.04 $ 0.05 $ (0.02) $ (0.08) $ (0.09) $ 0.00 ======== ======= ======== ======== ======== ======== ======== ======== Net Earnings/ (Loss) Per Share-- Diluted ..... $ 0.03 $ 0.04 $ 0.04 $ 0.05 $ (0.02) $ (0.08) $ (0.09) $ 0.00 ======== ======= ======== ======== ======== ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------
27 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders TENERA, Inc. We have audited the accompanying consolidated balance sheets of TENERA, Inc. at December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TENERA, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole presents fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP San Francisco, California January 22, 1999 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 29 PART III Item 10. Directors and Executive Officers of the Registrant The following tables set forth certain information with respect to the directors and executive officers of the Company. The directors of the Company are as follows: William A. Hasler, 57, has served as a Director of the Company since his election in March 1992 and Chairman of the Board of the Company since July 1998. Mr. Hasler is Co-Chief Executive Officer of Aphton Corporation, a bio-technology firm. Previously, Mr. Hasler was dean of the Walter A. Haas School of Business at the University of California, Berkeley. Prior to his appointment as dean in 1991, Mr. Hasler was Vice Chairman of Management Consulting for KPMG Peat Marwick from 1986 to 1991. Mr. Hasler is also a director of Asia Pacific Wire and Cable Corporation, Ltd., Aphton Corporation, Walker Systems, and TCSI Corporatin. Delbert F. Bunch, 56, has served as Director of the Company since his election in June 1998. He previously served as Senior Vice President of the Company from 1988 to 1991. Mr. Bunch has been President, since 1992, of Management Strategies, Inc., a private consulting firm to the commercial and U.S. government nuclear industry. Mr. Bunch was the Principal Deputy Secretary for Nuclear Energy, U.S. Department of Energy from 1983 to 1988. Jeffrey R. Hazarian, 43, has served as a Director of the Company since his election in October 1996, and was named its Executive Vice President in November 1997. He has also served as its Chief Financial Officer and Corporate Secretary since 1992. Previously, Mr. Hazarian held the position of Vice President of Finance from 1992 to 1997. Thomas S. Loo, Esq., 55, was elected as a Director of the Company in February 1997. He previously served as a Director of the Company from August 1987 to September 1993. Mr. Loo has been a partner, since 1986, of Bryan Cave LLP, general counsel to the Company. Mr. Loo has also served as a director of Teknekron Corporation since March 1989. Robert C. McKay, 47, has served as a Director of the Company since his election in June 1997, and was appointed its Chief Executive Officer and President in November 1997. Previously, Mr. McKay was Chief Operating Officer of the Company since April 1997. He was elected Senior Vice President of the Company in December 1992. Andrea W. O'Riordan, 27, has served as Director of the Company since her election in June 1998. Ms. O'Riordan is an Applications Marketing Coordinator for Oracle Corporation. Prior to her joining Oracle Corporation in 1996, Ms. O'Riordan was Marketing Coordinator, Latin America, for a Reuters Company, from 1993 to 1995. George L. Turin, Sc.D., 69, has served as a Director of the Company since his election in March 1995. Previously, Mr. Turin served as a Professor of Electrical Engineering and Computer Science at the University of California at Berkeley from 1960 to 1990. Mr. Turin also served as Vice President, Technology for Teknekron Corporation from 1988 to 1994. Officers of the Company hold office at the pleasure of the Board of Directors. There are no familial relationships between or among any of the executive officers or directors of the Company. 30 Item 11. Executive Compensation The following tables set forth certain information covering compensation paid by TENERA to the Chief Executive Officer ("CEO") and each of the Company's other executive officers, other than the CEO, whose total annual salary and bonus exceeded $100,000 (the "named executives") for services to TENERA in all their capacities during the fiscal years ended December 31, 1998, 1997, and 1996. SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------- Annual Compensation Awards ------------------------------ ------------- Securities All Other Name and Underlying Compensa- Principal Position Year Salary Bonus(1) Options(2) tion(3) - --------------------------------------------------------------------------------------------------------------- Robert C. McKay, Jr. 1998 $ 200,000 $ 152,500 -- $ 3,200 Chief Executive Officer 1997 179,375 2,179 90,000 -- President 1996 145,390 -- 28,000 8,777 Jeffrey R. Hazarian 1998 159,000 50,400 75,000 3,180 Executive 1997 145,875 25,000 -- -- Vice President and 1996 142,500 -- 27,000 8,586 Chief Financial Officer - ---------------------------------------------------------------------------------------------------------------
(1) Includes $100,000 retention bonus paid to Mr. McKay in 1998 (see "Other Compensation Arrangements" below) and 1998 accrued bonus of $3,000 for Mr. Hazarian paid in February 1999. (2)Reflects the number of options granted under the 1992 Option Plan. The options expire at the earlier of the end of the option period or three months after employment termination. (3)These amounts represent the amounts accrued for the benefit of the named executives under the Company's 401(k) Plan. The following table sets forth certain information concerning options granted during 1998 to the named executives: OPTIONS GRANTS IN 1998
- ---------------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ---------------------------------------------------- ----------------------- % of Total Number of Options Securities Granted to Underlying Employees Exercise or Options in Fiscal Base Price Expiration Name Granted Year ($/Share) Date 5% 10% - ---------------------------------------------------------------------------------------------------------------- Robert C. McKay, Jr. ..... -- -- $ -- -- $ -- $ -- Jeffrey R. Hazarian....... 75,000 20.27 0.725 2/19/04 18,493 41,954 - ----------------------------------------------------------------------------------------------------------------
31 Other Compensation Arrangements The 1992 Option Plan provides that options may become exercisable over such periods as provided in the agreement evidencing the option award. Options granted to date, including options granted to executive officers and set forth in the above tables, generally call for vesting over a four-year period. The 1992 Option Plan provides that a change in control of the Company will result in immediate vesting of all options granted and not previously vested. Other than as set forth below for Mr. McKay, the Company has no employment contracts or arrangements for its executive officers. Mr. McKay, upon appointment to Chief Operating Officer in 1997, was granted a retention bonus arrangement, amounting to $100,000, dependent upon his continued employment through June 30, 1998. The bonus was paid to Mr. McKay in 1998 in accordance with the arrangement. Directors Compensation Except as described below, the directors of the Company are paid no compensation by the Company for their services as directors. Delbert F. Bunch, William A. Hasler, Thomas S. Loo, Andrea W. O'Riordan, and George L. Turin as non-employee directors, are paid a retainer of $1,000 per month. These non-employee directors are also paid a fee of $1,000 for each meeting of the Board and any Board Committee which they attend. The 1993 Outside Directors Compensation and Option Plan was approved by the Board effective March 1, 1994, as amended by the Board in 1998, and reserves up to 300,000 options for issuance to non-employee directors. In March 1998, 12,500 stock options were granted to each of Messrs. Hasler, Loo, and Turin. In July 1998, 12,500 stock options were granted to each of Mr. Bunch and Ms. O'Riordan. During 1997, 8,000 stock options were issued to each of Messrs. Hasler, Loo, Turin, and Williams (resigned in December 1997). During 1996, 12,500 stock options were issued to each of Ms. Cheng (resigned in February 1997) and Messrs. Hasler, Turin, and Williams. The options expire ten (10) years after, vest one (1) year after the date of grant, and have an exercise price equal to the fair market value of the shares of Common Stock on the date of grant. Upon exercise of the options, a director may not sell or otherwise transfer more than 50% of the shares until six (6) months after the date on which the director ceases to be a director of the Company. Due to their resignations, Mr. Williams' 1997 options and Ms. Cheng's 1996 options did not vest and were forfeited. Compensation Committee Interlocks and Insider Participation During 1998, the Compensation Committee was composed of William A. Hasler, Thomas S. Loo, Andrea W. O'Riordan, and George Turin. Thomas S. Loo is a partner in the law firm of Bryan Cave LLP, general counsel to the Company and Teknekron Corporation, and is a director of Teknekron Corporation. Andrea W. O'Riordan, a director of the Company since June 29, 1998, is the daughter of Harvey E. Wagner, the Company's largest stockholder by virtue of a limited partnership interest in Incline Village Investment Group Limited Partnership (see Item 12). Mr. Wagner is also the sole stockholder and a director of Teknekron Corporation. 32 Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners The following table sets forth certain information as of March 1, 1999, with respect to beneficial ownership of the shares of Common Stock of the Company by each person who is known by the Company to own beneficially more than 5% of the shares of Common Stock:
- ---------------------------------------------------------------------------------------------------------------- Approximate Shares Percent Beneficially Beneficially Name and Address Owned Owned - ---------------------------------------------------------------------------------------------------------------- Harvey E. Wagner .......................................................... 3,708,658 36.6%(1) P.O. Box 7463 Incline Village, NV 89450 Dr. Michael John Keaton Trust ............................................. 1,106,887 10.9%(2) P.O. Box 400 Orinda, CA 94563-0400 - ----------------------------------------------------------------------------------------------------------------
(1) Such shares are held of record by Incline Village Investment Group Limited Partnership, a Georgia limited partnership, and were contributed to such partnership by Mr. Wagner in exchange for a 99% limited partnership interest. An additional 37,462 shares, as to which Mr. Wagner disclaims beneficial ownership, were contributed to such partnership by Mr. Wagner's spouse, Leslie Wagner, in exchange for a 1% general partner interest. Such partnership has sole voting and investment power with respect to all such shares. Mr. Wagner subsequently transferred a 14.7% limited partnership interest in the partnership to Ms. O'Riordan, a director of the Company, who disclaims beneficial ownership of all the shares held by such partnership. (2) Mr. Keaton has sole voting and investment power with respect to all shares shown as beneficially owned by him, subject to community property laws where applicable. 33 (b) Security Ownership of Management The following table sets forth information as of March 1, 1999, with respect to current beneficial ownership of shares of Common Stock by (i) each of the directors of the Company, (ii) each of the named executive officers (see Item 11. "Executive Compensation"), and (iii) all current directors and executive officers as a group.
- ------------------------------------------------------------------------------------------------------------------- Shares Shares Beneficially Acquirable Percentage Name Owned(1) Within 60 Ownership(2) Days(3)(4) - ------------------------------------------------------------------------------------------------------------------- Delbert F. Bunch .............................................. -- -- William A. Hasler ............................................. 20,000 58,000(3) * Jeffrey R. Hazarian ........................................... 7,186 136,250(4) 1.4% Thomas S. Loo.................................................. -- 20,500(3) * Robert C. McKay, Jr............................................ 1,789 181,000(4) 1.8% Andrea W. O'Riordan (5)........................................ -- -- * George L. Turin................................................ 45,504 48,000(3) * ------------ ------------- ------------ All Directors and Executive Officers as a Group (7 persons) ... 74,479 443,750 5.1% - -------------------------------------------------------------------------------------------------------------------
(1) The persons named above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. (2) Based on the number of shares outstanding at, or acquirable within 60 days of March 1, 1999. Asterisks represent less than 1% ownership. (3) Represents options under the Company's 1993 Outside Directors Compensation and Option Plan which are exercisable on March 1, 1999, or within 60 days thereafter. (4) Represents options under the Company's 1992 Option Plan which are exercisable on March 1, 1999, or within 60 days thereafter. (5) Ms. O'Riordan is the daughter of Harvey E. Wagner, the Company's largest stockholder (see Item 12(a), "Security Ownership of Certain Beneficial Owners"). Beneficial ownership as shown in the tables above has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this Rule, certain securities may be deemed to be beneficially owned by more than one person (such as where persons share voting power or investment power). In addition, securities are deemed to be beneficially owned by a person if the person has the right to acquire the securities (for example, upon exercise of an option or the conversion of a debenture) within 60 days of the date as of which the information is provided; in computing the percentage of ownership of any person, the amount of securities outstanding is deemed to include the amount of securities beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in the preceding tables do not necessarily reflect the person's actual voting power at any particular date. Item 13. Certain Relationships and Related Transactions See "Compensation Committee Interlocks and Insider Participation." 34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements The following financial statements of the Company are filed with this report and can be found in Part II, Item 8, on the pages indicated below: PAGE Consolidated Statements of Operations-- Year Ended December 31, 1998, 1997, and 1996 ....................... 14 Consolidated Balance Sheets-- December 31, 1998 and 1997 ............15 Consolidated Statements of Shareholders' Equity -- Year Ended December 31, 1998, 1997, and 1996 ........................16 Consolidated Statements of Cash Flows-- Year Ended December 31, 1998, 1997, and 1996 ........................17 Notes to Consolidated Financial Statements ..........................18 Report of Independent Auditors ......................................28 (a)(2) Financial Statement Schedules The following financial statement schedules with respect to the Company are filed in this report: Schedule VIII-- Valuation and Qualifying Accounts and Reserves ...37 All other schedules are omitted because they are either not required or not applicable. (a)(3) Exhibits 2.1 Agreement and Plan of Merger dated as of June 6, 1995 among the Registrant, Teknekron Technology MLP I Corporation, TENERA, L.P., and TENERA Operating Company, L.P. (a form of which is attached as Annex A to the Registrant's Consent Solicitation Statement/Prospectus included in the Registration Statement on Form S-4 (Registration No. 33-58393) declared effective by the Securities and Exchange Commission ("SEC") on June 2, 1995 (the "Registration Statement"), and is incorporated herein by this reference). 2.2 Asset Acquisition Agreement dated November 14, 1997, between Registrant and Spear Technologies, Inc. (filed as Exhibit 2.1 to the Registrant's Form 8K filed with the SEC on November 14, 1997 and incorporated by reference herein (the "Form 8-K")). 3.1 Certificate of Incorporation of the Registrant dated October 27, 1994 (filed by incorporation by reference to Exhibit 3.3 to the Registration Statement). 3.2 By-Laws of the Registrant (filed by incorporation by reference to Exhibit 3.4 to the Registration Statement). 4.1 Form of Certificate of Common Stock of Registrant (filed by incorporation by reference to Exhibit 4.5 to the Registration Statement). 10.1(1) Second Amendment, dated August 31, 1998, to Registrant's lease on its properties located in Louisville, Colorado. * 10.2(1) Amended and Restated 1993 Outside Director Compensation and Option Plan. -------------------------------------- (1) Filed herewith. * Management contract or compensatory plan. 35 11.1 Statement regarding computation of per share earnings: See "Note 5 to Consolidated Financial Statements." 21.1(1) List of Subsidiaries of the Registrant. 23.1(1) Consent of Ernst & Young LLP, Independent Auditors. 27.1(1) Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the last quarter of 1998. (c) Exhibits (see Item 14(a)(3) above.) (d) Financial Statement Schedules The schedules listed in Item 14(a)(2) above should be used in conjunction with the Consolidated Financial Statements of the Company for the year ended December 31, 1998. ---------------------------- (1) Filed herewith. 36 SCHEDULE VIII TENERA, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (In thousands)
- ---------------------------------------------------------------------------------------------------------------- Additions Deductions ------------ --------------------------- Balance Charged to Balance at Beginning Costs and Credited to End of Description of Year Expenses Special Item Other Year - ---------------------------------------------------------------------------------------------------------------- 1996 Reserve for Sales Adjustment and Credit Losses ............. $ 2,888 $ 289 $ 250 $ 1,301 $ 1,626 1997 Reserve for Sales Adjustment and Credit Losses ............. 1,626 36 122 182 1,358 1998 Reserve for Sales Adjustment and Credit Losses ............. 1,358 9 -- 67 1,300 - ----------------------------------------------------------------------------------------------------------------
37 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 15, 1999 TENERA, INC. By /s/ JEFFREY R. HAZARIAN ------------------------------------ Jeffrey R. Hazarian Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ DELBERT F. BUNCH Director March 15, 1999 - --------------------------- (Delbert F. Bunch) /s/ WILLIAM A. HASLER Director March 15, 1999 - --------------------------- (William A. Hasler) Director, Chief Financial Officer, Executive Vice President, and Corporate Secretary /s/ JEFFREY R. HAZARIAN (Principal Financial Officer) March 15, 1999 - --------------------------- (Jeffrey R. Hazarian) /s/ THOMAS S. LOO Director March 15, 1999 - --------------------------- (Thomas S. Loo) Director, Chief Executive Officer, and President /s/ ROBERT C. MCKAY (Principal Executive Officer) March 15, 1999 - --------------------------- (Robert C. McKay) /s/ ANDREA W. O'RIORDAN Director March 15, 1999 - --------------------------- (Andrea W. O'Riordan) Controller and Treasurer /s/ JAMES A. ROBISON, JR. (Principal Accounting Officer) March 15, 1999 - --------------------------- (James A. Robison, Jr.) /s/ GEORGE L. TURIN Director March 15, 1999 - --------------------------- (George L. Turin) 38 EXHIBIT INDEX Ex. 10.1 Second Amendment, dated August 31, 1998, to Registrant's lease on its properties located in Louisville, Colorado Ex. 21.1 List of Subsidiaries of the Registrant Ex. 23.1 Consent of Independent Auditors Ex. 27.1 Financial Data Schedule EX-10.1 2 SECOND AMENDMENT REGISTRANT'S LEASE Exhibit 10.1 SECOND AMENDMENT TO LEASE This is a Second Amendment to Lease, dated the 31st day of August, 1998, to that certain Lease Agreement, ("Lease") executed the 11th day of November, 1996, by and between T. BRYAN ALU AND CHARLES HURTH, JR., hereinafter called "Landlord" and TENERA, INC., hereinafter called "Tenant". NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: AMENDMENT ITEM NO 1: EXTENSION OF LEASED PREMISES The term of the lease shall be extended for an additional period of approximately two (2) years and one (1) month at the base rate of $8.75 per square foot per year for the leased premises and the expansion space herein noted and shall commence following the current tenant's vacation of the premises and Landlord's completion of its finished obligation pursuant to Item No. 5 herein, expected to be October 15, 1998 (Commencement Date) and will expire at 11:59 on October 31, 2000, pursuant to Section 1.4 of the Lease. AMENDMENT ITEM NO. 2: EXPANSION OF LEASED PREMISES The original Leased Premises is modified to be 4,171 square feet, as shown on the attached floor plan (Exhibit A). Additionally, landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, 2,382 additional square feet (the "Expanded Premises") as shown on Exhibit A and after the Commencement Date, as defined herein, the term "Leased Premises" as defined and used in the Lease shall be deemed to mean and include the original Leased Premises covered by the aforementioned Lease, plus the Expanded Premises. AMENDMENT ITEM NO. 3: BASE RENT Base Rent due on the Leased Premises shall be an amount equal to $4,778.23 per month, based on the rental rate of $8.75 per square foot per annum on 6,553 square feet. This rate shall escalate annually by four percent (4%) on the anniversary dates of the lease and throughout any option periods. AMENDMENT ITEM NO. 4: BUILDING MAINTENANCE Pursuant to Article 11 of the Lease and as amended herein, Landlord shall maintain both interior and exterior of the building including, but not limited to, window cleaning, pest control, landscaping grounds and snow removal from parking areas and sidewalks. The costs for these items will be passed through to Tenant as an operating expense pursuant to Article 6.2 of the Lease (Landlord will reconcile all costs annually and provide Tenant with a full accounting of all costs) and as amended herein, along with a mutually agreed management fee of $.25 per square foot per year. Effective on the Commencement Date, the Tenant's pro-rata share of operating costs as defined in Section 1.2 of the Lease will be amended to equal 27.3%. For reasons of clarity, it is hereby noted that the Tenant is responsible for the following items including, but not limited to signage, trash removal, janitorial, security agreements, and insurance pursuant to Section 9 of the Lease. Tenant shall also have the carpet within the Leased Premises professionally cleaned upon the termination of the Lease. AMENDMENT ITEM NO. 5: TENANT IMPROVEMENTS Prior to the commencement date hereof, Landlord shall re-carpet the expanded portion of the premises with a carpet of similar quality to that in the original space, as shown on the attached Exhibit A, and repaint where necessary. Additionally, Landlord shall replace the stained vertical blinds in the entire leased premises and shall replace any stained or missing ceiling tiles. AMENDMENT ITEM NO. 6: OPTION TO RENEW So long as Tenant is not in default of this lease, Tenant shall have the option to extend this lease for two (2) terms of one (1) year each. The lease rate shall escalate by four percent (4%) for each of these option periods. Tenant shall provide Landlord one hundred twenty (120) days written notice of its intent to so renew. AMENDMENT ITEM NO. 7: ALL OTHER TERMS AND CONDITIONS Except as set forth herein, all of the terms and provisions of the Lease, from and after the Commencement Date, shall be applicable to the Expanded Premises, as well as the original Leased Premises. Except as modified hereby, the terms and provisions of the Lease are hereby ratified and agreed to be in full force and effect. In the event of a conflict between the Second Amendment to the Lease and the Lease, the Second Amendment to Lease shall control. IN WITNESS WHEREOF, Landlord and Tenant have executed this Second Amendment as of the day and year first above written. LANDLORD: TENANT: TENERA, INC. /s/ T. Bryan Alu /s/ William S. Glover - ------------------ --------------------- Its President of TENERA Rocky Flats, LLC /s/ Jeffrey R. Hazarian ----------------------- Executive Vice President and Chief Financial Officer EX-10.2 3 1993 OUTSIDE DIRECTOR COMPENSATION AND OPTION PLAN Exhibit 10.2 TENERA, INC. 1993 OUTSIDE DIRECTOR COMPENSATION AND OPTION PLAN Amended and Restated as of March 1, 1998 1. Purpose of the Plan. The purpose of this 1993 Outside Director Compensation and Option Plan, as Amended and Restated as of March 1, 1998, is to provide for the fair compensation of Outside Directors of the Company; to encourage ownership of Common Stock of the Company by Outside Directors of the Company; to provide an additional incentive for such Outside Directors to continue in service to the Company; and to promote the success of the Company's business. It is anticipated that the Plan will assist the Company in attracting and retaining directors capable of making valuable contributions to the long-term success of the Company. It is the intent of the Company to reduce over several years the cash annual retainer for Outside Directors and grant Options for shares of Common Stock in lieu thereof pursuant to the Plan. 2. Effective Date of Plan. The Plan as originally adopted became effective as of March 1, 1994 pursuant to the approval of the General Partner of the Partnership. Pursuant to the Merger Agreement effecting conversion of the Partnership and Operating Partnership to corporate form, the Plan was amended and restated as of June 30, 1995 to incorporate revisions necessary to reflect the change to corporate form and the fact that Options outstanding under the Plan, whether granted before or after June 30, 1995, relate to Shares of Common Stock of the Company instead of Units representing limited partner interests of the Partnership. This Amendment and Restatement is effective as of March 1, 1998 and increases the number of shares authorized for issuance under the Plan, increases the number of Shares subject to Annual Grants under the Plan and provides for Options to be granted to persons who are not Outside Directors on March 1 of a Plan Year but who are elected or appointed to the Board of Directors as Outside Directors prior to September 1 of such Plan Year. 3. Definitions. Unless the context clearly requires a different meaning, the following words shall have the following meanings when used herein: (a) "Board of Directors" or "Board" means the Board of Directors of the Company. (b) "Common Stock" means the Common Stock, par value $0.01 per share, of the Company. (c) "Company" means TENERA, Inc., a Delaware corporation. (d) "Merger" means the merger of TENERA, L.P. (the "Partnership"), TENERA Operating Company, L.P. (the "Operating Partnership"), and Teknekron Technology MLP I Corporation (the "General Partner"), with and into TENERA, Inc., a Delaware corporation, which succeeded to their assets and liabilities. (e) "Merger Agreement" means the Agreement and Plan of Merger, dated as of June 6, 1995, among the Company, the Partnership, the Operating Partnership, and the General Partner approved by the holders of Units of limited partner interest of the Partnership pursuant to the Partnership's Consent Solicitation Statement filed with the Securities and Exchange Commission dated June 6, 1995. (f) "Option" means an option to purchase shares of Common Stock of the Company granted pursuant to this Plan. (g) "Outside Director" means a member of the Board of Directors of the Company who is not otherwise an officer of or employed by the Company or any affiliate of the Company. (h)"Plan" means this 1993 Outside Director Compensation and Option Plan, Amended and Restated as of March 1, 1998, as it may be amended from time to time. (i) "Plan Year" means a twelve month period ending February 28 of each year, commencing with the year ending February 28, 1994. (j) "Retainer" means the the annual base fee, as adjusted from time to time, paid to Outside Directors as compensation for their service, exclusive of any fees paid for attendance at any meeting of the Board or a committee thereof. (k) "Share" means a share of Common Stock. 4. Retainer; Meeting Fees. Annually the Board of Directors shall establish an annual Retainer payable to the Outside Directors in cash at such time or times as the Board may determine appropriate and establish such meeting fees for attendance at Board or Committee meetings as the Board shall deem appropriate. The Retainer for the current Plan Year ending February 28, 1994 shall be reduced from $12,000 to $6,000. 5. Outside Director's Stock Options. 5.1 Shares of Common Stock Subject to Plan. The maximum number of Shares which may be issued upon exercise of Options granted under the Plan shall be Three Hundred Thousand (300,000) Shares. Such Shares may be either issued Shares which shall have been reacquired by the Company or authorized but unissued Shares as the Board from time to time may determine. If any outstanding Option under the Plan for any reason expires or is terminated without having been exercised in full, the Shares allocable to the unexercised portion of such Option shall again become available for Options pursuant to the Plan. 5.2 Participation in the Plan. All Outside Directors of the Company are eligible for and shall automatically participate in the Plan. A director of the Company who is also an officer or employee of the Company or an affiliate of the Company shall not be eligible to receive any Options pursuant to the Plan. An Outside Director who shall have been granted an Option under the Plan may be granted one or more additional Options provided such Outside Director continues to be eligible to participate in the Plan. 5.3 Issuance of Options. On March 1 of each year for so long as there are Shares available for issuance under the Plan, every Outside Director shall be granted an option to purchase 12,500 Shares, subject to adjustment annually by the Board of Directors (the "Annual Grant"). Commencing with the Plan Year beginning on March 1, 1998 and for so long as there are Shares available for issuance under the Plan, every person who is not a director of the Company on March 1 of a Plan Year but who is elected or appointed to the Board of Directors as an Outside Director prior to September 1 of such Plan Year shall also be granted an Annual Grant on the date of such election or appointment. The Board of Directors may increase or decrease the number of Options granted in each Annual Grant prior to the commencement of the Plan Year for which such Annual Grant is first effective. If the Board takes no action to adjust the size of the Annual Grant, the Annual Grant as in effect for the immediately preceding Plan Year shall remain in effect. 5.4 Option Price. The purchase price of Shares covered by each Option shall be equal to 100% of the fair market value of the Shares at the close of trading on the last trading day prior to the grant date of any Option. Such fair market value shall be the closing price as reported on the American Stock Exchange, or if no such closing price is reported, the closing price on the nearest preceding trading date upon which a sale is reported. 5.5 Term of Options. Each Option shall expire at 11:59 p.m. (Pacific Time) on the date which is ten (10) years after the date of grant. 5.6 Exercise of Options. (a) An Option may be exercised in whole or in part in accordance with its terms, before the expiration of the term of such Option, at any time or from time to time after vesting thereof by the Optionee by giving written notice to the Company, specifying the number of Shares to be purchased and the Option grant date, by mail or in person addressed to the Chief Financial Officer of the Company, 2001 Center Street, Berkeley, California 94704. Each Annual Grant shall vest and shall first become exercisable one year after the date of grant. The number of Shares as to which the Option may be exercised shall be cumulative, so that once the Option shall become exercisable as to any Shares it shall continue to be exercisable as to such Shares, until expiration or termination of the Option as provided herein. No exercise of an Option may be for less than 100 Shares, unless such lesser amount is the entire number of Shares then available for exercise. (b) The purchase price of the Shares purchased upon exercise of an Option shall be paid at the time any notice of exercise is given (i) in full in cash at the time of the exercise; (ii) with shares of the Common Stock of the Company; or (iii) any combination of cash and shares of the Common Stock of the Company. In the event that an Option is exercised in full or in part with shares of the Common Stock of the Company, such Shares shall be valued at 100% of the fair market value of the Shares at the close of trading on the last trading day prior to the exercise of such Option. Such fair market value shall be the closing price as reported on the American Stock Exchange, or if no such closing price is reported, the closing price on the nearest preceding trading date upon which a sale is reported. (c) Whenever the Company issues or transfers Shares under the Plan, the Company shall have the right to require the Outside Director to remit to the Company an amount sufficient to satisfy any federal, state and local withholding tax requirements prior to the delivery of any certificates for such Shares. (d) Upon notice from the Company, the Company's transfer agent shall, on behalf of the Company, prepare a certificate representing such Shares acquired pursuant to exercise of the Option, register the Optionee as the owner of such Shares on the books of the Company and cause the fully executed certificate to be delivered to the Optionee as soon as practicable after payment of the option price in full. The holder of an Option shall not have any of the rights of a Stockholder with respect to the Shares covered by the Option until and to the extent that the Option shall have been duly exercised. 5.7 Nontransferability of Options. An Option shall not be transferable other than by will or the laws of descent and distribution, and an Option may be exercised during the lifetime of the Outside Director only by the Outside Director. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during his lifetime, by operation of law or otherwise, or be made subject to execution, attachment or similar process. 5.8 Termination of Service. (a) In the event that an Optionee ceases to be a member of the Board for any reason other than death or disability (as determined by the Board of Directors), any then unvested Options shall immediately terminate and become void, and any Option which has then vested but remains unexercised shall remain exercisable pursuant to its terms until the expiration date of the Option. (b) In the event that an Optionee ceases to be a member of the Board by reason of death or disability (as determined by the Board of Directors), any then unvested Options shall immediately vest and all vested Options remain exercisable pursuant to their terms at any time until the expiration date of such Option. 5.9 Adjustments Upon Changes in Capitalization. In the event that the outstanding shares of the Common Stock of the Company are changed into or exchange for a different number or kind of securities of the Company or of another corporation or other entity by reason of any reorganization, merger, consolidation, recapitalization or reclassification, or in the event of a stock split, combination or distributions payable in Shares, automatic adjustment shall be made in the number and kind of Shares as to which outstanding Options shall be exercisable and in the available securities set forth in Section 5.1 hereof, to the end that the proportionate interest of the Optionee shall be maintained as before the occurrence of such event. Such adjustment in outstanding Options shall be made without change in the total price applicable to the unexercised portion of such Options and with a corresponding adjustment in the Option price per Share. If an Option hereunder shall be assumed, or a new Option substituted therefor, as a result of sale of the Company, whether by merger, consolidation or sale of property or securities, then membership on the Board of Directors of such assuming or substituting corporation or by a parent corporation or subsidiary therefor shall be considered for purposes of an Option to be membership on the Board of Directors of the Company. 6. Transfer Limitations Upon Exercise. As part of the consideration for and as a condition to each Annual Grant and the issuance of Shares upon exercise of an Option, the Outside Director shall not sell, transfer, pledge, encumber or otherwise dispose of more than fifty percent (50%) of the Shares subject to each Annual Grant prior to the date which is six (6) months after the date on which such Outside Director is no longer a director of the Company. Notwithstanding the above limitation on transferability of Shares acquired upon exercise of an Option, in the event of the death or disability of the Outside Director as referenced in Section 5.8(b), all such Shares shall be freely transferable by the Outside Director or his or her legal representative or heirs, as the case may be, subject to all applicable federal and state securities laws. The Company may issue such instructions as it deems appropriate to its transfer agent to evidence the limitations on transferability of such Shares, including, without limitation, appropriate legends on certificates representing the Shares acquired upon exercise of an Option and "stop transfer" instructions with respect thereto. 7. Termination and Amendment of the Plan. No Option shall be granted under the Plan after ten years from the date the Plan is adopted by the Board of Directors. The Board may at any time prior to or after that date suspend or terminate the Plan. No such termination or suspension shall impair, without the consent of the Optionee, any Option theretofore granted to such Optionee under the Plan or deprive such Optionee of any Shares which he or she may have acquired under the Plan. Any Option outstanding at the time of termination of the Plan shall remain in effect subject to the provisions of this Plan until the Option shall have been exercised or shall have expired. The Board may at any time modify or amend the Plan provided that no such modification impairs, without the consent of the Optionee, any Option theretofore granted. 8. Administration of the Plan. The Plan is intended to be self-operative to the maximum extent consistent with prudent business practice and no separate agreement evidencing any Annual Grant shall be required. 9. Regulatory Matters. (a) Each Option granted under the Plan shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the shares of the Common Stock subject to such Option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the issue or purchase of Shares thereunder, no such Option may be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board. (b) The Company shall have no obligation to deliver any certificates representing Shares upon exercise of an Option until one of the following conditions has been satisfied: (i) The issuance of the Shares with respect to which the Option has been exercised has been registered under applicable federal and state securities laws; or (ii) Counsel for the Company shall have given an opinion that such issuance of Shares is exempt from registration under applicable federal and state securities laws; and (iii) The Company has complied with all applicable laws and regulations, including, without limitation, all regulations of the American Stock Exchange or any other exchange on which the Company's Common Stock is then listed for trading. (c) The Company shall use its best efforts to bring about compliance with the above conditions within a reasonable time, except that the Company shall be under no obligation to cause a registration statement or post-effective amendment of any registration statement to be prepared at its expense solely for the purposes of covering the issuance of Shares pursuant to the exercise of an Option. (d) The Company may require the Optionee to deliver written representations and warranties upon exercise of an Option that are necessary or appropriate to show compliance with federal and state securities laws, including representations to the effect that a purchase of Shares under the Option is made for investment and not with a view to their distribution (as that term is used in the Securities Act of 1933, as amended). EX-21.2 4 LIST OF SUBSIDIARIES OF THE REGISTRANT Exhibit 21.2 TENERA Energy, LLC TENERA Rocky Flats, LLC TENERA Technologies, LLC TENERA Colorado Corp. EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS 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 Option Plan of TENERA, Inc., as amended, of our report dated January 22, 1999, with respect to the consolidated financial statements and schedule of TENERA, Inc., included in the Form 10-K for the year ended December 31, 1998. ERNST & YOUNG LLP San Francisco, California March 15, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS Dec-31-1998 Jan-01-1998 Dec-31-1998 3,361 0 6,726 1,300 0 9,012 194 0 9,206 4,538 0 5,803 0 0 0 9,206 0 27,445 0 20,718 4,853 0 (129) 2,003 329 1,674 0 0 0 1,674 0.17 0.16
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