TO TENNEY SHAREHOLDERS:
1996 consolidated the restructuring and
reorganization, with operating profits continuing since
the third quarter of 1994. The majority of our revenues
was generated by DynaVac, our manufacturing subsidiary,
which has continued its growth, and early in 1997 moved
its operations into a new facility twice the size of the
previous and adding additional equipment and
capabilities.
On September 6, the Company announced the settlement
reached with the Sheet Metal Workers National Pension
Fund which provided for payment of a reduced amount over
a five-year period. On November 22, the Company
announced that its domestic licensee agreement had been
paid off with the receipt of the total license fees
payable.
Revenues in 1996 increased 11% to $10,640,000, as
compared to $9,564,000 in 1995. Net income was $730,000
($0.20 per share) versus $1,743,000 ($0.48 per share).
These numbers contain a number of extraordinary items as
detailed in Managements Discussion and Analysis. For the
year, income from operations was $416,000 ($0.11 per
share) as compared to $673,000 in 1995 ($0.18 per share).
The years operating earnings were impacted by the
investments made to posture the Company for the future.
In 1995, the Company met bank requirements by
completely paying off bank debts. In 1996, the Company
set up a line of credit with a new bank and had no bank
debt outstanding at the end of the year.
On March 11, 1997, the Company announced a
reclassification of its Common Stock and a stock
distribution. All shareholders of record on April 10,
1997, will receive one share of Series A Common, having
ten votes per share in comparison to the existing Common,
which will be classified as Series B, having one vote per
share. We believe our plan for two classes of stock will
ultimately increase shareholder value based on the
relatively low market cap and price earnings of our
shares. It will give us the flexibility to pursue
acquisitions and financing.
We wish to express our sincere thanks for your
continued support.
Sincerely,
ROBERT S. SCHIFFMAN
Chairman, President and
Chief Executive Officer
March 27, 1997
TENNEY ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(In thousands of dollars)
ASSETS
Current assets:
Cash and cash equivalents $ 661
Accounts receivable, net 1,642
Current portion of installment note receivable 55
Inventories 465
Prepaid expenses and other current assets 55
Deferred tax asset 280
Total current assets 3,158
Equipment, net 301
Installment note receivable, noncurrent portion 258
Other assets 218
Total Assets $ 3,935
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 1,460
Current portion of long-term capital leases 43
Accrued payroll and payroll taxes 237
Billings in excess of estimated revenue on
long-term contracts 286
Pension obligation, current portion 73
Total current liabilities 2,099
Long-term debt, net of current portion 512
Total liabilities 2,611
Commitments and contingencies
Stockholders equity:
Preferred stock $0.01 par value:
Authorized 10,000,000 shares
Issued and outstanding - none
Common stock $.01 par value:
Authorized 50,000,000 shares
Issued 3,704,980 shares 37
Additional paid-in capital 2,295
Retained earnings (deficit) (971)
1,361
Less treasury stock, 9,388 shares, at cost 37
Total stockholders equity 1,324
Total liabilities and stockholders equity $ 3,935
See Notes to Consolidated Financial Statements.
TENNEY ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
(In Thousands of Dollars
Except per Share Amounts)
Net revenue:
Product and product related $ 8,148 $ 7,416
Service 940 1,020
Parts 633 741
License Fees 919 387
Totals 10,640 9,564
Cost of sales:
Product and product related 7,128 6,011
Service 776 663
Parts 271 307
Totals 8,175 6,981
Gross profit 2,465 2,583
Selling and administrative expenses 2,049 1,910
Income from operations 416 673
Other income (expense):
Interest expense (21) (74)
Other income, net 283 61
Totals 262 (13)
Income before income taxes and
extraordinary items 678 660
Income taxes (benefit) (52) (220)
Income before extraordinary items 730 880
Extraordinary item - gain on restructuring
of debt net of income tax of $6 thousand 0 863
in 1995.
Net income $ 730 $ 1,743
Net income per common share before
extraordinary items $ 0.20 $ 0.24
Extraordinary item per common share 0.00 0.24
Net income per common share (see Note 11) $ 0.20 $ 0.48
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, 1996 AND 1995
(In Thousands of Dollars)
Additional Retained Less
Common Stock Paid-in Earnings Treasury Stock
Shares Amount Capital (Deficit) Shares Amount Totals
Balance --
January 1, 1995 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
Restatement of
Par Value (332) 332
Issuance of Stock
Option granted
under 1995 Stock
Option Plan 10,000 3 3
Net income 730 730
Balance --
December 31, 1996 3,694,980 $ 37 $ 2,295 $ (971) 9,388 $ 37 $ 1,324
See Notes to Consolidated Financial Statements.
TENNEY ENGINEERING, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(In Thousands of Dollars)
1996 1995
Operating activities:
Net income $ 730 $ 1,743
Adjustments to reconcile income to net cash
provided by (used in) continuing operations:
Depreciation and amortization 105 72
Deferred tax asset (52) (228)
Gain on debt forgiveness,
principal and interest 0 (869)
Changes in operating assets and liabilities:
Accounts and installment receivables 63 (533)
Inventories (154 (27)
Prepaid expenses and other current assets 42 (11)
Other assets (8) (7)
Accounts payable and other liabilities (58) 170
Accrued payroll and payroll taxes 75 37
Billings in excess of estimated revenues (32) (403)
Pension obligation (135) 0
Net cash provided by (used in)
continuing operations 576 (56)
Investing activities:
Acquisition of equipment (68) (50)
Net cash used in investing activities (68) (50)
Financing activities:
Exercise of Options and Issuance of
Common Stock 3 0
Proceeds from financing 300 0
Payments of note payable and
long-term capital leases (373) (513)
Net cash used in financing activities (70) (513)
Net increase (decrease) in cash and
cash equivalents 438 (619)
Cash and cash equivalents, beginning of year 223 842
Cash and cash equivalents, end of period $ 661 $ 223
Supplemental disclosure of cash flow information:
Interest paid $ 21 $ 8
Income tax paid 4 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 Companys manufacturing operation.
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. License fees are
fees received under a License Agreement (see Note 4).
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.
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 3,689,390 in 1996 and
3,685,592 in 1995, respectively (see Note 11).
Stock-based compensation:
The Company has adopted 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 (see Note 11).
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. Certain reclassifications have been made
to prior year amounts to conform with current year
presentations.
Note 2 - Financial condition and results of operation:
As shown in the accompanying consolidated financial
statements, the Company has realized net income for the
years ended December 31, 1996 and 1995, respectively,
from operations, which has resulted in an increase in the
Companys stockholders equity.
On December 12, 1994, First Fidelity Bank and the
Company signed a settlement agreement in which the
Company conveyed to First Fidelity Bank the title in the
real estate located at Union, New Jersey, and reduced
total debt significantly. During 1995, debt to First
Fidelity Bank was extinguished (see Note 9).
As at December 31, 1996, the Licensee paid all
license fees due under the License Agreement (see Note
4).
Note 3 - Restructuring:
The Company in February, 1993, ceased manufacturing
operations at its Union, New Jersey, facility. The
Company is engaged in one industry segment: The
engineering, marketing and manufacturing of diversified
high-technology vacuum systems for space simulation,
optic coating and sputtering; and provides service,
refurbishing, upgrading, installation and sale or rental
of reconditioned test equipment.
The Company formerly had employees who were members
of a union and the Company contributed to a multi-
employer pension plan for such employees in accordance
with a collective bargaining agreement based on monthly
hours worked. Due to the cessation of manufacturing
operations at the Companys Union, New Jersey
manufacturing plant, 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, the 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 letter from the Trustees of the Sheet Metal
Workers National Pension Fund (Plan Trustees) alleging
$529,743.28, principal, due as withdrawal liability.
Payments may be made in installment with interest and the
Plan Trustees demanded 18 quarterly payments of
$33,879.28 and a final payment of $32,797.59, with the
initial payment to be made by January 19, 1994. The
Company made a provision for this liability in its 1993
Consolidated Financial Statements. The Plan Trustees
demand also stated that the amount due was subject to
adjustment for performance of the Plan during 1992.
The Company did not make the January 19, 1994
payment. In December 1994 the Company received from the
Plan Trustees a modified calculation reducing the
withdrawal liability to $502,665 principal amount. The
Plan Trustees demanded payment of sixteen quarterly
installments of $33,879.28 commencing January 19, 1994
and a seventeenth payment of $29,151.09.
The Company did not make any such payments.
On December 7, 1995 the Company was served with a
Summons and Complaint in an action filed in the U.S.
District Court for the Eastern District of Virginia,
Alexandria Division (Case Number 95-1609A) by the Plan
Trustees. A copy of the Complaint was filed as Exhibit 99
to a report on Form 8-K for an event occurring December
7, 1995 and reference is made to the Complaint itself for
the terms thereof and the relief demanded by the Plan
Trustees.
The Company has negotiated with the Plan Trustees
the amount of the liability and an installment payment
schedule.
On September 6, 1996, the Company agreed to a
settlement of the matter proposed by the Plan Trustees
and it executed a Settlement Agreement (the Agreement).
Among other matters, the Agreement provides that the
Company shall pay the Plan Trustees $720,090.49 (the
Settled Amount) on account of the withdrawal liability,
statutory interest and counsel fees, provided, however,
that if the Company pays to Plan Trustees $397,330 plus
interest scheduled to be paid $75,000 on or before
September 13, 1996 and sixty (60) monthly payments of
$6,613.09 over a five (5) year period commencing October
1, 1996, Plan Trustees will accept such reduced amount in
full satisfaction of the withdrawal liability. The
Agreement contains various representations and warranties
by the Company. In the event that the Company does not
make timely payments or otherwise defaults under the
Agreement, the Settled Amount will be due to Plan
Trustees.
In conjunction with the Agreement, the Company has
executed a confession of judgment for the Settled Amount
in the form annexed to the Agreement, which may be filed
by the Plan Trustees in the event the Company fails to
make timely payments or otherwise defaults under the
Agreement.
At December 31, 1995, the Company had reserved on
its balance sheet the amount of $581,835.64 for the
withdrawal liability to Plan Trustees. Payments to Plan
Trustees under the Agreement, an initial payment of
$75,000 and monthly payments of $6,613.09 will be charged
against this reserve when made. If the Company does not
default and if all payments are made in accordance with
the provisions of the Agreement, any balance in the
reserve will be recognized as forgiveness of indebtedness
when payments are completed. The Company has timely made
all payments due under the Agreement.
In the event that payments to Plan Trustees are not
timely made or in the event of any other default under
the Agreement, Plan Trustees may enter judgment against
the Company for the Settled Amount and the Company would
owe to Plan Trustees an amount in excess of the amount
reserved for the withdrawal liability.
Note 4 - License agreement:
Concurrent with its announcement to discontinue
manufacturing at the Union Facility, the Company entered
into a six-year licensing agreement with a 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 Companys 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. 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 which expired in December 1996 with
the Licensee whereby, for an annual fee of $120,000, the
Company will make the services of the Companys president
available to the Licensee for a specified period of time
(see Note 13).
During November 1996, the Company and the Licensee
agreed to accelerate payment of license fees by having
the Licensee prepay $532,000, representing the amount
remaining of the total $1,900,000 license fees. In
addition, the sum of $100,000 for the purchase of the
Companys rights, title and interest in the Tenney
trademark were received. The installation and servicing
agreement and the inventory purchase agreement remain in
effect.
Net revenue for 1996 and 1995 includes consulting
revenue of $120,000. Purchases by the Licensee from the
Companys former subsidiary in 1996 and 1995 totaled
approximately $55,200 and $9,500, respectively.
Note 5 - Accounts receivable:
Accounts receivable consist of the following:
1996
(In Thousands
of Dollars)
Accounts receivable, billed $ 1,670
Allowance for doubtful accounts (28)
Totals $ 1,642
At December 31, 1996, sales recognized on the percentage of
completion method approximated $7,927,000.
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 Gloeklers assets and
the common stock and are personally guaranteed by the
purchaser.
Note 7 - Inventories:
Inventories consist of the following:
1996
(In Thousands
of Dollars)
Raw materials $ 775
Less:
Provision for write-downs
to estimated realizable value 310
Totals $ 465
Accumulated costs on long-term contracts recognized by
the percentage of completion method (see Note 5) were
approximately $5,685,000 and $3,521,000 in 1996 and 1995,
respectively.
Note 8 - Property, Plant and Equipment:
Property and equipment, which is stated at cost, is
summarized as follows at December 31, 1996:
1996
(In Thousands
of Dollars)
Equipment $ 1,331
Equipment under capital leases 352
1,683
Accumulated depreciation (1,382)
Total equipment - net $ 301
The Company leases certain equipment for use in its
operations under capital leases. Property, plant and
equipment at December 31, 1996, included capital leases
of $352,000 and related accumulated depreciation of
$197,000.
During 1995, the Company occupied the Union Facility
under a Use and Occupancy Agreement with First Fidelity
Bank arising out of the conveyance of the title of this
facility under the settlement agreement dated December
1994. First Fidelity sold the property in December 1995,
and the Company entered into a three-year lease with the
new owner of the property for approximately 18,500 square
feet at an annual rental of $90,000.
The Companys DynaVac subsidiary leased a 15,000
square feet facility in Weymouth, Massachusetts, on a
month-to-month basis. During September 1996, DynaVac
leased a 27,900 square feet facility in Hingham,
Massachusetts, for a term of six years. Effective January
1997, annual rentals are as follows: 1997--$147,000;
1998--$151,000; 1999--$157,000; 2000--$163,000; 2001--
$169,000 and 2002--$176,000.
At December 31, 1996, the aggregate minimum rental
commitments under non-cancelable leases for the period
shown are as follows:
Capital Operating
Year Leases Leases
(In Thousands
of Dollars)
1997 $ 55 $ 237
1998 55 241
1999 55 157
2000 55 163
2001 33 169
Total $ 253 $ 967
Less imputed interest 72
Present value of net lease payments $ 181
Less current installments 43
Long-term debt obligation at
December 31, 1996 $ 138
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,
1996 1995
(In Thousands
of Dollars)
Notes payable - bank $ 0 $ 0
Current portion of capital leases 43 76
Current portion of pension obligation 73 36
Total $ 116 $ 112
The Company and First Fidelity 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
Companys assets remained in effect, until 93 days after
the date of the last payment. As at August 30, 1995, the
Company completed paying 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. In
December 1996, First Fidelity Bank released their
security interest in the Companys assets.
On September 12, 1996, the Company and Summit Bank
(the Bank) entered into a Loan and Security Agreement
for a $300,000 renewable working capital line of credit
(the Term Note). The Bank was granted a security
interest in substantially all the Companys assets. At
December 31, 1996, the Company had no outstanding
borrowings under this line of credit.
Long-term debt consists of the following at December 31,
1996
(In Thousands
of Dollars)
Capital lease obligations $ 181
Multi-employer pension obligation 447
Total long-term debt including
current maturities 628
Less: current maturities 116
Total long-term debt $ 512
Long-term liabilities consist of capital leases
entered into for equipment of $27,300 in 1996 and
$194,000 in 1995, respectively, 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 $79,400--1997; $79,400--1998; $79,400--
1999; $79,400--2000; and $59,500--2001.
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 Companys 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 Companys consolidated financial statements.
At December 31, 1996, it was determined that the
valuation allowance should be reduced by $280,000. This
determination was based primarily on the improvement in
the Companys net income during 1996 and 1995.
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 $52,000.
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, 1996:
(In Thousands
of Dollars)
Deferred tax assets:
Inventory reserve $ 105
Accounts receivable reserve 10
Deferred revenue 110
Deferred compensation 27
Deferred pension obligation 22
Tax loss carryforward 944
Total deferred tax assets 1,218
Deferred tax liabilities:
Depreciation (10)
Valuation allowance (928)
Total net deferred tax assets $ 280
In 1996 and 1995, the Company utilized net
operating loss carryforwards of $587,000 and
$1,028,000, respectively. The income tax expense
results from the federal alternative tax which was
allocated as follows:
1996 1995
(In Thousands
of Dollars)
Income before extraordinary item $ 4 $ 8
Extraordinary item 0 6
Current income tax expense 4 14
Deferred income tax benefit (56) 228
Net income tax (benefit) (52) $(214)
At December 31, 1996, the Company has available, for
tax reporting purposes, net operating loss carryforwards
of approximately $2,800,000 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
1996 and 1995 is 39%.
1996 1995
(In Thousands
of Dollars)
Income taxes computed at the
federal statutory rates $ 230 $ 350
State taxes (net of federal benefit) 40 60
Realization of benefits of tax loss
carryforwards (200) (396)
Valuation allowance adjusted (122) (228)
Net income tax (benefit) $ (52) $(214)
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).
The fair value of each option granted is estimated
on the grant date using the Black-Scholes model. The
following assumptions were made in estimating fair value:
Assumption 1995 Plan
Dividend Yield 0%
Risk-free Interest Rate 7.50%
Expected Life 3 Years
Expected Volatility 24.89%
The Company applies APB Option 25 in accounting for
its stock compensation plan. Accordingly, no compensation
cost has been recognized for the 1995 Plan in 1996 or
1995. Had compensation cost been determined on the basis
of fair value pursuant to FASB Statement No. 123, net
income and earnings per share would have been reduced as
follows:
1996 1995
Net income
As reported 730,000 1,743,000
Pro forma 687,000 1,731,000
Primary earnings per share
As reported 0.20 0.48
Pro forma 0.19 0.47
Fully diluted earnings per share
As reported 0.20 0.48
Pro forma 0.19 0.47
Following is a summary of the status of the 1995 Plan during
1996 and 1995:
Weighted
Average
Number of Exercise
Shares Price
Outstanding at 1/1/96 155,000 $ 0.24420
Granted 145,000 0.89789
Exercised (10,000) 0.23437
Canceled 0 --
Outstanding at 12/31/96 290,000 $ 0.57104
Options exercisable at 12/31/96 290,000 $ 0.57104
Weighted average fair value
of options granted during 1996 $ 0.21708
Weighted
Average
Number of Exercise
Shares Price
Outstanding 1981 Plan at 1/1/95 57,000 $0.31250-$0.34375
Granted 155,000 0.24420
Exercised
Canceled 1981 Plan (57,000) 0.31250-0.34375
Outstanding at 12/31/95 155,000 $ 0.24420
Options exercisable at 12/31/95 155,000 $ 0.24420
Weighted average fair value
of options granted during 1995 $ 0.07894
Following is a summary of the status of options outstanding at
December 31, 1996:
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Price Range Number Life Price Number Price
$0.23437-$0.25781 145,000 2 years $0.24420 145,000 $0.24420
$0.85937-$0.94531 145,000 3 years $0.89789 145,000 $0.89789
On March 11, 1997, the Board of Directors of the
Company adopted an amendment to the Companys Certificate
of Incorporation to classify outstanding Common Stock,
effective at the close of business April 10, 1997, as
Series B Common Stock. The amendment authorizes the
Company to issue 40 million shares of Series B Common
Stock, $.01 par value per share, and 10 million shares of
Series A Common Stock, par value $.01 per share. The
Board of Directors also voted to distribute one share of
Series A Common Stock on May 27, 1997, for each share of
Series B Common Stock owned of record April 10, 1997.
Note 12 - Retirement and pension plans:
The Company maintains a retirement plan for salaried
employees (the Salaried Plan) which provides for defined
benefits. The Companys 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. During 1996, the Company
accrued pension costs of $25,000 pursuant to Statement of
Financial Accounting Standards No. 87, Employers
Accounting for Pension Costs. The Company accounted for
the curtailment in 1989 pursuant to Statement of
Financial Accounting Standards No. 88, Employers
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 6% at
December 31, 1996:
1996
(In Thousands
of Dollars)
Actuarial present value of projected
benefit obligation including vested
benefits of $705,000 $ 705
Plan assets at fair value 658
Plan assets less than projected
benefit obligation consisting of: $ (47)
Unrecognized net transition liability $ (22)
Net accrued pension costs (25)
Total $ (47)
The expected long-term rate of return on assets was 7.0%.
Unionized 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 1996 and 1995. Due to the
cessation of manufacturing operations at the Companys
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
which expired on December 31, 1996, with its president
which requires a minimum annual salary of $200,000.
Lease commitment:
DynaTenn, Inc. (d/b/a DynaVac), a wholly-owned
subsidiary which manufactures diversified industrial
vacuum equipment, leased its facility in Weymouth,
Massachusetts under an operating lease which expired on
January 1, 1997. Rent charged to operations under this
lease approximated $73,000 and $68,000 in 1996 and 1995,
respectively. During September 1996, DynaVac leased a
27,900 square feet facility in Hingham, Massachusetts,
for a term of six years. Effective January 1997, annual
rentals are as follows: 1997--$147,000; 1998--$151,000;
1999--$157,000; 2000--$163,000; 2001--$169,000 and 2002--
$176,000.
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 this lease approximated $82,500 in 1996, and rent
under a Use and Occupancy Agreement (see Note 8) was
$50,000 in 1995.
Contingencies:
The Company is not a party to any material pending
legal proceeding.
Note 15 - Other income and (expense):
Other income and (expense) consist of the
following:
1996 1995
(In Thousands
of Dollars)
Interest expense $ (21) $ (74)
Sale of Trademark (A) 100 -
Interest income 21
Other, net 183 40
Totals $ 262 $ (13)
(A) In November 1996, the Company and Licensee
agreed to the purchase by the Licensee of the rights,
title and interest in the Tenney trademark (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. 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 years ended December 31, 1996 and 1995,
the Company did not have any major customer who
contributed more than 10% of net revenue.
Concentrations of credit risk:
The Companys 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 Companys 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,
1996, the Companys uninsured cash balances total
approximately $461,000.
Note 18 - Supplemental schedule of noncash investing
and financing activities:
During 1996 the Company entered into two five-year
capital leases totaling $27,300 for telephone equipment
and service vans. During 1995 the Company recognized
$869,000 in forgiveness of debt; and in addition,
entered into five-year capital leases in the amount of
$194,000 for equipment.
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, 1996, and the related
consolidated statements of operations, changes in
stockholders equity (deficiency) and cash flows for the
years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Companys
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 overall financial
statement presentation. We believe that our audits
provides a reasonable basis for our opinion.
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, 1996, and the
consolidated results of its operations and its cash flows
for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
ZELLER WEISS & KAHN
Mountainside, New Jersey
March 26, 1997
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company and First Fidelity 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. First
Fidelity Banks security interest in substantially all the
Companys 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 Companys
paying the monthly amounts when due. The Company made
all payments to First Fidelity Bank, and on August 29,
1995, paid any remaining balance. The 1995 portion of the
forgiveness of $869,000 was recognized during the first
three quarters of 1995. In November 1995, First Fidelity
Bank released all its security interest in the assets of
the Company. (See Note 9 of the Notes to Consolidated
Financial Statements.)
On September 12, 1996, the Company and Summit Bank, (the
Bank) entered into a Loan and Security Agreement (Term
Note) for a $300,000 renewable working capital line of
credit expiring May 31, 1997. The Bank was granted a
security interest in substantially all the Companys
assets. As at December 31, 1996, the Company had no
borrowings outstanding under the Term Note.
During 1996, the Company has been able to generate a
positive cash flow from operations.
At December 31, 1996, the Companys cash and cash
equivalents totaled $661,000 as compared to $223,000 at
December 31, 1995. Contributing to the change in cash
between years was cash provided by operating activities
of $579,000 in 1996 and cash used of $56,000 in 1995. The
principal reason for cash being provided by operating
activities in 1996 was the prepayment of License Fees.
(See Note 4 of the Notes to Consolidated Financial
Statements.) During 1996, the primary use of cash was
payments of Accounts Payable, Note Payable and Long-Term
Debt.
During November 1996, the Company and the domestic
Licensee agreed to a prepayment of the remaining balance
of the fees due under a six-year License Agreement. In
addition, the Licensee exercised its option to purchase
the Tenney trademark.(See Note 4 of the Notes to
Consolidated Financial Statements.)
The Company is engaged in one industry segment: The
engineering, marketing and manufacturing of diversified
high-technology vacuum systems for space simulation,
optic coating and sputtering; and provides service,
refurbishing, upgrading, installation and sale or rental
of reconditioned test equipment.
The Company formerly had employees who were members of a
union and contributed to multi-employer pension plan for
such employees in accordance with a collective bargaining
agreement based on monthly hours worked. Due to the
cessation of manufacturing operations at the Companys
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, the 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
$529,743, 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 December 1994, the Company received from the
Fund a modified calculation of the withdrawal liability
in the amount of $502,665.
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.
The Company negotiated with the Fund the amount of the
liability and an installment payment schedule.
On September 6, 1996, the Company agreed to a settlement
of the matter proposed by the Fund and it executed a
Settlement Agreement(the Agreement). Among other
matters, the Agreement provides that the Company shall
pay the Fund $720,090 (the Settled Amount) on account
of the withdrawal liability, statutory interest and
counsel fees; provided, however, that if the Company pays
to the Fund the amount of $397,330 principal, plus
interest of $74,455, totaling $471,785 -- $75,000 upon
signing and sixty (60) monthly payments of $6,613.09
commencing October 1, 1996 -- the Fund would accept the
total of $471,785 in satisfaction of the total withdrawal
liability.
The Agreement contains various representations and
warranties by the Company. In the event that timely
payments are not made or the Company otherwise defaults
under the Agreement, the Settled Amount will be due the
Fund, less any payments received. The Company has made
all payments to the Fund when they are due, and continues
to do so.
The Company had reserved on its balance sheet as at
December 31, 1995, the sum of $581,835 for the withdrawal
liability to the Fund. The Company will charge all the
payments made to the Fund to this reserve account; and if
all payments are made in accordance with the provisions
of the Agreement, any balance in the reserve will be
recognized as forgiveness of indebtedness when payments
are complete. At December 31, 1996, the reserve
approximated $447,000. (See Note 3 of the Notes to
Consolidated Financial Statements.)
Management believes that during 1997 the Company will be
able to satisfy, from operations and borrowings, its cash
requirements. 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
$10,640,000 for 1996 compares to 1995 net revenue of
$9,564,000.
Product and product-related net revenue for 1996 and 1995
was $8,148,000 and $7,416,000, respectively. The increase
in net revenue within this classification, between years,
was due to vacuum system revenue increasing primarily
because several large orders were received during 1996,
and the increase of the sale of reconditioned
environmental test equipment.
Service-related revenues of $940,000 for the year 1996
compare to 1995 revenues of $1,020,000. The 1996 and 1995
service revenue included revenue of $120,000 per year
from the Licensee for part-time services of the Companys
president. Such agreement expired on December 31, 1996.
Service revenue in 1996 was down due to a decrease of
service-related orders being received.
Revenue related to the sale of parts totaled $633,000 and
$741,000 for the years ended December 31, 1996 and 1995,
respectively. The decrease is due to a lower level of
parts orders being received.
License fees of $919,000 for the year 1996 compare to
1995 fees of $387,000. The increase of fees is due to
the prepayment of $532,000 by the Licensee. (See Note 4
of the Notes to Consolidated Financial Statements.)
The Companys order backlog at December 31, 1996 and 1995
was approximately $2,440,000 and $3,870,000,
respectively. The decrease in backlog is primarily due to
increased sales in the Companys DynaVac subsidiary.
The total cost of sales as a percentage of net revenue
was 76% for the year 1996 and compares to 73% for the
year 1995.
The 1996 cost of sales related to product and product-
related sales were approximately 87% as compared to 77%
for 1995. The increase in the cost of sales percentage
between years was primarily due to non-manufacturing use
of labor and overhead increases due to the preparation
and move to larger facilities.
Service cost of sales as a percentage of sales was 82%
and 65% for the years ending December 31, 1996 and 1995,
respectively. The increase is primarily due to lower
sales in certain geographic areas which did not cover
fixed overheads associated with those areas.
Cost of sales as a percentage of sales during 1996 for
parts was 43% and compares to 41% for the year 1995. The
increase in the cost of sales percentage in the 96/95
comparison was due primarily to the inventory sales mix.
Selling and administrative expenses were $2,049,000 and
$1,910,000 for 1996 and 1995, respectively. As a
percentage of total net revenue, selling and
administrative expenses were 19% and 20% for 1996 and
1995, respectively.
Interest expense was $21,000 in 1996 and reflects a
decrease of $53,000 from the 1995 interest expense of
$74,000. The decrease is due primarily to the paying off
all bank debt during the year.
The Company had no principal debt forgiveness in 1996 and
recognized $869,000 of principal debt forgiveness in
1995. (See Note 9 of the Notes to Consolidated Financial
Statements.)
Other income, net was $283,000 and $61,000 in 1996 and
1995, respectively. Other income in 1996 was comprised
primarily of income received from the domestic Licensee
for the purchase of the title and interest to the
Tenney trademark. (See Note 9 of the Notes to
Consolidated Financial Statements.)
At December 31, 1996, the Company had available for tax
reporting
purposes net operating loss carryforwards of
approximately $2,800,000, 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 Companys profitability. The cumulative effect to
January 1, 1993, of the adoption of SFAS No. 109 was
immaterial. As permitted by SFAS No. 109, prior years
financial statements have not been restated. (See Note 10
of the Notes to Consolidated Financial Statements.)
The net income for 1996 was $730,000 as compared to
$1,743,000 in 1995.
Currently, the Company has its Common Stock traded on the
Nasdaq Stock Market OTC Bulletin Board under the symbol
TNGI.