TO TENNEY SHAREHOLDERS:
The year of 1995 represented a decided improvement over
1994 and previous
years, with each quarter showing an operating profit, plus
additional gains on
exchange of property and extraordinary items. Our net worth has
become positive
in the amount of $591,000.
Revenues in 1995 increased to $9,564,000 from $7,159,000 in
1994 and
included sales in DynaVac, license and technology fees, rental
income and service
revenue, as well as parts and used equipment sales.
For the year the Company had income from operations of
$673,000 versus a
loss in 1994 of $(209,000). Net income for 1995 was $1,743,000
or $0.48 per
share compared to $1,146,000 or $0.31 per share in 1994. The
year included
meeting bank requirements by completely paying off bank debt.
Our manufacturing operation, DynaVac, has continued its
growth and
profitability in its niche marketplace of custom vacuum
equipment.
Our service operation has expanded into the sale of used
equipment, as well
as the continuing servicing, refurbishing, upgrading and sale of
parts for
equipment manufactured by us through our 64-year history as well
as competitors'
equipment.
Please refer to the "Management's Discussion and Analysis"
section of this
report for a detailed status of the Company.
We thank you for your patience, understanding and continued
support and
look forward to the future as a challenge for our existing and
new business
segments.
Sincerely,
Robert S. Schiffman
Chairman, President and
Chief Executive Officer
March 27, 1996
TENNEY ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
(In thousands of dollars)
ASSETS
Current assets:
Cash and cash equivalents $ 223
Accounts receivable, net 1,715
Current portion of installment note receivable 45
Inventories 311
Prepaid expenses and other current assets 97
Deferred tax asset 228
Total current assets 2,619
Equipment, net 311
Installment note receivable, noncurrent portion 323
Other assets 145
Total Assets $ 3,398
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 1,518
Current portion of long-term capital leases 76
Accrued payroll and payroll taxes 162
Billings in excess of estimated revenue on
long-term contracts 318
Pension obligation, current portion 36
Total current liabilities 2,110
Long-term debt, net of current portion 697
Total liabilities 2,807
Commitments and contingencies
Stockholders' equity:
Preferred stock $1.00 par value:
Authorized 1,000,000 shares
Issued and outstanding - none
Common stock $.10 par value:
Authorized 10,000,000 shares
Issued 3,694,980 shares 369
Additional paid-in capital 1,960
Retained earnings (deficit) (1,701)
628
Less treasury stock, 9,388 shares, at cost 37
Total stockholders' equity 591
Total liabilities and stockholders' equity $ 3,398
See Notes to Consolidated Financial
Statements.
TENNEY ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
(In Thousands of Dollars Except per Share Amounts)
Net revenue:
Product and product related $ 7,803 $ 5,108
Service 1,020 1,448
Parts 741 603
Totals 9,564 7,159
Cost of sales:
Product and product related 6,011 4,256
Service 663 920
Parts 307 278
Totals 6,981 5,454
Gross profit 2,583 1,705
Other expenses:
Selling and administrative expenses 1,910 1,942
Provision for loss on restructuring - (28)
Totals 1,910 1,914
Income (loss) from operations 673 (209)
Other income (expense):
Interest expense (74) (367)
Gain on exchange of property in lieu of
foreclosure - 1,460
Other income, net 61 66
Totals (13) 1,159
Income before income taxes and
extraordinary items 660 950
Income taxes (benefit) (220) 24
Income before extraordinary items 880 926
Extraordinary item - gain on restructuring
of debt net of income tax of $6 thousand 863 220
in 1995 and $4 thousand in 1994
Net income $ 1,743 $ 1,146
Net income per common share before
extraordinary items $ 0.24 $ 0.25
Extraordinary item per common share 0.24 0.06
Net income per common share (see Note 11) $ 0.48 $ 0.31
Exercise of options would not be dilutative.
See Notes to Consolidated Financial Statements.
TENNEY ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1995 AND 1994
(In Thousands of Dollars)
Additional Retained Less
Common Stock Paid-in Earnings Treasury Stock
Shares Amount Capital (Deficit) Shares Amount Totals
Balance January 1,
1994 3,694,980 $ 369 $ 1,960 $ (4,590) 9,388 $ 37 $ (2,298)
Net income 1,146 1,146
Balance December
31, 1994 3,694,980 369 1,960 (3,444) 9,388 37 (1,152)
Net income 1,743 1,743
Balance December
31, 1995 3,694,980 $ 369 $ 1,960 $ (1,701) 9,388 $ 37 $ 591
See Notes to Consolidated Financial Statements.
TENNEY ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
Operating activities:
(In Thousands of Dollars)
Net income $ 1,743 $ 1,146
Adjustments to reconcile income to net cash
provided by (used in) continuing operations:
Depreciation and amortization 72 132
Provision for restructuring - (89)
Provision for pension withdrawal liability - (28)
Provision for inventory write-downs - 200
Provision for bad debts - 50
Deferred tax asset (228) -
Gain on conveyance of property
in lieu of foreclosure - (1,460)
Gain on debt forgiveness, principal and interest (869) (289)
Acquisition of capital leases for fixed assets 194 -
Changes in operating assets and liabilities:
Accounts and installment receivables (533) 141
Inventories (27) 428
Prepaid expenses and other current assets (11) (23)
Other assets (7) (90)
Accounts payable and other liabilities 170 196
Accrued payroll and payroll taxes 37 (41)
Billings in excess of estimated revenues (403) 667
Pension obligation 79 -
Net cash provided by continuing operations 217 940
Investing activities:
Acquisition of equipment (244) (42)
Net cash (used in) investing activities (244) (42)
Financing activities:
Payments of note payable and long-term capital leases (592) (345)
Net cash used in financing activities (592) (345)
Net increase (decrease) in cash and cash equivalents (619) 553
Cash and cash equivalents, beginning of year 842 289
Cash and cash equivalents, end of period $ 223 $ 842
Supplemental disclosure of cash flow information:
Interest paid $ 8 $ 37
Income tax paid 28 -
See Notes to Consolidated Financial Statements.
Note 1 - Summary of accounting policies:
Principles of consolidation:
The consolidated financial statements include the
accounts of Tenney
Engineering, Inc. (the "Company") and its
wholly-owned subsidiaries. All
material intercompany accounts and transactions
have been eliminated in
consolidation.
Net Revenues:
Revenue from product sales and short-term contracts
and services are
recognized when the transactions are consummated.
The Company generally
recognizes revenue on long-term, large installation
contracts under the
percentage of completion method. Under this
method, revenue is recognized
according to the ratio of costs incurred to
currently estimated total contract
costs. At the time a loss on a contract becomes
known, the entire amount of
the estimated ultimate loss is recorded.
Product and product-related net revenue includes
revenue from the Company's
manufacturing operation, including the discontinued
activities (see Note 3),
license and technology fees and rental income.
Service revenue includes
revenue from the servicing and installation of
environmental equipment and
from the services provided under the Leased
Employee Agreement with the
Licensee (see Note 4). Parts revenue includes
revenue from the sale of
replacement and spare parts for equipment
previously manufactured by the
Company as well as equipment now being manufactured
by the Licensee.
Cash equivalents:
The Company considers all highly liquid debt
instruments purchased with a
maturity of three months or less to be cash
equivalents.
Inventories:
Inventories are valued at the lower of cost
(first-in, first-out) or market.
Work-in-process inventories are stated at actual
production cost, including
factory overhead.
Machinery and equipment:
Machinery and equipment are carried at cost, less
accumulated depreciation.
Depreciation is provided using primarily the
straight-line method over the
estimated useful lives of the assets. Estimated
useful lives vary from 3 to
10 years.
Research and development costs:
Costs and expenses related to research and product
development are expensed
as incurred. There were no research and
development costs for 1995 and 1994,
respectively.
Gain per common share:
Gain per common share is computed based on the
weighted average number of
common shares outstanding during the year. The
assumed exercise of
outstanding stock options would not have a
significant effect on the per
share computations. The weighted average number of
common shares outstanding
was 3,685,592 in 1995 and 1994, respectively (see
Note 11).
Stock-based compensation:
In 1996 we will adopt SFAS No. 123, "Accounting for
Stock-Based Compensation."
This standard establishes a fair value method of
accounting for stock-based
compensation plans either through recognition or
disclosure. We intend to
adopt this standard by disclosing the pro forma net
income and earnings per
share amounts assuming the fair value method was
adopted on January 1, 1995.
The adoption of this standard will not impact our
results of operations,
financial position or cash flows.
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 reported amounts of assets and
liabilities and disclosure of
contingent assets and liabilities at the date of
the financial statements and
revenues and expenses during the period reported.
Actual results could differ
from those estimates. Estimates are used when
accounting for long-term
contracts, allowance for doubtful accounts,
inventory obsolescence, product
warranty reserves, depreciation and amortization,
employee benefit plans,
taxes, restructuring reserves and contingencies.
Note 2 - Financial condition and results of operation:
As shown in the accompanying consolidated financial
statements, the Company has
incurred net income for the years ended December 31,
1995 and 1994, respectively,
from operations, which has resulted in an increase in
the Company's consolidated
financial condition.
On December 12, 1994, the bank and the Company signed
a Settlement Agreement in
which the Company conveyed to the Bank the title in
the real estate located at
Union, New Jersey, and reduced total debt
significantly. During 1995, the
Company paid all of the bank debt when due (see Note
9).
As at December 31, 1995, the Company completed three
years under the License
Agreement, and the Licensee has performed its
obligations, for the most part,
under the various agreements incorporated under the
License Agreement (see Note
4).
Significant obligation:
As discussed in Note 3, with the cessation of its
manufacturing operations at
the Union, New Jersey, facility, the Company received
a revised notification for
payment of a withdrawal liability from its union
employees' multi-employer
pension plan in the amount of approximately $502,000.
The Company has engaged
counsel to advise it with respect to this matter.
The Company met with a
representative of the pension plan and has made a
proposal to the Fund for
extended terms and a reduction of the principal.
Failure to reach an accord will
have a material adverse effect on the Company.
Note 3 - Restructuring:
The Company in February, 1993, ceased manufacturing
operations at its Union, New
Jersey, facility. The Company's operations now
consist of manufacturing, through
one of its wholly owned subsidiaries, diversified
vacuum systems for space
simulation, optic coating and plasma treatment for
medical labware, the servicing
and installation of environmental equipment, and
earning license and technology
fees.
During the fourth quarter of 1993, the Company
received a demand from the Sheet
Metal Workers' National Pension Fund (the "Fund") for
payment of a withdrawal
liability from its union employees' multi-employer
pension plan in the amount
of approximately $530,000, to be paid in quarterly
payments starting in January,
1994. The Company engaged counsel to advise it in
these matters and made a
provision for this amount in the 1993 Consolidated
Financial Statements. The
Company failed to make the first payment when due in
January 1994. In March
1994, the Company received notice that they were in
default. In May 1994, the
Company proposed, through counsel, an amount
significantly less than the original
amount. In June 1994, the Company received
notification from the Fund rejecting
the Company's offer.
In November 1994, the Company proposed, through
counsel, a modified offer
significantly less than the total demanded, along
with a significantly less
periodic payment. The Company continued to make
periodic payments significantly
less than the requested periodic amounts. In
December 1994, the Company received
from the Fund a modified calculation of the
withdrawal liability in the amount
of approximately $502,000. On May 31, 1995, the
Company received a rejection
of all proposals along with all funds tendered.
On December 7, 1995, the Company was served with a
Complaint of Civil Action
filed in the U.S. District Court, Eastern District of
Virginia, by the Fund,
demanding payment of past-due installments of
withdrawal liability (aggregating
$271,034 at the date of the Complaint), plus interest
on overdue installments,
statutory liquidated damages, attorneys' fees and
injunctive relief requiring
payment of future quarterly withdrawal installments
and in the alternative
immediate payment of the entire withdrawal liability
plus accrued interest,
statutory liquidated damages and attorneys' fees.
In February 1996, the Company filed an Answer and
Affirmative Defense to the
action. The Company and its counsel are having
discussions with representatives
of the Fund in an attempt to reduce the amount of the
liability and to work out
an installment payment schedule. At December 31,
1995, the Company had in
reserve $581,000 in respect of the possible liability
to the Fund.
In the expectation that an agreement can be arrived
at with the Fund, the amount
reserved has been classified as being current and
non-current.
The Company is not in a position to make immediate
payment of the entire amount
or a significant portion of the entire amount
demanded by the Fund in the
Complaint. If the Company is required to make
immediate payment of the entire
amount or of the past-due installments alleged to be
due, it would have a
material adverse effect on the Company.
The Company reported net income of $1,743,000 and
$1,146,000 for the years
ended December 31, 1995 and 1994, respectively. The
table below presents the
Company's consolidated net revenue and gross profit
for those periods, and the
estimated portions thereof attributable to its
continuing activities and the
activities that have been discontinued. For
financial accounting purposes, the
discontinued activities are considered to be a
portion of the same business
segment as those of the continuing activities and,
accordingly, have not been
reflected as a discontinued operation in the
Company's consolidated financial statements.
1995 1994
(In Thousands of Dollars)
Net revenue:
Continuing activities $ 9,564 $ 6,845
Discontinued activities - 314
Totals $ 9,564 $ 7,159
Gross profit:
Continuing activities $ 2,583 $ 1,746
Discontinued activities - (20)
Totals $ 2,583 $ 1,726
Note 4 - License agreement:
Concurrent with the Company's announcement to
discontinue manufacturing at the
Union Facility, the Company entered into a six-year
licensing agreement with a
privately owned manufacturer (the "Licensee") of
environmental conditioning
equipment. The terms of the agreement, among others,
provide for: the Licensee
to manufacture and sell environmental test chambers
and other equipment under
the Tenney name with the Company also retaining the
right to manufacture such
products; the Company to receive license fees (up to
a maximum of $1,900,000)
equal to 5% of qualifying sales during the term of
the agreement with specified
minimum amounts payable annually; an option for the
Licensee to purchase the
Company's rights, title and interest in the Tenney
trademark for $100,000 at the
end of the license term in the event the Company is
no longer manufacturing such
products; the Company to perform all servicing and
installation of the
aforementioned equipment; and perform other Company
obligations related to the
Technology Transfer Agreement (see Note 14). The
agreement further requires the
Licensee to purchase annually, from a former
subsidiary of the Company, depending
on market conditions, certain minimum amounts of
inventory with cash payments
thereon being made directly to the Company (see Note
6).
In addition, the Company entered into a four-year
consulting agreement with the
Licensee whereby, for an annual fee of $120,000, the
Company will make the
services of the Company's president available to the
Licensee for a specified
period of time (see Note 13).
In 1995 and 1994, the Company earned License fees of
approximately $387,000 and
$275,000, respectively. Net revenue for 1995 and
1994 includes consulting
revenue of $120,000. Purchases by the Licensee from
the Company's former
subsidiary in 1995 and 1994 totaled approximately
$9,500 and $2,400,
respectively.
Note 5 - Accounts receivable:
Accounts receivable consist of the following:
1995
(In Thousands of Dollars)
Accounts receivable, billed $1,625
Due from Licensee, net 128
1,753
Allowance for doubtful accounts (38)
Totals $1,715
At December 31, 1995, sales recognized on the
percentage of completion method
approximated $5,603,800.
Note 6 - Note receivable:
In December 1992, the Company sold all of the
outstanding stock of its wholly-
owned insulated enclosure subsidiary, Gloekler
Refrigerator Company ("Gloekler")
for aggregate consideration of approximately
$858,000, of which $300,000 was
cash. The balance was evidenced by installment
receivables which provide for
payments by Gloekler either in cash or by credits
issued for inventory purchases
through 2005. The receivables, which have been
discounted to reflect imputed
interest are secured by a second lien on all of
Gloekler's assets including the
common stock and are personally guaranteed by the
purchaser.
Note 7 - Inventories:
Inventories consist of the following:
1995
(In Thousands of Dollars)
Raw materials $ 587
Work in process 34
621
Less:
Provision for write-downs to estimated
realizable value 310
Totals $ 311
Accumulated costs on long-term contracts recognized
by the percentage of
completion method (see Note 5) were approximately
$3,521,000 and $3,514,000 in
1995 and 1994, respectively.
Note 8 - Property and Equipment:
Property and equipment, which is stated at cost, is
summarized as follows at
December 31, 1995:
1995
(In Thousands of Dollars)
Property (see below) $ -
Equipment 1,264
Equipment under capital leases 324
1,588
Accumulated depreciation (1,277)
Total equipment - net $ 311
On December 12, 1994, in accordance with the
Settlement Agreement, the Company
conveyed to First Fidelity Bank, N.A. (the "Bank")
the title to all real estate
located in Union, New Jersey, with a net book value
of approximately $340,000
net of accumulated depreciation (see Note 9).
In conjunction with the conveyance of the property,
the Company entered into a
Use and Occupancy Agreement for approximately 10,500
square feet of space at an
annual rental of $50,000 and 25% of building
operating costs (excluding real
estate taxes), which was terminated on December 14,
1995. On that date the
Company entered into a three-year lease with the new
owner of the property for
approximately 10,500 square feet at an annual rental
of $70,000. On January 12,
1996, the Company and the new owners entered an
amendment to the lease for an
additional 8,000 square feet of space at an annual
rental of $20,000, occupancy
not to take effect until July 1996.
In addition, the Company leases certain equipment for
use in its operations under
capital leases. Property and equipment at December
31, 1995, included capital
leases of $324,000 and related accumulated
depreciation of $106,000.
At December 31, 1995, the aggregate minimum rental
commitments under non-
cancellable leases for the period shown are as
follows:
Year Capital Leases Operating Leases
(In Thousands of Dollars)
1996 $ 85 $ 69
1997 51 90
1998 51 90
1999 49 -
2000 30 -
Total $ 266 $ 249
Less imputed interest 38
Present value of net lease payments $ 228
Less current installments 76
Long-term debt obligation at
December 31, 1995 $ 152
Imputed interest was calculated using rates between
7.06% - 9.76%
Note 9 - Debt:
Debt maturing within one year consists of the
following at December 31,
1995 1994
(In Thousands of Dollars)
Notes payable - bank $ - $ 590
Current portion of capital leases 76 -
Current portion of pension obligation 36 -
Total $ 112 $ 590
The Company was indebted to the Bank in the amount of
$1,020,000 principal at
June 30, 1994, pursuant to a line of credit agreement
evidenced by a promissory
note (the "Term Note"), the maturity date of which
had been extended from time
to time. The Company was also indebted to the Bank
in the amount of $2,480,474
principal pursuant to a mortgage loan secured by the
Company's real property in
Union, New Jersey. The Bank also had a security
interest in substantially all
of the Company's other assets.
The Company and the Bank entered into a Settlement
Agreement as at December 12,
1994, in which the Company conveyed the title to the
real estate located in
Union, for a credit of $1,800,000 against the total
indebtedness of $3,758,663,
the remaining balance of $1,958,663 was converted to
a non-interest Note due
September 30, 1995, in the amount of $800,000,
payable $200,000 in December,
1994, and the balance of $600,000 due in nine monthly
non-interest-bearing
amounts of $66,667, and forgiveness of debt of
$1,158,663. The original Term
Note security in substantially all the Company's
assets remained in effect,
until 93 days after the date of the last payment. As
at August 30, 1995, the
Company paid the balance of the Term Note. The
forgiveness of $1,158,663 has
been recognized, $289,666 during the fourth quarter
of 1994 and the remaining
$868,997 quarterly during the first three quarters of
1995.
Long-term debt consists of the following at December
31,
1995
(In Thousands of Dollars)
Capital lease obligations $ 228
Multi-employer pension obligation 581
Total long-term debt including
current maturities 809
Less: current maturities 112
Total long-term debt $ 697
Long-term liabilities consist of capital leases
entered into for equipment of
$194,000 in 1995, and the long-term portion of the
multi-employer pension fund
liability (see Note 3). The debt to mature under the
multi-employer pension fund
liability is $37,000--1996; $37,000--1997;
$37,000--1998; $37,000--1999;
$55,000--2000; and $388,300 thereafter.
Note 10 - Income taxes:
Effective January 1, 1993, the Company has adopted
the Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"),
"Accounting for Income Taxes."
SFAS 109 requires the use of an asset and liability
approach in accounting for
income taxes. Deferred tax assets and liabilities
are recorded based on
differences between the financial statement and tax
bases of assets and
liabilities at the tax rates in effect when these
differences are expected to
reverse.
Deferred tax assets are reduced by a valuation
allowance if, based on the weight
of available evidence, it is more likely than not
that all or some portion of
the deferred tax assets will not be realized. The
ultimate realization of the
deferred tax asset depends on the Company's ability
to generate sufficient
taxable income in the future. While management
believes that the total deferred
tax asset will eventually be fully realized by future
operations, as a result
of the losses experienced prior to 1994, management
recorded a valuation
allowance equal to 100% of the deferred tax asset
upon adoption of SFAS 109 on
January 1, 1993. As a result, the initial adoption
of SFAS 109 has no impact
on the Company's consolidated financial statements.
At December 31, 1995, it was determined that the
valuation allowance should be
reduced by $228,000. This determination was based
primarily on the improvement
in the Company's net income during 1995 and 1994.
Accordingly, management believes that it is more
likely than not that the Company
will generate sufficient taxable income to realize
these future tax benefits.
The changes in the valuation allowance resulted in
the recording at December 31,
1995, of an income tax benefit of $214,000.
If the Company is unable to generate sufficient
taxable income in the future,
increases in the valuation allowance will be required
through a charge to
expense. If, however, the Company achieves
sufficient profitability to realize
all of the deferred tax assets, the valuation
allowance will be further reduced
and reflected as an income tax benefit in future
periods.
The components of the net deferred tax asset are as
follows at December 31, 1995:
(In Thousands of Dollars)
Deferred tax assets:
Inventory reserve $ 105
Accounts receivable reserve 13
Deferred revenue 111
Deferred compensation 41
Deferred pension obligation 197
Tax loss carryforward 1,168
Total deferred tax assets 1,635
Deferred tax liabilities:
Depreciation (3)
Valuation allowance (1,404)
Total net deferred tax assets $ 228
In 1995 and 1994, the Company utilized net operating
loss carryforwards of
$1,028,000 and $1,612,000, respectively. The income
tax expense results from
the federal alternative tax which was allocated as
follows:
1995 1994
(In Thousands of Dollars)
Income before extraordinary item $ 8 $ 24
Extraordinary item 6 4
Current income tax expense 14 28
Deferred income tax benefit 228 -
Net income tax (benefit) $(214) $ 28
At December 31, 1995, the Company has available, for
tax reporting purposes, net
operating loss carryforwards of approximately
$3,400,000 which expire through
2008.
A reconciliation of income tax provision at federal
statutory rate to the income
tax provision at the effective tax rate as follows:
The effective rate for 1995
is 39% and for 1994 was 34%.
1995 1994
(In Thousands of Dollars)
Income taxes computed at the federal
statutory rates $ 350 $ 628
State taxes (net of federal benefit) 60 165
Realization of benefits of tax loss
carryforwards (396) (765)
Reduction of valuation allowance (228) -
Net income tax (benefit) $(214) $ 28
Note 11 - Common stock:
On May 26, 1995, at the annual meeting, a new
ten-year incentive stock option
plan for officers and key employees was approved and
adopted. The plan provided
that options could be granted from time to time at a
price of not less than 100%
of the fair market value of the common stock as of
the date of grant for officers
and employees who own less than 10% of the voting
stock of the Company and 110%
of fair market value for those officers and employees
who own more than 10% of
the voting stock (affiliate employees). Options
granted are exercisable
immediately and terminate no later than ten years
from date of grant (five years
from date of grant for affiliate employees). On June
1, 1995, the Board of
Directors of the Company granted and issued, to
officers and key employees,
155,000 options under the 1995 ten-year incentive
stock option plan for officers
and key employees. Certain employees with the right
to purchase 57,000 shares
of stock under the 1991 ten-year incentive stock
option plan surrendered all
outstanding options.
A summary of plan transactions follows:
Number of Option Price
Shares per Share
Outstanding and exercisable -
January 1, 1995 57,000 $.31250 - $.34375
Outstanding and exercisable -
June 1, 1995 155,000 $.23437 - $.25781
Cancelled (57,000) $.31250 - $.31250 Outstanding and exercisable -
December 31, 1995 155,000 $.23437 - $.25781
Note 12 - Retirement and pension plans:
The Company maintains a retirement plan for salaried
employees (the "Salaried
Plan") which provides for defined benefits. The
Company's funding policy is
to contribute annually at least the minimum amount
required by the Employee
Retirement Income Security Act of 1974. In June
1989, the Company amended the
Salaried Plan so that benefits would no longer accrue
and subsequent to that date
contributions have not been required due to the
overfunded status of the Salaried
Plan. The Company accounted for the curtailment in
1989 pursuant to Statement
of Financial Accounting Standards No. 88, "Employer's
Accounting for Settlements
and Curtailments of Defined Benefit Plans and for
Termination Benefits."
The following table sets forth the funded status of
the Salaried Plan assuming
a discount rate of 7% at December 31, 1995:
1995
(In Thousands of Dollars)
Actuarial present value of projected benefit
obligation including vested benefits of $587 $ 587
Plan assets at fair value, primarily insurance
contracts 637
Plan assets in excess of projected benefit
obligation consisting entirely of unrecognized net gain $ 50
The expected long-term rate of return on assets was
7.5%.
Union employees were included in a separate
multi-employer pension plan to which
the Company made monthly contributions in accordance
with a contractual union
agreement based on monthly hours worked. There was
no related pension expense
in 1995 and 1994. Due to the cessation of
manufacturing operations at the
Company's Union, New Jersey, facility, the Company
ceased being a participant
in the multi-employer pension plan in February 1993
(see Note 3).
Note 13 - Commitments and contingencies:
Employment agreement:
In connection with the license agreement which
provides for the Company to
receive $120,000 annually pursuant to a consulting
agreement (see Note 4),
the Company entered into a four-year employment
agreement with its president
which requires a minimum annual salary of $200,000
commencing in 1993.
Lease commitment:
DynaTenn, Inc. (d/b/a "DynaVac"), a wholly-owned
subsidiary which
manufactures diversified industrial vacuum
equipment, leases its facility
in Weymouth, Massachusetts under an operating
lease which expires in April
1996. Rent charged to operations under this lease
approximated $68,000 and
$60,000 in 1995 and 1994, respectively.
Tenney Engineering, Inc. leases its facility in
Union, New Jersey under an
operating lease which expires in December 1998
(see Note 8). Rent charged
to operations under a Use and Occupancy Agreement
(see Note 8) was $50,000
in 1995 and $2,083 in 1994.
Contingencies:
The Company is involved in various lawsuits.
Other than the one explained
in Note 3, all the others are covered by insurance
and subject to deductible
amounts. Management believes that the outcome of
these lawsuits will not
have a material adverse effect on the Company's
consolidated financial
condition.
Note 14 - Technology Transfer Agreement:
In April 1991, the Company entered into a Technology
Transfer Agreement (the
"Technology Agreement") with an entity in the
People's Republic of China for
an eight-year period. The Technology Agreement
requires the Company to provide
certain technology to assist the purchaser in
developing and producing
environmental chambers. Provisions of the Technology
Agreement include time
tables during which the technology will be
transferred and training will be
provided. In addition, should the purchaser be
successful in developing and
producing products, of which there is no guarantee,
the Technology Agreement
contains provisions relating to the future purchase
of these products by the
Company and places restrictions on the purchaser's
sale of products within the
Company's marketplace. In conjunction with the
license agreement (see Note 4),
the Licensee agreed to perform certain of the
Company's obligations under the
Technology Agreement, including the purchase of
products.
The aggregate contract amount under the Technology
Agreement is $1,200,000,
which is secured by a letter of guarantee. Payments
occur upon the completion
of certain milestones and revenue is recognized as
earned. Payments from this
contract totalled approximately $0, $0, $149,000,
$165,000 and $360,000 in 1995,
1994, 1993, 1992 and 1991, respectively. During 1995
and 1994, the Company
recognized in net revenue approximately $0 and
$20,000, respectively, under the
Technology Agreement. There were nominal expenses in
1995 and 1994.
Note 15 - Other income and (expense):
Other income and (expense) consist of the following:
1995 1994
(In Thousands of Dollars)
Interest expense $ (74) $ (367)
Gain on:
Exchange of property in lieu
of foreclosure (A) - 1,460
Interest income 21 23
Other, net 40 43
Totals $ (13) $1,159
(A) On December 1, 1994, the Company entered into
a Settlement Agreement with
the Bank, which in part required the Company
to convey to the Bank the
title to the real estate, with a net book
value of approximately
$340,000, for a credit against the total
indebtedness of $1,800,000,
which resulted in a net gain of $1,460,000 for
the year (see Note 9).
Note 16 - Extraordinary item
Extraordinary item consists of gain on restructuring
of debt net of income taxes.
The Settlement Agreement also provided for the
forgiveness of debt to be forgiven
quarterly when periodic quarterly payments totaling
$200,000 are made timely.
The Company in December of 1994 made the first
required payment of $200,000, and
recognized the forgiveness of $224,000 principal and
$65,000 interest forgiveness
was netted against interest expense for the year
ended December 31, 1994. During
the first three quarters of 1995, the Company made
timely payments of amounts
due under the Settlement Agreement and accordingly
recognized approximately
$869,000 forgiveness of debt (see Note 9).
Note 17 - Major customer and concentrations of credit risk:
Major customer:
During the year ended December 31, 1995, the
Company did not have any major
customer who contributed more than 10% of net
revenue. There was one major
customer who accounted for net revenue in excess
of 10% during the year ended
December 31, 1994.
Concentrations of credit risk:
The Company's financial instruments that are
exposed to concentrations of
credit risk consist primarily of cash equivalents,
accounts receivable and
inventories. The Company places its cash and cash
equivalents in highly
liquid instruments with high credit quality
financial institutions.
In general, the Company's accounts receivable
result from its manufacturing
and servicing operations and reflect a broad
customer base to primarily
large-sized companies both nationally and
internationally. Also, the Company
routinely assesses the financial strength of its
customers. As a
consequence, with the exception of the major
customer noted above and amounts
due from the Licensee, concentrations of credit
risk are limited.
The Company maintains cash balances at several
financial institutions located
in the Northeast. Accounts at each institution
are insured by the Federal
Deposit Insurance Corporation up to $100,000. At
December 31, 1995, the
Company's uninsured cash balances total
approximately $23,000.
Note 18 - Supplemental schedule of noncash investing and
financing activities:
During 1995 the Company recognized $869,000 in
forgiveness of debt, in addition
entered into a five-year capital lease in the amount
of $144,000 for computer
equipment. In 1994, the Company exchanged property
with a book value of
approximately $340,000 for a credit against its bank
indebtedness of $1,800,000.
In addition, the Bank forgave approximately $224,000
of principal indebtedness
(see Notes 15 and 16).
* * *
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Tenney Engineering, Inc.
We have audited the accompanying consolidated balance
sheet of Tenney Engineering, Inc. and Subsidiaries as of December 31, 1995,
and the related consolidated statements of operations, changes in
stockholders' equity (deficiency) and cash flows for the years ended
December 31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements 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
over all financial statement presentation.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Tenney Engineering, Inc. and Subsidiaries as of December 31, 1995, and the
consolidated results of its operations and its cash flows for the years
ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
ZELLER WEISS & KAHN
Mountainside, New Jersey
March 27, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
During 1995, the restructuring that was started in 1992 was
concluded. The Company and the
Bank entered into a Settlement Agreement as at December 12, 1994,
in which the Company
conveyed the title to the real estate located in Union, New
Jersey, for a credit of
$1,800,000 against the total indebtedness of $3,758,663. The
remaining balance of $1,958,663
was converted to a non-interest Note due September 30, 1995 in
the amount of $800,000,
payable $200,000 in December 1994 and the balance of $600,000 due
in nine monthly non-
interest-bearing amounts of $66,667, and forgiveness of debt of
$1,158,663. The Bank's
security interest in substantially all the Company's assets
remained in effect, until 93 days
after the date of the last payment. The forgiveness of
$1,158,663 was recognized quarterly
upon the Company's paying the monthly amounts when due. The
Company made all payments to
the Bank when due, and on August 29, 1995, paid the final
balance. The forgiveness of
$1,158,663 was recognized, $289,666 during the fourth quarter
1994 and the balance of
approximately $869,000 was recognized during the first three
quarters of 1995. (See Note
9 of the Notes to Consolidated Financial Statements.)
During 1995, the Company has been able to generate a positive
cash flow from operations.
At December 31, 1995, the Company's cash and cash equivalents
totaled $223,000 as compared
to $842,000 at December 31, 1994. Contributing to the change in
cash between years was cash
provided by operating activities of $217,000 in 1995 and $940,000
in 1994. The principal
reason for cash being provided by operating activities in 1995
was the obtaining of longer
terms from vendors. The two principal reasons for the cash
provided by operating activities
in 1994 were $428,000 realization of inventory and $667,000
progress payments received in
advance of billings on work-in-process projects. The primary use
of cash was the paying off
of the Company's note payable bank (see Note 9 of the Notes to
Consolidated Financial
Statements). At December 31, 1995, the Company had working
capital of $509,000 as compared
to a (deficiency) of $(1,371,000) at December 31, 1994.
At December 31, 1995, the Company completed three years of the
six-year License Agreement
with a privately owned manufacturer of environmental conditioning
equipment ("Licensee"),
which authorized the Licensee to manufacture and sell
environmental test chambers and other
equipment under the "Tenney" name with the Company retaining the
right to manufacture such
products. (See Note 4 of the Notes to Consolidated Financial
Statements.)
The Company's operations now consist of manufacturing through its
DynaTenn, Inc. subsidiary
(d/b/a "DynaVac") diversified vacuum systems for space
simulation, optic coating and plasma
treatment for medical labware and servicing, refurbishing,
upgrading and installing
environmental equipment and earning license and technology fees
and rental income.
Prior to the cessation of manufacturing at the Union Facility,
the Company participated in
a multi-employer pension plan. Due to the cessation of
manufacturing operations at the
Company's Union Facility (see Note 3 of the Notes to Consolidated
Financial Statements), the
Company ceased being a participant in the multi-employer pension
plan in February 1993.
Under the Multi-Employer Pension Plan Amendments Act of 1980, a
Company may, under certain
circumstances, become subject to liabilities in excess of
contributions made under its
collective bargaining agreement.
During the fourth quarter of 1993, the Company received a demand
from the Sheet Metal
Workers' National Pension Fund (the "Fund") for payment of a
withdrawal liability from its
union employees' multi-employer pension plan in the amount of
approximately $530,000, to be
paid in quarterly payments starting in January, 1994. The
Company engaged counsel to advise
it in these matters and made a provision for this amount in the
1993 Consolidated Financial
Statements. The Company failed to make the first payment when
due in January 1994. In March
1994, the Company received notice that they were in default. In
May 1994, the Company
proposed, through counsel, an amount significantly less than the
original amount. In June
1994, the Company received notification from the Fund rejecting
the Company's offer. In
November 1994, the Company proposed, through counsel, a modified
offer significantly less
than the total demanded, along with a significantly less periodic
payment. In December 1994,
the Company received from the Fund a modified calculation of the
withdrawal liability in the
amount of approximately $502,000. On May 31, 1995, the Company
received a rejection of all
proposals.
On December 7, 1995, the Company was served with a Complaint of
Civil Action filed in the
U.S. District Court, Eastern District of Virginia, by the Fund,
demanding payment of past-
due installments of withdrawal liability (aggregating $271,034 at
the date of the Complaint),
plus interest on overdue installments, statutory liquidated
damages, attorneys' fees and
injunctive relief requiring payment of future quarterly
withdrawal installments and in the
alternative immediate payment of the entire withdrawal liability
plus accrued interest,
statutory liquidated damages and attorneys' fees.
In February 1996, the Company filed an Answer and Affirmative
Defense to the action. The
Company and its counsel are having discussions with
representatives of the Fund in an attempt
to reduce the amount of the liability and to work out an
installment payment schedule. At
December 31, 1995, the Company had in reserve $581,000 in respect
of the possible liability
to the Fund.
In the expectation that an agreement can be arrived at with the
Fund, the amount reserved
has been classified as being current and non-current. (See Note
3 of the Notes to
Consolidated Financial Statements.)
The Company is not in a position to make immediate payment of the
entire amount or a
significant portion of the entire amount demanded by the Fund in
the Complaint. If the
Company is required to make immediate payment of the entire
amount or of the past-due
installments alleged to be due, it would have a material adverse
effect on the Company.
In April 1991, the Company entered into a Technology Transfer
Agreement with an entity in
the People's Republic of China. This agreement is for a period
of eight years and provides
for payments to the Company upon the completion of certain
milestones. The total contract
fee is $1,200,000 of which the Company received cash of
approximately $0, $0, $149,000,
$165,000 and $360,000 in 1995, 1994, 1993, 1992 and 1991,
respectively. The Company is not
dependent upon the entity to fulfill its obligation under this
agreement. (See Note 14 of
the Notes to Consolidated Financial Statements.)
Management believes that during 1996 the Company will be able to
satisfy its cash require-
ments for normal operations. The Company has been able to
generate a positive cash flow from
its normal business activities. The Company expects the Licensee
to perform under the terms
of the License and related agreements. Additionally, the Company
must complete its open
order backlog in a timely manner and then collect on such
receivables.
Results of Operations
Total net revenue from continuing operations of $9,564,000 for
1995 compares to 1994 net
revenue of $7,159,000.
Product and product-related net revenue for 1995 and 1994 was
$7,803,000 and $5,108,000,
respectively. The increase in net revenue within this
classification, between years, was
due to vacuum system revenue increasing primarily because several
large orders received
during the fourth quarter of 1994 were completed during 1995.
License fees earned of
approximately $387,000 and $275,400 during the years 1995 and
1994, respectively, were
included in this revenue classification. Net revenue for 1995
and 1994 includes revenue of
approximately $0 and $20,000, respectively, related to the
Technology Transfer Agreement.
(See Note 14 of the Notes to Consolidated Financial Statements.)
Service-related revenues of $1,020,000 for the year 1995 compares
to 1994 revenues of
$1,448,000. The 1995 and 1994 service revenue included revenue
from the Company's Leased
Employee Agreement with the Licensee of $120,000. Service
revenue in 1995 was unfavorably
affected when the Company began to use service-related resources
in buying, refurbishing and
upgrading used equipment which was sold and recorded in the
product-related sales category.
Revenue related to the sale of parts totaled $741,000 and
$603,000 for the years ended
December 31, 1995 and 1994, respectively.
The Company's order backlog at December 31, 1995 and 1994 was
approximately $3,870,000 and
$5,300,000, respectively. The decrease in backlog is primarily
due to the Company's DynaVac
subsidiary.
The total cost of sales as a percentage of net revenue was 73%
for the year 1995 and compares
to 76% for the year 1994.
The 1995 cost of sales related to product and product-related
sales were approximately 77%
as compared to 83% for 1994. The decrease in the cost of sales
percentage between years was
primarily due to the Company increasing productive use of
resources in this area, which
reduced idle time and lowered overhead charges.
Service cost of sales as a percentage of sales was 65% and 64%
for the years ending December
31, 1995 and 1994, respectively.
Cost of sales as a percentage of sales during 1995 for parts was
41% and compares to 46% for
the year 1994. The decrease in the cost of sales percentage in
the 95/94 comparison was due
primarily to a favorable inventory sales mix.
Selling and administrative expenses were $1,910,000 and
$1,942,000 for 1995 and 1994,
respectively. The decrease in the 1995/94 period was due
primarily to continued cost
containment programs. As a percentage of total net revenue,
selling and administrative
expenses were 20% and 27% for 1995 and 1994, respectively.
Interest expense was $74,000 in 1995 and reflects a decrease of
$293,000 from the 1994
interest expense of $367,000. The decrease is due primarily to
the Company not having any
interest-bearing bank debt and paying off all bank debt during
the year in accordance with
the conditions of the Settlement Agreement reached with the Bank
in December, 1994. (See
Note 9 of the Notes to Consolidated Financial Statements.)
The Company recognized $869,000 of principal debt forgiveness in
1995 and $224,000
forgiveness in 1994 in accordance with the conditions of the
Settlement Agreement. (See Note
9 of the Notes to Consolidated Financial Statements.)
Other income, net was $61,000 and $66,000 in 1995 and 1994,
respectively. Other income in
1995 was comprised primarily of interest income related to
investment activities of liquid
cash balances during the first and second quarters of the year.
At December 31, 1995, the Company had available for tax reporting
purposes net operating loss
carryforwards of approximately $3,402,000, expiring through 2008.
Effective January 1, 1993,
the Company has adopted the Statement of Financial Accounting
Standards ("SFAS No. 109"),
"Accounting for Income Taxes," which applies a balance sheet
approach to income tax
accounting. The new standard requires the Company to reflect on
its balance sheet the
anticipated tax impact of future taxable income or deductions
implicit in the balance sheet
in the form of temporary differences. The Company has reflected
future tax benefits on its
balance sheet since the realization of such benefits is dependent
on the Company's
profitability. The cumulative effect to January 1, 1993 of the
adoption of SFAS No. 109 was
immaterial. As permitted by SFAS No. 109, prior year's financial
statements have not been
restated. (See Note 10 of the Notes to Consolidated Financial
Statements.)
The net income for 1995 was $1,743,000 as compared to $1,146,000
in 1994.
During June, 1994, the American Stock Exchange received approval
from the Securities and
Exchange Commission to strike the Company's Common Stock from
listing and registration on
the Exchange. June 24, 1994, was the last day the Company's
Common Stock was traded on the
Exchange. Currently, the Company has its Common Stock traded on
the Nasdaq Stock Market OTC
Bulletin Board under the symbol "TNGI".
MARKET FOR COMPANY'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
In June 1994, the Company received a final
confirmation from the American Stock
Exchange that the application with the Securities and Exchange
Commission to strike the
Company's Common Stock from listing and registration on the
Exchange due to noncompliance
with listing requirements was approved. The Company has secured
a listing on the Nasdaq
Stock Market OTC Bulletin Board under the symbol "TNGI". The
approximate number of holders
of record of the Company's Common Stock at December 31, 1995 was
1,079. In addition,
approximately 50% of the outstanding shares are held for
shareholders' account at brokerage
firms and financial institutions. The following table sets forth
the range of high and low
closing prices for transactions on the American Stock Exchange
during the first and second
quarters of 1994 and on the OTC Bulletin Board during the third
and fourth quarters of 1994
and all four quarters of 1995.
PRICE RANGE OF COMMON STOCK
1995 1994
High Low High Low
First Quarter 3/8 3/32 3/8 1/4
Second Quarter 1/4 5/32 5/16 1/8
Third Quarter 5/8 5/32 3/8 1/16
Fourth Quarter 7/8 1/4 1/4 3/64
It has been the Company's policy not to pay cash
dividends.
A copy of the Company's 1995 report filed with the
Securities and Exchange Commission, on Form 10-KSB, is
available to shareholders on request. It may be
obtained by writing Martin Pelman, Treasurer, Tenney
Engineering, Inc., 1090 Springfield Road, P.O. Box 3142,
Union, New Jersey 07083-1942.
REGISTRAR AND TRANSFER AGENT
Continental Stock Transfer & Trust Company
New York, N.Y.
ACCOUNTANTS
Zeller Weiss & Kahn
Mountainside, N.J.