-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RLxFeEM6ZztEEiJa7wcl8zvBpD+77I9b7DBmiup9YbRRKbUqaZ32T7e9PmOn/W77 BWIFMxDTtay3yYezRI0N9A== 0000804731-97-000002.txt : 19970329 0000804731-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000804731-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENERA INC CENTRAL INDEX KEY: 0000804731 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 943022241 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09812 FILM NUMBER: 97567189 BUSINESS ADDRESS: STREET 1: ONE MARKET, SPEAR TOWER STREET 2: SUITE 1850 CITY: SAN FRANCISCO STATE: CA ZIP: 94105-1018 BUSINESS PHONE: 4155364744 MAIL ADDRESS: STREET 1: ONE MARKET, SPEAR TOWER STREET 2: SUITE 1850 CITY: SAN FRANCISCO STATE: CA ZIP: 94105-1018 FORMER COMPANY: FORMER CONFORMED NAME: TENERA LP DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________________ FORM 10-K (MARK ONE) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________ COMMISSION FILE NUMBER 1-9812 TENERA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 94-3213541 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) One Market, Spear Tower, Suite 1850, San Francisco, California 94105-1018 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 536-4744 _________________________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Stock SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy as information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of March 17, 1997, the aggregate market value of the Registrant's Common Stock held by nonaffiliates of the Registrant was $4,215,650 based on the last transaction price as reported on the American Stock Exchange. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purposes. The number of shares outstanding on March 17, 1997, was 10,123,153. PART I ITEM 1. BUSINESS GENERAL TENERA, Inc. ("TENERA" or the "Company"), a Delaware corporation, was formed in connection with the conversion of TENERA, L.P. (the predecessor of the Company, the "Predecessor Partnership") into corporate form (the "Merger" or "Conversion"), completed on June 30, 1995. Pursuant to the Merger, the Company succeeded to the business, assets, and liabilities of the Predecessor Partnership. Therefore, the Company and the Predecessor Partnership are sometimes collectively referred to herein as TENERA or the Company. (See Note 1 to Financial Statements. Organization) The Company provides a broad range of professional services and software products to solve complex management, engineering, environmental, and safety challenges associated with the licensing, operation, asset management, and maintenance of power plants and mass transit systems. Its services and products cover the following general areas: consulting and management services and software services, products, and systems. In the area of consulting and management services, TENERA provides services to assist its commercial electric power industry clients with respect to nuclear and fossil plant operations and maintenance, nuclear safety and licensing, organizational effectiveness, management audits, utility and project management, risk management, and certain environmental engineering tasks, and also provides expert witness and analysis support for regulatory and legal proceedings. For its governmental clients, TENERA provides the Department of Energy ("DOE") and DOE prime contractors with assistance in devising, implementing, and monitoring strategies to upgrade from an operational, safety, and environmental perspective at DOE-owned nuclear reactor sites. For the mass transit area, TENERA provides its clients with consulting services associated with the maintenance of their rolling stock, right-of-way, and facilities. The software services, products, and systems area complements the management and consulting services areas providing software services and information management products, specialized data bases, and systems which support electric power generation and mass transit systems in areas such as regulatory compliance, facility operations, maintenance, and data management. TENERA has developed expertise in providing solutions to the complex technical and regulatory issues facing the commercial electric power industry, particularly with respect to nuclear facilities. Over the past several years, commercial electric utilities have experienced increased competitive pressure due to a continued deregulation of electric power production. For example, utilities continue to find it more difficult to recover total capital expenditures through rate increases, as well as facing increased competition from independent power producers, alternative energy production, and cogeneration. During the same period, utilities have responded to continued regulatory pressures to comply with complex safety and environmental guidelines. Safety problems and environmental issues have also emerged at government-owned production facilities. A massive program is underway throughout the DOE complex of nuclear facilities to comply with health, safety, and environmental requirements similar to those applicable to commercial facilities, principally in the areas of hazardous wastes, decontamination, decommissioning, and remediation. Electric utilities, as well as a variety of other industries, have been subjected to extensive regulation regarding environmentally safe handling of hazardous materials. It has been TENERA's strategy to provide solutions to these issues by providing clients with a high level of professional skills and a broad range of scientific, technological, and management resources, including software and data bases which are used either in support of consulting projects or as the basis for development of stand alone software products and systems. The Company assists its clients in the initial identification and analysis of a problem, the implementation of a technologically feasible solution that client management believes will be sensitive to business and public interest constraints, and the ongoing monitoring of that solution. During 1995, the Company formed TENERA Rocky Flats, LLC ("LLC"), a Colorado limited liability company, to provide consulting and management services in connection with participation in the Performance Based Integrating Management Contract ("Rocky Flats Contract") at the DOE's Rocky Flats Environmental Technology Site ("Site"). 1 BACKGROUND The Company's principal markets are the commercial electric utility industry and the DOE-owned nuclear reactor sites. The electric utility industry has undergone considerable change in recent years and faces a complex mix of economic and regulatory pressures. There has been gradual deregulation of the production and distribution of electricity, and the associated desire by utilities to meet demand for electricity through higher operating efficiency. Some of the Company's largest commercial clients have responded to a more competitive environment by implementation of significant cost control measures. Electric utilities and the DOE-owned nuclear reactor sites also face close scrutiny resulting from public concern over health, safety, and the environment. The Company believes that increased enforcement of environmental laws and regulations at various levels of government continues to be prompted by publicity and public awareness of environmental problems and health hazards posed by hazardous materials and toxic wastes. Economic pressures have resulted in certain changes in the focus of electric utility management. For example, the rate-making process now represents a significant area of risk to utilities. This has highlighted the importance of careful planning and documentation in connection with rate case preparation. Furthermore, rate base decisions apparently are shifting their emphasis to ongoing performance reviews related to such measures as plant capacity factors. This has resulted in substantial penalties for extended plant outages and has stimulated actions by the utilities to assure more reliable operations. The DOE has begun the implementation of programs to address safety problems and environmental concerns which have emerged at its nuclear facilities. These programs are designed to bring the operations into compliance with a variety of health, safety, and environmental requirements, similar to those applicable to the commercial electric utility industry. The DOE's decontamination, decommissioning, and remediation programs are also aimed at achieving significant cleanup of its hazardous waste storage facilities and the partial shutdown of nuclear operations at certain of its sites. The markets for electric utility and DOE facility professional services and software products covers a broad range of activities. Typical markets include waste management, outage support, operating plant services, licensing support, safety and health management, maintenance and information services, decommissioning consulting, risk assessment, quality assurance and control, organizational effectiveness, engineering support, records management, fuel related services, and plant security. In recent years, the slowdown in construction of commercial power plants has placed a premium on extending existing plant life and has shifted the electric utility commercial market emphasis. This has also resulted in greater attention by utilities to management systems for preventive maintenance and improved methods of plant operation, which may, in time, result in the expansion of the market for services and software associated with the efficient and profitable operation of existing capacity. The Company's other market, mass transit systems, consists of public entities that provide ground transportation services to the general public. The properties are typically characterized as either bus or rail operators, with rail and large bus operators comprising approximately 75% of the budgeted mass transit funds for maintenance and capital assets. The transit industry consists primarily of government or quasi-government agencies, which are subject to swings in government subsidy levels, and operate in a political arena. A significant portion of this funding is spent by the operators on asset operation and maintenance. In several sectors of the country, transit infrastructure and fleets are aging and may require extensive maintenance or replacement to the extent that capital budgets will allow. The industrial association, American Public Transit Association ("APTA") is a strong representative of the transit industry, with a membership comprised of over 96% of the transit organizations. TENERA has established close and active ties with APTA in order to maintain a clear understanding of the issues facing this industry. The Company has sold total solution systems and services to some of the most prestigious operators in the industry (i.e., New York Metropolitan Transit Authority and Amtrak). The experience gained during these engagements has provided the Company's transit consultants with additional insight into the day-to-day, on-the-line problems which must be solved by the operator's maintenance organizations. 2 SERVICES AND PRODUCTS The Company provides its services by utilizing its professional skills and technological resources in an integrated approach which combines technical and project management capabilities with software systems and data bases. Services performed by the Company typically include one or more of the following: consultation with the client to determine the nature and scope of the problem, identification and evaluation of the problem and its impact, development and design of a process for correcting the problem, preparation of business plans, preparation of reports for obtaining regulatory agency permits, and analysis in support of regulatory and legal proceedings. The Company operates in one business segment providing services which cover these general areas: consulting and management services and software services, products, and systems. The following table reflects the percentage of revenues derived for each of these areas for the period indicated during the fiscal years ended December 31, 1994 through 1996:
________________________________________________________________________ Year Ended December 31, -------------------------- 1996 1995 1994 ________________________________________________________________________ Consulting and Management Services ......... 91.8% 85.5% 83.6% Software Services, Products, and Systems ... 8.2% 14.5% 16.4% ________________________________________________________________________
Consulting and Management Services. The Company's consulting and management services involve determining a solution to client problems and challenges arising in the design, operation, and management of large facilities and mass transit systems. Focus is also placed on providing expertise in the wide range of disciplines required to resolve complex legal and regulatory issues and offering executives guidance in planning and implementing a coordinated, effective response to such issues. The Company applies its professional skills, software, and specialized data bases to all aspects of these problems and challenges in the following general areas: - Operations and maintenance - Engineering design review and verification - Nuclear safety and licensing - Organizational effectiveness - Management audits - Project management - Nuclear safety and criticality at DOE facilities - Environmental engineering issues at DOE and electric utility facilities Software Services, Products, and Systems. To complement its professional services, the Company offers a range of information software services, products, and systems including data bases designed to support mass transit and electric utility clients in areas such as asset management, regulatory compliance, facility operations, and equipment maintenance and data management related to management consulting, operating performance, and environmental engineering requirements. The principal proprietary aspect of the software business lies in the ability to utilize it to solve client problems and to market this capability. Software applications for a variety of industrial sectors and requirements have been developed for PC, mini, and mainframe hardware installations. The Company offers interactive software applications for mass transit systems or large facility information management requirements, which are designed for use with IBM mainframe and networked personal computer environments. Major core products which are customized to the client's specifications include: - An on-line interactive system for coordinating and controlling all aspects of maintenance for large mass transit systems and electric utility facilities 3 - Networked PC software to manage nuclear safety-related data bases and engineering processes in conformance with rigorous software quality assurance requirements MARKETING AND CLIENTS Marketing. The Company's marketing strategy emphasizes its ability to offer a broad range of services and software designed to meet the needs of its clients in a timely and cost-efficient manner. The Company has the organization and capability to undertake not only small tasks requiring a few professionals but also the management, staffing, design, and implementation of major projects which may last for several months and involve large numbers of professionals in several geographic locations. Characteristic of TENERA's marketing strategy are significant projects in which initial contracts have been only a fraction of the ultimate sale. The Company provides financial incentives to attract senior technical professionals with extensive utility and transit industry experience and to encourage these individuals to market the complete range of TENERA's services and software throughout existing and potential customer organizations. TENERA's marketing efforts are facilitated by the technical reputation and industry recognition often enjoyed by its professional staff. TENERA's reputation in the electric power and mass transit industries often leads to invitations to participate at an early stage in the conceptualization of a project. During this phase, the Company assists clients in developing an approach for efficiently and productively solving a problem. This assistance can lead, in turn, to a request for TENERA to use existing software or to develop software systems to solve the problem. If new services or products are developed for a client, they generally are marketed to other clients with similar needs. Clients. During the year ended December 31, 1996, TENERA provided services and software to over 75 clients involving over 125 contracts. During the year ended December 31, 1995, TENERA provided services and software to over 66 clients involving over 150 contracts. Over 80% of TENERA's clients during the year ended December 31, 1996, had previously used its services or software. During the year ended December 31, 1996, two customers, Kaiser-Hill Company, LLC ("Kaiser-Hill"), prime contractor of the Rocky Flats Contract, and Commonwealth Edison Company ("ComEd"), accounted for approximately 68% of the Company's total revenue. Kaiser-Hill and ComEd represented approximately 56% and 12%, respectively. During the year ended December 31, 1995, these two clients accounted for approximately 38% of the Company's total revenue (Kaiser-Hill - 31%; ComEd - 7%). The Company has maintained working relationships with Kaiser-Hill and ComEd for two years and ten years, respectively, during which time various contracts have been completed and replaced with new or follow-on contracts. There can be no assurance that these relationships will be maintained at current levels or beyond the existing contracts, and the loss of these clients could have a material adverse effect on the Company. OPERATIONS The Company contracts for the billing of its services in one of four ways: time and materials ("T & M"), cost plus fixed fee ("CPFF"), cost plus incentive fee ("CPIF"), or fixed price. T & M, CPFF, and CPIF contracts, which cover a substantial amount of TENERA's revenues, are generally billed monthly by applying a multiplier factor to specific labor costs or by use of a fixed labor rate per hour charged to each project. T & M, CPFF, and CPIF contracts are generally structured to include "not-to-exceed" ceilings; however, if after initial review or after work has started, it is noted that additional work beyond the initial scope of work is required, the contract normally can be renegotiated to include such additional work and to increase the contract ceiling accordingly. The Company also receives license and annual maintenance fees from contracts involving software products. During the year ended December 31, 1996, such fees amounted to $283,000 ($814,000 in 1995). Fixed-price contracts are generally applicable to instances in which TENERA has been requested to deliver services and/or products previously developed or products and/or services deliverable to multiple customers. Certain fixed price contracts are established where TENERA is developing software products or transferring the technology to a new platform. 4 TENERA generally receives payments on amounts billed 30 to 90 days after billing, except for retention under contracts. Since the majority of TENERA's clients are utility companies, DOE, DOE prime contractors, or major mass transit systems, TENERA historically has experienced a low percentage of losses due to poor credit risks. BACKLOG As of December 31, 1996, TENERA had contracted a backlog of approximately $6.7 million, all of which is cancelable by the clients. Contracted backlog represents the aggregate of the residual (unspent) value of those active contracts entered into by TENERA for services which are limited by a contractual amount and does not include any estimates of open-ended services contracts or unfunded backlog that may result from additions to existing contracts. Since all outstanding contracts are cancelable, there is no assurance that the revenues from these contracts will be realized by the Company. If any contract is canceled, there is no assurance that the Company will be successful in replacing such contracts. COMPETITION The market for consulting and management services and related software products and services is highly competitive and TENERA competes with several larger firms with significantly greater resources. The primary competitive factor in the market for consulting and management services is price, and a number of TENERA's competitors are able to offer such services at prices that are lower than those offered by TENERA. RESEARCH AND DEVELOPMENT It has been TENERA's policy to undertake development projects of software, systems, and data bases only if they can be expected to lead directly to proprietary products that may be generally marketable. A portion of TENERA's research and development effort may be funded through customer-sponsored projects, although the rights to the systems and data bases generally remain with TENERA. Because TENERA's research and development activities involve the integration of customer-funded, cost sharing, and TENERA-funded projects, it is not possible to segregate on a historical basis all of the specific costs allocable as research and development costs. In 1996 however, TENERA expended in excess of $562,000 ($68,000 in 1995) of its funds on software development designed to meet customers needs for 1996 and beyond. PATENTS AND LICENSES The Company does not hold any patents material to its business. TENERA relies upon trade secret laws and contracts to protect its proprietary rights in software systems and data bases. The license agreements under which customers acquire the rights to use TENERA's products generally restrict the customers' use of the products to their own operations and prohibit disclosure to others. PERSONNEL At December 31, 1996, the Company employed a total of 176 consultants, engineers, programmers, and scientists and a supporting administrative staff of over 30 employees. Nine employees hold doctorates and 71 employees hold master's degrees. TENERA also retains the services of independent contractors in order to fulfill specific needs for particular projects. None of TENERA's employees are represented by a labor union. ITEM 2. PROPERTIES The Company's headquarters are located in San Francisco, California, and consist of approximately 13,500 square feet of leased office space. TENERA also leases approximately 5,000 square feet of office space in Hartford, Connecticut. These leases expire in 1997 and 2000, respectively. Additionally, TENERA maintains leases covering approximately 8,000 square feet in total in Louisville, Colorado; Knoxville, Tennessee; and Richland, Washington which expire at various dates through 1998. 5 The Company believes that its facilities are well maintained and adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS On November 4, 1994, PLM Financial Services, Inc. ("PLM") filed an action against the Predecessor Partnership, among others, in the Superior Court of California for the County of Alameda. The action entitled PLM Financial Services, Inc. v. TERA Corporation, et al., Case No. 743 439-0, seeks damages in excess of $4.6 million in unpaid equipment rent and other unspecified damages allegedly owing to PLM under an equipment lease dated September 29, 1984 between PLM and TERA Power Corporation ("TERA Power"), a former subsidiary of TERA Corporation (the "Predecessor Corporation"). PLM has named the Predecessor Partnership in the action pursuant to a Guaranty dated September 24, 1984 of the lease obligations of TERA Power made by the Predecessor Corporation. Upon the liquidation of the Predecessor Corporation in late 1986, the stock of TERA Power was transferred to the TERA Corporation Liquidating Trust (the "Trust") and was thereafter sold to Delta Energy Projects Phases II, IV, and VI pursuant to a stock purchase agreement dated May 31, 1991. Management understands that TERA Power has asserted various defenses to the claims asserted by PLM in the action. Moreover, management believes that, even if there is liability under the lease, the Guaranty has been exonerated and the Company will be able to defend this action successfully. Management does not believe that eventual resolution of this matter will have a material effect on the Company's financial position; however, an adverse outcome could have a material adverse impact on the financial position, results of operations, and cash flows of the Company. On October 13, 1995, the League for Coastal Protection ("League") filed an action on behalf of the League and the general public against the Company, among others, in the Superior Court of California for the County of San Francisco. The action entitled League for Coastal Protection v. Pacific Gas & Electric Company ("PG&E"), et al., Case No. 973182, seeks injunctive relief and disgorgement of unspecified profits under the California Business and Professions Code, Section 17200, et seq. The plaintiff contends that certain studies performed by the Company and its predecessors respecting the requirements of 316(b) of the Clean Water Act, that ultimately were submitted by PG&E to the Regional Water Quality Control Board ("RWQCB") in 1988 in connection with the Diablo Canyon Nuclear Power facility at Diablo Canyon, California, were deficient in various respects, and that the Company and PG&E covered up those deficiencies from the RWQCB and other state agencies. On October 13, 1995, the League filed an action against the Company among others, in the United States District Court for the Northern District of California, entitled League for Coastal Protection v. Pacific Gas & Electric Company, et al., Case No. C96-1393DLJ, seeking injunctive and other relief under the United States Clean Water Act related to the same studies and reporting described above. On February 5, 1996, John W. Carter filed an action against the Company and others in the United States District Court for the Northern District of California entitled United States of America, ex rel. and State of California, ex rel., John W. Carter v. Pacific Gas & Electric Company, et al., Case No. C-95-2843-MHP, under the False Claims Act. This action, which is based on the same studies and reports described above, seeks unspecified damages and penalties. An agreement has been reached in principal for a global settlement with the League, Carter, the California Attorney General, and the Environmental Protection Agency. While the settlement is being documented, all matters have been stayed, and/or held in abeyance, pending consummation of the settlement. As a result of the settlement, all of the actions will be dismissed. The Company is not required to make any payment or other contribution to the settlement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 6 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Shares of the Company's Common Stock are listed for trading on AMEX under the symbol TNR. The first trading day on AMEX was June 30, 1995, at which time 10,417,345 shares were outstanding. The Units of the Predecessor Partnership were listed for trading on AMEX under the symbol TLP. The first and last trading days on AMEX for the Predecessor Partnership was January 28, 1988, and June 30, 1995, respectively. There were approximately 500 shareholders of record as of March 17, 1997.
___________________________________________________________________________________ 1996 1995 1994 ------------------ ------------------ ------------------ Price Range of Price Range of Price Range of TENERA, Inc. TENERA, Inc. Predecessor Shares Shares (1) Partnership Units ------------------ ------------------ ------------------ High Low High Low High Low ___________________________________________________________________________________ First Quarter .... $ 1.375 $ 0.875 $ 0.9375 $ 0.50 $ 1.6875 $ 1.25 Second Quarter ... 1.4375 0.875 1.1875 0.75 1.4375 1.0625 Third Quarter .... 1.0625 0.75 1.875 1.1875 1.1875 0.50 Fourth Quarter ... 0.875 0.625 1.50 0.875 1.3125 0.625 ___________________________________________________________________________________ (1) Reflects trading prices of the Predecessor Partnership Units for the period from January 1, 1995 to June 30, 1995.
The Board of Directors of the Company determines the amount of cash dividends which the Company may make to shareholders after consideration of projected cash requirements and a determination of the amount of retained funds necessary to provide for growth of the Company's business. The Company and its Predecessor Partnership have made no distributions since 1991. The Company does not anticipate resumption of cash distributions in the foreseeable future. 7 ITEM 6. SELECTED FINANCIAL DATA The following combined selected financial data of the Company for the five prior fiscal years should be read in conjunction with the combined financial statements and related notes included elsewhere. TENERA, INC. FINANCIAL HIGHLIGHTS
(In thousands, except per unit and statistical amounts) _______________________________________________________________________________________________________________ Year Ended December 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 _______________________________________________________________________________________________________________ OPERATIONS DATA Revenue ................................................ $ 24,003 $ 25,545 $ 23,600 $ 29,340 $ 36,648 Operating (Loss) Income ................................ (1,382) 1,203 (1,239) (315) 826 Net (Loss) Earnings .................................... (1,080) 898 (1,202) (294) 795 Earnings (Loss) per Share/Equivalent Unit(1) ........... (0.11) 0.07 (0.13) (0.03) 0.08 Weighted Average Shares/Equivalent Units(1) ............ 10,248 10,014 9,555 9,646 9,710 CASH FLOW DATA Net Cash Provided (Used) by Operating Activities ....... 2,954 (286) 17 1,472 (626) Net Increase (Decrease) in Cash and Cash Equivalents ... 2,490 (469) 363 1,085 (1,418) FINANCIAL POSITION AT DECEMBER 31 Cash and Cash Equivalents .............................. 3,964 1,474 1,943 1,580 495 Working Capital ........................................ 4,555 5,836 4,024 5,196 5,383 Total Assets ........................................... 7,940 10,087 8,616 9,345 11,111 Total Liabilities ...................................... 3,062 3,912 4,069 3,524 4,932 Shareholders' Equity/Partners' Capital ................. 4,878 6,175 4,547 5,821 6,179 Book Value per Share/Equivalent Unit(1)(2) ............. 0.48 0.60 0.48 0.60 0.64 OTHER INFORMATION Number of Employees .................................... 208 270 170 202 263 _______________________________________________________________________________________________________________ (1) Equivalent Units represent both the general and limited partners' interest in Predecessor Partnership earnings. (2) Calculated as Shareholders' Equity divided by shares of Common Stock outstanding at December 31, 1996 and December 31, 1995, and as the Predecessor Partnership's Partners' Capital divided by Equivalent Units outstanding at December 31, for the years 1992 to 1994, respectively.
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION TENERA, INC. RESULTS OF OPERATIONS
______________________________________________________________________________________________________ Year Ended December 31, -------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- ---------- % Increase % Increase (Decrease) (Decrease) % of to Prior % of to Prior % of Revenue Year Revenue Year Revenue ______________________________________________________________________________________________________ Revenue .............................. 100 (6) 100 8 100 Direct Costs ......................... 65 (4) 63 10 62 General and Administrative Expenses .. 41 19 32 (23) 45 Other Income (Expenses) .............. 0 275 0 (69) 0 Special Items, Net ................... 0 N/M -- (100) 2 ---------- ---------- ---------- ---------- ---------- Operating (Loss) Income ............ (6) (215) 5 N/M (5) Interest Income, Net ................. 1 164 0 (97) 0 ---------- ---------- ---------- ---------- ---------- Net (Loss) Earnings Before Income Tax Benefit/Expense .................. (5) (220) 5 N/M (5) ========== ========== ========== ========== ========== ______________________________________________________________________________________________________ N/M Not meaningful.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995 Lower revenue and higher general and administrative expenses resulted in a net loss before income tax benefit/expense of $1,217,000, compared to net earnings before income tax expense of $1,204,000 in 1995. The revenue decrease is primarily the result of reduced sales of consulting and management services throughout the year; lower sales activity of software services until the award of a software contract in August 1996, valued at approximately $2.9 million, with the National Railroad Passenger Corporation ("Amtrak"); and the reduced availability of staff reassigned to internal software product development; partially offset by an increase in revenue related to the Rocky Flats Contract at DOE's Site. Concentration of revenue from the government sector increased to 61% of total revenue for 1996 from 49% in 1995. This is primarily the result of the Rocky Flats Contract which was in existence for the entire year of 1996, but commenced in mid-1995. During 1996, the government sector quarterly revenue declined approximately 40% from the first quarter to the fourth quarter, due primarily to site budget constraints on the Rocky Flats Contract. The Company is unable to determine whether future budgetary actions at Rocky Flats will further reduce revenue from the Rocky Flats Contract. The number of clients served during the year increased slightly to 75 from 66 in 1995. Revenue from software license and maintenance fees during 1996 decreased to $283,000 from $814,000 in 1995, primarily due to fewer new software installations. Direct costs were lower in 1996, primarily as a result of the reduced revenue generation opportunities. Gross margins decreased to 35% in 1996 from 37% in 1995 due to the full year impact of the lower margin Rocky Flats Contract. This lower margin contribution is primarily due to the cost-plus pricing characteristics of 9 the contract. Gross margin contribution from overall project activity during the year, before consideration for the impact of the Rocky Flats Contract, was up slightly to 44% in 1996 from 43% in 1995. General and administrative costs increased by $1.6 million in 1996, primarily reflecting increased professional staff time spent on overhead and sales activities, higher severance costs, and increased internally-funded software development costs. Prior to January 1, 1996, the Company's product development had been primarily funded by clients as part of the development of software applications. These cost increases resulted in an increase in general and administrative expenses as a percentage of revenue from 32% in 1995 to 41% in 1996. Other income for 1996 primarily relates to the final liquidation, in April 1996, of the Company's interest in the Individual Plant Evaluation Partnership ("IPEP partnership"), a technical services partnership in which it was an operating participant until its termination in 1995. The Company previously booked a loss provision of $30,000 in 1995 for estimated closure costs of the IPEP partnership. Other income also includes gains on the sale of assets related to facility downsizing (approximately $10,000 in 1996 and 1995). The special items' net expense of $50,000 is comprised of two items (see Note 8 to Financial Statements. Special Items). First, in the second quarter of 1996, the Company recorded a $250,000 adjustment to the reserve related to the settlement of specific disputed costs on certain government contracts with the DOE. This positive earnings impact resulted from a further reduction of the reserve for sales adjustment established in 1991, and is based upon the successful government audits and contract closeouts of prior periods. The second special adjustment occurred in December 1996, and more than offset the first item. This adjustment related to the repricing of debt owed to the Company by one of its executive officers (see Note 3 to Financial Statements. Related Party Transactions). The principal amount of the note was reduced to the then current fair market value of the stock held as security, resulting in a charge to earnings of approximately $300,000. Net interest income in 1996 represents earnings from the investment of cash balances in short-term, high-quality, government and corporate debt instruments, partially offset by capital lease interest expense. The Company had no borrowings under its line of credit during 1996. Net interest income in 1995 reflects investment earnings on smaller average cash balances, partially offset by interest costs associated with short-term borrowing on the Company's line of credit during the first six months of 1995. YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994 Higher revenue and lower general and administrative expenses resulted in net earnings before income tax expense for 1995 of $1,204,000 versus a pre-tax loss of $1,702,000 in 1994 before the special item for settlement with the DOE. The revenue increase was primarily a result of the impact of beginning the Rocky Flats Contract at the Site on July 1, 1995. This contract is a cost-plus incentive agreement with estimated revenue for direct and overhead cost recovery exceeding $16 million and an incentive fee percentage comprised of a 1% base and 4.5% maximum performance-based award over a two-year base period. The total period of performance for the Rocky Flats Contract includes options to extend the contract beyond the two-year initial base period, upon the request of Kaiser-Hill, through June 30, 2000. The Rocky Flats Contract, as with all TENERA contracts, is cancelable by the clients (see Item 1. "Business"). The Rocky Flats Contract's impact on revenue for 1995 was partially offset by the impact of reduced technical services sales to electric utility clients and related staffing when compared to 1994. Concentration of revenue from the government sector increased to 49% of total revenue for 1995 from 36% in 1994. This was primarily due to the Rocky Flats Contract activity which represented 45% of total revenue in the final six months of 1995 and 31% of total revenue for the entire year. The number of clients served during the year decreased slightly to 66 from 73 in 1994. Revenue from software license and maintenance fees during 1995 rose to $814,000 from $393,000 in 1994, primarily due to the recognition of license fees associated with achieving certain milestones in the ongoing New York Metropolitan Transit Authority and Long Island Rail Road installations. 10 Direct costs were higher in 1995, primarily reflecting the increased staffing for the Rocky Flats Contract. Gross margin contribution from overall project activity during the year, before consideration for the impact of the Rocky Flats Contract, was up from 38% in 1994 to 43% in 1995. The 1995 margins reflected improved pricing in services to electric utility clients and achievement of milestones under software contracts. The gross margin contribution for the Rocky Flats Contract was only 19%. This lower gross margin contribution was primarily due to the cost-plus pricing characteristics of the contract. General and administrative expenses decreased by $2,422,000 in 1995 as compared to 1994, primarily due to overall reduced staff size during the first half of the year, improved technical staff productivity on client projects, and lower professional service, facilities, travel, and office equipment costs in 1995, partially offset by costs associated with the Conversion incurred in 1995 and incentive compensation awards. These net cost reductions resulted in a drop in general and administrative expenses as a percentage of revenue from 45% in 1994 to 32% in 1995. Other expense for 1995 primarily related to the Company's interest ($30,000) in the estimated loss of the Individual Plant Evaluation Partnership ("IPEP"), a technical services partnership in which it was an operating participant, partially offset by a gain on the sale of assets related to facility downsizing ($10,000). The special item of $500,000 in 1994, reflected the estimated settlement of specific disputed costs on certain U.S. Government contracts with the DOE. This positive earnings adjustment resulted from a partial reduction of the reserve for sales adjustment established in 1991. The reserve was established to provide for a dispute between the Company and the DOE with respect to the allowability and amount of potential rate adjustments on U.S. Government contracts for certain employee compensation costs. Net interest income represented earnings from the investment of cash balances in short-term, high-quality, corporate debt instruments, offset by the interest costs associated with short-term borrowing on the Company's line of credit during the first six months of 1995. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by $2,490,000 during 1996. The increase was due to cash provided by operations ($2,954,000), offset by cash used in net acquisition of equipment ($247,000), and in financing activities ($217,000). Receivables decreased by $5,758,000 from December 31, 1995, primarily due to an increase in collections and a reduction in revenue during 1996. The allowance for sales adjustments decreased by $1,262,000 since December 31, 1995, primarily due to contract closeouts of various government contracts from prior periods. Accounts payable decreased by $144,000 since the end of 1995, primarily due to the net reduction of prepaid fixed-price project commitments. Accrued compensation and related expenses decreased by $382,000 during the period primarily reflecting staff reductions. Income taxes payable and deferred income taxes decreased by $216,000 and $90,000, respectively, during the period resulting from payment of 1995 income taxes and reduced tax liability associated with 1996 net losses. Equity decreased by $1,297,000 in 1996, due to net losses ($1,080,000) and the repurchase of stock ($217,000). No cash dividend was declared in 1996. The impact of inflation on revenue and projects of the Company was minimal. At December 31, 1996, the Company had available $4,500,000 of a $5,000,000 revolving loan facility with its lender which expires in May 1998. The Company has no outstanding borrowing against the line; however, $500,000 was assigned to support standby letters of credit. Management believes that cash expected to be generated by operations, the Company's working capital, and its loan facility are adequate to meet its anticipated liquidity needs through the next twelve months. 11 OPERATING RISKS Statements contained in this report which are not historical facts, are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to the risks and uncertainties which could cause actual results to differ materially from those projected, including those risks and uncertainties discussed below. History of Losses; Uncertainty of Future Profitability. Revenue decreased each year from 1990 to 1994 ($51.2 million in 1990, $44.1 million in 1991, $36.6 million in 1992, $29.3 million in 1993, $23.6 million in 1994), and has remained relatively flat from 1994 through 1996, while net earnings (loss) from operations over the same periods declined from $7.9 million in 1990, to $(6.2 million) in 1991, $0.8 million in 1992, $(0.3 million) in 1993, $(1.2 million) in 1994, $0.9 million in 1995, and $(1.2 million) in 1996. There can be no assurance of the level of earnings, if any, that the Company will be able to derive in the future. Uncertainty Regarding Industry Trends and Customer Demand. As a result of the slowdown in the construction of power plants and the absence of new power plants scheduled for construction, as well as the gradual deregulation of the production and distribution of electricity, the market for engineering services and software relating to licensing and construction of power plants has contracted, and the market for services and software related to efficient and profitable operation of existing capacity has expanded. This trend has caused some electric utilities to close power plants and to curtail certain other activities traditionally supported by TENERA. This reduced demand for TENERA's traditional engineering services and software, which has caused TENERA to discontinue certain business units and related facilities, and to downsize and realign engineering staff, has had, and may continue to have, a material adverse impact on operating results. TENERA's profitability depends on its ability to successfully adjust to these industry changes through additional downsizing or realignment of professional staff and through the successful development and marketing of new services and software. There can be no assurance that TENERA will have the financial and other resources necessary to successfully research, develop, introduce, and market new products and services, that if, or when, such new products or services are introduced, they will be favorably accepted by current or potential customers, or that TENERA will be otherwise able to fully adjust its services and products to meet the changing needs of the industry. See "Business - Background." Uncertainty of Access to Capital; Research and Development. Management currently believes that cash expected to be generated from operations, the Company's working capital, and its available loan facility, are adequate to meet its anticipated near-term needs. If cash from operations is less than currently anticipated, TENERA may need to seek other sources of capital. Moreover, additional amounts will be required to adequately fund research and development of new products and services necessary to meet changing industry trends and customer demand. There can be no guarantee that such sources will be available in sufficient amounts or on terms favorable to TENERA, or at all. Reliance on Key Personnel. Due to the nature of the consulting and professional services business, the Company's success depends, to a significant extent, upon the continued services of its officers and key technical personnel and the ability to recruit additional qualified personnel. The Company experienced a historically high rate of turnover as revenue and earnings began to decline in 1991 and thereafter, and the further loss of such officers and technical personnel, and the inability to recruit sufficient additional qualified personnel could have material adverse effect on the Company. Government Contracts Audits. The Company's United States government contracts are subject in all cases to audit by governmental authorities. The Company earlier in 1994 concluded an audit begun in 1991 of certain of its government contracts with the DOE relating to the allowability of certain employee compensation costs. The Company made a special charge to earnings in 1991 for a $2.4 million provision for the potential rate adjustments then disputed by the Company and the government. As a result of resolving the dispute, the Company recognized increases to earnings of $500,000 in 1994 and $250,000 in 1996. Cash payments to clients associated with the settlement, which are estimated to be between $400,000 and $500,000, which were accrued for in the 1991 Special Charge to earnings, are expected to be made as government contracts with individual clients are closed out. There can be no assurance that no additional charges to earnings of the Company may result from future audits of the Company's government contracts. 12 Litigation. PLM Financial Services, Inc. has filed an action, in the Superior Court of California for the County of Alameda, seeking damages in excess of $4.6 million in unpaid equipment rent and other payments allegedly owing to PLM under an equipment lease between PLM and TERA Power Corporation, a former subsidiary of TERA Corporation of the Predecessor Corporation. PLM has named the Company in the action pursuant to a guaranty of the lease obligations made by the Predecessor Corporation. Management believes that, even if there is liability under the lease, the guaranty has been exonerated and the Company will be able to defend this action successfully. Management does not believe that eventual resolution of this matter will have a material effect on the Company's financial position; however, an adverse outcome could have a material adverse impact on the financial position, results of operations, and cash flows of the Company. See "Legal Proceedings." Competition. The market for engineering and management services and related software products and services is highly competitive and TENERA competes with several larger firms with significantly greater resources. Significant competitive factors in the market for engineering and management services are price and the ability to offer new products and services designed to meet changing customer demand. A number of TENERA's competitors are able to offer such services at prices that are lower than those offered by TENERA, and to devote far greater resources toward the development of new products and services. This competition has had, and is expected to continue to have, a material adverse impact on TENERA's business. Reliance on Major Customers. During fiscal 1996, two customers, Kaiser-Hill and ComEd, accounted for approximately 68% of the Company's total revenues, and during 1995, these two customers accounted for approximately 38% of the Company's total revenues. All outstanding customer contracts are cancelable upon notice by either party, and therefore, there can be no assurance that relationships with customers will be maintained at existing levels, or at all. Budgetary constraints at the Rocky Flats Site resulted in a decline in revenue attributable to Kaiser-Hill, and a 40% decline in revenue from the government sector, generally from the first quarter to the fourth quarter of 1996, and if continued, such budgetary constraints could result in further declines in revenue in the future. The discontinuation or material reduction of business relations with these customers could have a material adverse impact on TENERA's business. See "Business - Marketing and Clients." 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TENERA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) ___________________________________________________________________________ Year Ended December 31, ------------------------------- 1996 1995 1994 ___________________________________________________________________________ Revenue .................................. $ 24,003 $ 25,545 $ 23,600 Direct Costs ............................. 15,527 16,082 14,612 General and Administrative Expenses ...... 9,843 8,240 10,662 Other Income (Expenses) .................. 35 (20) (65) Special Items, Net ....................... (50) -- 500 --------- --------- --------- Operating (Loss) Income .............. (1,382) 1,203 (1,239) Interest Income, Net ..................... 165 1 37 --------- --------- --------- Net (Loss) Earnings Before Income Tax Benefit/Expense .................... (1,217) 1,204 $ (1,202) ========= Income Tax (Benefit) Expense ............. (137) 306 --------- --------- Net (Loss) Earnings ...................... $ (1,080) $ 898 ========= ========= Net (Loss) Earnings per Share (Pro Forma for 1995) ..................... $ (0.11) $ 0.07 ========= ========= Weighted Average Number of Shares Outstanding .............................. 10,248 10,014 ========= ========= ___________________________________________________________________________ See accompanying notes.
14 TENERA, INC. CONSOLIDATED BALANCE SHEETS
(In thousands, except share and unit amounts) __________________________________________________________________________________________ December 31, --------------------------- 1996 1995 __________________________________________________________________________________________ ASSETS Current Assets Cash and cash equivalents .............................. $ 3,964 $ 1,474 Receivables, less allowances of $1,626 (1995 - $2,888) Billed ............................................... 1,087 4,857 Unbilled ............................................. 2,032 2,758 Other current assets ................................... 534 641 ---------- ---------- Total Current Assets ............................... 7,617 9,730 Property and Equipment, Net .............................. 323 340 Other Assets ............................................. -- 17 ---------- ---------- Total Assets ..................................... $ 7,940 $ 10,087 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY/PARTNERS' CAPITAL Current Liabilities Accounts payable ....................................... $ 1,026 $ 1,170 Accrued compensation and related expenses .............. 2,036 2,418 Income taxes payable ................................... -- 216 Deferred income taxes .................................. -- 90 ---------- ---------- Total Current Liabilities .......................... 3,062 3,894 Non-Current Liabilities .................................. -- 18 ---------- ---------- Total Liabilities ................................ 3,062 3,912 Commitments and Contingencies Shareholders' Equity Common Stock, $0.01 par value, 25,000,000 authorized, 10,417,345 issued and outstanding ...................... 104 104 Paid in capital, in excess of par ...................... 5,698 5,698 Retained (deficit) earnings ............................ (619) 461 Treasury stock - 292,498 shares (1995 - 87,402 shares) ................................. (305) (88) ---------- ---------- Total Shareholders' Equity ....................... 4,878 6,175 ---------- ---------- Total Liabilities and Shareholders' Equity ..... $ 7,940 $ 10,087 ========== ========== __________________________________________________________________________________________ See accompanying notes.
15 TENERA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (PARTNERS' CAPITAL)
(In thousands, except share and unit amounts) _________________________________________________________________________________________________________________________________ Shareholders' Equity Partners' Capital ----------------------------------------- ------------------------------------------ Paid In Capital Notes In Retained from Common Excess (Deficit) Treasury General Limited Treasury Limited Stock of Par Earnings Stock Partner Partners Units Partners Total _________________________________________________________________________________________________________________________________ December 31, 1993 ............ $ -- $ -- $ -- $ -- $ 335 $ 6,555 $ (1,065) $ (4) $ 5,821 Repurchase of 51,507 Units ... -- -- -- -- -- -- (76) -- (76) Amortization of Notes ........ -- -- -- -- -- -- -- 4 4 Net Loss ..................... -- -- -- -- (23) (1,179) -- -- (1,202) -------- --------- --------- --------- --------- --------- --------- --------- --------- December 31, 1994 ............ -- -- -- -- 312 5,376 (1,141) -- 4,547 Repurchase of 242,481 Units .. -- -- -- -- -- -- (182) -- (182) Net Earnings Through June 30, 1995 ................ -- -- -- -- 9 428 -- -- 437 Merger of Predecessor Partnership into TENERA, Inc. ................. 93 4,709 -- -- (321) (5,804) 1,323 -- -- Common Stock Issued at $0.89 per Share .............. 11 989 -- -- -- -- -- -- 1,000 Repurchase of 87,402 Shares .. -- -- -- (88) -- -- -- -- (88) Net Earnings for July 1, 1995 to December 31, 1995 ......... -- -- 461 -- -- -- -- -- 461 -------- --------- --------- --------- --------- --------- --------- --------- --------- December 31, 1995 ............ 104 5,698 461 (88) -- -- -- -- 6,175 Repurchase of 205,096 Shares . -- -- -- (217) -- -- -- -- (217) Net Loss ..................... -- -- (1,080) -- -- -- -- -- (1,080) -------- --------- --------- --------- --------- --------- --------- --------- --------- December 31, 1996 ............ $ 104 $ 5,698 $ (619) $ (305) $ -- $ -- $ -- $ -- $ 4,878 ========= ========= ========= ========= ========= ========= ========= ========= ========= _________________________________________________________________________________________________________________________________ See accompanying notes.
16 TENERA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) _________________________________________________________________________________________________ Year Ended December 31, ---------------------------------- 1996 1995 1994 _________________________________________________________________________________________________ CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) earnings ....................................... $ (1,080) $ 898 $ (1,202) Adjustments to reconcile net (loss) earnings to cash provided (used) by operating activities: Depreciation ............................................ 272 298 383 (Gain) Loss on sale of equipment ........................ (8) 1 24 Decrease in allowance for sales adjustments ............. (1,262) (9) (820) Amortization of Limited Partners' notes ................. -- -- 4 Deferred income taxes ................................... (90) 90 -- Changes in assets and liabilities: Receivables ........................................... 5,758 (2,137) 1,919 Other current assets .................................. 107 40 (109) Other assets .......................................... 17 30 23 Accounts payable ...................................... (144) (495) 286 Accrued compensation and related expenses ............. (382) 764 (491) Income taxes payable ............................... (216) 216 -- Non-Current liabilities ............................... (18) 18 -- ---------- ---------- ---------- Net Cash Provided (Used) by Operating Activities .... 2,954 (286) 17 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment ..................... (258) (164) (361) Proceeds from sale of equipment ........................... 11 1 33 ---------- ---------- ---------- Net Cash Used in Investing Activities ............... (247) (163) (328) CASH FLOWS FROM FINANCING ACTIVITIES (Repayment) Borrowings under bank loan agreement .......... -- (750) 750 Repurchase of equity ...................................... (217) (270) (76) Issuance of Common Stock .................................. -- 1,000 -- ---------- ---------- ---------- Net Cash (Used) Provided by Financing Activities .... (217) (20) 674 ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ 2,490 (469) 363 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............. 1,474 1,943 1,580 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR .................... $ 3,964 $ 1,474 $ 1,943 ========== ========== ========== _________________________________________________________________________________________________ See accompanying notes.
17 TENERA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1. ORGANIZATION Company. TENERA, Inc. (the "Company"), a Delaware corporation, was formed in connection with the conversion of TENERA, L.P. (the predecessor of the Company; the "Predecessor Partnership") into corporate form (the "Conversion"). Therefore the Company and the Predecessor Partnership are sometimes collectively referred to herein as the Company. On June 30, 1995, the Company completed the Conversion by means of a merger (the "Merger") of the Predecessor Partnership, its General Partner (Teknekron Technology MLP I Corporation) and its Operating Partnership (TENERA Operating Company, L.P.) with, and into, TENERA, Inc. Pursuant to the Merger: (i) the Company succeeded to the business, assets, and liabilities of the Predecessor Partnership; (ii) each limited partner Unit previously held by Unitholders in the Predecessor Partnership, (including 184,946 equivalent Units representing the interest in the Partnership of the General Partner), automatically converted to one share of Common Stock of TENERA, Inc.; and (iii) an additional 1,123,596 shares of Common Stock were issued to the sole shareholder of the General Partner in consideration of the contribution of $1,000,000 made to TENERA, Inc. by the General Partner in connection with the Merger. The Merger was approved by the Unitholders of the Predecessor Partnership pursuant to the Consent Solicitation Statement/Prospectus dated June 6, 1995, included in the Company's Registration Statement on Form S-4 (Registration Number 33-58393; the "Form S-4"). TENERA Rocky Flats, LLC ("LLC"), a Colorado limited liability company, was formed by the Company in 1995 to provide consulting services in connection with participation in the Performance Based Integrating Management Contract ("Rocky Flats Contract") at the Department of Energy's ("DOE") Rocky Flats Environmental Technology Site ("Site"). NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company and the LLC. All intercompany accounts and transactions have been eliminated. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Cash and Cash Equivalents. Cash and cash equivalents consist of demand deposits, certificates of deposit, bank acceptances or repurchase agreements of major banks having strong credit ratings, and commercial paper issued by companies with strong credit ratings. The Company includes in cash and cash equivalents, all short-term, highly liquid investments which mature within three months of acquisition. Property and Equipment. Property and equipment are stated at cost ($2,723,000 and $2,518,000 at December 31, 1996 and 1995, respectively), net of accumulated depreciation ($2,400,000 and $2,178,000 at December 31, 1996 and 1995, respectively). Depreciation is calculated using the straight line method over the estimated useful lives, which range from three to five years. Revenue. Revenue from time-and-material and cost plus fixed-fee contracts is recognized when costs are incurred; from fixed-price contracts, on the basis of percentage of work completed (measured by costs incurred relative to total estimated project costs); from software license fees at time of customer acceptance; and from software maintenance agreements, equally over the period of the maintenance support agreement (usually 12 months). The Company's revenue recognition policy for its software contracts is in compliance with the American Institute of Certified Public Accounts' Statement of Position 91- 1, "Software Revenue Recognition." The Company primarily offers its services and software products to the electric power industry, the DOE, and the municipal transit industry in North America. 18 The Company performs credit evaluations of these customers and normally does not require collateral. Reserves are maintained for potential sales adjustments and credit losses; such losses to date have been within management's expectations. Actual revenue and cost of contacts in progress may differ from management estimates and such differences could be material to the financial statements. During 1996, two clients accounted for 56% and 12% of the Company's total revenue. During 1995 and 1994, a single client accounted for 31% and a different client accounted for 29% of total revenue, respectively. Income Taxes. As a result of the Conversion, the Company is no longer subject to partnership tax treatment whereby the Company pays no entity-level tax on Company income. The Company became a C Corporation subject to federal and state statutory income tax rates for income earned after the close of business on June 30, 1995. Due to the net loss in 1996, an income tax benefit has been recorded for the twelve-month period ended December 31, 1996. During 1995, a provision for income taxes was made for the six months ended December 31, 1995; however, no provision for income taxes was made by the Company for the six months ended June 30, 1995. Accounting for Stock-Based Compensation. Statement of Financial Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") is effective for the Company's 1996 year. The Company continues to account for employee stock options in accordance with Accounting Principles Board Opinion No. 25 ("APB 25") and has provided the pro forma disclosures required by FAS 123 in Note 4. Per Share and Pro Forma Per Share Information. Per share data for 1996 is computed based on weighted average number of shares of common stock outstanding and common stock equivalents using the treasury stock method. In accordance with financial reporting guidelines, pro forma earnings per share information for 1995 was based on the assumption that the Company was taxed for federal and state income tax purposes as a C Corporation at a 40% effective tax rate, and was computed based on weighted average number of shares of common stock outstanding and the effect of common stock equivalents from outstanding stock options, using the treasury stock method. Historical earnings (loss) per share information for 1995 and 1994 has been omitted from the face of the historical statements of operations because this data is not indicative of the Company's ongoing operations as a result of the change in tax treatment. NOTE 3. RELATED PARTY TRANSACTIONS Teknekron. The principal shareholder of Teknekron Corporation ("Teknekron") beneficially owned approximately 37%, 36%, and 26% of the Company's outstanding shares of Common Stock/Predecessor Partnership Units at December 31, 1996, 1995, and 1994, respectively. Teknekron provided management and related services to the Predecessor Partnership under an advisory services agreement, which expired on June 30, 1995. Charges to earnings for the services amounted to none in 1996, $125,000 in 1995, and $600,000 in 1994. Individual Plant Evaluation Partnership ("IPEP"). The Company was an equal participant in a partnership, IPEP, with Westinghouse Electric Corporation and Fauske & Associates, Inc., which provided executive consulting services to commercial utility companies. IPEP ceased activities in 1995 and dissolved in April 1996. Revenue recognized for services provided through IPEP amounted to none in 1996, $390,000 in 1995, and $173,000 in 1994, and represented less than 1% of total revenue in 1995 and 1994. The participants paid a royalty to IPEP, equal to 2% to 4% of billed fees on certain projects, for administrative services. Royalties paid to IPEP amounted to none in 1996, $1,000 in 1995, and $4,000 in 1994. The Company's interest in IPEP was accounted for under the equity method. Each of the participants shared equally in the earnings and losses of IPEP. In 1996, the Company recorded income of $17,000 related to the final liquidation of IPEP. For 1995, the Company recognized $30,000 as its share of IPEP's 1995 estimated losses ($34,000 in 1994). Notes Receivable. The Company included in other current assets, notes receivables from executive officers which amounted to none and $347,639 at December 31, 1996 and 1995, respectively. In 1996, certain terms of the note made by an executive officer, related to the purchase of stock by such officer in 1988, were renegotiated to provide for a purchase price adjustment on the stock securing the note balance, and the remaining balance of 19 the note was reduced to the then fair market value of the stock held as security, resulting in a charge to operations of $300,419 in 1996. TERA Corporation Liquidating Trust ("Trust"). The Trust was established by TERA Corporation ("Predecessor Corporation") in 1986, to facilitate the orderly sale or other disposition of the remaining assets and satisfaction of all remaining debts and liabilities. The Company did not recognize any income or expense from the Trust in 1996, 1995, and 1994. Toltec Development Corporation ("Toltec"). The Company entered into a lease for approximately 10,000 square feet of office space during 1993 for its Berkeley facilities with Toltec, an affiliate of Teknekron. The lease expired in 1995. Expenses related to lease payments to Toltec totaling $141,000 and $224,000 were recorded in 1995 and 1994, respectively. NOTE 4. EMPLOYEE BENEFIT PLANS Incentive Bonus Plans. The Company has incentive plans based on financial performance. Bonus awards of cash and shares are discretionary and are determined annually by the Board of Directors. In 1996, there were no charges to earnings for incentive bonuses ($150,000 in 1995 and none in 1994). Additionally, $90,000 of the 1995 bonus accrual was not paid and was reversed in 1996. Profit Sharing Plan ("PSP"). Effective January 1, 1997, the Company initiated a profit sharing plan whereby the funding for the plan is based on overall company profitability as measured by pretax earnings. Twenty percent of pretax earnings will be distributed quarterly to eligible employees on an equal percentage of salary basis. 401(k) Savings Plan. The 401(k) Savings Plan is administered through a trust that covers substantially all employees. Employees can contribute amounts to the plan, not exceeding 10% of salary. In 1995 and 1994, the Company matched these amounts with a 50% contribution on a matching contribution base, not exceeding 6% of salary. Effective January 1, 1996, the Company's matching contribution increased to 100% of a matching contribution base, not exceeding 6% of the employee's salary. As of January 1, 1997, the Company amended the plan to discontinue the matching contribution, but allow employees to contribute up to 15% of salary. The Company, at its discretion, may also contribute funds to the plan for the benefit of employees. During 1996, 1995, and 1994, no discretionary amounts were contributed to the plan by the company. Money Purchase Plan ("MPP"). On December 31, 1995, the MPP was merged with and into the 401(k) Savings Plan, eliminating the MPP contribution. Previously, the MPP was administered through a trust that covered substantially all employees. In 1995 and 1994, the Company's contribution amount was 3% of eligible employees annual salaries. During 1996, charges to earnings for the 401(k) Savings Plan amounted to $397,000 ($720,000 in 1995 and $492,000 in 1994 for the 401(k) and MPP Plans combined). Stock Option Plans. The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. In connection with the Merger, the Company amended its Stock Option Plan to reflect the fact that options will relate to shares of common stock, instead of limited partnership units of the Predecessor Partnership. All outstanding options for units were automatically converted to options to purchase an equal number of shares of common stock at the original exercise price and on the same terms and conditions as the original unit options. Under the provisions of the Company's Stock Option Plan, 1,500,000 shares were reserved for issuance upon the exercise of options granted to key employees and consultants. During 1996, options were granted for 391,500 shares at an exercise price of $1.00, the then fair market value, expiring on February 1, 2002. In 1995, options were granted for 130,000 shares at an exercise price of $1.1875, the then fair market value, expiring on July 1, 2001. In 1994, options were granted for 315,000 shares at an exercise price of $1.3125, and 20 290,000 shares at an exercise price of $0.6875, the then fair market values, expiring on February 7, 2004, and December 30, 2004, respectively. During 1996, options for 278,500 shares were canceled due to employee terminations ($28,000 and $362,000 in 1995 and 1994, respectively). No options were exercised in 1996, 1995, and 1994. As of December 31, 1996, options for 1,081,000 shares were outstanding and options for 545,000 shares were exercisable. Under the provisions of the 1993 Outside Directors Compensation and Stock Option Plan, which was approved by the Board of Directors, effective March 1, 1994, 150,000 shares were reserved for issuance upon the exercise of options granted to non-employee directors. During 1996, options were granted for 50,000 shares at an exercise price of $1.00, the then fair market value, expiring on March 1, 2006. In 1995, options were granted for 60,000 shares at an exercise price of $0.6875, the then fair market value, expiring on March 1, 2005. In 1994, options were granted for 20,000 shares at an exercise price of $1.3125, the then fair market value, expiring on March 1, 2004. No options were exercised in 1996, 1995, and 1994. As of December 31, 1996, 130,000 options were outstanding and 80,000 options were exercisable. Pro forma information regarding net income (loss) and earnings (loss) per share is required by FAS 123 for fiscal years beginning after December 31, 1994, and has been determined as if the Company had accounted for its stock options under the fair value method of FAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996: risk-free interest rates of 7.0% and 6.0%, respectively, for the March and July 1995 grants, and 5.2% and 5.7%, respectively, for the February and March 1996 grants; dividend yield of 0% for both years; volatility factors of the expected market price of the Company's common stock of 0.54 and 0.53, respectively; and a weighted-average expected life of the option of five years for all grants. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, options valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting periods of the options. Pro forma information regarding the Company's net income (loss) and earnings (loss) per share follows:
(In thousands, except for per share amounts) __________________________________________________________________________________________ Year Ended December 31, --------------------------- 1996 1995 __________________________________________________________________________________________ Net (Loss) Earnings - As Reported ........................ $ (1,080) $ 898 Pro Forma Net (Loss) Earnings - FAS 123 .................. (1,133) 881 Net (Loss) Earnings per Share - As Reported .............. (0.11) 0.07 Pro Forma Net (Loss) Earnings per Share - FAS 123 ........ (0.11) 0.07 __________________________________________________________________________________________
21 A summary of the Company's stock option activity, and related information follows:
(In thousands, except for dollar amounts) ________________________________________________________________________________________________________ Year Ended December 31, -------------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- ---------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ________________________________________________________________________________________________________ Outstanding - Beginning of Year ........ 1,048 $ 1.20 886 $ 1.24 623 $ 1.75 Granted .................. 441 1.00 190 1.03 625 1.02 Exercised ................ -- -- -- -- -- -- Forfeited ................ (278) 1.36 (28) 1.19 (362) 1.75 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding - End of Year .............. 1,211 $ 1.09 1,048 $ 1.20 886 $ 1.24 ========== ========== ========== ========== ========== ========== Exercisable at End of Year .............. 625 $ 1.16 638 $ 1.34 426 $ 1.41 Weighted-Average Fair Value of Options Granted During the Year .. $ 0.52 $ 0.54 N/A ________________________________________________________________________________________________________ N/A Not applicable under FAS 123.
Exercise prices for options outstanding as of December 31, 1996, ranged from $0.6875 to $1.75. The weighted-average remaining contractual life of those options is 6.4 years. 22 NOTE 5. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1995, are as follows, using the liability method:
__________________________________________________________________________________________ December 31, --------------------------- 1996 1995 __________________________________________________________________________________________ Current Deferred Tax Assets Contract reserves not currently deductible ............. $ 551 $ 663 Accrued expenses not currently deductible .............. 231 246 Net operating loss carryforward ........................ 367 -- Other .................................................. 165 214 ---------- ---------- Total Current Gross Deferred Tax Assets .............. 1,314 1,123 Less: Valuation Allowance ............................. (401) -- Current Deferred Tax Liabilities Revenue differences related to timing .................. 913 1,213 ---------- ---------- Net Current Deferred Tax Liabilities ................. $ -- $ 90 ========== ========== __________________________________________________________________________________________
The current and deferred tax provisions for the years ended December 31, 1996 and 1995, are as follows:
____________________________________________________________________________ Year Ended December 31, --------------------------- 1996 1995 ____________________________________________________________________________ Current: Federal .................................. $ (47) $ 202 State .................................... -- 14 ---------- ---------- (47) 216 ---------- ---------- Deferred: Federal .................................. (77) 77 State .................................... (13) 13 ---------- ---------- (90) 90 ---------- ---------- Tax (Benefit) Provision .................. $ (137) $ 306 ========== ========== ____________________________________________________________________________
23 A valuation allowance of $401,000 was established for the year ended December 31, 1996, for those deferred tax assets which may not be realized. There was no valuation allowance at December 31, 1995. The provision (benefit) for income taxes differed from the amount computed by applying the statutory federal income tax rate for the years ended December 31, 1996 and 1995, as follows:
_____________________________________________________________________________ Year Ended December 31, --------------------------- 1996 1995 _____________________________________________________________________________ Federal Statutory Rate ...................... (35)% 34 % State Taxes, Net of Federal Benefit ......... (1)% 6 % Permanent Differences ....................... (8)% -- Valuation Allowance ......................... 33 % -- Non-Taxable Partnership Earnings ............ -- (15)% ---------- ---------- Income Tax (Benefit) Provision .............. (11)% $ 25 % ========== ========== _____________________________________________________________________________
The Company paid income taxes of $410,000 in 1996. No income taxes were paid in 1995. At December 31, 1996, the Company had net operating loss carryforwards of approximately $970,000 for federal and $700,000 for state income tax purposes. The federal net operating loss carryforwards expire in the year 2011. The state net operating loss expires in 2001. Utilization of the Company's net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code. The annual limitation may result in the expiration of net operating losses before utilization. NOTE 6. COMMITMENTS AND CONTINGENCIES Leases. The Company occupies facilities under noncancelable operating leases expiring at various dates through 2000. The leases call for proportionate increases due to property taxes and certain other expenses. Rent expense amounted to $702,000 for the year ended December 31, 1996 ($734,000 in 1995 and $850,000 in 1994). Minimum rental commitments under operating leases, principally for real property, are as follows:
(Year Ending December 31) ___________________________________________________________________________ 1997 ....................................................... $ 511,000 1998 ....................................................... 124,000 1999 ....................................................... 96,000 2000 ....................................................... 40,000 2001 and Thereafter ........................................ -- ------------ Total Minimum Payments Required ............................ $ 771,000 ============ ___________________________________________________________________________
Revolving Loan Agreement. A loan agreement with a bank provides for a revolving line of credit of $5,000,000, through May 1998. At December 31, 1996, $4,500,000 was available under the credit line, and in addition, $500,000 was assigned to support standby letters of credit. Amounts advanced under the line of credit are secured by the Company's eligible accounts receivable. Under the agreement, the Company is obligated to comply with certain covenants related to equity, quick ratio, debt/equity ratio, and profits. At December 31, 1996, the Company obtained a waiver from the lender with respect to a certain financial covenant in the loan agreement concerning tangible net worth. The waiver extends to the next review date, March 31, 1997. The 24 interest rate under the agreement is the bank's prime rate (8.25% at December 31, 1996). During 1996, the Company paid no interest expense ($39,000 in 1995 and $9,000 in 1994). Contingent Liabilities. In December 1986, the Predecessor Partnership received a substantial portion of its Predecessor Corporation's net assets and operations in connection with a restructuring plan approved by the shareholders. The balance of the Predecessor Corporation's assets and liabilities were transferred to the Trust for the benefit of the shareholders, to facilitate the orderly sale or other disposition of the remaining assets, and satisfaction of all remaining debts and liabilities. The Company has assumed such contingent liabilities of the Trust to the extent they exceed the assets of the Trust. Management believes that adequate assets exist to satisfy all liabilities of the Trust, contingent or otherwise, not specifically transferred to the Company. NOTE 7. LEGAL PROCEEDINGS PLM Financial Services, Inc. ("PLM") filed an action on November 4, 1994, in the Superior Court of California for the County of Alameda seeking damages in excess of $4.6 million in unpaid equipment rent and other payments allegedly owing to PLM under an equipment lease between PLM and TERA Power Corporation, a former subsidiary of the Predecessor Corporation. PLM has named the Predecessor Partnership in the action pursuant to a guaranty of the lease obligations made by the Predecessor Corporation. Management believes that the guaranty has been exonerated and will be able to defend this action successfully. Management does not believe that eventual resolution of this matter will have a material effect on the Company's financial position, however, an adverse outcome could have a material adverse impact on the financial position, results of operations, and cash flows of the Company. On October 13, 1995, the League for Coastal Protection ("League") filed an action on behalf of the League and the general public against the Company, among others, in the Superior Court of California for the County of San Francisco. The action entitled League for Coastal Protection v. Pacific Gas & Electric Company ("PG&E"), et al., Case No. 973182, seeks injunctive relief and disgorgement of unspecified profits under the California Business and Professions Code, Section 17200, et seq. The plaintiff contends that certain studies performed by the Company and its predecessors respecting the requirements of 316(b) of the Clean Water Act, that ultimately were submitted by PG&E to the Regional Water Quality Control Board ("RWQCB") in 1988 in connection with the Diablo Canyon Nuclear Power facility at Diablo Canyon, California, were deficient in various respects, and that the Company and PG&E covered up those deficiencies from the RWQCB and other state agencies. On October 13, 1995, the League filed an action against the Company among others, in the United States District Court for the Northern District of California, entitled League for Coastal Protection v. Pacific Gas & Electric Company, et al., Case No. C96-1393DLJ, seeking injunctive and other relief under the United States Clean Water Act related to the same studies and reporting described above. On February 5, 1996, John W. Carter filed an action against the Company and others in the United States District Court for the Northern District of California entitled United States of America, ex rel. and State of California, ex rel., John W. Carter v. Pacific Gas & Electric Company, et al., Case No. C-95-2843-MHP, under the False Claims Act. This action, which is based on the same studies and reports described above, seeks unspecified damages and penalties. An agreement has been reached in principal for a global settlement with the League, Carter, the California Attorney General, and the Environmental Protection Agency. While the settlement is being documented, all matters have been stayed, and/or held in abeyance, pending consummation of the settlement. As a result of the settlement, all of the actions will be dismissed. The Company is not required to make any payment or other contribution to the settlement. NOTE 8. SPECIAL ITEMS There were two special items in 1996, one of which also occurred in 1994. This item amounted to $250,000 and $500,000 in 1996 and 1994 respectively, and reflects the estimated settlement of specific disputed costs on certain U.S. Government contracts with the DOE. These positive earnings adjustments resulted from partial reductions of the reserve for sales adjustment established in 1991. The reserve related to a dispute between the Company and the DOE with respect to the allowability and amount of potential rate adjustments on U.S. Government contracts for certain employee compensation costs. 25 The other special item in 1996, related to the repricing of debt owed by one of the Company's executive officers. In December 1996, certain terms of the note related to the purchase of stock by an executive officer in 1988, were renegotiated to provide for a purchase price adjustment on the stock securing the note balance and a corresponding reduction in the note balance. The remaining balance of the note was paid off, by the transfer to the Company of the stock purchased by the executive officer in 1988, at the fair market value of the stock. As a result, a charge of approximately $300,000 was made in 1996 to adjust the price of the stock to the then current fair market value. NOTE 9. SELECTED QUARTERLY COMBINED FINANCIAL DATA (UNAUDITED) A summary of the Company's quarterly financial results follows:
(In thousands, except per share or unit amounts) __________________________________________________________________________________________________________________________ Quarter Ended Quarter Ended -------------------------------------- -------------------------------------- 12/31/96 9/30/96 6/30/96 3/31/96 12/31/95 9/30/95 6/30/95 3/31/95 __________________________________________________________________________________________________________________________ Revenue ............................... $ 5,125 $ 5,586 $ 6,036 $ 7,256 $ 7,288 $ 7,249 $ 5,664 $ 5,344 Direct Costs .......................... 3,297 3,651 3,678 4,901 4,585 5,033 3,265 3,199 General and Administrative Expenses ... 2,241 2,734 2,663 2,205 2,264 1,866 2,154 1,956 Other Income (Expenses) ............... 14 -- 17 4 (30) 1 2 7 Special Item .......................... (300) -- 250 -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Operating (Loss) Income ............... (699) (799) (38) 154 409 351 247 196 Interest Income (Expense) ............. 47 43 43 32 6 1 (6) -- -------- -------- -------- -------- -------- -------- -------- -------- Net (Loss) Earnings Before Income Tax Benefit/Expense ................... (652) (756) 5 186 415 352 $ 241 $ 196 ======== ======== Income Tax (Benefit) Expense .......... (137) (76) 2 74 165 141 -------- -------- -------- -------- -------- -------- Net (Loss) Earnings ................... $ (515) $ (680) $ 3 $ 112 $ 250 $ 211 ======== ======== ======== ======== ======== ======== Net (Loss) Earnings Per Share (Pro Forma First Half 1995) ........... $ (0.05) $ (0.07) $ 0.00 $ 0.01 $ 0.02 $ 0.02 $ 0.02 $ 0.01 ======== ======== ======== ======== ======== ======== ======== ======== __________________________________________________________________________________________________________________________
26 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders TENERA, Inc. We have audited the accompanying consolidated balance sheets of TENERA, Inc. at December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity (partners' capital), and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TENERA, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole presents fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP San Francisco, California January 24, 1997 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following tables set forth certain information with respect to the directors and executive officers of the Company. The directors of the Company are as follows: Michael D. Thomas, 48, has served as Chairman of the Board of the Company since his election in August 1991, and was named its Chief Executive Officer in September 1994. He was President of Teknekron Corporation from 1991 until December 31, 1994, and was Vice President of Marketing and Corporate Business Development for Teknekron Corporation from 1989 to 1991. William A. Hasler, 55, has served as a Director of the Company since his election in March 1992. Mr. Hasler is dean of the Walter A. Haas School of Business at the University of California, Berkeley. Prior to his appointment as dean in 1991, Mr. Hasler was Vice Chairman of Management Consulting for KPMG Peat Marwick from 1986 to 1991. Mr. Hasler is also a director of The Gap, Inc., ESCAgenetics Corporation, Aphton Corporation, Walker Systems, and TCSI Corporation. Jeffrey R. Hazarian, 41, has served as a Director of the Company since his election in October 1996, and was named its Chief Financial Officer, Vice President of Finance, and Corporate Secretary of the Company in 1992. Previously, Mr. Hazarian held the position of Vice President, Planning and Analysis of the Company from 1990 to 1992. Thomas S. Loo, Esq., 53, was elected as a Director of the Company in February 1997. He previously served as a Director of the Predecessor Partnership from August 1987 to September 1993. Mr. Loo has been a partner, since 1986, of Bryan Cave LLP, general counsel to the Company. Mr. Loo has also served as a director of Teknekron Corporation since March 1989. George L. Turin, Sc.D., 67, has served as a Director of the Company since his election in March 1995. Previously, Mr. Turin served as a Professor of Electrical Engineering and Computer Science at the University of California at Berkeley from 1960 to 1990. Mr. Turin also served as Vice President, Technology for Teknekron Corporation from 1988 to 1994. Barry L. Williams, J.D., 52, has served as a Director of the Company since his election in September 1993. Mr. Williams has been President of Williams Pacific Venture, Inc., a venture capital consulting company, since 1987. From 1988 until its sale in 1992, Mr. Williams was also President of C.N. Flagg Power, Inc., a company that provides construction services primarily to the electric utility industry. Mr. Williams is also a director of American President Companies, PG&E, and Simpson Manufacturing Co., Inc. In addition to Messrs. Thomas and Hazarian, the executive officers of the Company are as follows: Raymond A. Allen III, 37, has served as Vice President of the Company since his arrival at the Company in July 1996. Previously, Mr. Allen was Vice President of Commercial Operations for ABB Environmental Services, Inc. and was employed by ABB in various positions since 1984. Robert C. McKay, 45, was elected Senior Vice President of the Company in December 1992. Previously, Mr. McKay was a Vice President of the Company from 1991 to 1992, and a senior technical manager of the Company from 1990 to 1991. Formerly, Mr. McKay was Manager, Management Systems for the Tennessee Valley Authority from 1988 to 1990. Joe C. Turnage, Ph.D., 51, has served as Senior Vice President of the Company since his arrival at the Company in 1988. Kenneth S. Voss, 46, has served as Vice President of Business Development since his arrival at the Company in June 1996. Previously, Mr. Voss was Vice President of Sales and Service at Software 29 Professionals, Inc. from 1992 to 1996, and General Manager for SHL Systemhouse, Inc. from 1981 to 1992. Officers of the Company hold office at the pleasure of the Board of Directors. There are no familial relationships between or among any of the executive officers or directors of the Company. ITEM 11. EXECUTIVE COMPENSATION The following tables set forth certain information covering compensation paid by TENERA to the Chief Executive Officer ("CEO") and each of the Company's other executive officers, other than the CEO, whose total annual salary and bonus exceeded $100,000 (the "named executives") for services to TENERA in all their capacities during the fiscal years ended December 31, 1996, 1995, and 1994. SUMMARY COMPENSATION TABLE
____________________________________________________________________________________________________________ Long-Term Compensation ---------------------- Annual Compensation Awards Payouts ---------------------- ---------- ---------- Securities Underlying All Other Options/ LTIP Compensa- Name and Principal Position Year Salary Bonus SARs(1) Payouts(2) tion(3) ____________________________________________________________________________________________________________ Michael D. Thomas(4) ........ 1996 $ 220,915 -- 55,000 $ -- $ 8,602 Chief Executive Officer 1995 214,000 -- 25,000 -- 8,602 1994 -- -- 100,000 -- -- Joe C. Turnage .............. 1996 169,295 -- 45,000 -- 105,054(5) Senior Vice President 1995 170,000 -- 20,000 55,750 8,703 1994 158,100 -- 35,000 55,751 8,452 Robert C. McKay, Jr. ........ 1996 145,390 -- 28,000 -- 9,000 Senior Vice President 1995 169,030 -- 20,000 -- 9,000 1994 135,000 -- 70,000 -- 3,531 Jeffrey R. Hazarian ......... 1996 142,500 -- 27,000 -- 8,058 Chief Financial Officer 1995 142,192 -- 13,000 -- 8,058 1994 126,046 -- 20,000 -- 7,563 ____________________________________________________________________________________________________________ (1) Reflects the number of options granted under the 1992 Stock Option Plan; no SARs have been issued. (2) These amounts reflect forgiveness of certain indebtedness pursuant to notes executed by the individual in payment for partnership units acquired pursuant to the Entrepreneurial Equity Incentive Plan ("EEIP"). The EEIP was discontinued in March 1992. (3) These amounts represent the amounts accrued for the Company's Profit Sharing/401(k) Plan for 1996, 1995, and 1994, respectively, and allocated to the named executive officers. (4) Mr. Thomas was President of Teknekron Corporation until December 31, 1994. He assumed the position of Chief Executive Officer of the Company in September 1994, for which he received no compensation. (5) This amount includes forgiveness of interest from the repricing of indebtedness to the Company incurred in connection with the purchase of company stock ($96,351) (see Item 13. "Certain Relationships and Related Transactions," and Notes 3 and 8 to Financial Statements).
30 The following table sets forth certain information concerning options/SARs granted during 1996 to the named executives: OPTIONS/SAR GRANTS IN 1996
_______________________________________________________________________________________________ Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term --------------------------------------------- -------------------- % of Total Number of Options/ Securities SARs Underlying Granted to Exercise Options/ Employees or Base SARs in Fiscal Price Expiration Name Granted Year ($/Share) Date 5% 10% _______________________________________________________________________________________________ Michael D. Thomas ..... 55,000 14.05 $ 1.00 2/1/2002 $ 18,700 $ 42,400 Joe C. Turnage ........ 45,000 11.49 1.00 2/1/2002 15,300 34,700 Robert C. McKay, Jr. .. 28,000 7.20 1.00 2/1/2002 9,500 21,600 Jeffrey R. Hazarian ... 27,000 6.90 1.00 2/1/2002 9,200 20,800 _______________________________________________________________________________________________ N/A Not applicable.
OTHER COMPENSATION ARRANGEMENTS Joe C. Turnage, Senior Vice President, executed an employment agreement upon joining the Company in 1988. The employment agreement provided for purchases of limited partnership units of the Predecessor Partnership by Mr. Turnage at the fair market value upon the date of issuance, dependent upon meeting various objectives set forth in the agreement. Pursuant to the Agreement and the EEIP, Mr. Turnage purchased an aggregate of 289,371 limited partnership units, the purchase price of which was payable by notes, which notes were to be forgiven over specified periods, provided Mr. Turnage remained in the employ of the Company. In late 1991, the terms of the EEIP awards made to Mr. Turnage and others with similar arrangements, were modified and the period over which the remaining balance of the notes was extended and the conditions for future forgiveness modified. In 1996, these notes were repriced to the then current fair market value of the stock held as security, resulting in a special item charge (see Item 13. "Certain Relationships and Related Transactions"). The amount of indebtedness forgiven is included in the Summary Compensation Table under the captions "LTIP Payouts." Mr. Turnage's employment may be terminated at any time by the Company under the terms of the employment agreement. The 1992 Stock Option Plan provides that options may become exercisable over such periods as provided in the agreement evidencing the option award. Options granted to date, including options granted to executive officers and set forth in the above tables, generally call for vesting over a four-year period. The 1992 Stock Option Plan provides that a change in control of the Company will result in immediate vesting of all options granted and not previously vested. DIRECTORS COMPENSATION Except as described below, the directors of the Company are paid no compensation by the Company for their services as directors. Thomas S. Loo, William A. Hasler, George L. Turin, and Barry L. Williams as non-employee directors, are paid a retainer of $1,000 per month. These non-employee directors are also paid a fee of $1,000 for each meeting of the Board and any Board Committee which they attend. The 1993 Outside Directors Compensation and Stock Option Plan was approved by the Board effective March 1, 1994, which provides for the annual issuance of options for non-employee directors. During 1994, 10,000 stock options were issued to each of Messrs. Hasler and Williams. During 1996 and 1995, 12,500 and 15,000 stock options, respectively, were issued to each of Ms. Cheng (resigned in February 1997) and Messrs. Hasler, Turin, and Williams. The 31 options expire ten (10) years after, vest one (1) year after the date of grant, and have an exercise price equal to the fair market value of the shares of Common Stock on the date of grant. Upon exercise of the options, a director may not sell or otherwise transfer more than 50% of the shares until six (6) months after the date on which the director ceases to be a director of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1996, the Compensation Committee was composed of Susan T. Cheng, William A. Hasler, and Barry L. Williams. Susan T. Cheng was Treasurer and Vice President of Teknekron Corporation until February 1, 1997. (See Item 13. "Certain Relationships and Related Transactions") EFFECT OF MERGER ON OPTION PLANS In connection with the Conversion, the Company amended the Predecessor Partnership's 1992 Unit Option Plan and 1993 Outside Director Compensation and Unit Option Plan to reflect the fact that options now relate to shares of Common Stock instead of Units. Except for the changes from Units to Common Stock and minor conforming changes, the amended 1992 Stock Option Plan and the 1993 Outside Director Compensation and Stock Option Plan are identical to the previous plans and all outstanding options for Units were automatically converted to options for Common Stock at the original exercise price and on the same terms and conditions as the original Unit options. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth certain information as of March 17, 1997, with respect to beneficial ownership of the shares of Common Stock of the Company by each person who is known by the Company to own beneficially more than 5% of the shares of Common Stock:
_____________________________________________________________________________ Approximate Shares Percent Beneficially Beneficially Name and Address Owned Owned _____________________________________________________________________________ Harvey E. Wagner ............................... 3,708,658 36.6%(1) P.O. Box 7463 Incline Village, NV 89450 Dr. Michael John Keaton Trust .................. 1,106,887 10.9%(2) P.O. Box 400 Orinda, CA 94563-0400 _____________________________________________________________________________ (1) Such shares are held of record by Incline Village Investment Group Limited Partnership, a Georgia limited partnership, and were contributed to the Incline Village Investment Group Limited Partnership by Mr. Wagner in exchange for a 99% limited partnership interest. An additional 37,462 shares, as to which Mr. Wagner disclaims beneficial ownership, were contributed to the Incline Village Investment Group Limited Partnership by Mr. Wagner's spouse, Leslie Wagner, in exchange for a 1% general partner interest. The Incline Village Investment Group Limited Partnership has sole voting and investment power with respect to all such shares. (2) Mr. Keaton has sole voting and investment power with respect to all shares shown as beneficially owned by him, subject to community property laws where applicable.
32 (b) SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth information as of March 17, 1997, with respect to current beneficial ownership of shares of Common Stock by (i) each of the directors of the Company, (ii) each of the named executive officers (see Item 11. "Executive Compensation"), and (iii) all current directors and executive officers as a group.
_____________________________________________________________________________ Shares Beneficially Percentage Name Owned(1) Ownership(2) _____________________________________________________________________________ William A. Hasler .............................. 57,500(3) * Jeffrey R. Hazarian ............................ 52,186(4) * Thomas S. Loo .................................. 0 0 Robert C. McKay, Jr. ........................... 97,539(4) 1.0% Michael D. Thomas .............................. 116,400(4) 1.1% George L. Turin ................................ 73,004(3) * Joe C. Turnage ................................. 85,737(4) * Barry L. Williams .............................. 37,500(3) * ------------ ------------ All Current Directors and Executive Officers as a Group (10 persons) ........................ 519,866(3)(4) 5.1% _____________________________________________________________________________ (1) The persons named above have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. (2) Asterisks represent less than 1% ownership. (3) Includes options under the Company's 1993 Outside Directors Compensation and Stock Option Plan which are exercisable on March 17, 1997, or within 60 days thereafter. (4) Includes options under the Company's 1992 Stock Option Plan which are exercisable on March 17, 1997, or within 60 days thereafter.
Beneficial ownership as shown in the tables above has been determined in accordance with Rule 13d-3 under the Exchange Act. Under this Rule, certain securities may be deemed to be beneficially owned by more than one person (such as where persons share voting power or investment power). In addition, securities are deemed to be beneficially owned by a person if the person has the right to acquire the securities (for example, upon exercise of an option or the conversion of a debenture) within 60 days of the date as of which the information is provided; in computing the percentage of ownership of any person, the amount of securities outstanding is deemed to include the amount of securities beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding Units of any person as shown in the preceding tables do not necessarily reflect the person's actual voting power at any particular date. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain members of management or shareholders of the Company have certain direct or indirect interests in certain transactions involving the Company, separate from their interests as shareholders, as follows: (i) The Company had made certain loans to various employees, including officers, generally pursuant to employee benefit plan(s) and generally in connection with the purchase of stock or units. In making loans to officers, the Company held the stock as collateral securing the repayment for such loans. In December 1996, certain terms of the note related to the purchase of stock by an executive officer (Mr. Turnage) in 1988 were renegotiated to provide for a purchase price adjustment on the stock securing the note balance and a corresponding reduction in the note balance. The remaining balance of the note was 33 paid off by the transfer to the Company of the stock purchased by Mr. Turnage in 1988 at the fair market value of the stock as reported on AMEX at the date of the transfer. As a result, a charge of approximately $300,000 was made in 1996 to adjust the price of the stock to the then current fair market value. As of December 31, 1996, the Company had no notes receivables from its executive officers. The largest amount outstanding during 1996 was $347,639. (ii) Susan T. Cheng, a director of the Company until her resignation in February 1997, was Treasurer and Vice President of Teknekron Corporation until February 1, 1997. Mr. Wagner, the Company's largest stockholder, is the sole stockholder and a director of Teknekron Corporation. (iii) Thomas S. Loo, a director of the Company since February 7, 1997, is a partner in the law firm of Bryan Cave LLP, general counsel to the Company and Teknekron Corporation, and is a director of Teknekron Corporation. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K (a)(1) FINANCIAL STATEMENTS The following financial statements of the Company are filed with this report and can be found in Part II, Item 8, on the pages indicated below:
PAGE Consolidated Statements of Operations - Year Ended December 31, 1996, 1995, and 1994 ............................................ 14 Consolidated Balance Sheets - December 31, 1996 and 1995 ........ 15 Consolidated Statements of Shareholders' Equity (Partners' Capital) - Year Ended December 31, 1996, 1995, and 1994 ......... 16 Consolidated Statements of Cash Flows - Year Ended December 31, 1996, 1995, and 1994 ............................................ 17 Notes to Consolidated Financial Statements ...................... 18 Report of Independent Auditors .................................. 27 (a)(2) FINANCIAL STATEMENT SCHEDULES The following financial statement schedules with respect to the Company are filed in this report: Schedule VIII - Valuation and Qualifying Accounts and Reserves .. 37 All other schedules are omitted because they are either not required or not applicable.
(a)(3) EXHIBITS 2.1 Agreement and Plan of Merger dated as of June 6, 1995 among the Registrant, Teknekron Technology MLP I Corporation, TENERA, L.P., and TENERA Operating Company, L.P. (a form of which is attached as Annex A to the Registrant's Consent Solicitation Statement/Prospectus included in the Registration Statement on Form S-4 (Registration No. 33-58393) declared effective by the Securities and Exchange Commission on June 2, 1995 (the "Registration Statement"), and is incorporated herein by this reference). 3.1 Certificate of Incorporation of the Registrant dated October 27, 1994 (filed by incorporation by reference to Exhibit 3.3 to the Registration Statement). 3.2 By-Laws of the Registrant (filed by incorporation by reference to Exhibit 3.4 to the Registration Statement). 4.1 Form of Certificate of Common Stock of Registrant (filed by incorporation by reference to Exhibit 4.5 to the Registration Statement). 10.2 Registrant's lease on its Rockville, Maryland properties (filed as Exhibit 10.2 to the Predecessor Partnership's Form 10-K filed with the SEC on March 29, 1995, and incorporated by reference herein). 10.3 Registrants' lease on its Knoxville, Tennessee properties (filed as Exhibit 10.4 to Form 10-K filed with the SEC on March 25, 1994, and incorporated by reference herein). 10.4 Registrant's lease on its headquarters located in San Francisco, California (filed as Exhibit 10.12 to Form 10-Q filed with the SEC on November 14, 1995, and incorporated by reference herein). 35 10.5(1) Registrant's lease on its Hartford, Connecticut properties. 11.1 Statement regarding computation of per share earnings: See "Notes to Consolidated Financial Statements." 21.2 List of Subsidiaries of the Registrant (filed as Exhibit 21.2 to Form 10-K filed with the SEC on March 27, 1996, and incorporated by reference herein). 23.1(1) Consent of Independent Auditors. 27.1(1) Financial Data Schedule. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Registrant during the last quarter of 1996. (c) EXHIBITS (SEE ITEM 14(a)(3) ABOVE.) (d) FINANCIAL STATEMENT SCHEDULES The schedules listed in Item 14(a)(2) above should be used in conjunction with the Consolidated Financial Statements of the Company for the year ended December 31, 1996. - ------------------------------ (1) Filed herewith. 36 SCHEDULE VIII TENERA, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands) ______________________________________________________________________________________________________ Additions Deductions ----------- ------------------------ Balance Charged to Credited to Balance Beginning Costs and Special at End Description of Year Expenses Item Other of Year ______________________________________________________________________________________________________ 1994 Reserve for Sales Adjustment and Credit Losses ............ $ 3,717 $ 271 $ 500 $ 591 $ 2,897 1995 Reserve for Sales Adjustment and Credit Losses ............ 2,897 131 -- 140 2,888 1996 Reserve for Sales Adjustment and Credit Losses ............ 2,888 289 250 1,301 1,626 ______________________________________________________________________________________________________
37 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Dated: March 27, 1997 TENERA, INC. By: /s/ JEFFREY R. HAZARIAN -------------------------------------- Jeffrey R. Hazarian Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Signature Title Date Chairman of the Board and Chief Executive Officer /s/ MICHAEL D. THOMAS (Principal Executive Officer) March 27, 1997 - --------------------------- (Michael D. Thomas) /s/ WILLIAM A. HASLER Director March 27, 1997 - --------------------------- (William A. Hasler) Director, Chief Financial Officer, Corporate Secretary, and Vice President, Finance (Principal Financial and /s/ JEFFREY R. HAZARIAN Accounting Officer) March 27, 1997 - --------------------------- (Jeffrey R. Hazarian) /s/ THOMAS S. LOO Director March 27, 1997 - --------------------------- (Thomas S. Loo) /s/ GEORGE L. TURIN Director March 27, 1997 - --------------------------- (George L. Turin) /s/ BARRY L. WILLIAMS Director March 27, 1997 - --------------------------- (Barry L. Williams) 38 EXHIBIT INDEX Ex. 10.5 Registrant's Lease on its Hartford, Connecticut Properties Ex. 23.1 Consent of Independent Auditors Ex. 27.1 Financial Data Schedule EX-10.5 2 REGISTRANT'S LEASE ON ITS HARTFORD, CONNECTICUT PROPERTIES ****************************************************************************** AGREEMENT OF LEASE Between GOODWIN SQUARE LLC as Landlord and TENERA, INC. as Tenant Dated as of November 18, 1996 Goodwin Square Hartford, Connecticut 06103 ****************************************************************************** LEASE AGREEMENT OF LEASE made as of the date hereinafter set forth is by and between GOODWIN SQUARE LLC, a Connecticut limited partnership, having an office at 555 Long Wharf Drive, New Haven, Connecticut ("LANDLORD") and the tenant named below ("TENANT"). ARTICLE ONE PREMISES AND TERM Landlord hereby leases to Tenant and Tenant hereby hires from Landlord for the Term as defined below, the Premises together with the right to use, in common with others, all Common Elements of the Building, subject to the provisions of this Lease hereinafter set forth. TO HAVE AND TO HOLD unto Tenant, for the Lease Term commencing on the Commencement Date and ending, unless sooner terminated, on the Expiration Date. YIELDING AND PAYING the Rent subject to all the terms, covenants and conditions hereinbefore and hereinafter set forth. ARTICLE TWO BASIC TERMS AND DEFINITIONS SECTION 2.01 BASIC TERMS. The following terms shall have the meanings ascribed to them below except where the context otherwise requires: (a) "ADDRESS OF LANDLORD" is c/o Fusco Management Company, LLC., 555 Long Wharf Drive, New Haven, Connecticut 06511. (b) "ADDRESS OF TENANT" is One Market Spear Tower, Suite 1850, San Francisco, California 94105-1018, if prior to the Commencement Date and Goodwin Square, 225 Asylum Street, Hartford, Connecticut 06103, if after the Commencement Date. (c) "BASE RENT" shall be for each Lease Year an amount equal to the Gross Rentable Area of the Premises multiplied by the rental rate per square foot of Gross Rentable Area as follows: PERIOD | RATE/S.F. | MONTHLY | YEARLY RATE -----------------|-----------------|------------------|------------------- Entire Term | $18.00 | $7,977.00 | $95,724.00 (d) "BROKER" shall be Cushman & Wakefield of Connecticut, Inc. and McCarthy O'Callaghan and Co., Inc. (e) "COMMENCEMENT DATE" shall be December 1, 1996. -2- (f) "EXPIRATION DATE" shall mean (unless this Lease expires or is terminated pursuant to the terms of this Lease or by law at any earlier date), the last day of the calendar month which immediately precedes the forty-third (43rd) month after the Commencement Date, or May 31, 2000. (g) "LANDLORD" is Goodwin Square LLC. (h) "LEASE TERM" or "TERM" shall mean the period from the Commencement Date to the Expiration Date. The Term may be composed of the initial period of this Lease (the "INITIAL TERM") and may include any Renewal Term, if applicable ("RENEWAL TERM"). (i) "PARKING SPACES" shall mean one parking space within the Building's "GARAGE SPACE," as such term is defined in Section 2.02 below, for each full 1,000 square feet of Gross Rentable Area in the Premises (i.e., five spaces for the initial Gross Rentable Area). Parking Spaces will be provided on an unreserved basis at the current monthly market rental rates for parking spaces in such parking facilities, which rates may change from time to time. (j) "PERMITTED USE" shall mean use of the Premises as commercial office space for the conduct of Tenant's business. (k) "PREMISES" shall mean the commercial office space located on the 15th floor of the Building and deemed to contain 5,318 square feet of Gross Rentable Area and shown without cross-hatching on the space plan attached hereto and incorporated by reference as EXHIBIT A. (l) "SECURITY DEPOSIT" shall have the meaning ascribed to it in Section 2.5. (m) "TENANT" is Tenera, Inc., a corporation organized under the laws of the State of Delaware. (n) "TENANT OCCUPANCY RELATED OPERATING EXPENSES" shall mean the items of Operating Expenses listed in subparagraphs (iii), (vi), (viii) and (xii) of Section 5.03. (o) "TENANT'S PROPORTIONATE SHARE" shall be that fraction, the numerator of which is the Gross Rentable Area of the Premises (which is 5,318 s.f. as of the date hereof), as such may be increased by Tenant's lease of additional space, and the denominator of which is (i) with respect to Tenant Occupancy Related Operating Expenses, the Gross Rentable Area in the Building then occupied and (ii) with respect to all other Operating Expenses, the greater of (a) the gross rentable square feet in the Building then occupied and (b) ninety-five percent (95%) of the total gross rentable square feet of floor space in Landlord's Building, which for purposes hereof is deemed to be 331,738. Tenant's Proportionate Share is subject to adjustment as set forth in Section 2.02(h). -3- SECTION 2.02 DEFINITIONS. The following additional terms shall have the meanings ascribed to them below: (a) "ADDITIONAL RENT" shall mean the amounts due and payable to Landlord as provided in Section 5.02, together with any other amounts under this Lease described as Additional Rent, which amounts shall be due and payable to Landlord upon demand, unless otherwise provided. (b) "AFTER HOURS" shall mean any periods of time not within Business Hours of Business Days. (c) "BUILDING" shall mean the thirty (30) story, mixed-use office/hotel/retail building containing approximately 331,738 square feet of Gross Rentable Area built upon a parcel of land located in the block bounded by Pearl Street, Ann Street, Asylum Street and Haynes Street, all in the City of Hartford and State of Connecticut. (d) "BUSINESS DAYS" shall mean Monday through Saturday of each calendar week exclusive of the following holidays: New Year's Day; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; Christmas Day. (e) "BUSINESS HOURS" shall mean 8:00 a.m. to 6:00 p.m. of each Business Day and 7:00 a.m. to 1:00 p.m. on Saturdays. (f) "COMMON ELEMENTS" shall mean the atriums, hallways, corridors, washrooms, lobbies, sidewalks, plazas, stairways, elevators and other public portions of the Building. (g) "EVENT OF DEFAULT" shall have the meaning ascribed to it in Section 17.01. (h) "FULLY OCCUPIED" shall mean the Building has been leased at the Minimum Percentage Level; provided, if more of the Building's Gross Rentable Area has been leased, the actual larger percentage will represent "Fully Occupied." (i) "GARAGE SPACE" shall mean the parking area containing a total of 302 covered parking spaces located within the Building. (j) "GOVERNMENTAL AUTHORITY" shall mean the government of the United States, the State of Connecticut, the Town in which the Premises are located and any other governmental entity exercising authority or jurisdiction over the Building or the Premises. (k) "GROSS RENTABLE AREA" shall have the meaning ascribed to it in Section 2.03. (l) "IMPOSITIONS" shall have the meaning ascribed to it in Section 5.04. (m) "LAND" shall mean that piece or parcel of real property described in EXHIBIT B attached hereto. -4- (n) "LEASE" shall mean this instrument. (o) "LEASE YEAR" shall mean the period commencing on the Commencement Date and ending on the last day of the calendar month in which occurs the first anniversary of the Commencement Date; and each succeeding twelve (12) month period thereafter. (p) "MINIMUM PERCENTAGE LEVEL" shall mean that 95% of the Gross Rentable Area of the Building is leased. (q) "OPERATING EXPENSES" shall have the meaning ascribed to it in Section 5.03. (r) "OPERATING STATEMENT" shall have the meaning ascribed to it in Section 5.05. (s) "OPERATING YEAR" shall be the calendar year. (t) "RENT" shall mean the sum of Base Rent and Additional Rent as provided herein. (u) "RULES AND REGULATIONS" shall mean those Rules and Regulations attached as EXHIBIT D as Landlord may hereafter at any time, and from time to time, promulgate and provide written notice thereof to Tenant, which, in Landlord's sole discretion, shall be necessary or desirable for: (i) the reputation, safety, care or appearance of the Building, (ii) the preservation of good order therein, (iii) the operation or maintenance of the Building, or the equipment contained therein or (iv) the comfort of tenants or other occupants in the Building. (v) "SUPERIOR LEASE" and "SUPERIOR MORTGAGE" shall have the meanings ascribed to them in Section 22.01. (w) "SUPERIOR LESSOR" and "SUPERIOR MORTGAGEE" shall have the meanings ascribed to them in Section 22.01. (x) "TENANT IMPROVEMENTS" shall have the meaning ascribed to it in Article Nine (and may refer to the original Tenant Improvements to be constructed as part of Landlord's Work or other improvements constructed by Tenant pursuant to the provisions of Section 9.02, if any). (y) "TENANT'S PROPERTY" shall have the meaning ascribed to it in Section 14.01. SECTION 2.03 CALCULATION OF GROSS RENTABLE AREA. The calculation of Gross Rentable Area ("GRA") for the Premises is based upon the actual dimensions of the Premises in accordance with the current standards consistently applied within the Building for similar space. SECTION 2.04 RIGHT OF FIRST OFFER. Provided that Tenant is then not in default hereunder and is then occupying space in the Building under this Lease, if at any time during the Term Landlord has made or intends to make a proposal to lease any space on the 15th floor of the Building which is contiguous to the Premises (the "EXPANSION SPACE"), Landlord will notify -5- Tenant in writing of such fact (the "LANDLORD NOTIFICATION"), and Tenant shall have the right (the "RIGHT OF FIRST OFFER"), subject to any then existing rights of other tenants (regardless of when granted), to be exercised in writing to Landlord (the "TENANT RESPONSE") within 15 days after receiving such notification from Landlord (the "NOTIFICATION PERIOD"), to lease all, but not part, of the Expansion Space, to be leased by Tenant from the date that Landlord and Tenant shall have executed a definitive agreement with respect thereto (which shall in no event be more than 30 days from the date of the Tenant Response) to the last day of the Term, as the same may have been extended. If Tenant chooses not to exercise the Right of First Offer, then upon the expiration of the Notification Period, Landlord shall have the right to lease the Expansion Space to any party and on any terms. If Tenant leases the Expansion Space pursuant to this section, such space shall be leased upon all the covenants, agreements, terms, provisions and conditions set forth in this Lease (except for such covenants, agreements, terms, provisions and conditions of this Lease as shall be clearly inapplicable or irrelevant). ARTICLE THREE COMMENCEMENT OF LEASE TERM SECTION 3.01 COMMENCEMENT. The Term shall commence on the Commencement Date and shall expire and come to a complete end on the Expiration Date as those dates are more particularly set forth in Section 2.01. SECTION 3.02 DELAY. Notwithstanding anything contained in Section 3.01 to the contrary, if Landlord shall be unable to deliver possession of the Premises on the Commencement Date by reason of the fact that the Premises are not ready for occupancy, or for any other reason, Landlord shall not be subject to any liability for its failure to deliver possession on the Commencement Date. If repairs, improvements or decorations of the Premises are to be made by Landlord and are not completed on or before the Commencement Date, Landlord shall not be subject to any liability for any delay in such completion. No such failure to deliver possession on the Commencement Date or failure to complete the Premises on the Commencement Date shall affect the validity of this Lease or the obligations of Tenant hereunder. Notwithstanding anything herein to the contrary, in no event shall Tenant be required to pay Rent prior to the date that the Premises are ready for occupancy. SECTION 3.03 RENEWAL TERM. Provided Tenant shall not then be in default under the terms of this Lease, Tenant shall have the right to extend the Term of this Lease for one additional period of three (3) years (the "RENEWAL TERM"). Any such exercise must be made by Tenant giving written notice thereof to Landlord not less than nine months prior to the expiration of the original Term. This Lease shall be extended for the Renewal Term upon all the covenants, agreements, terms, provisions and conditions set forth in this Lease (except for such covenants, agreements, terms, provisions and conditions of this Lease as shall be clearly inapplicable or irrelevant or as provided below). During the Renewal Term, the Base Rent for the Premises shall be equal to the fair rental value for the Premises during the Renewal Term, after giving consideration to Tenant's size and credit rating, but in no event less than the rent payable -6- hereunder on the last day of the original Term. For purposes of the foregoing, "fair rental value" shall be the value agreed upon by Landlord and Tenant, which agreement shall be in writing, by letter or otherwise, signed by both parties at least six (6) months in advance of commencement of the Renewal Term. If the parties fail to agree upon the fair rental value by such time, the matter shall be submitted for the written appraisal of a licensed real estate appraiser, as selected and agreed upon by the parties. In the event the parties fail to agree upon a real estate appraiser, Landlord shall select an independent real estate appraiser of its choice, Tenant shall select an independent real estate appraiser of its choice and, if the two appraisers cannot agree upon an appraisal, the two appraisers so selected shall select a third independent real estate appraiser. All such real estate appraisers shall have an M.A.I. designation. The appraisers selected shall, by a majority vote, determine the fair rental value for Base Rent purposes. The rental value as determined shall be binding on the parties hereto. Any such appraisal shall be completed and fair rental value set at least four (4) months prior to commencement of the Renewal Term. ARTICLE FOUR USE SECTION 4.01 PERMITTED USE. Tenant shall use and occupy the Premises only for its Permitted Use. Tenant shall not violate the Rules and Regulations set forth in EXHIBIT D annexed hereto. SECTION 4.02 GOVERNMENTAL MATTERS. If any governmental license or permit, other than a certificate of occupancy shall be required for the proper and lawful conduct of Tenant's business in the Premises or any part thereof, Tenant, at its expense, shall duly procure and thereafter maintain such license or permit and submit the same to Landlord for inspection. Tenant shall at all times comply with the terms and conditions of each such license and permit. SECTION 4.03 TENANT'S RESPONSIBILITY. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy, the Premises, or do or permit anything to be done in the Premises, in any manner (a) which violates the certificate of occupancy for the Premises or for the Building; (b) which causes or is liable to cause injury to the Building or any equipment, facilities or systems therein; (c) which constitutes a violation of any applicable laws and requirements of any Governmental Authority or the requirements of insurance bodies; (d) which impairs or tends to impair the character, reputation or appearance of the Building as a first-class office building; (e) which impairs or tends to impair the proper and economic maintenance, operation and repair of the Building and/or its equipment, facilities or systems; or (f) which annoys or inconveniences or tends to annoy or inconvenience other tenants or occupants of the Building. SECTION 4.04 LOAD. Tenant shall not place a load upon any floor of the Premises which exceeds the live load per square foot which such floor was designed to carry and which is allowed by law. The permitted live load per square foot of Gross Rentable Area is 100 lbs. -7- SECTION 4.05 NOISE OR VIBRATION. Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the structure of the Building or to the Premises to such a degree as to be objectionable to Landlord shall be placed and maintained by the party owning the machines or equipment at such party's expense, in such a manner as to eliminate noise or vibration. In the event of any violation, Tenant shall be obligated to make such repairs to the Premises and Building resulting therefrom and to take all steps reasonably necessary to eliminate such noise or vibration. SECTION 4.06 ACCESS TO PREMISES. Tenant shall have unrestricted access to the Premises via the first floor atrium. Landlord shall keep the atrium free from unreasonable obstructions; provided however, that the atrium may be used for receptions and similar events, which Landlord agrees shall not unreasonably interfere with Tenant's access to the Premises through the atrium. ARTICLE FIVE RENT SECTION 5.01 BASE RENT. Commencing sixty days following the Commencement Date and continuing throughout the Lease Term, Tenant covenants and agrees to pay to Landlord a Base Rent at the annual rate set forth in Section 2.01, payable in equal monthly installments in advance as provided in Section 2.01 which shall be due and payable on the first day of each calendar month during the Lease Term at the office of Landlord set forth herein or at such other place as Landlord may designate without any set-off or deduction whatsoever except as shall be expressly provided herein to the contrary. In the event that such date for commencement of rent shall be a date other than the first day of a calendar month, Tenant shall pay to Landlord on the such date an amount equal to such proportion of an equal monthly installment of Base Rent as the number of days from and including said date bears to the total number of days in said calendar month, and said payment shall represent pro rata Base Rent to the end of such calendar month. SECTION 5.02 OPERATING EXPENSES AS ADDITIONAL RENT. Commencing January 1, 1998, Tenant shall pay, as Additional Rent, with each installment of Base Rent, one twelfth (1/12) of Tenant's Proportionate Share of the Escalation Amount of the Building's Operating Expenses for each Operating Year. For purposes hereof, "ESCALATION AMOUNT" in any Lease Year during the Term (including any Renewal Term) means the amount by which Operating Expenses of the Building for such Operating Year exceed the Operating Expenses of the Building for the Operating Year from January 1, 1997 through December 31, 1997. Such payment will be based upon Landlord's estimate of the Building's Operating Expenses for each Operating Year, which estimate will be based upon Landlord's reasonable projection of the cost of Operating Expenses for the period in question. Payments due hereunder may be subject to adjustments as provided in Section 5.05. SECTION 5.03 OPERATING EXPENSES. For purposes of this Article, the term "OPERATING EXPENSES" shall mean the sum of (a) Impositions (as defined in Section 5.04 below) and (b) all expenses paid or incurred by Landlord or on Landlord's behalf in respect of the repair, maintenance and operation of the Building, the Land and the curbs, sidewalks and atriums -8- adjoining the same, including, without limitation (i) salaries, wages, medical, surgical, union and general welfare benefits (including, without limitation, group life insurance) and pension payments of employees of Landlord engaged in the repair, operation and maintenance of the Building; (ii) payroll taxes, workmen's compensation, uniforms and related expenses for employees; (iii) the cost of all charges for gas, steam, electricity (determined as if Tenant's Proportionate Share of the Building's electrical service was separately metered to Tenant with respect to the Premises at the electrical utility's current rates for such service), any alternate source of energy, heat, ventilation, air-conditioning, water and other utilities furnished to the Building (including, without limitation, the Common Elements), together with any taxes on such utilities; (iv) the cost of painting; (v) the cost of all charges for rent, casualty, liability and fidelity insurance with regard to the Building and the maintenance and/or operation thereof; (vi) the cost of the purchase or rental of all supplies (including, without limitation, cleaning supplies), tools, materials and equipment, and sales and other taxes thereon; (vii) depreciation of hand tools and other movable equipment used in the repair, maintenance or operation of the Building; (viii) the cost of all charges for window and other cleaning and janitorial and security services, plant and landscaping service, plantings and replantings, elevator maintenance and repair, ice and snow removal and trash removal; (ix) charges of independent contractors; (x) repairs and replacements made by Landlord at its expense; (xi) alterations and improvements to the Building made by reason of the laws and requirements of any public authorities or the requirements of insurance bodies; (xii) a management fee equal to the greater of five (5%) percent of the gross income derived from the Building or the amount which is not in excess of the then prevailing rates for management fees of other first class office buildings in the City of Hartford, Connecticut; (xiii) that portion of the cost of any capital expenditures for repair or replacement of any Building element (which expenses are not chargeable to Operating Expenses under any other clause of this Section and which would be capitalized under Landlord's method of accounting) allocated to that Operating Year by dividing the amount of the expenditure by the useful life (as reasonable estimated by Landlord) of such capital expenditure; (xiv) reasonable legal, accounting and other professional fees incurred in connection with the operation, maintenance and management of the Building, and (xv) all other charges properly allocable to the repair, operation and maintenance of the Building in accordance with generally accepted accounting principles; EXCLUDING, HOWEVER, (1) an allowance for depreciation on the Building, (2) interest on and amortization of debts, (3) leasehold improvements, (4) brokerage commissions and advertising expenses for procuring new tenants of the Building, (5) refinancing costs, (6) the cost of any item included in Operating Expenses under clauses (i)-(xv) to the extent that such cost is reimbursed by an insurance company, a condemning authority, a tenant or any other party, but if at the time Operating Expenses are determined for an Operating Year such reimbursement has not been made, such cost may be included in Operating Expenses and an adjustment shall be made when and if such reimbursement is actually received by Landlord. SECTION 5.04 IMPOSITIONS. As utilized herein "IMPOSITIONS" shall mean all taxes (including personal property taxes, if any) assessments, water and sewer rents, rates and charges, charges for public utilities, excises, levies, license and permit fees and other governmental charges, general and special, ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever which at any time during the Term hereof may be assessed, levied, confirmed, imposed upon, or become due and payable out of or in respect of, or become a lien -9- on, the Land or Building or any part thereof or any appurtenances thereto, any use or occupation of the Land or Building (including sales taxes on lease payments) or such franchises as may be appurtenant to the use of the Land or Building; provided, however, that, nothing herein contained shall require Tenant to pay municipal, state or federal income taxes assessed against Landlord, municipal, state or federal capital levy, estate, succession, inheritance or transfer taxes of Landlord, or corporation franchise taxes imposed upon any corporate owner of the Land; provided further, however, that if at any time during the Term the methods of taxation prevailing at the execution date of this Lease shall be altered so as to cause the whole or any part of the taxes, assessments, or other Impositions or charges now levied, assessed or imposed on the Land and the Building thereon, in lieu thereof, to be levied, assessed and imposed, wholly or partially as a capital levy, or otherwise, on the rents received therefrom, or if any such tax, assessment, levy (including but not limited to any municipal, county, state or federal levy), Imposition or charge, or any part thereof, shall be measured by or be based in whole or in part upon the Land and Building and shall be imposed upon Landlord in lieu of the methods of taxation prevailing at the date of the execution of this Lease, then all such taxes, assessments, levies, Impositions or charges, or the part thereof to the extent that they are so measured or based, shall be deemed to be included within the term Impositions for the purposes hereof. SECTION 5.05 OPERATING STATEMENT. Within one hundred twenty (120) days after the expiration of each Operating Year, Landlord shall furnish to Tenant for such Operating Year an Operating Statement setting forth Landlord's computation of the sum payable by Tenant under Section 5.02 for a specified Operating Year. If the Operating Statement shall show that any sums paid by Tenant under Section 5.02 exceeded the actual sums to be paid by Tenant for such Operating Year, Landlord shall apply such excess amount against subsequent payments of Additional Rent due under Section 5.02, and if the Operating Statement shall show that the sums so paid by Tenant under Section 5.02 were less than the actual sums to be paid by Tenant for such Operating Year, Tenant shall pay, as Additional Rent, the amount of such deficiency within thirty (30) days after demand therefor. SECTION 5.06 OPERATING STATEMENT BINDING. Each such Operating Statement given by Landlord pursuant to Section 5.05 shall be conclusive and binding upon Tenant (i) unless within sixty (60) days after the receipt of such Operating Statement, Tenant shall notify Landlord that it disputes the correctness of the Operating Statement, specifying the particular respects in which the Operating Statement is claimed to be incorrect, and (ii) if such disputes shall not have been settled by agreement, either party may submit the dispute to arbitration as provided in Article Twenty-Six, within one hundred and twenty (120) days after receipt of such Operating Statement; pending the determination of such dispute by agreement or arbitration as aforesaid, Tenant shall within thirty (30) days after receipt of such Operating Statement pay the amounts due as Additional Rent in accordance with Landlord's statement, without prejudice to Tenant's position. If the dispute shall be determined in Tenant's favor, Landlord shall forthwith credit the amount of Tenant's overpayment of such Additional Rent resulting from compliance with Landlord's Operating Statement to each of the next succeeding installments of Additional Rent due under Section 5.02 until such overpayment is fully absorbed. -10- SECTION 5.07 INTEREST ON LATE PAYMENTS. Tenant covenants to pay Rent as it becomes due as provided in this Lease, in lawful money of the United States which shall be legal tender for the payment of all debts and dues, public and private, at the time of payment. All sums due and payable as Rent, if not paid within ten (10) days of when required in this Lease, shall bear interest at the lesser of (i) eighteen (18%) percent per annum, or (ii) the maximum permissible legal rate of interest at the time, and such interest shall be deemed to be Additional Rent and payable upon demand, provided in all cases there will be a minimum administrative late charge of one hundred ($100.00) dollars. SECTION 5.09 ALLOCATION OF OPERATING EXPENSES TO HOTEL. The Building as defined in this Lease means the office building within which the Premises are situated. As so defined, the "BUILDING" is a portion of a larger building or structure which contains a first class hotel of approximately 124 rooms (the "HOTEL") and a common atrium space. For purposes of allocation of Operating Expenses, the Building does not include the hotel and includes seventy (70%) percent of the atrium space. Further, in the event other elements of the Building or its systems are shared in common with the Hotel, the expenses associated with such elements will be shared between the Hotel and the Building on the basis of seventy (70%) percent to the Building and thirty (30%) percent to the Hotel. ARTICLE SIX LANDLORD'S WORK; CONDITION OF PREMISES SECTION 6.01 "AS IS" CONDITION. Tenant shall accept the Premises "AS IS," except that Landlord shall provide a new entrance to the Premises, two additional offices and a demising wall, all using building standard material and all as shown in EXHIBIT C attached hereto ("LANDLORD'S WORK"). So long as the demising wall included as part of Landlord's Work shall have been completed, the Premises shall be deemed ready for possession by Tenant, but Landlord shall complete all of Landlord's Work by December 24, 1996. Landlord represents and warrants to Tenant that such demising wall is completed and that Tenant may take possession of the Premises on December 1, 1996 in accordance with all applicable laws. Tenant's taking possession of the Premises shall be conclusive evidence that such Premises were in good order and satisfactory condition when Tenant took possession. No promise of Landlord to alter, remodel or improve the Premises or the Building and no representation by Landlord or its agents respecting the condition of the Premises or the Building have been made to Tenant or relied upon by Tenant other than as may be contained in this Lease or in any written amendment hereto signed by Landlord and Tenant. ARTICLE SEVEN LANDLORD'S SERVICES SECTION 7.01 LANDLORD'S SERVICES. So long as no Event of Default exists under this Lease, Landlord shall provide the following services on all Business Days during the Term unless otherwise stated: -11- (i) Water for normal lavatory and drinking purposes at all times. Provided, if Tenant requires, uses or consumes water for any other purposes, Tenant agrees that Landlord may install a meter or meters or other means to measure Tenant's water consumption in the Premises, and Tenant further agrees to reimburse Landlord for the cost of the meter or meters and the installation thereof, and to pay for the maintenance of said meter or meters and to pay Landlord's cost of other means of measuring such water consumption by Tenant within ten (10) days after the rendition of a bill thereof. Tenant shall reimburse Landlord for all water consumed as measured by said meter or meters or as otherwise measured, including sewer rents at the rates established by Landlord from time to time. The costs or charges which Landlord shall be entitled to collect from Tenant pursuant to this Section 7.01 shall be collectable as an item of Additional Rent. (ii) Heating and air conditioning when necessary for normal comfort in the Premises during Business Hours of all Business Days. The heating and air conditioning system shall be sufficient to provide reasonable comfort, within tolerances normal in first class office buildings. If Tenant shall require air conditioning service After Hours, Landlord shall furnish such After Hours air conditioning service upon reasonable advance notice from Tenant in accordance with Landlord's policies on After Hours service, and Tenant shall pay Landlord's then established charges therefor on Landlord's demand. (iii) Electricity. SECTION 7.02 INTERRUPTION OF SERVICES; AFTER HOURS. Tenant agrees that Landlord shall not be liable in damages, by abatement of Rent or otherwise, for failure to furnish or delay in furnishing any service, or for any diminution in the quality or quantity thereof, when such failure or delay or diminution is occasioned, in whole or in part, by repairs, renewals, or improvements, by any strike, lockout or other labor disputes, by inability to secure electricity, gas, water, or other utilities at the Building after reasonable effort to do so, by any accident or casualty whatsoever, by act or default of Tenant or other parties, by reason of laws, orders or regulations of any Governmental Authority or by reason of unavailability or reduction in the availability or suitable fuels and/or power supplies, or by reason of Acts of God, or by any other cause beyond Landlord's reasonable control; and such failures or delays or diminution shall never be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying Rent or performing any of its obligations under this Lease. Landlord shall be diligent in its efforts to cure such failure or delay or diminution. Landlord makes no representation, or warranties as to the habitability of the Premises other than during Business Hours. Landlord hereby reserves the right to diminish or stop providing heating, air conditioning (if any), elevator, water and sewer, electric and all other services which Landlord has hereby expressly or impliedly covenanted to provide without liability to Tenant whenever Landlord, in its reasonable opinion, deems such stoppage or reduction in such services to be necessary or desirable by reason of accident(s), emergency(ies), need for repair(s), alteration(s), replacement(s), inspection(s) or other appropriate cause(s). Such stoppage or reduction in services shall not be deemed to constitute an actual or constructive eviction nor shall Tenant become entitled to any reduction or abatement in Tenant's obligation to pay Rent. -12- SECTION 7.03 CHARGES FOR SERVICES. Charges for any service for which Tenant is required to pay from time to time hereunder shall be due and payable at the same time as the installment of Rent with which they are billed, or if billed separately, shall be due and payable within thirty (30) days after such billing. If Tenant shall fail to make payment for any such services, Landlord may, with notice to Tenant, discontinue any or all of such services and such discontinuance shall not be deemed to constitute an eviction or disturbance of Tenant's use and possession of the Premises or relieve Tenant from paying Rent or performing any of its other obligations under this Lease. SECTION 7.04 TENANT'S COMPLIANCE. 7.04.01. The performance by Landlord of its obligations under Section 7.01 is subject to Tenant's compliance with the conditions of occupancy established by Landlord. 7.04.02. Use of the Premises, or any part thereof, in a manner exceeding the heating, ventilating and/or air-conditioning design conditions (including occupancy and connected electrical load), or rearrangement of partitioning which interferes with normal operation of the heating, ventilating and/or air- conditioning in the Premises or the use of computer or data processing machines or other machines or equipment, may require changes in the heating, ventilating and/or air-conditioning systems servicing the Premises, in order to provide comfortable occupancy. Such changes, so occasioned, shall be made by Tenant, at its expense, as Alterations in accordance with the provision of Article Nine, but only to the extent permitted and upon the conditions set forth in that Article. SECTION 7.05 CLEANING SERVICES. Landlord shall provide the cleaning and janitorial services within the Premises described in EXHIBIT F. SECTION 7.06 MISCELLANEOUS. 7.06.1. Landlord, at its expense, and at Tenant's request shall provide the initial listings in the Building directory of the name of Tenant, provided that the size of the name so listed and location of the directory shall be at the discretion of Landlord in accordance with Building standard. Identification at the Premises shall be Tenant's responsibility and expense and shall comply with Building standard. 7.06.2. Notwithstanding anything to the contrary in this Article Seven or elsewhere in this Lease, Landlord shall have the right to institute such policies, programs and measures as may be necessary or desirable, in Landlord's discretion, for the conservation and/or preservation of energy or energy related services, or as may be required to comply with any applicable codes, rules and regulations, Governmental Authority, whether mandatory or voluntary. -13- ARTICLE EIGHT REPAIRS AND MAINTENANCE SECTION 8.01 TENANT'S OBLIGATIONS. Tenant shall, at its expense, throughout the Term of this Lease, take good care of the Premises, the fixtures and appurtenances therein and Tenant's Property. Tenant shall be responsible for the repair or replacement of any element of the Building damaged by Tenant or its agents, customers, invitees, contractors, employees or guests. Any repairs in or to the Building and the facilities and systems thereof for which Tenant is responsible, shall be performed in accordance with the provisions of Section 9.02 and 9.03. If Tenant fails to make repairs required of it hereunder, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements immediately upon being billed for the same. Landlord may, but shall not be required to, enter the Premises at all reasonable times to make such repairs, alterations, improvements and additions to the Premises or to the Building or to any equipment located in the Building as Landlord shall desire or deem necessary or as Landlord may be required to do by Governmental Authority or court order or decree. SECTION 8.02 LANDLORD'S MAINTENANCE. Landlord, at its expense, shall make all structural and non-structural repairs and replacements necessary or desirable in Landlord's opinion to keep in good order and repair the exterior of the Building and the Common Elements other than those repairs required to be made by Tenant as provided in Section 8.01. There shall be no abatement of Rent by reason of such maintenance, and there shall be no liability on the part of Landlord by reason of inconvenience, annoyance or injury to Tenant's business arising from Landlord or others making any repairs, alterations, additions, betterments, improvements, restorations or replacements in or to any portion of the Building or the Premises, or in or to any fixtures, appurtenances or equipment contained in the Building and the Premises, and there shall be no liability on Landlord's part (except for Landlord's gross negligence) for the failure of Landlord or its agents, servants and employees to make any repairs, alterations, additions, betterments, improvements, restorations or replacements in or to any portion of the Building or the Premises, or in or to any fixtures, appurtenances or equipment thereof. SECTION 8.03 REPAIRS REQUIRED BY GOVERNMENTAL AUTHORITY, ETC. If the National Board of Fire Underwriters or other body exercising similar functions or any bureau, department or official of a Governmental Authority, shall require or recommend any changes, modifications, alterations or the addition of additional sprinkler heads or other equipment, fire extinguishing system and/or fire detection system for any reason, or if any such installations, changes, modifications, alterations, sprinkler heads or other equipment become necessary to prevent the imposition of a penalty or additional charge against a full allowance for a sprinkler or fire extinguishing system and/or fire detection system in the fire insurance rate, from time to time, or by any fire insurance company as a result of the Permitted Use of the Premises under Section 4.01, Landlord shall, at its cost and expense, promptly make such installations within the Premises and supply such changes, modifications, alterations, additional sprinkler heads or other required or recommended equipment. Provided, if any such required alterations result from a -14- change in Tenant's use of the Premises or from Tenant improvements, equipment or finish which are materially different from the Building standard, Landlord shall make such alterations required by this Section at Tenant's sole cost and Tenant shall pay the cost of such work to Landlord on demand as an item of Additional Rent. SECTION 8.04 AREAS RESERVED TO LANDLORD. Except for inside surfaces of the Premises, all of the Building, including exterior Building walls, the lobby and elevators, core corridor walls and doors and any core corridor entrance, loading docks and refuse areas (including dumpsters), any terraces or roofs adjacent to the Premises, and any space in or adjacent to the Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other Building facilities, and the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, decoration and repair, are reserved to Landlord. Tenant shall permit Landlord to install, use and maintain pipes, ducts and conduits within the demising walls, bearing columns and ceilings of the Premises. Landlord reserves the right at any time to alter the demising wall between the Premises and the Expansion Space to eliminate the communicating door through such demising wall. SECTION 8.05 LANDLORD'S ACCESS. Landlord or Landlord's agent shall have the right to enter and/or pass through the Premises or any part thereof, at reasonable times during Business Hours of Business Days, upon advance notice to Tenant (except in emergencies) or at any time After Hours of Business Days, for the purpose of making such repairs or changes to the Building or its facilities as may be provided for by this Lease or as Landlord may be required to make by law or in order to repair and maintain the Building or its fixtures or facilities and to show them to actual and prospective Superior Lessors or Superior Mortgagees, or prospective purchasers, mortgagees or lessees of the Building. Landlord shall be allowed to take all materials into and upon the Premises that may be required for such repairs, changes, repainting or maintenance, without liability to Tenant, except for the negligence of Landlord, its agents, servants, employees or representatives. Landlord shall have the right (but not an obligation) to enter and/or pass through the Premises, or any part thereof, at such times as such entry shall be required by circumstances of emergency affecting the Premises or the Building. SECTION 8.06 CHANGES TO BUILDING. Landlord reserves the right, at any time after completion of the Building, without incurring any liability to Tenant therefor, to make such changes in or to the Building and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages, elevators and stairways thereof, as it may deem necessary or desirable so long as it shall not materially and detrimentally affect Tenant's business. ARTICLE NINE TENANT'S IMPROVEMENTS AND ALTERATIONS SECTION 9.01 [INTENTIONALLY OMITTED.] SECTION 9.02 TENANT IMPROVEMENTS. Tenant shall make no alterations, decorations, installations, additions or improvements (hereinafter individually and collectively referred to as "TENANT'S IMPROVEMENTS") in or to the Premises, whether structural or non-structural, without -15- Landlord's prior written consent. Except with respect to alterations or improvements prohibited under the Rules and Regulations, such consent shall not be unreasonably withheld. All Tenant's Improvements shall be performed at Tenant's sole cost and expense and by contractors or mechanics approved, in writing, by Landlord, and in such a manner so that the same shall not interfere with the operation and maintenance of the Building or with other work being done by Landlord or other tenants or occupants in the Building. All such Tenant's Improvements: (i) shall comply with all applicable laws, rules, orders, permits, authorizations of all Governmental Authorities and orders, rules and regulations of the National Board of Fire Underwriters, and other bodies exercising similar functions, and (ii) shall be made promptly and in good workmanlike manner using prime quality materials. SECTION 9.03 LANDLORD'S CONSENT. In the event Tenant desires to make any Tenant's Improvements, Tenant shall request Landlord's consent in writing not later than sixty (60) days prior to the date upon which Tenant proposes to commence such Tenant's Improvements. As a condition to Landlord's consent to any Tenant Improvements (other than additions, or substitutions for existing carpeting, or painting the walls in the Premises), Tenant shall, at Tenant's sole cost and expense, furnish Landlord with such plans and specifications, certificates evidencing appropriate insurance coverages, performance bonds, such permits, authorizations or consents as may be required by an applicable law, rule, order or requirement of any Governmental Authority having jurisdiction thereover and such other documents, agreements, authorizations or assurances as Landlord may in its sole discretion request. Tenant shall also reimburse Landlord for any cost or expense incurred by it in reviewing, approving or disapproving Tenant's proposed Improvements. SECTION 9.04 NO ENCUMBRANCES ON INCORPORATED MATERIAL OR EQUIPMENT. In no event shall any material or equipment be incorporated in or to the Premises in connection with any such Tenant's Improvements which is subject to any lien, encumbrance, chattel mortgage, security interest or charge of any kind whatsoever, or is subject to any conditional sale or other similar or dissimilar title retention agreement. Any mechanic's or materialman's lien filed against the Land or the Building or Landlord's interest therein, for work claimed to have been done, or for materials claimed to have been furnished to Tenant, shall be discharged by Tenant within thirty (30) days thereafter, at Tenant's sole cost and expense, by filing a bond as provided by law or otherwise. If Tenant shall fail to have discharged any lien or encumbrances described in this Section 9.04, Landlord may, but shall not be required to, cause such lien or encumbrance to be discharged by bonding or otherwise, and Tenant shall reimburse Landlord, as an item of Additional Rent, for all costs and expenses which Landlord may incur, including attorneys' fees and disbursements, within ten (10) days following written demand. SECTION 9.05 RESTRICTIONS ON USE OF LABOR AND MATERIAL. Tenant covenants that it will not at any time, either directly or indirectly, use any contractors or labor or materials in the Premises if the use of such contractors or labor or materials would create any difficulty with other contractors or labor engaged by Tenant or Landlord or others in the construction, maintenance or operation of the Building or any portion thereof. -16- SECTION 9.06 LIABILITY FOR ALTERATIONS. Landlord shall not be liable for any failure or diminution of any Building facilities or services, including, but not limited to, the air-conditioning system, the heating and ventilating systems, the electrical system, the plumbing system and/or any other mechanical system caused by Tenant's Improvements made by or on behalf of Tenant, and Tenant shall correct any such faulty installation and repair any damage caused thereby. Upon Tenant's failure to make such corrections and repairs, Landlord may make such corrections and repairs and charge Tenant for the cost thereof. Such sum as may be due Landlord pursuant to this Section 9.06 shall be deemed an item of Additional Rent and shall be paid by Tenant within ten (10) days following written demand. SECTION 9.07 LANDLORD'S LIABILITY LIMITED. Notwithstanding the right of Landlord to approve any matter described in this Article Nine, Landlord shall have no responsibility or liability for the performance or quality of work of any contractor, subcontractor, agent or consultant of Tenant. The approval by Landlord, whether express or implied, of Tenant performing Tenant's Improvements in or to the Premises shall in no way affect Landlord's rights or Tenant's obligations relating to the restoration of the Premises. Tenant agrees that any review or approval by Landlord of any plans or specifications with respect to any Tenant's Improvements is solely for Landlord's benefit, and without any representation or warranty whatsoever to Tenant with respect to the adequacy, correctness or efficiency thereof or otherwise. SECTION 9.08 LANDLORD'S REMEDY. If Tenant fails to comply with any provisions of this Article Nine, Landlord, in addition to any other remedy herein provided, may require Tenant to cease performing Tenant's Improvements, and Landlord may deny access to the Premises to any person performing any Tenant's Improvements on behalf of Tenant. ARTICLE TEN COMPLIANCE WITH LAWS AND REQUIREMENTS OF GOVERNMENTAL AUTHORITIES SECTION 10.01 TENANT'S NOTICE. Tenant shall give prompt notice to Landlord of any notice it receives of the violation of any laws or requirements of any Governmental Authority with respect to the Premises or the use or occupation thereof. Tenant shall, at Tenant's expense, comply with all laws and requirements of any Governmental Authorities which shall, in respect of the Premises or the use and occupation thereof, or the abatement of any nuisance in, on or about the Premises, impose any violation, order or duty on Landlord or Tenant, arising from (a) Tenant's use of the Premises, (b) the manner of conduct of Tenant's business or operation of its installations, equipment or other property therein, (c) any cause or condition created by Tenant, or (d) breach of any of Tenant's obligations hereunder; and Tenant shall pay all the costs, expenses, fines, penalties and damages which may be imposed upon Landlord or any Superior Mortgagee or Superior Lessor by reason of or arising out of Tenant's failure to comply with and observe the provisions of this Section fully and promptly. However, Tenant need not comply with any such law or requirement of any Governmental Authority so long as Tenant shall be contesting the validity thereof, or the applicability thereof to the Premises, in accordance with Section 10.02. -17- SECTION 10.02 TENANT MAY CHALLENGE VALIDITY OF LAWS OR REQUIREMENTS. Tenant, at its expense, after notice to Landlord, may contest, by appropriate proceedings prosecuted diligently and in good faith, the validity or applicability to the Premises of any law or requirement of any Governmental Authority, provided (a) the law or requirement at issue does not generally apply to the Building as a whole or to all tenanted space in the Building but has particular applicability to Tenant's Premises; (b) Landlord shall not be subject to criminal penalty or to prosecution for a crime, nor shall the Premises or any part thereof be subject to being condemned or vacated, by reason of non-compliance or otherwise by reason of such contest; (c) before the commencement of such contest, Tenant shall furnish to Landlord either (i) the bond of a surety company satisfactory to Landlord, which bond shall be, as to its provision and form, satisfactory to Landlord, and shall be in an amount at least equal to one hundred twenty-five (125%) percent of the cost of such compliance (as estimated by Landlord) and shall indemnify Landlord against the cost thereof and against all liability for damages, interest, penalties and expenses (including reasonable attorneys' fees and expenses), resulting from or incurred in connection with such contest or non-compliance, or (ii) other security in place of such bond satisfactory to Landlord; (d) such non- compliance or contest shall not constitute or result in any violation of any Superior Lease or Superior Mortgage, or if any such Superior Lease or Superior Mortgage shall permit such non-compliance or contest on condition of the taking of action or furnishing of security by Landlord, such action shall be taken and such security shall be furnished at the expense of Tenant; and (e) Tenant shall keep Landlord advised as to the status of such proceedings. Without limiting the application of the above, Landlord shall be deemed subject to prosecution for a crime if Landlord, or its managing agent, or any officer, director, partner, shareholder or employee of Landlord or its managing agent, as an individual, is charged with a crime of any kind or degree whatever, whether by service of a summons or otherwise, unless such charge is withdrawn before Landlord or its managing agent, or such officer, director, partner, shareholder or employee of Landlord or its managing agent (as the case may be) is required to plead or answer thereto. ARTICLE ELEVEN SECTION 11.01 LANDLORD'S INSURANCE. At all times during the Term of this Lease, Landlord shall insure the Building against loss or damage by fire, and such other casualties as may be included within the extended coverage clauses of policies which are then standard for use in the State of Connecticut, in such amount as Landlord in its sole judgment shall deem appropriate. SECTION 11.02 TENANT SHALL NOT JEOPARDIZE INSURANCE. Tenant shall not do, or permit to be done, any act or thing in, upon or around the Premises which (i) could result in termination of any insurance which Landlord may have in force with respect to the Building or Land, (ii) could adversely affect Landlord's right of recovery under any of such policies, or (iii) would result in the refusal by reputable and independent insurance companies to insure the Building or the Land in amounts reasonably satisfactory to Landlord. Tenant shall, with respect to the Premises, at is sole cost and expense, comply with all rules, orders, regulations or requirements of the National Board of the Fire Underwriters, or any other similar body having jurisdiction over the Land and Building and shall not knowingly do, or permit to be done, anything therein, or use -18- the Premises in a manner which increases the rate of premium over the rates in effect prior to the Commencement Date for any insurance that Landlord maintains with respect to the Land and Building. In the event Landlord receives notice from any insurance company insuring the Land and Building that Tenant's use of the Premises would make Landlord's insurance void or voidable, Tenant shall, upon receipt of written notice, immediately cease and desist such use. SECTION 11.03 TENANT RESPONSIBLE FOR INCREASED PREMIUMS. If, by reason of Tenant's non-compliance with any of the provisions contained in the Lease, Landlord's cost of obtaining and/or maintaining any of the forms of insurance referred to in Section 11.01 shall be greater than the cost that Landlord would incur but for Tenant's noncompliance, then, in that event, Tenant covenants that it shall pay to Landlord as an item of Additional Rent, within ten (10) days following the delivery of a written demand therefor, such excess cost as Landlord shall incur; provided, however, that if the remaining portion of the Lease Term shall be less than the period of time covered by any such insurance, Tenant shall only be obligated to pay its pro rata share of such excess cost apportioned to the Expiration Date. SECTION 11.04 REQUIRED INSURANCE. At all times during the Lease Term (and in the event Landlord grants permission to Tenant to enter the Premises for any reason prior to the Commencement Date, then from such earlier date) Tenant shall provide and thereafter keep in full force and effect the following: (i) comprehensive general liability insurance insuring against liability for bodily injury and death and for property damage in an amount as may from time to time be required by Landlords of other Class "A" office buildings in the City of Hartford, but in an amount not less than One Million ($1,000,000) Dollars each occurrence, combined single limit, such limits to be increased from time to time as reasonably specified by Landlord. With Landlord's prior consent, in its reasonable discretion, Landlord may self insure up to $3,000,000 per occurrence; (ii) workers' compensation providing statutory Connecticut benefits for all persons employed by Tenant in connection with the Premises; (iii) an "All Risk of Physical Loss" form of policy covering all of Tenant's Property and Tenant's Improvements including, but not limited to, moveable trade fixtures, inventory and decorations, such insurance to be in an amount not less than One Hundred (100%) Percent of the actual replacement value for all of Tenant's Property and contents, such replacement value to be determined from time to time as necessary to avoid coinsurance penalties, it being agreed that no omission on the part of Landlord to request any such determination shall relieve Tenant of its obligation to determine such replacement value as aforesaid; (iv) such other insurance in such amounts as may be required by Landlord against other insurable hazards as at the time are commonly insured against in the case of prudent owners of comparable Class "A" office buildings in the City of Hartford, Connecticut; and -19- (v) for and during any time when Tenant shall be constructing or making Tenant's Improvements, a policy of completed value non-reporting builder's risk insurance for the Premises, including building materials in the Premises, covering loss or damage from fire, lightning, extended coverage perils, vandalism and malicious mischief and perils covered under a difference in conditions policy and completed operations in an amount not less than the final cost, as reasonably estimated by Tenant, of such Tenant's Improvements (with an agreed amount clause). SECTION 11.05 MISCELLANEOUS INSURANCE REQUIREMENTS. 11.05.1 All insurance which Tenant shall be required to effect pursuant to this Article Eleven shall: (i) be in form and substance reasonably acceptable to Landlord; (ii) be underwritten by insurance companies that are licensed or authorized to do business in the State of Connecticut, shall be in good standing with the Connecticut Insurance Department, and shall have a rating issued by an organization regularly engaged in rating insurance companies of not less than one rating below the top rating; (iii) provide for deductibles which are not disproportionally large in light of the coverage and not unacceptable to Landlord; (iv) name Landlord as an additional insured (for the general liability insurance only), and, at Landlord's request, name any Superior Lessor or Superior Mortgagee as an additional insured (except when such an endorsement is not available) and contain provisions (where available) that no act or omission of Tenant shall affect or limit the obligations of the insurance company to pay the amount of any loss sustained to Landlord and/or any Superior Lessor or Superior Mortgagee; and (v) be issued for terms of not less than twelve (12) full calendar months and shall contain a provision that such insurance shall not be subject to cancellation or reduction in coverage unless Landlord shall be served with a written notice not later than thirty (30) days prior to cancellation or reduction in coverage. 11.05.2 At such time as Tenant shall first be allowed to enter the Premises, Tenant shall deliver to Landlord original insurance policies or certificates evidencing required insurance coverage. Not later than thirty (30) days prior to the expiration of any contract of insurance required under the terms hereof, renewals of or replacements for any such contracts of insurance shall be delivered to Landlord. In the event that Tenant shall fail to procure any contract of insurance required under the terms hereof or any renewal of or replacement for any contract of business which is expiring or has been cancelled, Landlord may, but shall not be obligated to, procure such insurance on behalf of Tenant and the cost thereof shall be immediately payable to Landlord as an item of Additional Rent. -20- 11.05.3 Any insurance to be acquired and maintained by Tenant hereunder may be satisfied by an appropriate rider to a blanket policy of insurance covering more than one business location, provided that all other requirements of this Article are fully satisfied thereby. SECTION 11.06 WAIVER OF SUBROGATION. Landlord and Tenant waive all rights against each other for damages caused by fire or other casualty to the extent covered by insurance obtained or required pursuant to this Lease. ARTICLE TWELVE DAMAGE BY FIRE OR OTHER CAUSE SECTION 12.01 DAMAGE OR DESTRUCTION. If the Premises shall be damaged by fire or other casualty, the following provisions will apply: (i) If Tenant shall continue to have reasonably convenient access to the Premises and no material portion of the Premises shall thereby be rendered unfit for use and occupancy by Tenant for the purposes set forth herein, Landlord shall repair such damage or destruction with reasonable diligence. During the period when such repair work is being conducted, the Rent shall not be abated or suspended. (ii) If Tenant shall not have reasonably convenient access to the Premises or any material portion of the Premises shall thereby be otherwise rendered unfit for use and occupancy by Tenant for the purposes set forth herein and if in the reasonable judgment of Landlord the damage or destruction may be repaired within one hundred twenty (120) days after the occurrence of the damage or destruction, then Landlord shall so notify Tenant within thirty (30) days after the occurrence of the damage or destruction and commence restoration with reasonable diligence. In the event that Landlord shall not complete such repairs within one hundred twenty (120) days after the occurrence of the damage or destruction, then Tenant shall have the right to terminate this Lease by giving written notice of such termination to Landlord within ten (10) days after the end of such one hundred twenty (120) day period, provided, however, that in the event that the repairs shall be delayed by strikes, governmental regulation, zoning laws, inability to obtain labor or materials, from any other cause beyond Landlord's control, or for other good reason, the time for completion shall be extended by the period of such delay. If in the reasonable judgment of Landlord the Premises, or means of access thereto, cannot be repaired within one hundred twenty (120) days after the occurrence of the damage or destruction and Landlord does not give Tenant the notice referred to in this subsection 12.01(ii), then either party shall have the right to terminate this Lease by giving written notice of such termination to the other party within the period of thirty (30) to forty-five (45) days after the occurrence of such damage or destruction. If neither party gives such notice of intention to terminate this Lease, then Landlord shall repair the damage or destruction with reasonable diligence; (iii) If Tenant shall not have reasonably convenient access to the Premises for more than thirty days or any material portion of the Premises shall be rendered unfit for use and occupancy by Tenant for the purposes set forth herein by reason of such damage or destruction -21- for more than thirty days, and if such damage or destruction was not caused by the negligence or willful act or omission of Tenant or any of its officers, employees, contractors, agents or invitees, then the Base Rent shall be equitably suspended or abated until Landlord shall have substantially completed the repair of the Premises and the means of access thereto. SECTION 12.02 LANDLORD'S AND TENANT'S ADDITIONAL OPTION TO TERMINATE THE LEASE IN EVENT OF DAMAGE. In addition to and apart from the foregoing provisions of this Article Twelve, (i) if more than twenty-five (25%) percent of the Gross Rentable Area of the Premises shall be damaged or destroyed by fire or other cause at any time during the last twelve (12) months of the Term of this Lease, Landlord or Tenant may terminate this Lease by giving written notice of such termination to Tenant within thirty (30) days after the occurrence of such damage or destruction, and (ii) if the Building is damaged or destroyed by fire or other cause to such extent that the cost to repair the damage or destruction (whether or not the Premises is damaged), as reasonably estimated by Landlord, will be more than twenty-five (25%) percent of the replacement value of the Building immediately prior to the occurrence of such damage or destruction, then Landlord or Tenant may terminate this Lease by giving written notice of such termination to Tenant within sixty (60) days after the occurrence of such damage or destruction. SECTION 12.03 EFFECT OF SUPERIOR LEASE OR SUPERIOR MORTGAGE. Tenant acknowledges that the Building may be subject to a Superior Lease or Superior Mortgage and that the foregoing options with respect to repairing or rebuilding are all subject to the provisions of such Superior Lease or Superior Mortgage. SECTION 12.04 LOSS CAUSED BY TENANT. Nothing herein contained shall relieve Tenant from any liability to Landlord or to its insurers in connection with any damage to the Premises or the Building by fire or other casualty if Tenant shall be legally liable for said fire or other casualty, except as provided in Section 11.06 of this Lease. SECTION 12.05 TENANT'S PROPERTY AND TENANT'S IMPROVEMENTS. Landlord's obligation to restore or rebuild the Premises shall not include the repair, reconstruction or replacement of any of Tenant's Property, or Tenant Improvements whether or not Tenant has received an allowance therefor. ARTICLE THIRTEEN ASSIGNMENT, SUBLETTING AND MORTGAGING PROHIBITED Tenant may not assign this Lease except to an affiliate of Tenant. For such purposes, "AFFILIATE" means any corporation which is a direct or indirect subsidiary of Tenant, which is a parent corporation of Tenant or which is a direct or indirect subsidiary of a parent corporation of Tenant. Tenant may sublet the Premises to an Affiliate or to any other party with Landlord's -22- prior written consent, which consent shall not be unreasonably withheld. If any sublet of the Premises to a non-Affiliate shall be at a rent per square foot in excess of the per square foot rent due hereunder, then Landlord and Tenant shall share equally in such excess, after deducting all direct, out-of- pocket costs of any sublet. ARTICLE FOURTEEN TENANT'S AND LANDLORD'S PROPERTY SECTION 14.01 TENANT'S PROPERTY. 14.01.1 All movable partitions, other business and trade fixtures, machinery and equipment, communications equipment, which are installed in the Premises by or for the account of Tenant, without expense to Landlord, and which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises, including retail inventory (all of which are sometimes called "TENANT'S PROPERTY") shall be and shall remain the property of Tenant and may be removed by it at any time during the Term of this Lease; provided that if any of Tenant's Property is removed, Tenant shall repair or pay the cost of repairing any damage to the Premises or to the Building resulting from such removal. Any equipment or other property for which Landlord shall have granted any allowance or credit to Tenant shall not be deemed to have been installed by or for the account of Tenant without expense to Landlord, shall not be considered Tenant's Property and shall be deemed the property of Landlord. 14.01.2 On or before the Expiration Date, or the date of any earlier termination of this Lease, or as promptly as practicable after such an earlier termination date, Tenant's Property (except such items thereof as Tenant shall have expressly agreed in writing with Landlord shall remain and become the property of Landlord) shall be removed by Tenant, and Tenant shall repair any damage to the Premises or the Building resulting from such removal. 14.01.3 Any other items of Tenant's Property (except money, securities and other like valuables) which shall remain in the Premises after the Expiration Date or as promptly as practical after an earlier termination of this Lease, may at the option of Landlord, be deemed to have been abandoned, and in such case either may be retained by Landlord as its property or may be disposed of, without accountability, in such manner as Landlord may see fit at Tenant's expense. SECTION 14.02 LANDLORD'S PROPERTY. All Tenant Improvements, including all fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term of this Lease, whether or not by or at the expense of Tenant including but not limited to wall to wall carpeting, wallpaper, partitions, and the like affixed to the Premises, shall be and remain a part of the Premises, shall be deemed the property of Landlord and shall not be removed by Tenant, except as hereinafter in this Article expressly provided. Upon the expiration of the Lease Term, Landlord may elect that Tenant remove any Tenant Improvements which Tenant may have installed in the Premises at any time during the Lease Term without Landlord's written consent and restore the Premises to the condition the same were in as of the Commencement Date. In the event Landlord desires to exercise its option -23- as contained in this Section 14.02 to require restoration of the Premises, Landlord shall give written notice to Tenant not later than the earlier to occur of: (i) thirty (30) days prior to the Expiration Date, or (ii) in that event of the earlier termination of the Lease Term for any other reason, upon such earlier termination of the Lease Term. If Landlord shall so notify Tenant, Tenant shall restore the Premises (or so much thereof as shall be the subject of Landlord's notice) to the condition that the Premises were in as of the Commencement Date of this Lease. If any Tenant Improvements which Tenant shall be required to remove from the Premises shall not be removed by Tenant within the time herein required, Landlord (in addition to all other rights and remedies which Landlord may have) shall be entitled to treat such property as having been abandoned by Tenant, and Landlord may remove the same and restore the Premises (or so much thereof as shall be the subject of Landlord's notice) to the condition the same were in as of the Commencement Date of the Lease at the sole cost and expense of Tenant and Tenant shall pay to Landlord, as an item of Additional Rent, within ten (10) days following written demand therefor, the cost incurred by Landlord in removing such property and restoring the Premises as aforesaid. Tenant's obligation to reimburse Landlord for the cost of removal of Tenant's Improvements and restoring the Premises described in this Section 14.02 shall survive the Expiration Date or the earlier termination of the Lease Term. Tenant also covenants that in the event Landlord shall exercise any of its rights as provided herein, Tenant shall indemnify and save Landlord harmless for all cost, expenses, damages, including reasonable attorneys; fees and disbursements which Landlord may incur as a result of the operation of this Section. ARTICLE FIFTEEN CONDEMNATION SECTION 15.01 TOTAL CONDEMNATION. 15.01.1 If the whole of the Land, Building or the Premises or so much of the Building or the Premises as is necessary for Tenant's use and occupancy of the Premises for the purposes set forth herein, or for reasonably convenient access to the Premises shall be taken for any public or any quasi-public use under any statute or by right of eminent domain, or by private purchase in lieu thereof under threat of condemnation or the exercise of the right of eminent domain, then this Lease shall automatically terminate as of the date that title shall be taken and the Rent shall be apportioned as of that date so that if the termination occurs in the middle of a month, Tenant shall be responsible only for Rent due prior to the termination. 15.01.2 In addition to and apart from the foregoing provisions of this Section, if more than twenty-five (25%) percent of the Gross Rentable Area of the Building shall be taken, then Landlord or Tenant may terminate the Term of this Lease by giving written notice of such termination within thirty (30) days after the date title vests in the taking authority. SECTION 15.02 PARTIAL CONDEMNATION. In the event of any taking which does not result in a termination of the Term of this Lease under Section 15.01, this Lease shall be unmodified and continue, provided, Landlord shall proceed with reasonable diligence to repair and restore the remaining part of the Building and the Premises to substantially its former condition to the extent that the same may be feasible. To the extent the partial taking results in a reduction of the -24- Gross Rentable Area of the Premises, Rent shall be equitably adjusted according to the Gross Rentable Area remaining. SECTION 15.03 CONDEMNATION PROCEEDS. In the event of any taking, partial or whole, provided for in this Article, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be and remain the sole and exclusive property of Landlord, and Tenant shall not be entitled to any portion of such award, judgment or settlement received by Landlord from such condemning authority. Tenant, however, may pursue its own claim against the condemning authority for any damage or award permitted under the laws of the State of Connecticut to be paid, provided Tenant's claim will not diminish or reduce the award, judgment or settlement receivable by Landlord. SECTION 15.04 TEMPORARY CONDEMNATION. If the temporary use or occupancy of all or any part of the Premises shall be taken by condemnation or in any other manner for any public or quasi-public use or purpose during the Term of this Lease, Tenant shall be entitled, except as hereinafter set forth, to receive that portion of the award or payment for such taking which represents compensation for the use and occupancy of the Premises, for the taking of Tenant's Property and for moving expenses, and Landlord shall be entitled to receive that portion which represents reimbursement for the cost of restoration of the Premises. The Lease shall be and remain unaffected by such taking and Tenant shall continue responsible for all of its obligations hereunder and shall continue to pay in full the Base Rent and Additional Rent when due. ARTICLE SIXTEEN SURRENDER On the Expiration Date of this Lease, or upon any earlier termination of this Lease, or upon any re-entry by Landlord upon the Premises, Tenant shall quit and surrender the Premises to Landlord including Tenant Improvements in good order, condition and repair, except for ordinary wear and tear and such damage or destruction as Landlord is required to repair or restore under this Lease, and Tenant shall remove all of Tenant's Property therefrom except as otherwise expressly provided in this Lease. ARTICLE SEVENTEEN EVENTS OF DEFAULT SECTION 17.01 EVENTS OF DEFAULT. Each of the following events shall be an "EVENT OF DEFAULT" hereunder: (a) Failure by Tenant to pay any installment of Rent within ten days of its due date. (b) Failure by Tenant to make any other payment required to be paid by Tenant hereunder for a period of thirty (30) days after written notice thereof from Landlord to Tenant. -25- (c) Failure by Tenant to observe or perform one or more of the other terms, covenants and conditions contained in this Lease on Tenant's part to be performed except for the payment of Rent, and such failure shall continue for a period of 30 days after written notice thereof by Landlord to Tenant specifying such failure (unless such failure requires work to be performed, acts to be done, or conditions to be removed which cannot by their nature reasonably be performed, done or removed, as the case may be, within such 30 day period, in which case no default shall be deemed to exist as long as Tenant shall have commenced curing the same within such 30 day period and shall diligently and continuously prosecute the same to completion provided such delay in effecting cure shall not expose Landlord to prosecution for a crime or constitute a default under any Superior Lease or Superior Mortgage). (d) If Tenant is generally not paying its debts as such debts become due or if Tenant shall admit, in writing, that it is unable to pay its debts as such debts become due. (e) If Tenant shall make an assignment for the benefit of creditors, or if Tenant shall file a voluntary petition under Title 11 of the United States Code or if such petition is filed against Tenant and an order for relief is entered, or if Tenant shall file any petition or answer seeking, consenting to or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under present or any future Federal bankruptcy code or any other law, or if Tenant shall seek or consent to or acquiesce to, or suffer the appointment of any trustee, receiver, custodian, assignee, liquidator or other similar official of Tenant or of all or any substantial portion of its assets or of the Premises or any interest of Tenant therein. (f) If within sixty (60) days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future Federal bankruptcy code or any other law, such proceeding shall not have been dismissed, or if, within sixty (60) days after the appointment, without the consent of acquiescence of Tenant, of any trustee, receiver, custodian, assignee, or liquidator of Tenant or of all or any substantial part of its assets or of the Premises or any interest of Tenant therein, such appointment shall not have been vacated or stayed on appeal or otherwise, or if, within thirty (30) days after the expiration of any such stay, such appointment shall not have been vacated. (g) If Tenant shall vacate or abandon the Premises or any portion thereof for ten (10) continuous days. (h) If a levy under execution or attachment shall be made against Tenant or its assets and such execution or attachment shall not be vacated or removed by court order, bonding or otherwise within a period of thirty (30) days. -26- SECTION 17.02 LANDLORD'S RIGHTS ON EVENT OF DEFAULT. 17.02.1 Upon the occurrence of any Event of Default, Landlord may exercise any one or more of the following rights: (a) Landlord may re-enter and repossess any of all of the Premises and any or all improvements thereon and additions thereto. (b) Landlord may declare the entire balance of the Base Rent for the remainder of the Term to be due and payable immediately, and collect such balance in any manner not inconsistent with applicable law; provided that if Landlord elects to relet any or all of the Premises following such acceleration of Base Rent, the provisions of subsection 17.02.1(d) shall be applicable with respect to the rights of Landlord and Tenant. Accelerated payments payable hereunder shall not constitute a penalty or forfeiture or liquidated damages, but shall merely constitute payment of Base Rent in advance. (c) Landlord may terminate this Lease by giving written notice of such termination to Tenant, which termination shall be effective as of the date of such notice or any later date therefor specified by Landlord therein (provided, that without limiting the generality of the foregoing provisions of this subsection 17.02.1(c), Landlord shall not be deemed to have accepted any abandonment or surrender by Tenant of any or all of the Premises or Tenant's leasehold estate under this Lease unless Landlord has so advised Tenant expressly and in writing, regardless of whether Landlord has reentered or relet any or all of the Premises or exercised any or all of Landlord's other rights under the provisions of this Section or applicable law). (d) Landlord may, in Landlord's own name (either (i) as agent for Tenant, if this Lease has not then been terminated, or (ii) for the benefit of Tenant, if this Lease has then been terminated), relet any or all of the Premises with or without any additional premises, for any or all of the remainder of the Term (or, if this Lease has then been terminated, for any or all of the period which would, but for such termination, have constituted the remainder of the Term) or for a period exceeding such remainder, on such terms and subject to such conditions as are acceptable to Landlord in its sole and absolute discretion (including, by way of example rather than of limitation, the alteration of any or all of the Premises in any manner which, in Landlord's judgment, is necessary or desirable as a condition to or otherwise in connection with such reletting, and the allowance of one or more concessions or "free-rent" or reduced-rent periods), and collect and receive the rents therefor. Anything contained in the provisions of this Lease or applicable law to the contrary notwithstanding, (i) Landlord shall not have any duty or obligation to relet any or all of the Premises as the result of any Event of Default, or any liability to Tenant or any other person for any failure to do so or to collect any rent or other sum due from any such reletting; (ii) Tenant shall have no right in or to any surplus which may be derived by Landlord from any such reletting, in the event that the proceeds of such reletting exceed Rent, or other sum owed by Tenant to Landlord hereunder; and (iii) Tenant's liability hereunder shall not be diminished or affected by any such failure to relet or the giving of any such initial or other concessions or "free-rent" or reduced rent periods in the event of any such reletting. In the event of any such reletting, Tenant shall pay to Landlord, at the times and in the manner specified by -27- the provisions of this Lease (unless Landlord has elected to accelerate Rent as provided in subsection 17.02.1(b), in which event Tenant shall be obligated to pay such accelerated amount as provided in subsection 17.02.1(b) above), the installments of the Base Rent and any Additional Rent accruing during the remainder of the Term (or, if this Lease has then been terminated, damages equaling the respective amounts of such installments of the Base Rent and any Additional Rent which would have accrued during such remainder, had this Lease not been terminated), less any monies received by Landlord with respect to such remainder from such reletting of any or all of the Premises. (e) Landlord may cure such Event of Default in any other manner, provided Tenant shall pay as an item of Additional Rent all costs and expenses which Landlord may incur in curing Tenant's default within ten (10) days following delivery of a written demand. The aforesaid costs and expenses which Landlord shall be entitled to incur on behalf of Tenant in curing any default of Tenant shall include, but shall not be limited to, reasonable materials, architects' fees, engineers' fees, attorneys' fees, contractor's fees, insurance premiums, fines and penalties. (f) Landlord may pursue any combination of such remedies and/or any other right or remedy available to Landlord on account of such Event of Default under this Lease and/or at law or in equity. 17.02.2 No such expiration or termination of this Lease, or summary dispossession proceedings, abandonment, reletting, bankruptcy, re-entry by Landlord or vacancy, shall relieve Tenant of any of its liabilities and obligations under this Lease (whether or not any or all of the Premises are relet), and Tenant shall remain liable to Landlord for all damages resulting from any Event of Default, including but not limited to, any damage resulting from the breach by Tenant of any of its obligations under this Lease to pay Rent and any other sums which Tenant is obligated to pay hereunder. 17.02.3 If any or all of the Premises are relet by Landlord for any or all of the unexpired Term of this lease, the amount of rent reserved upon such reletting shall be deemed to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. 17.02.4 On the occurrence of an Event of Default, Tenant shall, immediately upon its receipt of a written demand therefor from Landlord, reimburse Landlord, as Additional Rent, for all expenses (including, by way of example rather than of limitation, any and all repossession costs, management expenses, operating expenses, legal expenses and reasonable attorneys' fees) incurred by Landlord (i) in curing or seeking to cure any Event of Default and/or (ii) in exercising or seeking to exercise any of Landlord's rights and remedies under the provisions of this Lease and/or at law or in equity on account of any Event of Default, and/or (iii) otherwise arising out of any Event of Default. -28- SECTION 17.03 TENANT'S WAIVERS AND CONSENTS. To the extent not prohibited by law, Tenant hereby waives and releases all rights now or hereafter conferred by statute or otherwise which would have the effect of limiting or modifying any of the provisions of this Article Seventeen, including, but not limited to any and all rights of redemption it may otherwise have. Tenant shall execute, acknowledge and deliver any instruments which Landlord may request, whether before or after the occurrence of any Event of Default, evidencing such waiver or release. Except as expressly provided herein or prohibited by applicable law, Tenant hereby expressly waives the service of any notice of intention to re-enter provided for in any statute, or of the institution of legal proceedings to that end, and Tenant, for and on behalf of itself and all persons claiming through or under Tenant, also waives any and all right of redemption provided by any law or statute now in force or hereafter enacted or otherwise, or re-entry or repossession or to restore the operation of this Lease in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge or in case of re-entry or repossession by Landlord or in case of any expiration or termination of this Lease, and Landlord and Tenant waive and shall waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever arising out of, or in any way connected with, this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or damage. Tenant further agrees that any and all actions or proceedings arising directly or indirectly hereunder may, at the option of Landlord, be litigated in courts having situs within the State of Connecticut with a venue of Hartford, Connecticut, and Tenant hereby expressly consents to the jurisdiction of any state or federal court located within said state having such a venue and consents that any service of process in such action or proceeding may be made by personal service upon Tenant wherever Tenant may be then located, by certified or registered mail directed to Tenant at the Address of Tenant as provided herein, or otherwise as may be provided by law. The terms "enter", "re-enter", "entry" or "re-entry", as used in this Lease are not restricted to their technical legal meaning. SECTION 17.04 LANDLORD'S ACTIONS. Suit or suits for the recovery of damages, or for a sum equal to any installment or installments of Base Rent and Additional Rent payable hereunder or other sums payable by Tenant to Landlord pursuant to this Article Seventeen, may be brought by Landlord from time to time at Landlord's election, and nothing herein contained shall be deemed to require Landlord to await the Expiration Date had there been no Event of Default by Tenant and termination. Nothing contained in this Article Seventeen shall limit or prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding an amount equal to the maximum allowed by a statute or rule of law governing such proceeding and in effect at the time when such damages are to be proved, whether or not such amount shall be greater than, equal to or less than the amount of the damages referred to in any of the preceding Sections of this Article Seventeen. SECTION 17.05 INJUNCTIVE RELIEF. In the event of any breach or threatened breach by Tenant of any of the terms, covenants or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any rights and/or remedies allowed at law or in equity or by statute or otherwise as though re- entry, summary proceedings, and other remedies were not provided for in this Lease. -29- SECTION 17.06 LANDLORD'S RIGHTS CUMULATIVE. Each right and remedy of Landlord provided for in this Lease shall be cumulative and, in addition to every other right and/or remedy provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights and/or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise, shall not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity or by statute or otherwise. SECTION 17.07 BANKRUPTCY MATTERS. If an order for relief is entered or if a stay of proceeding or other acts become effective in favor of Tenant or Tenant's interest in this Lease in any proceeding which is commenced by or against Tenant under the present or any future Federal bankruptcy code or any other present or future applicable Federal, State or other statute or law, Landlord shall be entitled to invoke any and all rights and remedies available to it under such bankruptcy code, statute, law or this Lease, including, without limitation, such rights and remedies as may be necessary to protect adequately Landlord's right, title and interest in and to the Premises or any portion thereof and to assure adequately the complete and continuous future performance of Tenant's obligations pursuant to this Lease. Adequate protection of Landlord's right, title and interest in and to the Premises, and adequate assurance of the complete and continuous future performance of Tenant's obligations pursuant to this Lease, shall include, without limitation, the following requirements: (a) that Tenant comply with all of its obligations pursuant to this Lease; (b) that Tenant pay to Landlord, on the first day of each month occurring subsequent to the entry of such order or the effective date of such stay, a sum equal to the amount by which the Premises diminished in value during the immediately preceding monthly period, but, in no event, an amount which is less than the Base Rent and Additional Rent payable for such monthly period; (c) that Tenant continue to use the Premises in accordance with its Permitted Use; (d) that Landlord be permitted to supervise the performance of Tenant's obligations pursuant to this Lease; (e) that Tenant hire, at its sole cost and expense, such security personnel as may be necessary to insure the adequate protection and security of the Premises; (f) that Tenant pay Landlord as an item of Additional Rent within thirty (30) days after entry of such order or the effective date of such stay, as partial adequate protection against future diminution in value of the Premises and adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, an additional security deposit in an amount acceptable to Landlord, but in no event less than the Base Rent and Additional Rent payable during the preceding twelve (12) months of the Lease Term; -30- (g) that Tenant has and will continue to have unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that sufficient funds will be available to fulfill the obligations of Tenant pursuant to this Lease; (h) that if Tenant's trustee, Tenant or Tenant as debtor-in- possession assumes this Lease and proposes to assign the same to any person who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to the trustee, Tenant or Tenant as debtor-in-possession, the notice of such proposed assignment, setting forth (i) the name and address of such person, (ii) all of the terms and conditions of such offer, and (iii) the adequate assurance to be provided Landlord to assure such person's future performance under the Lease, including, without limitation, the assurance referred to in Title 11 U.S.C. 365(b)(3) (as the same may be amended), shall be given to Landlord by the trustee, Tenant or Tenant as debtor-in-possession no later than twenty (20) days after receipt by the trustee, Tenant or Tenant as debtor-in-possession of such offer, but in any event no later than ten (10) days prior to the date that the trustee, Tenant or Tenant as debtor-in- possession shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and motion, to be exercised by notice to the trustee given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. ARTICLE EIGHTEEN COVENANT OF QUIET ENJOYMENT Landlord covenants that upon Tenant paying the Rent and all other charges payable by Tenant hereunder and the performance of all the other terms, covenants, and conditions contained in this Lease on Tenant's part to be performed, Tenant shall peaceably and quietly enjoy the Premises, without hindrance, ejection or molestation by any persons lawfully claiming under Landlord, subject to the other terms, covenants and conditions of this Lease and to all Superior Leases or Superior Mortgages to which this Lease may be or become subject and subordinate. Landlord hereby represents that it is well seized and possessed of the Premises and has a lawful right to enter into this Lease. ARTICLE NINETEEN NO WAIVER SECTION 19.01 NO WAIVER. The failure of either party to seek redress for the violation of, or to insist upon the strict performance of any of the terms, covenants, or conditions contained in this Lease on the other party's part to be so performed, or any of the Rules and Regulations of the Building shall not constitute a waiver thereof, and the first party shall have all remedies provided herein and by applicable law with respect to any subsequent act, which would have originally constituted a default pursuant to the terms of this Lease. The receipt by Landlord of any installment of Rent and other charges with knowledge of the breach of any of Tenant's terms, -31- covenants, or conditions shall not be deemed a waiver of such breach. No term, covenant or condition of this Lease, on either party's part to be performed, shall be deemed to have been waived by the other party unless such waiver be in writing and signed by the other party. No payment by Tenant or receipt by Landlord of an amount less than Rent or other charges then payable shall be deemed to be other than on account of Rent and other charges then owing by Tenant, and shall be applied in any manner that Landlord may elect. No endorsement or statement on any check or any letter accompanying any check or payment of any installment of Rent or other charges shall be deemed binding on Landlord or constitute an accord and satisfaction, and Landlord may cash such check or payment without prejudice to Landlord's right to recover the full amount of Rent or other charges then owing by Tenant, and Landlord shall be entitled to pursue each and every remedy in this Lease provided at law or in equity. The receipt and retention by Landlord of a sum equal to Rent and other charges from anyone other than Tenant shall not constitute a waiver by Landlord of provisions contained in Article Thirteen, or the acceptance of such other person as Tenant, or a release of Tenant from the further performance the terms, covenants, and conditions herein to be performed by Tenant. It is specifically covenanted and agreed by Tenant that the failure of Landlord to bill for or collect any installment of Rent or other charges in a timely manner shall not be construed as a waiver of Landlord's right to collect any Rent or other charges at any time during the Lease Term or thereafter. Tenant's covenants as provided in the preceding sentence shall survive the Expiration Date or the earlier termination of the Lease Term. SECTION 19.02 NO SURRENDER IMPLIED. No act or failure to act by Landlord or Landlord's agents, employees, servants, contractors or subcontractors shall constitute an actual or constructive eviction by Landlord, nor shall such act or failure to act be deemed an acceptance of a surrender of the Premises, and no agreement to accept the surrender of the Premises shall be valid unless in writing signed by Landlord. No agent, employee, servant, contractor or subcontractor employed by Landlord shall have the power to accept the keys for the Premises prior to the Expiration Date or such earlier termination as shall have been agreed to in writing. The delivery of the keys to the Premises, except as provided in the preceding sentence, shall not operate as a termination of the Lease or a surrender of the Premises. In the event Tenant at any time desires to have Landlord sublet the Premises for Tenant's account, Landlord or anyone authorized by Landlord to act on Landlord's behalf is hereby authorized to receive said keys for such purpose without releasing Tenant from any of Tenant's obligations pursuant to this Lease, and Tenant hereby releases Landlord from any liability for loss of or damage to any of Tenant's Property in connection with such subletting. ARTICLE TWENTY BROKER Tenant covenants, warrants and represents that there is no broker involved in this Lease except as set forth in Section 2.01. Landlord agrees to be responsible for the broker's fee due said identified broker, if any. Tenant agrees to indemnify and hold harmless Landlord against -32- and from any claims for any brokerage commissions and all costs, expenses and liabilities in connection therewith, including, without limitation, attorneys' fees and expenses, arising out of any conversations or negotiations had by Tenant with any broker other than the broker identified above. ARTICLE TWENTY-ONE NOTICES Any notice, statement, demand, consent, approval, request or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this Lease or pursuant to any applicable law or requirement of public authority, shall be in writing (whether or not so stated elsewhere in this Lease) and shall be (i) hand-delivered, effective upon receipt, or (ii) sent by United States Express Mail or by private overnight courier, effective upon receipt deemed effective on the next day, or (iii) served by certified or registered mail), postage prepaid, return receipt requested, deemed effective on the day of actual delivery as shown by the addressee's return receipt or the expiration of five (5) days after the date of mailing, whichever is the earlier in time; addressed to the respective party at the address set forth in Section 2.01 above. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demands or other communications intended for it. The grace period for curing of defaults shall commence on the date of receipt of notice thereof from Landlord. ARTICLE TWENTY-TWO SUBORDINATION, ATTORNMENT AND NOTICE TO MORTGAGEES AND GROUND LESSORS SECTION 22.01 SUPERIOR MORTGAGEES AND SUPERIOR LESSORS. This Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to any mortgages or ground leases which may now or hereafter affect the Building and/or Land and to all renewals, modifications, replacements and extensions thereof. This Section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord or the holder of any such mortgage or ground lease or any of their respective successors in interest may reasonably request to evidence such subordination. Any mortgage to which this Lease is, at the time referred to, subject and subordinate is herein called a "SUPERIOR MORTGAGE" and the holder of a Superior Mortgage is herein called a "SUPERIOR MORTGAGEE." Any ground lease to which this Lease is subordinate is herein called a "SUPERIOR LEASE" and the holder of a Superior Lease is a "SUPERIOR LESSOR." Tenant agrees, in the event of any proceeding in foreclosure of any such Superior Mortgage or agreement to convey title by deed in lieu of foreclosure or in the event a Superior Lessor obtains possession of the Building due to the termination of the Superior Lease, Tenant will attorn to any such Superior Mortgagee or Superior Lessor, without any deductions or set-offs whatsoever if so requested to do so and to recognize such successor as Landlord under the Lease provided that such successor offers to recognize this Lease. Not in limitation, Tenant will execute a Subordination Agreement in the form attached to this Lease as EXHIBIT E. -33- SECTION 22.02 RIGHTS OF SUPERIOR MORTGAGEES AND SUPERIOR LESSORS. If any act or omission of Landlord would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right (a) until it has given written notice of such act or omission to Landlord and each Superior Lessor or Superior Mortgagee whose name and address shall previously have been furnished to Tenant, and (b) until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such Superior Lessor or Superior Mortgagee shall have become entitled under such Superior Lease or Superior Mortgage to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy), provided such Superior Lessor or Superior Mortgagee shall with due diligence give Tenant notice of intention to, and commence and continue to, remedy such act or omission. SECTION 22.03 MODIFICATIONS ON DEMAND OF MORTGAGEE. If any Superior Lessor or Superior Mortgagee shall require any modification(s) of this Lease, Tenant shall, at Landlord's request, promptly execute and deliver to Landlord such instruments effecting such modification(s) as Landlord shall require, provided that such modification(s) do not adversely affect in any material respect any of Tenant's rights under this Lease. ARTICLE TWENTY-THREE ESTOPPEL CERTIFICATE, NOTICE OF LEASE SECTION 23.01 ESTOPPEL CERTIFICATE. Tenant agrees, at any time, and from time to time at no cost or expense to Landlord and upon not less than five (5) days' prior written notice from Landlord, to execute, acknowledge and deliver to Landlord, addressed to Landlord a statement certifying: (a) the Commencement Date and the Expiration Date, (b) that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended (except by such writings as shall be stated), (c) that all conditions under this Lease to be performed by Landlord have been satisfied, (d) that there are no defenses or offsets against the enforcement of this Lease by Landlord, or stating those claimed by Tenant, (e) the amount of advance rental, if any (or none if such is the case), paid by Tenant, (f) the date to which rental has been paid, and (g) the amount of security deposited with Landlord, provided, however, that Tenant shall not be required to make written declarations as to any matters which to its knowledge are inaccurate or not true. It is hereby intended that any statement delivered by Tenant pursuant to this Section 23.01 may be relied upon by Landlord or a purchaser of Landlord's interest in the Land and/or Building and by any Superior Lessor or Superior Mortgagee or prospective mortgagee of the Land and/or Building and by any prospective landlord under a ground or underlying lease affecting the Land and/or Building or both. SECTION 23.02 NOTICE OF LEASE. At the request of either party, Landlord and Tenant shall promptly execute, acknowledge and deliver a notice of lease sufficient for recording in accordance with the statutes of the State of Connecticut. In no event shall this Lease be recorded and if Tenant records this Lease in violation of the terms hereof, Landlord shall have the option to terminate this Lease upon notice to Tenant.. -34- ARTICLE TWENTY-FOUR TRANSFER OF LANDLORD'S INTEREST AND LIMITATION OF OBLIGATION SECTION 24.01 LANDLORD'S TRANSFEREE BOUND. This Lease shall be binding upon Tenant, its heirs, successors and assigns. The obligations of Landlord under this Lease shall not be binding upon Landlord with respect to any period subsequent to the transfer of its interest in the Premises, and in the event of such transfer, said obligations shall thereafter be binding upon each transferee of the interest of Landlord in the Premises but only with respect to the period beginning with such transfer and ending with a subsequent transfer by such transferee. SECTION 24.02 TENANT'S REMEDY LIMITED. Tenant shall look only to Landlord's estate and property in the Land and Building (or the proceeds thereof) for the satisfaction of Tenant's remedies for the collection of a judgment or other judicial process requiring the payment of money by Landlord in the event of any default by Landlord hereunder, and no other Property or assets of Landlord or its partners or principals, disclosed or undisclosed, shall be subject to the levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use or occupancy of the Premises. Notwithstanding anything provided in this Lease or provided at law or in equity to the contrary, in the event that Tenant shall obtain a monetary judgment against Landlord in any action or proceeding, Tenant shall seek satisfaction of such a judgment only from Landlord's estate and interest in the Land and Building (or the proceeds from the sale thereof) and no other property or other assets belonging to Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of any such judgment arising from the relationship of Landlord and Tenant hereunder to Tenant's use and occupancy of the Premises. Tenant's covenants contained in this Article Twenty-Four shall survive the Expiration Date or the earlier termination of the Lease Term. SECTION 24.03 LANDLORD'S LIABILITY LIMITED. Neither Landlord nor any partner, director, officer, agent, servant or employee of Landlord shall be liable to Tenant for any injury or damage to Tenant or to any other person or for any damage to (by vandalism, illegal entry, steam, gases, water, rain, snow, electricity or any other causes), or loss (by theft or otherwise) of, any property of Tenant or of any other person, irrespective of the cause of such injury, damage or loss, unless caused by or due to the primary negligent act or omission of Landlord, its agents, servants or employees. Further, neither Landlord nor any partner, director, officer, agent, servant or employee of Landlord shall be liable (a) for any such damage caused by other tenants or persons in, upon or about the Building, or caused by operations in construction of any private, public or quasi-public work; or (b) in the event of any such primary negligent act of Landlord, for consequential damages arising out of any loss of use of the Premises or any equipment or facilities therein by Tenant or any person claiming through or under Tenant. SECTION 24.04 HOLD HARMLESS. Tenant shall indemnify and save harmless Landlord against and from (i) any and all claims against Landlord of whatever nature arising from any act, omission or negligence of Tenant, its contractors, licensees, agents, servants, employees, invitees and/or visitors, (ii) all claims against Landlord arising from any accident, injury or damage whatsoever caused to any person or to the property of any person and occurring during the Lease -35- Term in, around or about the Premises, (iii) all claims against Landlord arising from any accident, injury or damage occurring outside of the Premises, but within or about the Land and Building where such accident, injury or damage results or is claimed to have resulted from an act or omission of Tenant, its contractors, licensees, agents, servants, employees, invitees and/or visitors, and (iv) any breach, violation or non-performance of any of the terms, covenants, and conditions contained in this Lease on the part of Tenant to be fulfilled, kept, observed and performed. This indemnity and hold harmless covenant shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses (including attorneys' fees and disbursements) of any kind or nature incurred in connection with any such claim or proceeding brought thereon, and the defense thereof by Landlord. This indemnity and hold harmless covenant shall survive the Expiration Date or the earlier termination of the Lease Term for acts or omissions alleged to have occurred during the Lease Term and for any period of time prior to the Commencement Date of the Lease during which Tenant was given access to the Premises. ARTICLE TWENTY-FIVE PARKING During the Term, Tenant is entitled to the use for itself, and its employees, agents, customers and invitees a certain number of Parking Spaces as identified in Section 2.01 hereof. This right to use is ancillary to this Lease, cannot be severed from this Lease and confers upon Tenant no rights other than the explicit right to use set forth herein, subject to the Rules and Regulations of this Building or any rules and regulations applicable to any off site parking area. No specific Parking Spaces shall be reserved for Tenant. ARTICLE TWENTY-SIX MISCELLANEOUS SECTION 26.01 INTEGRATION CLAUSE. This Lease, together with all Exhibits and Schedules attached hereto which by this reference are hereby fully incorporated into this Lease, contains the entire agreement between Landlord and Tenant with respect to the Premises and all prior agreements between the parties hereto are merged into this Lease except for covenants in any such agreements that be their terms are said to survive, and any agreements hereafter made between Landlord and Tenant with respect to the Premises shall be ineffective to change, modify, waive, release, discharge, terminate or effect any provision of this Lease, in whole or in part, unless such agreement is in writing and signed by the party against whom enforcement is sought. SECTION 26.02 EFFECT OF PARTIAL INVALIDITY. If any of the provisions of this Lease, or the application thereof to any person or circumstances, shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision or provisions to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. -36- SECTION 26.03 WAIVER OF PREJUDGMENT REMEDIES. Tenant hereby acknowledges that this Lease constitutes a commercial transaction, as such term is used and defined in Connecticut General Statutes 52-278(a), and Tenant hereby waives any prejudgment remedy hearing as provided in Connecticut General Statutes 52-278(a) through 52-278(g), inclusive, and authorizes Landlord's attorney to issue a writ for a prejudgment remedy without a court order, provided the complaint shall set forth a copy of this waiver. SECTION 26.04 CHOICE OF LAW. This Lease shall be governed in all respects by the laws of the State of Connecticut. SECTION 26.05 TENANT DEFINED. If the term "Tenant," as used in this Lease, refers to more than one person, then, as used in this Lease, said term shall be deemed to include all of such persons or any of them; if any of the obligations of Tenant pursuant to this Lease are guaranteed, the term "Tenant" shall be deemed to include Tenant, the Guarantor, or either or both of them; and if this Lease shall have been assigned, the term "Tenant" shall be deemed to include Tenant, the assignee, or either or both of them. SECTION 26.06 RULES AND REGULATIONS. Tenant, its contractors, employees, agents, visitors, guests and licensees shall faithfully observe and comply with all the Rules and Regulations; provided, however, that in the case of any conflict between the provisions of this Lease and any such Rules or Regulations, the provisions of this Lease shall control, and provided, further, that nothing contained in this Lease shall be construed to impose any obligation or duty upon Landlord to enforce the Rules and Regulations or the terms, covenants or conditions in any other leases against any other tenants, and provided, further, that Landlord shall not be liable to Tenant for violation of the Rules and Regulations and/or the terms of any other leases by any other tenants, their servants, employees, agents, visitors, invitees, subtenants or licensees. SECTION 26.07 INDEPENDENT OBLIGATIONS. This Lease and the obligations of Tenant to pay Rent and other charges, and to perform and comply with all other terms, covenants and conditions on the part of Tenant to be performed and complied with, shall not be affected, impaired or excused because of Landlord's delay or failure in performing or complying with any of the terms, covenants and conditions on the part of Landlord to be performed or complied with, or in Landlord's delay or failing to furnish any service or facility for any reason(s) beyond the reasonable control of Landlord, including, without limiting the generality of the foregoing, strikes, lockouts or labor problems, pre-emption in connection with an emergency by any Governmental Authority, or by reason of any rule, order or regulation of any department or subdivision thereof, of any Governmental Authority, or by reason of the conditions of supply and demand which have been or shall be affected by war or other emergency or general market conditions, provided that this paragraph shall in no event affect Tenant's other rights hereunder where Tenant shall not be able to use the Premises for 180 consecutive days. SECTION 26.08 APPORTIONMENTS AND PRORATIONS. Any apportionments or prorations of Base Rent or Additional Rent to be made under this Lease shall be computed on the basis of a three hundred sixty (360) day year, with twelve (12) months of thirty (30) days each. -37- SECTION 26.09 LANDLORD'S CONSENT. If Tenant requires Landlord's consent to perform any act pursuant to the terms of this Lease, Landlord, in its reasonable discretion, may refer such a matter to its attorneys and Tenant agrees to reimburse Landlord for its reasonable attorneys' fees and disbursements as an item of Additional Rent and shall be paid by Tenant within ten (10) days following written demand. SECTION 26.10 SIGNS. Unless Landlord shall have given its prior written consent, Tenant shall not install, paint, inscribe or maintain any lettering, name, sign, business designation, advertising or publicity device on the Land or on any exterior window or on any other interior or exterior portion of the Building. Tenant shall have obtained Landlord's prior approval as to location, size, color and style, which approval shall not be unreasonably withheld. SECTION 26.11 KEYS. On or before the Commencement Date, Tenant will furnish Landlord with one (1) full set of keys which will permit Landlord entry to all portions of the Premises. Such keys may be utilized by Landlord in the performance of any of Landlord's obligations or in connection with any of Landlord's rights as provided herein or by operation of law or otherwise, provided Landlord shall have no duty to enter, protect or defend the Premises, unless expressly provided herein. In the event Tenant shall cause the locks to any doors or entrance ways to the Premises to be changed at any time during the Term, Tenant shall promptly (within 24 hours) deliver to Landlord substitute keys which will permit Landlord to unlock the same and will permit Landlord with equivalent entry as existed prior to such change. If Tenant fails to deliver such substitute keys and Landlord is required or entitled to enter the Premises for whatever reason, Landlord shall suffer no liability to Tenant by reason of any forced entry or damage to the Premises resulting from its entry without keys and Tenant shall promptly (within 10 days) reimburse Landlord for any expenses Landlord may incur in connection with such entry to the Premises under such circumstances. SECTION 26.12 HOLDOVER. In the event Tenant shall remain in possession of the Premises after the Expiration Date, such holdover shall not be deemed to extend or renew the Term, provided that notwithstanding any other provision hereof, Tenant shall be liable for the payment of Rent, increased to include Base Rent at a rate which equals two hundred (200%) percent of the Base Rent charged Tenant immediately prior to such holdover until such holding over is terminated by the disposition of Tenant. The provisions of this Section shall not operate as a waiver by Landlord of any right of re-entry or any other remedies against Tenant as provided in this Lease or by law. In addition, in the event of such holdover, Tenant agrees to indemnify and hold Landlord harmless from all loss or liability resulting from such holdover, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded on such holdover. SECTION 26.13 TIME OF ESSENCE. Time is of the essence with respect to the performance of each and every term, covenant and agreement under this Lease to be performed by Tenant concerning the payment of Rent or other charges. -38- SECTION 26.14 CAPTIONS; SECTIONS; GENDER. The captions contained herein have been inserted for convenience only and shall not have the effect or modifying, amending or changing the express terms and provisions of this Lease. Whenever used, the singular number shall include the plural, the plural the singular, and use of any gender shall include all genders. SECTION 26.15 DELIVERY OF LEASE. The preparation of a draft of this Lease shall not be deemed an offer. No rights are to be conferred upon Tenant until this Lease has been signed by Landlord and an executed copy this Lease has been delivered to Tenant. This Lease is a joint effort of both parties hereto and is not to be construed against either party as having been prepared by such party. SECTION 26.16 ARBITRATION. Tenant may, at any time when not in default in the payment of any Rent, request arbitration of any matter in dispute where arbitration is expressly provided for in this Lease, and Landlord may at any time request arbitration of any matter in dispute. The party requesting arbitration shall do so by giving notice to that effect to the other party, specifying in said notice the nature of the dispute, and said dispute shall be determined in the City of Hartford, by a single arbitrator, in accordance with the rules then outstanding of the American Arbitration Association (or any organization which is the successor thereto). The award in such arbitration may be enforced on the application of either party by the order of a judgment of a court of competent jurisdiction. All costs and expenses associated with such arbitration shall be allocated by the arbitrator. SECTION 26.17 REPRESENTATION AS TO TENANT'S LEGAL STATUS. Tenant hereby represents that it is a duly organized and validly existing corporation in good standing under the laws of the State of Delaware and will promptly confirm the same upon request of Landlord in the manner so requested by Landlord. Tenant hereby authorizes Jeffrey Hazarian, its Chief Financial Officer, to execute this Lease on behalf of Tenant and to take all other acts and sign all other documents and instruments necessary to effectuate the transactions contemplated by this Lease. SECTION 26.18 NO RIGHTS UPON DEFAULT. Notwithstanding anything herein that may be construed to the contrary, Tenant shall no right to exercise any option or right herein granted to Tenant if Tenant is in default hereof at the time of such attempted exercise. By way of example and not by way of limitation, the types of Tenant rights and options contemplated by this paragraph include rights to (i) lease additional space, (ii) renew the term hereof, (iii) reduce the amount of space leased hereunder, (iv) purchase the Building or the property on which the Building is situated or (v) require Landlord to provide additional tenant fit-out. SECTION 26.19 SUBLEASING EXPENSES. Tenant shall reimburse Landlord for all costs and expenses, including Landlord's reasonable attorneys' fees, in connection with Tenant's desire to assign or sublease the Premises. -39- SECTION 26.20 HOTEL CONFERENCE FACILITIES. During the term hereof and while the Hotel is owned by the then Landlord hereunder, Tenant shall have the right to use the Hotel's conference facilities at a discount of 10% from rates then charged generally (but always subject to any rules applicable thereto, such as availability). Tenant shall keep this provision in strictest confidence, the breach of which shall terminate this provision. IN WITNESS WHEREOF, the parties have hereunto set their hands effective as of the date first set forth above. Signed, Sealed and Delivered LANDLORD: in the Presence of: GOODWIN SQUARE LLC By: Connecticut General Life Insurance Company, on behalf of its Separate Account Connecticut Its Manager /s/ MONA A. LEES - ----------------------------------- By: CIGNA Investments, Inc. Its Authorized Agent /s/ KATHLEEN B. CHRISTENSEN By: /s/ JAMES H. ROGERS - ----------------------------------- ----------------------- Name: James H. Rogers Title: Managing Director - ----------------------------------- TENANT: TENERA, INC. /s/ JAMES E. ROBISON By: /s/ JEFFREY R. HAZARIAN - ----------------------------------- -------------------------------- Its Chief Financial Officer (Duly Authorized) - ----------------------------------- -40- STATE OF CONNECTICUT) ) ss. COUNTY OF HARTFORD ) On this 22nd day of Nov, 1996, personally appeared James H. Rogers, as Managing Director of Cigna Investments, Inc., agent of Connecticut General Life Insurance Company, the manager of Goodwin Square LLC, signer and sealer of the foregoing instrument who acknowledged the same to be his free act and deed, and the free act and deed of said organization, before me. /s/ DONNA M. LUCENTE ------------------------------------ Notary Public/Commissioner of the Superior Court [Notary Seal stamped here] STATE OF CALIFORNIA ) ) ss. COUNTY OF SAN FRANCISCO ) On this 19th day of November, 1996, personally appeared Jeffrey Hazarian of TENERA, a Delaware corporation, signer and sealer of the foregoing instrument who acknowledged the same to be his free act and deed and the free act and deed of said corporation before me. /s/ LAURIE MCNAIR ------------------------------------ Notary Public/Commissioner of the Superior Court [Notary Seal stamped here] EXHIBIT A DESCRIPTION OF PREMISES [Diagram of floor plan of leased space] EXHIBIT B DESCRIPTION OF THE LAND ALL THAT CERTAIN piece or parcel of land located in the Town of Hartford, County of Hartford and State of Connecticut being more particularly bounded and described as follows: Beginning at a point which marks the southwest corner of the intersection of Asylum Street and Haynes Street; thence S 08 degrees l7' 46" W along the westerly line of Haynes Street a distance of Two Hundred Sixty-Four and eighty one-hundredths (264.80) feet to a point; thence N 87 degrees 33' 59" W along the northerly line of Pearl Street a distance of One Hundred Five and sixty- three one hundredths (105.63) feet to a point; thence N 08 degrees 25' 00" W along land now or formerly of the Roman Corporation a distance of Eighty-Six and no one-hundredths (86.00) feet to a point; then N 87 degrees 28' 31" W along lands now or formerly of the Roman Corporation, 253 Asylum Street Associates Limited Partnership and Dora M. Bartley, partly by each, a distance of One Hundred Twenty-Six and no one-hundredths (126.00) feet to a point; then N 07 degrees l9' 21" E along the easterly line of Ann Street a distance of One Hundred Thirteen and sixty-seven one-hundredths (113.67) feet to a point; thence S 87 degrees 28' 31" E along lands now or formerly of Louis Mornealt, et al., Anthony B. Cacase, et al., and Asylum Associates Limited Partnership, partly by each, a distance of One Hundred Twenty-Eight and four one-hundredths (128.04) feet to a point; then S 08 degrees 25' 00" W along land now or formerly of Asylum Associates Limited Partnership a distance of Seventy-Six and forty-eight one-hundredths (76.48) feet to a point; then S 81 degrees ll' 39" E along the southerly line of Asylum Street a distance of One Hundred Four and fifty one-hundredths (104.50) feet to the point or place of beginning. EXHIBIT C LANDLORD'S WORK [Diagram of floor plan of landlord's work to be done] EXHIBIT D RULES & REGULATIONS 1. The halls, corridors, passages, courts, atrium, outside sidewalks, lobbies, concourses, ramps, staircases, escalators and elevators shall not be obstructed by Tenant, or the employees, agents, servants, visitors or licensees of Tenant, or used for any purpose other than ingress and egress to and from the Demised Premises. No bicycles or motorcycles shall be brought into the Building or kept in the Demised Premises without the written consent of the Landlord. 2. No freight, furniture, or bulky matter of any description will be received into the Building or carried into the elevators except in such a manner, during such hours and using such elevators and passageways as may be approved by Landlord. The installation and moving of such freight, furniture or bulky material of any description shall be made upon previous notice to Landlord, and the persons employed by Tenant for such work must be reasonably acceptable to Landlord. Tenant may, subject to the provisions of the immediately preceding sentence, move freight, furniture, bulky matter or other material into or out of the premises on Saturdays between the hours of 8:30 a.m. and 6:00 p.m. provided tenant pays the additional cost, if any, incurred by Landlord for security guards and other expenses arising by reason of such move by Tenant. Any hand trucks, carryalls, or similar appliances used for the delivery or receipt of merchandise or equipment shall be equipped with rubber tires, side guards and such other safeguards as Landlord shall require. 3. Only persons authorized by Landlord will be permitted to furnish janitorial services, floor polishing, carpet cleaning, and other similar services to Tenant, and only at hours and under reasonable regulations fixed by Landlord. Tenant shall use no other method of heating or cooling than that supplied by Landlord. 4. Tenant, or the employees, agents, servants, visitors or licensees of Tenant, shall not at any time, place, leave or discard any rubbish, paper articles or objects of any kind whatsoever outside the doors of the Demised Premises or in the corridors or passageways of the Building. No animals or birds shall be brought or kept in or about the Building. 5. All blinds on exterior windows shall remain down at all times; and the windows in the Demised Premises shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills or in the halls or in any other part of the Building, nor shall any article be thrown out of the doors or windows of the Demised Premises. 6. Tenant shall not lay linoleum or other similar floor covering so that the same shall come in direct contact with the floor of the Demised Premises, and if linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt shall be first fixed to the floor by a paste or other material that may easily be removed with water, the use of cement or other similar adhesive being expressly prohibited. -2- 7. Canvassing, soliciting or peddling in the Building is prohibited and Tenant shall cooperate to prevent same. 8. Any person in the Building will be subject to identification by employees and agents of Landlord. All persons in or entering the Building shall be required to comply with the security policies of the Building. If Tenant desires any additional security service for the Demised Premises, Tenant shall have the right (with the advance written consent of Landlord) to obtain such additional service at Tenant's sole cost and expense. Tenant shall keep doors to unattended areas locked and shall otherwise exercise reasonable precautions to protect property from theft, loss or damage. 9. Only workmen employed by Tenant with Landlord's approval, which shall not be unreasonably withheld or delayed, or contracted with by Landlord for Tenant may be employed for repairs, installations, alterations, painting, material moving and other similar work that may be done in or on the Demised Premises. 10. Tenant shall not bring or permit to be brought or kept in or on the Demised Premises any inflammable, combustible, corrosive, caustic, poisonous, or explosive substance, or cause or permit any odors to permeate in or emanate from the Demised Premises or make, or permit to be made, unseemly or disturbing noises or interfere with other tenants or those having business with them. 11. Tenant shall not conduct any restaurant, luncheonette, automat or cafeteria or the sale of service of food or beverages to its employees or to others. The employees of the Tenant shall not be prohibited from preparing their individual meals in suitable microwave or other appliances. 12. No boring, driving of nails or screws, cutting or stringing of wires shall be permitted in the common areas of the Building, except with the prior written consent of Landlord, which consent shall not be unreasonably withheld. 13. Tenant shall give immediate notice to Landlord in case of theft, unauthorized solicitation, or accident in the Demised Premises or in the Building or of defects therein or in any fixtures or equipment, or of any known emergency in the Building. 14. Tenant shall not use the Demised Premises or permit the Demised Premises to be used for photographic, multilithor, multigraphic reproductions except in connection with its own business and not as a service for other except with Landlord's prior written permission. 15. Tenant shall not use or permit any portion of the Demised Premises to be used as an office for a public stenographer or typist, offset printing, the sale of liquor or tobacco, a barber or manicure shop, an employment bureau, a labor union office, a doctor's or dentist's office, a dance or music studio, any type of school, or for any use other than those specifically granted in the lease. -3- 16. Tenant shall not advertise for laborers giving the Demised Premises as an address, nor pay such laborers at a location in the Demised Premises. 17. The requirements of Tenant will be attended to only upon application at the office of Landlord in the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties, unless under special instructions from the office of Landlord. 18. Tenant shall not place a load upon any floor of the Demised Premises which exceeds the live load per square foot which such floor was designed to carry and which is allowed by law. Business machines and mechanical and electrical equipment belonging to Tenant which cause noise, vibration, electrical or magnetic interference, or any other nuisance that may be transmitted to the structure or other portions of the building, shall be placed and maintained by Tenant at Tenant's expense in settings of cork, rubber, spring type, or other vibration eliminators sufficient to eliminate noise or vibration. 19. Tenant shall not place, install, or operate within the Demised Premises or any other part of the Building any engine or machinery, or conduct mechanical operations therein, without the written consent of Landlord. 20. No portion of the Demised Premises or any other part of the Building shall at any time be used or occupied as sleeping or lodging quarters. 21. For the purpose of the Lease, holidays shall be deemed to mean and include the following: (a) New Year's Day; (b) Memorial Day; (c) Independence Day; (d) Labor Day; (e) Thanksgiving Day; (f) Christmas Day; (g) any other generally recognized holidays taken by tenants occupying at least one-half (1/2) of the Gross Rentable Area of the Building. 22. Tenant shall at all times keep the Demised Premises neat and orderly. 23. Tenant shall comply with security regulations as Landlord may from time to time adopt. Such regulations may provide for the carrying and/or display of security passes by any occupants of the Building during non-working hours and non-business days and such other days and hours as Landlord may deem necessary or desirable for the orderly management of the Building. 24. Landlord reserves the right to rescind, and reasonably amend any rules or regulations, to add reasonable new rules or regulations, and to waive any rules or regulations with respect to any tenant or tenants. 25. Tenant shall not permit the restriction of air flow from heating, ventilation or air conditioning diffusers by objects such as papers, books, furniture, wall hangings, etc. 26. Smoking or carrying lighted cigars, pipes or cigarettes in the elevators of the Building is prohibited. -4- 27. Tenant shall not make any alterations, changes or improvements to or in the Demised Premises which are not consistent with planned and existing physical conditions in the Building or which would affect any portion of the Building other than the Demised Premises. Without limiting the generality of the foregoing, Tenant shall not make any such alterations, changes or additions which would affect the heating, ventilating, air conditioning, electrical, plumbing, fire safety, security or other systems of the Building without in its sold discretion of such alteration, change, or improvement would, in the opinion of Landlord, increase the Operating Expense of the Building or have an adverse affect on the furnishing of such services to other tenants of the Building. EXHIBIT E SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT, made this _____ day of _________, 199_, between , a Connecticut __________ with offices at _____________________________, Connecticut (hereinafter called "Tenant"), _________________, a ___________ having its principal office and place of business at _________ Connecticut (hereinafter called "Lender"), and Goodwin Square Associates Limited Partnership, a limited partnership organized and existing under the laws of the State of Connecticut (hereinafter referred to as "Landlord"). WITNESSETH WHEREAS, the Tenant has entered into a certain lease (the "Lease") dated _______________, 199_, with Landlord covering premises within a certain building known as Goodwin Square (the "Premises"); and WHEREAS, the Lender has agreed to make a loan secured by a mortgage (the "Mortgage") covering the Premises to the Landlord; and WHEREAS, it is a condition precedent to obtaining said loan or was a condition of said loan, that said Mortgage securing said loan be a lien or charge upon the Premises unconditionally prior and superior to the Lease and leasehold interest of Tenant; and WHEREAS, Tenant acknowledges when it is recorded that said Mortgage constitutes, or will constitute, a lien or charge upon the Premises which is, or should be, unconditionally prior and superior to the Lease and leasehold interest of Tenant; and WHEREAS, Lender has been requested by Tenant and by Landlord to enter into a non-disturbance agreement with Tenant; NOW THEREFORE, in consideration of the promises and mutual covenants hereinafter contained, the parties hereto mutually covenant and agree as follows: 1. The Lease and any extensions, renewals, replacements or modifications thereof, and all of the right, title and interest of the Tenant in and to said Premises are and shall be subject and subordinate to the Mortgage and to all of the terms and conditions contained herein, and to any renewals, modifications, replacements, consolidations and extensions thereof. 2. Lender consents to the Lease and, in the event of foreclosure of said Mortgage, or in the event Lender comes into possession or acquires title to the Premises as a result of the enforcement of foreclosure of the Mortgage or the note secured thereby, or as a result of any other means, Lender agrees to recognize Tenant and further agrees that Tenant shall not be disturbed in its possession of the Premises for any reason other than one which would entitle the Landlord to terminate the Lease under its terms or would cause, without any further action by -2- such Landlord, the termination of the Lease or would entitle such Landlord to dispossess the Tenant from the Premises. 3. Tenant agrees with Lender that if the interests of Landlord in the Premises shall be transferred to and owned by Lender by reason of foreclosure or other proceedings brought by it, or any other manner, or shall be conveyed thereafter by Lender or shall be conveyed pursuant to a foreclosure sale of the Premises (and for purposes of this paragraph, the term "Lender" shall be deemed to include any grantee of the Lender or purchaser at foreclosure sale), Tenant shall be bound to Lender under all of the terms, covenants and conditions of the Lease for the balance of the term thereof remaining and any extensions or renewals thereof which may be effected in accordance with any option therefor in the Lease, with the same force and effect as if Lender were the Landlord under the Lease, and Tenant does hereby attorn to Lender as its Landlord, said attornment to be effective and self-operative without the execution of any further instruments on the part of any of the parties hereto immediately upon Lender succeeding to the interest of the Landlord in the Premises. Tenant agrees, however, upon the election of and written demand by Lender within sixty (60) days after Lender receives title to the Premises, to execute an instrument in confirmation of the foregoing provisions, satisfactory to Lender, in which Tenant shall acknowledge such attornment and shall set forth the terms and conditions of its tenancy. 4. Tenant agrees with Lender that if Lender shall succeed to the interest of Landlord under the Lease, Lender shall not be (a) liable for any action or omission of any prior landlord under the Lease, or (b) subject to any offsets or defenses which Tenant might have against any prior landlord, or (c) bound by any rent or additional rent which Tenant might have paid for more than the current month to any prior landlord, or (d) bound by any security deposit which Tenant may have paid to any prior landlord, unless such deposit is in an escrow fund which fund has been deposited with a Connecticut banking institution pursuant to a certain Pledge and Escrow Agreement to which Lender is a party, or (e) bound by any amendment or modification of the Lease made without Lender's consent, or (f) bound by any provision in the Lease which obligates the Landlord to erect or complete any building or to perform any construction work or to make any improvements to the Premises. Tenant further agrees with Lender that Tenant will not voluntarily subordinate the Lease to any lien or encumbrance without Lender's consent. 5. In the event that the Landlord shall default in the performance or observance of any of the terms, conditions or agreements in the Lease, Tenant shall give written notice thereof to the Lender and the Lender shall have the right (but not the obligation) to cure such default. Tenant shall not take any action with respect to such default under the Lease including without limitation any action in order to terminate, rescind or void the Lease or to withhold any rental thereunder, for a period of 30 days after receipt of such written notice thereof by the Lender with respect to any such default capable of being cured by the payment of money and for a period of 30 days after receipt of such written notice thereof by the Lender with respect to any other such default (provided, that in the case of any default which cannot be cured by the payment of money and cannot with diligence be cured with such 30-day period because of the nature of such default or because Lender requires time to obtain possession of the Premises in order to cure the default, if the Lender shall proceed promptly to attempt to obtain possession of the Premises, where possession is required, and to cure the same and thereafter shall prosecute the curing of such -3- default with diligence and continuity, then the time within which such default may be cured shall be extended for such period as may be necessary to complete the curing of the same with diligence and continuity). 6. This Agreement shall bind and inure to the benefit of the parties hereto, their successors an assigns. As used herein the term "Tenant" shall include the Tenant, its successors and assigns; the words "foreclosure" and "foreclosure sale" as used herein shall be deemed to include the acquisition of Landlord's estate in the Premises by voluntary deed (or assignment) in lieu of foreclosure; and the word "Lender" shall include the Lender herein specifically named and any of its successors and assigns, including anyone who shall have succeeded to Landlord's interest in the Premises by, through or under foreclosure of the Mortgage. 7. This Agreement shall be the whole and only agreement between the parties hereto with regard to the subordination of the Lease and leasehold interest of Tenant to the lien or charge of the Mortgage in favor of Lender, and, with respect to Lender and Tenant only, shall supersede and cancel any prior agreements as to such, or any, subordination, including, but not limited to, those provisions, if any, contained in the Lease, which provide for the subordination of the Lease and leasehold interest of Tenant to a deed or deeds of trust or to a mortgage or mortgages to be thereafter executed, and shall not be modified or amended except in writing signed by all parties hereto. 8. Tenant declares, agrees and acknowledges that it intentionally and unconditionally waives, relinquishes and subordinates the Lease and leasehold interest in favor of the lien or charge upon said land of the Mortgage above mentioned to the extent set forth in this Agreement, and, in consideration of this waiver, relinquishment and subordination, specific loans and advances are being and will be made and, as part and parcel thereof, specific monetary and other obligations are being an will be entered into which would not be made or entered into but for said reliance upon this waiver, relinquishment and subordination. 9. The use of the neuter gender in this Agreement shall be deemed to include any other gender, and words in the singular number shall be held to include the plural, when the sense requires. 10. Any notice required or allowed by this Agreement shall be in writing and shall be sent by certified or registered United States mail, postage prepaid, return receipt requested: If to Tenant: If to Landlord: If to Lender: The parties may, by written notice to the others, designate a different mailing address for notices. -4- IN WITNESS WHEREOF, the parties hereto have placed their hands and seals the day and year first above written. Signed and acknowledged in TENANT: the presence of us: By: - ---------------------------- -------------------------------- Its - ---------------------------- LENDER: [ ] By: - ---------------------------- -------------------------------- Its - ---------------------------- LANDLORD: GOODWIN SQUARE LLC By: Connecticut General Life Insurance Company, on behalf of its Separate Account Connecticut Its Manager By: CIGNA Investments, Inc. - ---------------------------- Its Authorized Agent By: - ---------------------------- ------------------------ Name: Title: EXHIBIT F JANITORIAL SERVICES 1. Maintain recycling program, including providing appropriate receptacles. DAILY SERVICES 1. Empty wastebaskets and transport collected waste to trash handling areas. Replace soiler liners, as required. 2. Empty, damp clean and polish all ashtrays - inside and out. 3. Clean and service sand urns. 4. Clean and sanitize water fountains. WEEKLY SERVICES 1. Spot clean all furniture. 2. Low dust to hand height all horizontal surfaces of equipment, ledges, sills and baseboards. 3. Dust, spot clean glass and straighten all pictures, frames, charts, graphs and similar wall hangings. 4. Dust all partitions, doors and door frames. 5. Polish all metal brightwork. 6. Clean and vacuum all metal entrance and elevator saddles. MONTHLY SERVICES 1. Dust exterior of lighting fixtures. -2- REST ROOM CLEANING DAILY SERVICES 1. Clean, polish and sanitize all vitreous fixtures, including toilet bowls, urinals and sinks using a germicidal detergent solution. 2. Clean and polish all chrome fittings and brightwork, including shelves, flushometers and metal dispensers. 3. Clean and sanitize both sides of toilet seat with a germicidal detergent. 4. Clean and polish all glass and mirrors. 5. Empty all containers and disposals. Waste and refuse will be removed to designated areas. 6. Wash and sanitize exterior of all containers. 7. Empty, sanitize and replenish interior of sanitary napkin containers. 8. Empty and damp clean ashtrays. 9. Remove soil from doors, frames, light switches, kick and push plates, handles, etc. 10. Refill all dispensers (napkin, soap, tissue, towels, liners, cups). Supplies to be furnished by Landlord. 11. Spot clean all dispensers and receptacles. 12. Wet mop or wash entire floor with a germicidal disinfectant cleaning solution. 13. Low dust all horizontal surfaces to hand height. Low dusting includes sills, moldings, ledges, shelves, frames, vents, radiators, partitions, etc. MONTHLY SERVICES 1. Wash and sanitize all partitions, tile walls and enamel surfaces. -3- QUARTERLY SERVICES 1. Dust exterior of light fixtures. 2. High dust above hand height all horizontal surfaces. High dusting includes shelving, moldings, ledges, partitions, pipes, vents, heating outlets, etc. STAIRWAYS WEEKLY SERVICES 1. Dust mop landings, risers, rails, etc. three times per week. 2. Spot clean soils and spills. 3. Damp mop to control soil build-up. 4. Wash to control soil build-up on all handrails and guard rails in stairways. VINYL FLOORS DAILY SERVICES 1. Police for litter. WEEKLY SERVICES 1. Dust mop or sweep. 2. Spot mop soil and spills. 3. Damp mop. CARPETED FLOOR SURFACES DAILY SERVICES 1. Vacuum clean all traffic areas and obviously soiled carpeted surfaces. 2. Inspect for spots and stains. Spot clean and remove if possible. WEEKLY SERVICES 1. Vacuum all exposed difficult areas, such as under desks, wires, tables, counters, in difficult corners, baseboards and edges. -4- UPON REQUEST 1. Carpet shampooing will be performed and invoiced as an extra cost. GLASS DAILY SERVICES 1. Spot clean lobby window glass. MONTHLY 1. Completely wash and clean both sides of entrance glass doors. QUARTERLY SERVICES 1. Wash and clean the interior of exterior windows. SEMI-ANNUALLY 1. Clean exterior of exterior windows. EX-23.1 3 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-58982) pertaining to the 1992 Stock Option Plan of TENERA, Inc., as amended, of our report dated January 24, 1997, with respect to the consolidated financial statements and schedule of TENERA, Inc., included in the Form 10-K for the year ended December 31, 1996. ERNST & YOUNG LLP San Francisco, California March 27, 1997 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS Dec-31-1996 Jan-01-1996 Dec-31-1996 3,964 0 4,745 1,626 0 7,617 323 0 7,940 3,062 0 5,802 0 0 0 7,940 0 24,003 0 15,527 9,808 50 (165) (1,217) (137) (1,080) 0 0 0 (1,080) (0.11) (0.11)
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