-----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, FKe6SMMpVYAYj78KfUAwJN+3l5wOiejyyxcrjMyH4xfUwdCvLTFQz8gFdTnhFlPH nNbr9OpZ1/pEMNE9ogrLtg== 0000897101-99-000294.txt : 19990331 0000897101-99-000294.hdr.sgml : 19990331 ACCESSION NUMBER: 0000897101-99-000294 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGNIA SYSTEMS INC/MN CENTRAL INDEX KEY: 0000875355 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 411656308 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13471 FILM NUMBER: 99577218 BUSINESS ADDRESS: STREET 1: 10801 RED CIRCLE DR CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129308200 MAIL ADDRESS: STREET 1: 10801 RED CIRCLE DRIVE STREET 2: 10801 RED CIRCLE DRIVE CITY: MINNETONKA STATE: MN ZIP: 55343 10-K 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1998 Commission File Number 0-19380 - -------------------------------------------------------------------------------- INSIGNIA SYSTEMS, INC. ------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1656308 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 5025 Cheshire Lane North Plymouth, MN 55446-3715 ----------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (612) 392-6200 -------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value --------------------------------------------------------------------- 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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Number of shares of outstanding Common Stock, $.01 par value, as of March 25, 1999 was 8,651,496. 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 or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 25, 1999 was approximately $17,302,992 based upon the last sale price of the registrant's Common Stock on such date. Documents Incorporated By Reference: Portions of the registrant's proxy statement for the Annual Meeting of Shareholders scheduled for May 20, 1999 are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS PART I.........................................................................1 Item 1. Business...........................................................1 Item 2. Properties.........................................................7 Item 3. Legal Proceedings..................................................8 Item 4. Submission of Matters to a Vote of Security Holders................8 Item 4A. Executive Officers of the Registrant..............................8 PART II........................................................................9 Item 5. Market for the Registrant's Common Equity..........................9 Item 6. Selected Financial Data...........................................10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................10 Item 8. Financial Statements and Supplementary Data.......................15 Item 9. Disagreements with Accountants on Accounting and Financial Disclosures.......................................................16 PART III......................................................................16 Item 10. Directors and Executive Officers of the Registrant...............16 Item 11. Executive Compensation...........................................16 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................................16 Item 13. Certain Relationships and Related Transactions...................16 PART IV.......................................................................17 Item 14. Exhibits, Schedule and Reports on Form 8-K.......................17 PART I. Item 1. Business GENERAL Insignia Systems, Inc. (the "Company") markets in-store promotional programs and services to retailers and manufacturers. Since its inception in 1990, the Company has marketed point-of-purchase merchandising systems and resources to merchants in over 30 classes of retail trade. The Company started with simple standalone printers, trade-named Impulse(R) and SIGNright(R), and ultimately developing fully featured ODBC (open data-based connectivity) compliant software applications, trade-named Stylus(R). The Company has evolved to market turn-key solutions that allow retailers to quickly and easily produce high quality point-of-purchase signs, labels and large format promotional materials in their stores. The Company continues to support the supply and service needs of domestic clients of these in-store printing systems and actively markets these products internationally through independent distributors. In May of 1998, the Company formally launched the Insignia Point-Of-Purchase-Services (POPS(TM)) program. Insignia POPS is an account and product-specific, in-store promotion program. Funded by consumer goods manufacturers, Insignia POPS combines product selling information and graphics supplied by the manufacturer with the retailer's logo and current store price on a sign designed to fit each participating retailer's decor and merchandising theme. For participating retailers, Insignia POPS is a source of new revenue and is the first in-store promotion program that delivers a complete call-to-action, on an account and store-specific basis, with all participating retail stores updated weekly. For consumer goods manufacturers, the POPS program provides access to the optimum retail promotion site for their products - the retail shelf edge. In addition, the POPS program offers manufacturers lead-times of less than 30 days, no production costs and micro-marketing capabilities such as store-specific messaging and multiple language options. Company management has been investing the Company's primary resources and energies in the development of the Insignia POPS program for the last three years. During this time, management has also been restructuring the organization and redirecting the Company's activities to leverage the Company's in-store experience, acquire the promotion industry expertise and develop the necessary operational and systems foundation to successfully compete in the in-store promotion industry. In November, 1996 the Company replaced the Impulse Retail System with the SIGNright system, which performed essentially the same functions as the Impulse. The Company's business strategy with the Impulse system and the SIGNright system was to obtain both initial revenue from the sale of electronic sign production equipment and software, and recurring revenue from the sale of the sign cards, label supplies, and accessories used with them. In 1998, the Company eliminated the direct sale of the SIGNright system in the United States, but will continue to market the SIGNright system through its international sales representatives. The Company's second product, a PC-based software product tradenamed Stylus, is used by retail chains to produce signs, labels, and posters. The Company's third product, Insignia POPS, combines the Company's expertise in signage and in-store merchandising with its Stylus software products to provide for a unique sign to be ordered by a Page 1 brand manufacturer and placed in a participating retail store. The Company markets its Stylus software and the Insignia POPS through a direct marketing process. The sign systems are marketed through independent distributors in foreign markets and its accessories and supplies principally through telemarketers. INDUSTRY AND MARKET BACKGROUND Product manufacturers are constantly seeking in-store ways to motivate consumers to buy that particular manufacturer's product. Industry studies have proven that the shelf edge sign represents the final and best opportunity for the manufacturer to convince the consumer to buy. The Company estimates that manufacturers now spend approximately $1 billion annually on in-store efforts. The Company's market studies indicate that in-store signs are the most effective means of inducing a purchase, second only to personal demonstrations and sampling. The Company's marketing studies also indicate that the most effective sign contains information that can be best supplied by the product manufacturer in combination with the retailer's price and design look. COMPANY PRODUCTS INSIGNIA POPS (POINT OF PURCHASE SERVICES) The Insignia POPS program is an in-store point-of-purchase promotional program which enables manufacturers to deliver account-specific promotional messages quickly and accurately - in designs and formats that have been pre-approved and supported by participating retailers. By utilizing proprietary technology, Insignia combines product-specific information including product features, product benefits, a graphic image and an advertising tag line supplied by consumer goods manufacturers, together with the retailer's logo, colors and the current store price on a sign that is displayed directly in front of the manufacturer's product in participating retail stores. Insignia POPS signs are responsive to each participating retailers' look, quality, content and consistency of promotion materials displayed in-store, while ensuring retailer pricing authority. Insignia POPS signs, including the retailer's logo, design, color and price in combination with the manufacturer's selling messages and images, are created and printed by the Company and placed at the shelf by store personnel for two-week display cycles. The Company collects and organizes data from both manufacturers and retailers, then formats, prints and delivers the signs to retailers for distribution and display. The Company will charge the manufacturer, on average, $4.75 per sign/per week/per store. Retailers are paid a flat fee per/sign per/display cycle by the Company based upon third-party compliance audits and retailer-supplied product movement data provided to Insignia. STYLUS SOFTWARE In late 1993, the Company introduced its second major product, tradenamed Stylus, which is a PC-based software product used by retailers to produce signs, labels, and posters. The Company believes that the primary market for the Stylus software is large independent retailers and retail chains. The Company estimates that there are approximately 350,000 such retail locations in the U.S. The Stylus software allows retailers to create signs, labels, and posters by manually entering the information for the sign or by importing information from a computer database. Retailers can Page 2 import barcode and price information from their point-of-sale system and can add a graphic image of the product from a CD-ROM containing branded clip-art. They can also create a database of selling information such as product features and benefits, nutritional information, or lifestyle-type uses for the product which can be added to create a more informative sign or label. A significant portion of the retail marketplace is made up of chain retailers who require that signs be consistent and controlled from headquarters. Most chain retailers continue to create their signs at their headquarters, duplicate them and deliver them to their stores. The headquarters version of the Company's Stylus software allows chains to create signs and labels centrally to maintain consistency in appearance, and then transmit to store-level printers. The Company believes the Stylus software product has significant benefits for chain retailers. The current retail price of the Stylus software is $2,495 for the single store version and $4,990 for the headquarters version. The Company also sells the sign cards and labels used with the Stylus software in a variety of sizes, colors, and styles. The Company sells these supplies at competitive prices, but is not in a proprietary position. THE SIGNRIGHT SYSTEM The Impulse Retail System was developed by an independent product design and development firm (the "Developer"). In November 1996, the Company replaced the Impulse Retail System with the SIGNright system. In 1998, the Company eliminated the domestic sale of the SIGNright system. The Company's business strategy with the Impulse system and the SIGNright system was to obtain both initial revenue from the sale of electronic sign production equipment and software, and recurring revenue from the sale of the sign cards, label supplies, and accessories used with them. Sign cards for the SIGNright system and Impulse Retail System are sold by the Company in a variety of sizes, colors and combinations and can be customized to include pre-printed custom artwork (such as the retailer's logo) as required by the customer. Approximately 53% of 1998 revenues came from the sale of sign cards and the Company expects that this percentage will be slightly lower in the future as the Company expects the Insignia POPS revenue to increase in the future. MARKETING AND SALES The Company's marketing strategy is to focus on food manufacturers and food retailers. By utilizing the Insignia POPS program, food manufacturers and food retailers can easily accomplish what had previously been either impossible or extremely difficult: tailoring national promotional programs to regional and local needs with minimal effort. In addition to the benefits provided to manufacturers and retailers, POPS media allows for more information to be provided to consumers to aid in purchasing decisions, and because the POPS media is consistent in format and design, consumer messages are clearer. The Company believes Insignia POPS is the most complete in-store media promotion program available, benefiting consumer, retailer, and manufacturer. The Company markets its Stylus software in the United States and internationally primarily through resellers that integrate Stylus as an ODBC design and publishing component into their retail data and information management software applications. Page 3 Through April 1998, the Company marketed the SIGNright system through telemarketing by in-house sales personnel and independent sales representatives. In May 1998, the Company discontinued the sale of the SIGNright system to U.S. customers, but continues to market the SIGNright system through its international sales representatives covering 20 countries. During 1996, 1997 and 1998 foreign sales accounted for approximately 16%, 14% and 16% of total sales, respectively. The Company expects that sales to foreign distributors will be approximately 14% of total sales in 1999. PATENTS AND TRADEMARKS The Developer has entered into a joint venture agreement with a Japanese firm (the "Supplier") to manufacture and supply the SIGNright system. The Supplier has entered into an exclusive supplier agreement whereby the Company would have the exclusive distribution rights of the SIGNright system. The manufacturing agreement required the Company to purchase 24,000 units by October 31, 1998. However, the Company was unable to sell this number of units by October 31, 1998. Therefore, the Developer could grant the same manufacturing rights for the SIGNright system to another party. However, the Developer has stated it does not presently intend to grant similar manufacturing rights to any other party. The Company is not presently aware of any patents of third parties which the SIGNright system would infringe. There can be no assurance, however, that such conflicting rights do not exist, in which event the Company would be unable to sell its product without obtaining a license from others. There is no assurance the Company would be able to obtain any such license on satisfactory terms, or at all. The barcode which the Company uses on the sign cards for the Impulse and SIGNright systems was also developed by the Developer, which has granted the Company an exclusive worldwide license of its rights to the barcode. The license requires the Company to pay a royalty of 1% of the net sales price received by the Company on each sign card or other supply item that bears the barcode and used by the Impulse Retail Systems. Although a patent has been issued to the Developer which covers the use of the barcode, there is no assurance that the Company will be able to prevent other suppliers of sign cards from copying the barcode used by the Company. However, the Company believes that the number, relatively small size and geographic dispersal of Impulse and SIGNright users, their relationship with the Company, and the Company's retention of its customer list as a trade secret will discourage other sign card suppliers from offering barcoded sign cards for use on the Impulse and SIGNright machines. The Company has obtained trademark registration in the United States of the trademark "Insignia POPS" for use on in-store point-of-purchase media. The Company is not obligated to pay any royalty related to this trademark. The Company has obtained trademark registration in the United States of the trademark "Impulse" for use on sign production machines. The Company is not obligated to pay any royalty related to this trademark. Page 4 The Company has obtained trademark registration in the United States of the trademark "SIGNright" for use on sign production machines. The Company is not obligated to pay any royalty related to this trademark. The Company has obtained trademark registration in the United States of the trademark "Stylus" for use on sign and label software. The developer of the DOS version of the Stylus software has granted to the Company an exclusive worldwide license to market and sell the DOS version of the Stylus software. The Company no longer sells and markets the DOS version of the Stylus software and has terminated this license agreement. The Company has developed the Windows version of the Stylus software which it is now marketing and selling. PRODUCT DEVELOPMENT The Company's product development activities for the Insignia POPS program have been conducted internally and include the proprietary data management and operations system as well as the current offering of point-of-purchase display promotion products. Ongoing internal systems enhancements as well as the development of point-of-purchase and other promotion products will be conducted utilizing both internal and external resources as appropriate. The Company's product development activities on the SIGNright system were primarily conducted by the Developer on a contract basis. The Company continues to introduce various additional complementary products such as new sign card formats, new colors and new types of sign cards. The Stylus software product was initially developed on a contract basis beginning in 1992 and continuing through 1997. Beginning in 1993, the Company hired in-house employees to develop and modify portions of the Stylus software product. The Company plans no further development to its existing Stylus software products. Product development costs of $498,160 in 1996, $493,686 in 1997 and $407,409 in 1998 were primarily related to development of the Stylus software product. SUPPLIERS The Company has no plans to develop an in-house manufacturing capability for the SIGNright machine and is obligated to purchase the SIGNright machine from the Supplier. Prices under the supply agreement are fixed in Japanese yen. The Company owns certain tooling for the SIGNright machine which is used by the Supplier. The Company believes there are other manufacturers capable of manufacturing and providing the SIGNright machine on comparable terms. However, the time required to locate and qualify another supplier could cause a delay in the manufacturing process that might have a serious adverse effect on the Company. The thermal paper used by the Company in its SIGNright and Impulse thermal sign cards is purchased exclusively from one supplier. While the Company believes that an alternative supplier would be available if necessary, any disruption in the relationship with or deliveries by the current supplier could have a serious adverse effect on the Company. Page 5 COMPETITION INSIGNIA POPS (POINT-OF-PURCHASE-SERVICES) Insignia POPS has three major competitors in its market: News America Marketing In-Store (News America), Catalina Marketing Corporation (Catalina) and FLOORgraphics(TM), Inc. (FLOORgraphics). News America offers a network of in-store advertising, promotion and sales merchandising services. News America has branded all of their in-store products with their FSI coupon business as SmartSource(TM). Catalina offers more than 20 strategic marketing solutions that provide targeted communications and incentives at the checkout based on consumer's actual purchase behavior. These marketing solutions include a scanner-based network and in-store electronic marketing programs. FLOORgraphics is an in-store media company that projects national advertising campaigns at retail point-of-sale through large format, full color "floor billboards." Placed on a category exclusive basis, FLOORgraphics activate recall of national ad campaigns at point-of-sale. The Insignia POPS main strengths, in relation to its competition are: - the linking of manufacturers to retailers at a central coordination point - providing a complete call to action - supplying account-specific and store-specific messages at the retail shelf THE SIGNRIGHT SYSTEM The Company's patent covers the SIGNright system and the use of sign card encoded with a complementary barcode. The Company could face competition from suppliers of sign cards who duplicate the barcode used by the Company. Management believes that the number, relatively small size, and geographic dispersal of its customers, their relationship with the Company, and the Company's retention of its customer list as a trade secret will discourage such competition. However, there is no assurance that such competition will not develop. STYLUS SOFTWARE Stylus software has three major competitors in its market: Access, Inc. (Access), Electronic Label Technology, Inc. (ELT), and Retail Technologies, Inc. (RTI). Access offers a product called dSIGN, which by its very nature of requiring individual customization is focused more toward large retail chains. ELT sells numerous versions of LabelMaster. RTI markets Design-R-Labels. The Company believes that its complete line of Stylus products compares favorably on features, benefits, cost, performance, and ease of use and implementation to that of its main competitors. The Company has several products and can provide solutions to operate in the following environments: UNIX/AIX, AS/400, MD-DOS, Windows 3.1/95/NT, OBDC, or with stand-alone printers. The Company's main strengths, in relation to its competition are: merchandising, large format printing, high speed printing, image handling, ease of use, and rapid implementation for their products, services and offerings. Unlike the SIGNright system, the Stylus product does not offer the Company the benefit of proprietary sign card stock. While this leaves customers free to buy stock from alternate suppliers, the Company believes that it will capture a significant portion of sign card and label sales due to the wide array of pre-printed and perforated sign and label stock offered by the Company at competitive prices. Page 6 RESTRUCTURING PROGRAM During January 1998, the Company implemented a restructuring program (Program) to achieve a more focused marketing strategy regarding the selling of SIGNright machines. This marketing strategy eliminated the marketing and selling of SIGNright machines through direct channels. This resulted in the Company streamlining and downsizing its operations by reducing its workforce and consolidating certain employee groups. As a result of this Program, the Company reduced its workforce from 130 full time employees to 93 full time employees. The Company took a charge to earnings in December 1997 due to this restructuring in the amount of $315,000. During April 1998, the Company initiated a further restructuring program to redirect the Company's marketing strategy toward the Insignia POPS program. This marketing strategy eliminated the marketing and selling of SIGNright machines domestically. As a result of this program, the Company reduced its workforce from 93 full time employees to 65 full time employees. The Company took a charge to earnings in 1998 due to this restructuring in the amount of $546,000. This $546,000 charge is comprised of a $196,000 write-down of a prepayment made to its Japanese vendor for SIGNright machines, a $106,000 charge for the write-off of SIGNright machines, a $15,000 charge for moving expenses, a $47,000 charge for accrued rental costs associated with a portion of the lease of the facility which in 1998 was permanently idle and separate from the remaining utilized lease space, and severance costs in the amount of $182,000 as a result of the workforce reduction. EMPLOYEES As of March 12, 1999, the Company had 66 full-time employees. The full-time employees included 2 in telemarketing, 16 in other sales and marketing positions, 38 in operations and customer service, 7 in administration and accounting functions and 3 in senior management positions. None of the Company's employees are represented by unions. Item 2. Properties The Company is located in approximately 26,000 square feet of office and warehouse space in suburban Minneapolis, Minnesota, which has been leased until December 2004. The Company believes that this facility is more than adequate to meet the Company's current and foreseeable needs. Page 7 Item 3. Legal Proceedings In December 1997, Meta-4, Inc., the developer of the DOS version of the Company's Stylus software product, brought suit against the Company in U.S. District Court in the District of Minnesota. The complaint alleged copyright infringement and breach of contract in connection with the Company's distribution of the Company's Stylus software product. This lawsuit was settled in March 1999. Under the settlement Meta-4 assigned all its rights to the Stylus software to the Company in consideration of $15,000 in cash and 75,000 shares of the Company's common stock. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1998. Item 4A. Executive Officers of the Registrant The names, ages and positions of the Company's executive officers are as follows: Name Age Position - -------------------------------------------------------------------------------- G. L. Hoffman 49 Chairman and Secretary Scott F. Drill 46 President and Chief Executive Officer Gary L. Vars 58 Executive Vice President, General Manager, POPS Division John R. Whisnant 53 Vice President, Finance and Chief Financial Officer G. L. Hoffman, a co-founder of the Company, has been the Chairman and Secretary of the Company since it was incorporated in January 1990 and was President and Chief Executive Officer from January 1990 until February 1998. Prior to that time he was a co-founder of Varitronic Systems, Inc., which develops, manufactures and markets business graphic products. Mr. Hoffman was employed as Chairman, Executive Vice President and Secretary of Varitronics from 1983 until January 1990. Mr. Hoffman also had primary responsibility for developing Varitronics' international marketing and private label distribution systems. Scott F. Drill, has been President and Chief Executive Officer of the Company since February 24, 1998. Since May 1996 Mr. Drill was a partner in Minnesota Management Partners (MMP), a venture capital firm located in Minneapolis, Minnesota. He remains a partner in MMP, which completed investment of its capital in January 1998. From 1983 through March 1996 Mr. Drill was President and Chief Executive Officer of Varitronic Systems, Inc. and Chairman since 1990. Prior to starting Varitronics, Mr. Drill held senior management positions in sales and marketing at Conklin Company and Kroy, Inc. Gary L. Vars has been Executive Vice President and General Manager of the POPS Division since September 15, 1998. Prior to joining Insignia Systems Mr. Vars spent 22 years as a marketing and business development consultant to Fortune 500 companies. From 1966 to 1976 Mr. Vars held Page 8 various management positions at the Pillsbury Co., including Director of Marketing and New Product Development, Grocery Products Division. John R. Whisnant joined the Company as Vice President of Finance and Chief Financial Officer of the Company in October 1995. From June 1994 to September 1995 he was self employed as a franchise consultant. From June 1992 to June 1994 he served as President of AmericInn, Inc. a motel franchising company. PART II. Item 5. Market for the Registrant's Common Equity MARKET INFORMATION The Company's common stock trades on the Nasdaq Small-Cap Market System under the symbol ISIG. The following table sets forth the range of high and low bid prices reported on the Nasdaq System. These quotations represent prices between dealers and do not reflect retail market-ups, mark-downs or commission. 1998 High Low ----------------------------------------------------- First Quarter 1-15/16 1 Second Quarter 2-15/16 1-5/32 Third Quarter 3 1-1/2 Fourth Quarter 2-3/8 1 1997 High Low ----------------------------------------------------- First Quarter 4-5/8 1-13/16 Second Quarter 4 2-5/16 Third Quarter 3-3/8 2-1/2 Fourth Quarter 2-5/8 1-1/32 APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of March 17, 1999, the Company had 147 shareholders of record and approximately 855 beneficial owners. DIVIDENDS The Company has never paid cash dividends on its common stock. The Board of Directors presently intends to retain all earnings for use in the Company's business and does not anticipate paying cash dividends in the foreseeable future. Page 9 Item 6. Selected Financial Data (In thousands, except per share amounts.)
For the Years Ended December 31 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Net sales $ 8,704 $ 13,321 $ 14,667 $ 15,547 $ 16,304 Operating income (loss) (3,396) (3,393) (999) (1,470) (947) Net income (loss) (3,416) (3,380) (999) (1,451) (909) Net income (loss) per share: Basic and diluted $ (.44) $ (.50) $ (.18) $ (.27) $ (.17) Shares used in calculation of Net loss per share: Basic and diluted 7,714 6,790 5,404 5,360 5,203 Working capital $ 2,232 $ 3,462 $ 3,512 $ 4,351 $ 4,952 Total assets 4,069 5,855 6,426 6,832 8,107 Long-term debt and lease obligation 72 186 289 383 -- Total stockholders' equity 2,430 3,795 4,174 5,118 6,413
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items in the Company's statements of operations as a percentage of net sales.
Year Ended December 31 1998 1997 1996 - ------------------------------------------------------------------------- Net Sales 100.0% 100.0% 100.0% Cost of Sales 53.7 51.3 48.2 - ------------------------------------------------------------------------- Gross Profit 46.3 48.7 51.8 Operating Expenses: Sales and Marketing 51.3 53.0 42.5 Product Development 4.7 3.7 3.3 General and Administrative 23.1 15.1 12.8 Restructuring Charge 6.3 2.4 -- - ------------------------------------------------------------------------- Total Operating Expenses 85.4 74.2 58.6 - ------------------------------------------------------------------------- Operating Loss (39.0) (25.5) (6.8) Other Income (0.2) 0.1 -- - ------------------------------------------------------------------------- Net Loss (39.2)% (25.4)% (6.8)% - -------------------------------------------------------------------------
Page 10 FISCAL 1998 COMPARED TO FISCAL 1997 NET SALES: Net sales for the year ended December 31, 1998 decreased 35% to $8,704,000 compared to sales of $13,321,000 in 1997. The decrease in sales in 1998 resulted primarily from discontinuing domestic sales of the SIGNright machine in 1998 and significantly lower Stylus software revenue. Machine and machine related revenue was $997,000 in 1998 compared to $3,500,000 in 1997. Stylus software revenue was $532,000 in 1998 compared to software revenue of $1,597,000 in 1997. GROSS PROFIT: The Company's gross profit decreased 38% in 1998 to $4,033,000 as compared to 1997. Gross profit as a percentage of net sales decreased to 46.3% for 1998 compared to 48.7% for 1997. The decrease in 1998 was due primarily to the overall decrease in net sales and change in product mix. Also, the Company's fixed costs did not decrease in the same proportion as net sales decreased in 1998. The Company's foreign sales were 16% in 1998, 14% in 1997 and 16% in 1996. The Company expects that sales to foreign distributors will be approximately 14% in 1999. OPERATING EXPENSES: Operating expenses decreased 25% in 1998. In 1998 the Company recorded a restructuring charge of $546,000, offset by a $2,620,000 decrease to sales expenses as a result of the restructuring which accounted for the 25% overall decrease in operating expenses in 1998. Sales expenses decreased 58% in 1998. The decrease in 1998 was due primarily to the restructuring of the Company and elimination of SIGNright sales personnel. Marketing expenses also decreased 53% in 1998 as a result of an expense reduction effort and the restructuring of the Company. Product development expenses decreased 17% in 1998 as the Company eliminated any further independent product development of its Stylus software. The Company expects that its operating expenses will increase in 1999 as the Company continues to invest in the POPS program. Operating expenses as a percentage of net sales were 85.4% in 1998. The increase as a percentage of net sales in 1998 was due primarily to the lower sales volume of the SIGNright machine and Stylus software. The Company expects its operating expenses as a percentage of net sales to decrease and its net sales to increase at a faster rate than operating expenses as the Company is able to leverage its fixed expenses and increase its POPS program revenues. NET LOSS: The Company had a net loss of $3,416,000 in 1998 compared to a net loss of $3,380,000 in 1997. The net loss in 1998 resulted primarily from a substantial decrease in net sales and a decrease in margins due to a higher proportion of fixed expense allocated to lower sales, along with a restructuring charge of $546,000 and the increased costs of investing in the Insignia POPS program. FISCAL 1997 COMPARED TO FISCAL 1996 NET SALES: Net sales for 1997 decreased 9% compared to sales of $14,667,000 in 1996. The decrease in sales in 1997 compared to 1996 resulted primarily from a decreased demand for the SIGNright machine compared to the demand for the Impulse machine in 1996 and a lower sales price for the SIGNright machines. Page 11 GROSS PROFIT: The Company's gross profit decreased 15% in 1997 as compared to 1996. Gross profit as a percentage of net sales decreased to 48.7% for 1997 compared to 51.8% for 1996. The decrease in 1997 was due primarily to the overall decrease in net sales in 1997. Also, the Company's fixed costs did not decrease in the same proportion as net sales decreased in 1997. OPERATING EXPENSES: Operating expenses increased 15% in 1997 compared to 1996. In 1997 the Company recorded a restructuring charge of $315,000 and also introduced its Insignia POPS program and incurred $1,007,000 of sales expenses which accounted for the 15% increase in 1997. Sales expenses increased 27% in 1997. The increase in 1997 was due to the introduction of the Insignia POPS program. Marketing expenses decreased 19% in 1997. This decrease was a result of an expense reduction effort. General and administrative expenses increased 7% in 1997. The increase in 1997 was due primarily to an increase in rent and bad debt expense. Product development expenses decreased 1% in 1997. Operating expenses as a percentage of net sales were 74.2% in 1997 compared to 58.6% in 1996. The increase as a percentage of net sales in 1997 was due primarily to the lower sales volume of the SIGNright machine. NET LOSS: The Company had a net loss of $3,380,000 in 1997 compared to a net loss of $999,000 in 1996. The net loss in 1997 resulted primarily from a substantial decrease in net sales and a decrease in margins due to a higher proportion of fixed expense allocated to lower sales, along with a restructuring charge of $315,000. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations with proceeds from public and private equity placements. At December 31, 1998, working capital was $2,232,000 compared to $3,462,000 at December 31, 1997. During the same period total cash and cash equivalents increased $655,000 to $1,120,000. Net cash used in operating activities during 1998 was $830,000, primarily due to the net loss and the increase in accrued expenses, offset by the decrease in accounts receivable, inventory, prepaids and other liabilities. Accounts receivable decreased $1,360,000 in 1998 as extended term payment plans were paid down during 1998. Inventory decreased $407,000 primarily due to the Company's decision to reduce its inventory levels of SIGNright machines. Prepaid expenses decreased $352,000 primarily due to the write-off of SIGNright machine deposits. The Company expects accounts receivable to remain relatively flat during 1999. The Company also expects inventory levels to remain flat during 1999. Net cash of $740,000 was used in investing activities in 1998. The net cash decrease was due to the purchase of marketable securities in the amount of $1,701,000 offset by the maturity of marketable securities in the amount of $1,046,000 and the purchase of property and equipment of $116,000. Net cash of $1,569,000 was provided by financing activities, primarily from the proceeds from the issuance of common stock of $2,038,000 offset by principal payments on long term debt of $103,000 and payments to the line of credit in the amount of $365,000. The Company anticipates that its working capital needs will remain consistent with prior years. In December of 1997, the Company entered into a loan agreement with a commercial financing Page 12 division of a U.S. Bank. The bank issued the Company a line of credit in the amount of $3,000,000. As of December 31, 1998 there was no outstanding balance on the line of credit and the borrowing availability was approximately $1,200,000. The Company believes that with this line of credit it will have sufficient capital resources to fund its current business operations and anticipated growth for the foreseeable future. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained herein and in the following section and like statements elsewhere in this report are forward looking statements. Actual results could differ materially from those anticipated as a result of various factors. Set forth below are the principal factors and risks considered most likely to cause actual results to differ materially from management's expectations. Significant risk factors, while not all inclusive, are: 1. RESULTS OF INSIGNIA POPS PROGRAM. It will be necessary to achieve lift results from the Insignia POPS program that are comparable to the results to date from the Insignia POPS program in order to obtain additional participating manufacturers and retailers at the rate anticipated by the Company. 2. COMPETITION. Insignia POPS will be competing for the marketing expenditures of branded product manufacturers, who use various forms of point-of-purchase marketing methods, such as displays, coupons, in-store samples, etc. There is no assurance that Insignia POPS will compete successfully with these traditional marketing methods. 3. SIGN PRODUCTION. The Company's ability to produce the planned number of signs will depend on a number of factors, including receipt of data and information from both the retailers and manufacturers and conducting the necessary training. 4. BUSINESS CONDITIONS OF THE GENERAL ECONOMY. 5. COST OF THE RAW MATERIAL. The Company's printing gross margin percentage is a sensitive function of the cost of the raw paper materials. 6. SIGN CARD REVENUE. The Company derives a significant portion of its revenue from the sale of the bar-coded sign cards required by the Impulse and SIGNright systems, which are no longer being marketed domestically by the Company. If a substantial number of existing customers discontinue the use of the sign card there could be a serious adverse effect on the Company's revenue. 7. DEPENDENCE ON KEY EMPLOYEES. The Company is highly dependent upon the services of its present officers, and the loss of any of them could have a material adverse effect on the Company. None of the Company's officers are bound by employment or non-competition agreements with the Company. The success of the Company will also depend on its ability to attract and retain capable sales and marketing personnel. Page 13 YEAR 2000 COMPLIANCE GENERAL DESCRIPTION: The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date sensitive software or imbedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. YEAR 2000 COMPLIANCE: The Company has modified or upgraded portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. This modification and upgrade was completed in March 1999. The Company believes that with these modifications and upgrades, the year 2000 issue has been mitigated. THIRD PARTY: The Company does not have any direct interfacing with significant third party vendors. The Company has queried significant suppliers and subcontractors who do not share information systems with company (external agents). To date, the Company is not aware of any external agent with a year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of insuring that external agents will be year 2000 ready. The inability of external agents to complete their year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. COST: The Company utilized both internal and external resources to reprogram and modify the software and operating equipment for year 2000 modifications. The total cost of the year 2000 project was approximately $20,000 and is being funded through operating cash flows. PRODUCT: The Company has made modifications to any of its products which require remediation to be year 2000 compliant. Accordingly, the Company does not believe that the year 2000 presents a material exposure as it relates to the Company's products.
------------------------------- ------------------- ------------------ ------------------ ------------------ RESOLUTION PHASES ASSESSMENT REMEDIATION TESTING IMPLEMENTATION ------------------------------- ------------------- ------------------ ------------------ ------------------ E Information Technology 100% Complete 100% Complete 100% Complete 100% Complete X ------------------------------- ------------------- ------------------ ------------------ ------------------ P Operating Equipment with 100% Complete 100% Complete 100% Complete 100% Complete O Embedded Chips or Software S ------------------------------- ------------------- ------------------ ------------------ ------------------ U Products 100% Complete 100% Complete 100% Complete 100% Complete R ------------------------------- ------------------- ------------------ ------------------ ------------------ E 3rd Party - System Interface N/A N/A N/A N/A T ------------------------------- ------------------- ------------------ ------------------ ------------------ Y 3rd Party - Surveying 100% Complete Implement P contingency plans E or other alternatives as necessary. ------------------------------- ------------------- ------------------ ------------------ ------------------
Page 14 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS The following Independent Auditors' Report and Financial Statements thereon are included on the pages indicated: Report of Independent Auditors...............................................F-1 Balance Sheets as of December 31, 1998 and 1997..............................F-2 Statements of Operations for the years ended December 31, 1998, 1997, and 1996.............................................................F-3 Statement of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996..........................................F-4 Statement of Cash Flows for the years ended December 31, 1998, 1997, and 1996.............................................................F-5 Notes to Financial Statements................................................F-6 Page 15 REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors Insignia Systems, Inc. We have audited the accompanying balance sheets of Insignia Systems, Inc. as of December 31, 1998 and 1997, and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the index at Item 14(a).These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Insignia Systems, Inc. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/Ernst & Young LLP Minneapolis, Minnesota February 5, 1999 Page F-1 INSIGNIA SYSTEMS, INC. BALANCE SHEETS
AS OF DECEMBER 31 1998 1997 - ------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 0 $ 0 Marketable securities 1,120,100 464,837 Accounts receivable - net of $96,000 allowance in 1998 and $204,000 in 1997 1,280,021 2,712,505 Inventories 1,210,500 1,617,578 Prepaid expenses 187,784 540,028 - ------------------------------------------------------------------------------------------------ Total Current Assets 3,798,405 5,334,948 PROPERTY AND EQUIPMENT: Production tooling, machinery and equipment 1,894,577 1,902,704 Office furniture and fixtures 358,602 356,099 Computer equipment 954,096 978,952 Leasehold improvements 35,134 312,420 - ------------------------------------------------------------------------------------------------ 3,242,409 3,550,175 Accumulated depreciation and amortization (2,972,303) (3,030,500) - ------------------------------------------------------------------------------------------------ Total Property and Equipment 270,106 519,675 - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 4,068,511 $ 5,854,623 - ------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 518,529 $ 424,361 Accrued compensation and benefits 176,746 234,291 Accrued expenses 85,138 245,028 Deferred revenue 404,729 361,976 Warranty reserve 25,840 98,430 Other 241,515 40,523 Line of credit 0 365,447 Current portion of long-term debt 114,087 103,221 - ------------------------------------------------------------------------------------------------ Total Current Liabilities 1,566,584 1,873,277 LONG-TERM DEBT 72,018 186,104 COMMITMENTS (SEE NOTES 5 AND 9) STOCKHOLDERS' EQUITY: Common stock, par value $.01: Authorized shares - 20,000,000 Issued and outstanding shares - 8,498,800 in 1998 and 6,857,721 in 1997 84,998 68,578 Additional paid-in capital 15,163,071 13,083,563 Unearned compensation (47,932) (2,250) Accumulated deficit (12,770,228) (9,354,649) - ------------------------------------------------------------------------------------------------ Total Stockholders' Equity 2,429,909 3,795,242 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,068,511 $ 5,854,623 - ------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. Page F-2 INSIGNIA SYSTEMS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ NET SALES $ 8,703,604 $ 13,321,124 $ 14,667,382 Cost of Sales 4,670,419 6,832,609 7,063,836 - ------------------------------------------------------------------------------------------------------ Gross Profit 4,033,185 6,488,515 7,603,546 OPERATING EXPENSES: Sales 3,672,173 5,557,557 4,381,247 Marketing 790,981 1,501,242 1,845,730 Product development 407,409 493,686 498,160 General and administrative 2,012,899 2,014,322 1,877,411 Restructuring Charge 545,992 314,568 -- - ------------------------------------------------------------------------------------------------------ Total Operating Expenses 7,429,454 9,881,375 8,602,548 - ------------------------------------------------------------------------------------------------------ Operating Loss (3,396,269) (3,392,860) (999,002) OTHER INCOME (EXPENSE): Interest income 56,936 84,667 46,751 Interest expense (113,672) (56,717) (64,911) Other income (expense) 37,426 (14,602) 17,936 - ------------------------------------------------------------------------------------------------------ NET LOSS $ (3,415,579) $ (3,379,512) $ (999,226) - ------------------------------------------------------------------------------------------------------ Net loss per share: Basic and diluted $ (.44) $ (.50) $ (.18) - ------------------------------------------------------------------------------------------------------ Shares used in calculation of net loss per share: Basic and diluted 7,714,522 6,790,484 5,403,741 - ------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. Page F-3 INSIGNIA SYSTEMS, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional ------------ Paid-In Unearned Accumulated Shares Amount Capital Compensation Deficit Total ----------------------------------------------------------------------------------------------------------------------- BALANCE AT JAN. 1, 1996 5,361,006 $ 53,610 $ 10,056,117 $ (16,125) $ (4,975,911) $ 5,117,691 Employee stock purchase plan 42,852 429 46,280 -- -- 46,709 Amortization of stock grant -- -- -- 8,812 -- 8,812 Net loss -- -- -- -- (999,226) (999,226) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 31, 1996 5,403,858 54,039 10,102,397 (7,313) (5,975,137) 4,173,986 Sale of common stock 1,373,660 13,737 2,890,471 -- -- 2,904,208 Exercise of stock options 13,768 138 13,630 -- -- 13,768 Employee stock purchase plan 66,435 664 77,065 -- -- 77,729 Amortization of stock grant -- -- -- 5,063 -- 5,063 Net loss -- -- -- -- (3,379,512) (3,379,512) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 31, 1997 6,857,721 68,578 13,083,563 (2,250) (9,354,649) 3,795,242 Sale of common stock 1,600,000 16,000 1,961,252 -- -- 1,977,252 Exercise of stock options 40,066 400 55,898 -- -- 56,298 Exercise of stock warrants 2,013 20 4,258 -- -- 4,278 Issuance of stock warrants in lieu of services -- -- 58,100 (47,932) -- 10,168 Amortization of stock grant -- -- -- 2,250 -- 2,250 Net loss -- -- -- -- (3,415,579) (3,415,579) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 31, 1998 8,499,800 $ 84,998 $ 15,163,071 $ (47,932) $(12,770,228) $ 2,429,909 - ------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. Page F-4 INSIGNIA SYSTEMS, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net loss $(3,415,579) $(3,379,512) $ (999,226) Adjustments to reconcile net loss to net Cash used in operating activities: Depreciation and amortization 336,613 662,279 540,192 Provision for bad debt expense 72,000 185,000 70,000 Provision for obsolete inventory 69,500 71,500 47,500 Amortization of unearned compensation 2,250 5,063 8,812 Gain on sale of equipment (2,444) -- -- Issuance of stock warrants in lieu of services 10,168 -- -- Changes in operating assets and liabilities: Accounts receivable 1,360,484 (252,654) (479,477) Inventories 337,578 326,885 (35,897) Prepaid expenses 352,244 (324,466) 116,056 Accounts payable 94,168 (257,800) (101,890) Accrued compensation and benefits (57,545) 5,272 6,317 Deferred revenue 42,753 268,052 73,047 Warranty reserve (72,590) 55,590 (31,160) Accrued expenses and other 41,102 137,705 2,789 - --------------------------------------------------------------------------------------------------------- Net Cash Used in Operating Activities (829,298) (2,497,086) (782,937) INVESTING ACTIVITIES: Purchases of property and equipment (116,279) (230,651) (341,980) Proceeds from sale of equipment 31,680 -- -- Purchase of marketable securities (1,700,967) (1,812,307) (1,114,271) Maturity/sale of marketable securities 1,045,704 1,496,897 1,468,750 - --------------------------------------------------------------------------------------------------------- Net Cash (Used In) Provided By Investing Activities (739,862) (546,061) 12,499 FINANCING ACTIVITIES: Net change in line of credit (365,447) (307,834) 673,281 Proceeds from issuance of Common Stock 2,037,827 2,995,704 46,709 Principal payments on long-term debt (103,220) (93,391) (84,497) - --------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 1,569,160 2,594,479 635,493 - --------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 0 (448,668) (134,945) Cash and Cash Equivalents at Beginning of Year 0 448,668 583,613 - --------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 0 $ 0 $ 448,668 - ---------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. Page F-5 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") markets in-store promotional programs, products and services to retailers and manufacturers. These products include thermal sign card supplies for the Company's SIGNright and Impulse systems, Stylus software, and Insignia POPS. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. CASH EQUIVALENTS. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. REVENUE RECOGNITION. The Company recognizes revenue associated with equipment, software and sign card sales at the time the products are shipped to customers. Revenue associated with maintenance agreements are recognized over the life of the contract. Revenue associated with Insignia POPS is recognized at the completion of service. MARKETABLE SECURITIES. Marketable securities are composed of debt securities and are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in other income. INVENTORIES. Inventories are primarily comprised of Impulse machines, SIGNright machines, sign cards, and accessories. Inventory is valued at lower of cost or market using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost. Depreciation and amortization is provided on a straight line basis over three to five years. Leasehold improvements are amortized over the shorter of the term of the lease or life of the asset. PRODUCTION TOOLING COSTS. Expenditures relating to the purchase and installation of production tooling are capitalized and amortized over the anticipated useful life of the product. INCOME TAXES. Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. STOCK-BASED COMPENSATION. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," but applies Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its plans. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Page F-6 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS IMPAIRMENT OF LONG-LIVED ASSETS. The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. USE OF ESTIMATES. The preparation of financial statements in conformity with general 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. NET LOSS PER COMMON SHARE. Loss per share is calculated under FASB Statement 128. Basic loss per share is based on the weighted average shares outstanding and exclude any dilutive effects of options and warrants. Diluted loss per share for the Company is the same as basic earnings per share because the effect of options and warrants is anti-dilutive. ADVERTISING COSTS. Advertising costs are charged to operations as incurred. Advertising expenses were approximately $361,500, $677,195 and $758,786 in 1998, 1997 and 1996, respectively. RESEARCH AND DEVELOPMENT. Research and development expenditures are charges to operations as incurred. Statement of Financial Accounting Standards No. 86, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. All research and development costs have been expensed. 3. RESTRUCTURING PROGRAM. During January 1998, the Company implemented a restructuring program (Program) to achieve a more focused marketing strategy regarding the selling of SIGNright machines. This marketing strategy eliminated the marketing and selling of SIGNright machines through direct channels. This resulted in the Company streamlining and downsizing its operations by reducing its workforce and consolidating certain employee groups. As a result of this Program, the Company reduced its workforce from 130 full time employees to 93 full time employees. The Company took a charge to earnings in December 1997 due to this restructuring in the amount of $315,000. Accruals established as part of this restructuring were fully utilized in 1998. During April 1998, the Company initiated a further restructuring program to redirect the Company's marketing strategy toward the Insignia POPS program. This marketing strategy eliminated the marketing and selling of SIGNright machines domestically. As a result of this program, the Company reduced its workforce from 93 full time employees to 65 full time employees. The Company took a charge to earnings in 1998 due to this restructuring in the amount of $546,000. This $546,000 charge is comprised of a $196,000 write-down of a prepayment made to its Japanese vendor for SIGNright machines, a $106,000 charge for the write-off of SIGNright machines, a $15,000 charge for moving Page F-7 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS expenses, a $47,000 charge for accrued rental costs associated with a portion of the lease of the facility which in 1998 was permanently idle and separate from the remaining utilized lease space, and severance costs in the amount of $182,000 as a result of the workforce reduction. 4. MARKETABLE SECURITIES. Marketable securities consist of U.S. Treasury Debt Securities which mature in April 1999 and certificates of deposit. Approximately $170,000 of these certificates are pledged as collateral for the loan agreement (see Note 8) and approximately $243,000 of these certificates are pledged as collateral for the building lease agreement (see Note 9). Investments are classified as available-for-sale and are stated at amortized cost which approximates fair market value. As a result no unrealized gains or losses were recognized at December 31, 1998 and 1997. 5. COMMITMENTS. PRODUCT DESIGN AGREEMENTS. The Company has an exclusive licensing agreement for a bar-code used with the Impulse Retail System and SIGNright system. The Company has agreed to pay royalties totaling 1% of net sales on all paper and supplies using the bar-code technology of the Impulse Retail System. HARDWARE PURCHASE AGREEMENT. The Company has a purchase agreement with a Japanese company that holds the rights to supply its SIGNright machine. As of December 31, 1998, the Company had a purchase commitment for 1,000 SIGNright machines in the approximate amount of $350,000. As of December 31, 1998, the Company had paid $175,000 of this commitment. In addition, before beginning production, the Company paid for tooling, equipment and development expenditures of approximately $248,000. The purchase price for the SIGNright machine is payable in Japanese yen and therefore the dollar value of such payments may fluctuate with exchange rates. 6. INCOME TAXES. At December 31, 1998, the Company had net operating loss carryforwards of approximately $11,848,000 which are available to offset future taxable income through 2018. These carryforwards are subject to the limitations of Internal Revenue Code Section 382. This section provides limitations on the availability of net operating losses to offset current taxable income if significant ownership changes have occurred for federal tax purposes. Significant components of the deferred tax assets are as follows: As of December 31 1998 1997 ---------------------------------------------------------------------- DEFERRED TAX ASSETS: Net operating loss carryforwards $ 4,383,600 $ 2,897,600 Depreciation and amortization 144,000 106,900 Accounts receivable allowance 35,600 75,600 Allowance for machine returns 9,500 36,400 Inventory reserve 87,400 134,400 Restructuring reserve 57,400 110,500 Other 20,500 50,000 ---------------------------------------------------------------------- Total deferred tax asset 4,738,000 3,411,400 Valuation allowance (4,738,000) (3,411,400) ---------------------------------------------------------------------- Net deferred tax assets $ -- $ -- Page F-8 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS 7. STOCK OPTIONS, WARRANTS AND AWARDS. STOCK OPTION PLAN. The Company has a stock option plan for its employees and directors. Under the terms of the plan, the Company grants incentive stock options to employees at an exercise price at or above 100% of fair market value on the date of grant. The plan also allows the Company to grant non-qualified options at an exercise price of less than 100% of fair market value at the date of grant. The stock options expire five years after the date of grant and typically vest in one-third increments on the first, second and third anniversaries of the grant date. The following tables summarizes activity under the plan:
Plan Plan Weighted Shares Options Average Exercise Available for Grant Outstanding Price Per Share -------------------------------------------------------------------------------- Balance at December 31, 1995 46,843 335,100 $ 2.16 Shares reserved 300,000 -- -- Granted (223,400) 223,400 1.92 Cancelled 99,300 (99,300) 2.25 Exercised -- -- -- -------------------------------------------------------------------------------- Balance at December 31, 1996 222,743 459,200 1.79 Granted (199,000) 199,000 2.84 Cancelled 5,632 (5,632) 2.86 Exercised -- (13,768) 2.59 -------------------------------------------------------------------------------- Balance at December 31, 1997 29,375 638,800 1.98 Reserved 600,000 -- -- Granted (749,000) 749,000 1.25 Cancelled 236,734 (236,734) 2.21 Exercised -- (40,066) 1.41 -------------------------------------------------------------------------------- Balance at December 31, 1998 117,109 1,111,000 1.54
The number of options exercisable under the plan were: December 31, 1996 267,262 December 31, 1997 342,523 December 31, 1998 541,623 Page F-9 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS The following tables summarizes information about the stock options outstanding at December 31, 1998.
Options Outstanding Options Exercisable -------------------------------------------------- ------------------------------------ Weighted Weighted Weighted Ranges of Average Average Number Average Exercise Number Remaining Exercise Price Exercisable at Exercise Price Prices Outstanding Contractual Life Per Share December 31, 1998 Per share ----------------------------------------------------------------------------------------------------------- $1.06 -$2.75 701,334 5 Years $1.34 203,126 $1.17 1.81 - 3.38 91,000 4 Years 3.10 48,166 3.48 1.25 - 1.38 95,000 3 Years 1.36 66,665 1.36 1.00 - 1.88 29,500 2 Years 1.44 29,500 1.44 1.38 - 3.38 194,166 1 Year 1.56 194,166 1.56 ----------------------------------------------------------------------------------------------------------- 1.06 - 3.38 1,111,000 3 Years 1.54 541,623 1.52
Options outstanding under the plan expire at various dates during the period January 1999 through December 2003. The weighted average fair value of options granted during the years ended December 31, 1998, 1997 and 1996 was $.75, $1.62 and $.80, respectively. The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of option valuation models that were not developed for use valuing employee stock options. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1996; risk-free interest rate of 6.0%; volatility factor of the expected market price of the Company's common stock of .532, and a weighted-average life of the option of three years; and for 1997: risk-free interest rate of 6.0%; volatility factor of the expected market price of the Company's common stock of .882, and a weighted-average life of the option of three years; and for 1998: risk-free interest rate of 6.0%; volatility factor of the expected market price of the Company's common stock of .978, and a weighted-average life of the option of three years. 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, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect Page F-10 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS 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 employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
1998 1997 1996 --------------------------------------------------------------------------------------- Pro forma net loss $(3,715,870) $(3,508,528) $(1,111,522) Pro forma net loss per common share $ (.48) $ (.52) $ (.21)
The pro forma effect on the net loss for 1996, 1997 and 1998 is not representative of the pro forma effect on net loss in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. WARRANTS. During 1995, the Company issued five year warrants to an outside consultant to purchase 1,000 shares of Common Stock at $1.50 per share. Prior to 1995, the Company issued five year warrants to consultants to purchase a total of 17,500 shares of Common Stock exercisable at various prices between $2.56 per share and $4.00 per share. The warrants expire on various dates through November 1999. During 1990, two non-employee board members provided strategic planning, financial and general advisory assistance to the Company. In exchange for their services, the Company granted to each individual a warrant to purchase 75,000 shares of Common Stock at $2.00 per share for a five year period. During 1994, these warrants were extended to September 9, 1999. During 1997, a non-employee Board member providing strategic planning and advisory assistance to the Company was granted a warrant to purchase 25,000 shares of common stock at $2.31 per share. The warrant will expire in five years. In 1998, the Company issued three year warrants to outside consultants to purchase 70,000 shares of common stock at $1.625 per share. The Company valued these warrants at $58,100 and will recognize consulting expense associated with these warrants over the vesting period. The Company recognized an expense of $10,168 in 1998 associated with these warrants. STOCK AWARD. In December 1993, the Company granted 25,000 shares of restricted stock at no cost to an officer of the Company. The restriction on the shares were removed as the individual completed employment periods with the Company through various dates from 1995 through 1998. 8. FINANCING AGREEMENTS AND LONG-TERM DEBT. The Company entered into a $3 million line of credit agreement with a finance corporation against which $0 was outstanding at December 31, 1998. The credit agreement provides that the minimum amount of interest due and payable in any month under the line of credit agreement will be not less than $7,500. The outstanding balance under the line of credit accrues interest at a rate of 2 percent over the bank's reference rate per annum. This credit agreement was amended in September 1998 to Page F-11 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS provide for the temporary suspension of this line of credit, until such time that the Company elects to reinstate the credit agreement and the availability of advances under the credit agreement. As a result of this suspension, the agreement shall remain effective for one year upon reinstatement of the credit line. No minimum amount of interest will be due and payable during the suspension period. The Company pledged as security all inventory, accounts receivable, equipment and general intangibles. The carrying amount of the Company's debt instruments approximates fair value. The Company also has a long-term loan agreement with a finance corporation which accrues interest at a rate of 10.05 percent per annum and expires on August 1, 2000. In 1995 the Company borrowed $500,000 and pledged certain printing press assets and U.S. Treasury Debt Securities as collateral against this facility. Long-term debt as of December 31, 1998 is as follows: Obligations under long-term debt $186,105 Less current portion 114,087 ----------------------------------------------------- $ 72,018 ----------------------------------------------------- Maturities of long-term debt as of December 1998 are as follows: 1999 $114,087 2000 72,018 ----------------------------------------------------- $186,105 ----------------------------------------------------- Cash paid during the year for interest was $113,672, $56,166 and $51,285 in 1998, 1997, and 1996, respectively. 9. LEASES. In December 1998, the Company relocated its office space to a 26,000 square foot office and warehouse space. The Company leases its office space under a five year operating lease. The term of the operating lease is January 1, 1999 through December 31, 2004. The future noncancelable lease payments, exclusive of costs associated with the landlord operating costs, due on the operating lease as of December 31, 1998 are as follows: 1999 $ 209,484 2000 $ 209,484 2001 $ 209,484 2002 $ 209,484 2003 $ 209,484 --------------------------------------------------- $1,047,420 --------------------------------------------------- The Company incurred approximately $312,567, $506,000, and $429,000 in rent expense in 1998, 1997, and 1996, respectively. As a result of this relocation, the Company expensed $55,000 of moving expenses in 1998. Page F-12 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS 10. CUSTOMER SALES. No single customer represented a significant portion of total sales. Export sales accounted for 16%, 14%, and 16% of total sales in 1998, 1997, and 1996, respectively. 11. EMPLOYEE BENEFIT PLANS. The Company has a Retirement Profit Sharing and Savings Plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to defer up to 15% of their income on a pre-tax basis through contributions to the plan. The Company may make matching contributions with respect to salary deferral at a percentage to be determined by the Company each year. In 1998, 1997, and 1996, the Company made no matching contributions. The Company adopted an Employee Stock Purchase Plan effective January 1, 1993. The plan enables employees to contribute up to 10% of their compensation toward the purchase of the Company's Common Stock at 85% of market value. In 1998, 1997, and 1996, 0, 66,435 and 42,852 shares, respectively, were purchased by employees under the plan. At December 31, 1998, 150,941 shares are reserved for future employee purchases of Common Stock under the plan. 12. SOURCE OF SUPPLY. The Company currently buys the components of its products from sole suppliers. Although there are a limited number of manufacturers capable of manufacturing its products, management believes that other manufacturers could adapt to provide the products on comparable terms. The time required to locate and qualify other manufacturers, however, could cause a delay in manufacturing that may be financially disruptive to the Company. 13. STOCKHOLDERS' EQUITY. In June 1998, the Company issued 1,600,000 units consisting of 1,600,000 shares of its common stock and warrants to purchase an additional 800,000 shares of common stock. The Company received net proceeds of approximately $2,000,000, which is available for general corporate purposes. The warrants are exercisable at $1.625 per share and expire in June 2001. 14. SUBSEQUENT EVENT (UNAUDITED). In December 1997, Meta-4, Inc., the developer of the DOS version of the Company's Stylus software product, brought suit against the Company in U.S. District Court in the District of Minnesota. The complaint alleged copyright infringement and breach of contract in connection with the Company's distribution of the Company's Stylus software product. This lawsuit was settled in March 1999. Under the settlement Meta-4 assigned all its rights to the Stylus software to the Company in consideration of $15,000 in cash and 75,000 shares of the Company's common stock. Page F-13 Item 9. Disagreements with Accountants on Accounting and Financial Disclosures None. PART III. Item 10. Directors and Executive Officers of the Registrant Information concerning Executive Officers of the Company is included in this Annual Report in Item 4A under the caption "Executive Officers of the Registrant." The information required by Item 10 concerning the directors of the Company is incorporated herein by reference to the Company's proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 11. Executive Compensation The information required by Item 11 is incorporated herein by reference to the Company's proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Item 12 is incorporated by reference to the Company's proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 13. Certain Relationships and Related Transactions The information required by Item 13 is incorporated by reference to the Company's proxy statement for its 1999 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Page 16 PART IV. Item 14. Exhibits, Schedule and Reports on Form 8-K (a) Exhibits
Exhibit Page Number or Incorporation Number Description By Reference To - ---------------- ---------------------------------------- ------------------------------------------------ 3.1 Articles of Incorporation of Exhibit 3.1 of the Registrant's Registration Registrant, as amended to date Statement of Form S-18, Reg. No. 33-40765C 3.2 Bylaws, as amended to date Exhibit 3.2 of the Registrant's Registration Statement of Form S-18, Reg. No. 33-40765C 4.1 Specimen Common Stock Certificate of Exhibit 4.1 of the Registrant's Registration Registrant Statement of Form S-18, Reg. No. 33-40765C 10.1 License Agreement between Thomas and Exhibit 10.1 of the Registrant's Registration Lawrence McGourty and the Company Statement of Form S-18, Reg. No. 33-40765C dated January 23, 1990, as amended 10.2 Barcode License and Support Agreement Exhibit 10.2 of the Registrant's Registration between Thomas and Lawrence McGourty Statement of Form S-18, Reg. No. 33-40765C and the Company dated January 23, 1990 10.3 The Company's 1990 Stock Plan, as Exhibit 10.3 of the Registrant's Annual amended Report on Form 10-K for the year ended December 31, 1995 10.4 Sign Printer Sales Agreement between Exhibit 10.4 of the Registrant's Registration the Company and Creative Machineries Statement of Form S-18, Reg. No. 33-40765C International, Inc. dated January 29, 1990, as amended 10.6 Lease Agreement between Plymouth 21 Partners II, and the Company, dated October 5, 1998 10.7 Common Stock Warrant dated September Exhibit 10.7 of the Registrant's Registration 28, 1990 issued to Erwin Kelen Statement of Form S-18, Reg. No. 33-40765C 10.8 Non competition and Consulting Exhibit 10.12 of the Registrant's Registration Agreement between Varitronics and G. Statement of Form S-18, Reg. No. 33-40765C L. Hoffman dated January 12, 1990
Page 17 10.9 Employee Stock Purchase Plan Exhibit 10.14 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.10 Loan and Security Agreement between Exhibit 10.15 of the Registrant's Annual Report FBS Business Finance Corporation and on Form 10-K for the year ended December 31, the Company dated July 31, 1995 1995 10.11 Loan Agreement between Republic Exhibit 10.16 of the Registrant's Annual Report Acceptance Corporation and the Company on Form 10-K for the year ended December 31, dated December 20, 1997 1997 10.12 Amendment to the Loan Agreement 59 between Republic Acceptance Corporation and the Company dated December 30, 1998 23 Consent of Ernst & Young LLP 63 25 Power of Attorney (See signature page 20 of this Form 10-K) 27 Financial Data Schedule 64
(b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during 1998. Page in This Form 10-K -------------- Schedule II: Valuation and Qualifying Accounts..............................19 Page 18 SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E - -------------------------------------- ------------ --------------------------- ------------ ----------- Additions --------------------------- (1) (2) Charged Balance at Charged to To Other Balance Beginning Costs and Accounts Deductions at End of Description of Period Expenses Describe Describe Period - -------------------------------------- ------------ ------------ ---------- ------------ ----------- Year ended December 31, 1998 Allowance for doubtful accounts $204,382 $72,000 -- $180,032 (1) $96,350 Provision for normal returns and rebates 102,925 9,629 86,712 (5) 25,842 Provision for obsolete inventory 127,949 69,500 107,943 (4) 89,506 Year ended December 31, 1997 Allowance for doubtful accounts 135,475 185,000 -- 116,093 (1) 204,382 Provision for normal returns and rebates 54,485 $65,556 (2) 17,116 (3) 102,925 Provision for obsolete inventory 120,162 71,500 63,713 (4) 127,949 Year ended December 31, 1996 Allowance for doubtful accounts 88,587 70,000 -- 23,112 (1) 135,475 Provision for normal returns and rebates 99,166 5,069 (2) 49,750 (3) 54,485 Provision for obsolete inventory 108,000 47,500 35,338 (4) 120,162
- ---------------------------------------------------------- (1) Uncollectable accounts written off, net of recoveries. (2) Charged against sales. (3) Rebates paid to customer buying groups. (4) Inventory scrapped and disposed of. (5) Includes $14,112 for rebates paid to customer buying groups and $72,600 credited to income. Page 19 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. By: /s/ Scott Drill --------------- Scott Drill President and CEO Dated: March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. Power of Attorney Each person whose signature appears below constitutes and appoints John R. Whisnant his true and lawful attorney-in-fact and agent, acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all said attorney-in-fact and agent, acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Title Date - --------------------------- ------------------------------------------------- ---------------- /s/ G. L. Hoffman Chairman and Secretary March 29, 1999 - -------------------------- G. L. Hoffman /s/ Scott F. Drill President and Chief Executive Officer March 29, 1999 - -------------------------- (principal executive officer) Scott F. Drill /s/ John R. Whisnant Vice President of Finance and Chief March 29, 1999 - -------------------------- Financial Officer (principal financial officer) John R. Whisnant /s/ Erwin A. Kelen Director March 29, 1999 - -------------------------- Erwin A. Kelen /s/ Don E. Schultz Director March 29, 1999 - -------------------------- Don E. Schultz /s/ Gordon F. Stofer Director March 29, 1999 - -------------------------- Gordon F. Stofer /s/ Frank D. Trestman Director March 29, 1999 - -------------------------- Frank D. Trestman
Page 20 EX-10.6 2 LEASE AGREEMENT EXHIBIT 10.6 ARTICLE 1. BASIC LEASE TERMS 1.1 PARTIES. This lease agreement ("Lease") is entered into this 5th day of October, 1998 by and between Plymouth Partners II, a Minnesota General Partnership ("Landlord") and Insignia Systems, Inc., a Minnesota Corporation ("Tenant"). 1.2 PREMISES. In consideration of the rents, terms, provisions and covenants of this Lease, Landlord hereby leases, lets and demises to Tenant the following described premises ("Premises") as illustrated on Exhibit A attached hereto: approximately 9,762 square feet of warehouse space, approximately 4,543 square feet of production space and 11,881 square feet of office space located at 5025 Cheshire Lane North, Plymouth, Minnesota ("Building") which consists of approximately 26,186 square feet, as legally described on Exhibit B attached hereto. The square footage of the Premises was calculated by a certified and registered architect in accordance with the ANSI/BOMA standard for measuring floor area publication dated June 7, 1996. The improvements to the Premises shall consist of the Tenant Finish Specifications included on the floorplan attached hereto as Exhibit C and the Schedule of Additional Leasehold Improvements attached hereto as Exhibit D which shall detail the improvements, if any, to be installed at the expense of Landlord or Tenant, as set forth on Exhibit D. 1.3 TERM. Subject to and upon the conditions set forth herein, the term of this Lease shall commence on April 1, 1999 the "Commencement Date") and shall terminate (60) months thereafter on March 31, 2004, unless sooner terminated or extended as hereinafter provided. The term may be renewed for One (1) additional term of Three (3) years each as provided in Section 1.10 below. 1.4 BASE RENT. Base rent is: Month Monthly Base Rent ----- ----------------- 1 - 60 $17,457.00 1.5 ADDRESSES. Landlord's Address: Tenant's Address: HOYT PROPERTIES, INC. INSIGNIA SYSTEMS, INC. 708 South Third Street 5025 Cheshire Lane North Suite 108 Plymouth, MN 55446 Minneapolis, MN 55415 (612) 338-7787 21 Tenant's Address for Notices: 5025 Cheshire Lane North Plymouth, Minnesota 1.6 PERMITTED USE. General office and warehouse and sign printing operations. 1.7 SECURITY DEPOSIT. None 1.8 PRO RATA SHARE. 100% subject to adjustment as provided in Section 2.2 hereof. 1.9 EARLY OCCUPANCY. It is agreed and understood that Tenant shall have Early Occupancy of the Premises on December 15, 1998 for the purpose of facility set-up as well as operating its business. It is also agreed and understood that for such early occupancy period (December 15, 1998 through and including March 31, 1999) Tenant shall be under all the terms and conditions of this Lease including providing proof of insurance coverage and converting gas and electrical service to Tenant's account except Tenant shall not be required to pay Base Rent and Operating Expenses. If early occupancy on December 15, 1998 cannot be achieved (except for reasons caused by Lessee and provided the Lease is executed by Tenant on October 9, 1998) the Commencement Date shall be extended by the same number of days that it took beyond December 15, 1998. 1.10 OPTION TO RENEW. a) Provided Tenant has not been in default and has performed all of its covenants and obligations hereunder, Tenant shall have the option to extend the Term of this Lease (hereinafter, the "Option") for one consecutive period of Three (3) years at a monthly Base Rent equal to the following: $17,457.00 plus an increase based on 75% of the following CPI factor: CPI factor = the percentage increase in the United States Consumer Price Index, all items, St. Paul Minneapolis Area between the time period April 1, 1998 and March 31, 2004. An example calculation of this is as follows: Assume the CPI increase for the above stated 5 year period turns out to be 10%, the Monthly Base Rent increase would equal 7.5% hence, the Monthly Base Rent for the renewal period would equal $18,766.28. In no event shall the Monthly Base Rent for the renewal period be less than $17,457.00. Such option to renew is also upon the following terms and conditions: b) Tenant shall exercise said Option only by giving written notice to Landlord not earlier than April 1, 2003 and not later than September 30, 2003. 22 c) It is understood and agreed that this Option is personal to Insignia Systems, Inc. is not transferable; in the event of any assignment or subleasing during the initial term of the Lease of any or all of the Demised Premises said Option shall be null and void. ARTICLE 2. RENT 2.1 BASE RENT. Tenant agrees to pay monthly as base rent during the term of this Lease the sum of money set forth in Section 1.4 of this Lease, which amount shall be payable to Landlord at the address shown above. One monthly installment of rent shall be due and payable on the date of execution of this Lease by Tenant for the first month's rent and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the Rent Commencement Date during the term of this Lease; provided, if the Rent Commencement Date should be a date other than the first day of a calendar month, the monthly rental set forth above shall be prorated to the end of that calendar month, and all succeeding installments of rent shall be payable on or before the first day of each succeeding calendar month during the term of this Lease. Tenant shall pay, as additional rent, all other sums due under this Lease. Notwithstanding anything in this Lease to the contrary, if Landlord, for any reason whatsoever (other than Tenant's default), cannot deliver possession of the Premises to the Tenant on the Rent Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, nor shall the expiration of the term be extended, but all rent shall be abated until Landlord delivers possession. All base rent, additional rent and other sums payable by Tenant pursuant to this Lease are payable without demand and without any reduction, abatement, counterclaims or setoff. 2.2 OPERATING EXPENSES. Tenant shall also pay as additional rent commencing on the Commencement Date, Tenant's pro rata share of the operating expenses of Landlord for the Building and/or project of which the Premises are a part. Landlord may invoice Tenant monthly for Tenant's pro rata share of the estimated operating expenses for each calendar year, which amount shall be adjusted from time-to-time by Landlord based upon anticipated operating expenses. Within ninety (90) days following the close of each calendar year, Landlord shall provide Tenant an accounting showing in reasonable detail all computations of additional rent due under this Section. In the event the accounting shows that the total of the monthly payments made by Tenant exceeds the amount of additional rent due by Tenant under this Section, the accounting shall be accompanied by evidence of a credit to Tenant's account. In the event the accounting shows that the total of the monthly payments made by Tenant is less than the amount of additional rent due by Tenant under this Section, the accounting shall be accompanied by an invoice for the additional rent. Notwithstanding any other provision in this Lease, during the year in which this Lease terminates, Landlord, prior to the termination date, shall have the option to invoice Tenant for Tenant's pro rata share of the operating expenses based upon the previous year's operating expenses. If this Lease shall terminate on a day other than the last day of a calendar year, the amount of any additional rent payable by Tenant applicable to the year in which the termination shall occur shall be prorated on the ratio that the 23 number of days from the commencement of the calendar year to and Including such termination date bears to 365. Tenant agrees to pay any additional rent due under this Section within ten (10) days following receipt of the invoice or accounting showing additional rent due. Tenant's pro rata share set forth in Section 1.8 shall be equal to a percentage based upon a fraction the numerator of which is the total area of the Premises as set forth in Article 1, subject to adjustment as provided in this Lease, and the denominator of which shall be the net rentable area of the Building. Upon termination of the Lease, Landlord and Tenant agree to reconcile within sixty (60) days any amounts due from either party for the over payment or underpayment of operating expenses by Tenant. 2.3 DEFINITION OF OPERATING EXPENSES. The term "operating expenses" includes all expenses incurred by Landlord with respect to the maintenance and operation of the Building of which the Premises are a part, including, but not limited to, the following: maintenance, repair and replacement costs; electricity, fuel, water, sewer, gas and other common Building utility charges; signage; equipment used for maintenance and operation of the Building; security charges; security, window washing and janitorial services; trash and snow removal; landscaping and pest control; management fees, wages and benefits payable to employees of Landlord whose duties are directly connected with the operation and maintenance of the Building; all services, supplies, repairs, replacements or other expenses for maintaining and operating the Building or project including parking and common areas; improvements made to the Building which are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed; installation of any device or other equipment which improves the operating efficiency of any system within the Premises and thereby reduces operating expenses; all other expenses which would generally be regarded as operating, repair, replacement and maintenance expenses; all real property taxes and installments of special assessments, including dues and assessments by means of deed restrictions and/or owners' associations which accrue against the Building during the term of this Lease and legal fees incurred in connection with actions to reduce the same except that Tenant shall have the right to approve legal fees associated with reducing taxes; and all insurance premiums Landlord is required to pay or deems necessary to pay, including fire and extended coverage, rent loss and public liability insurance, with respect to the Building. Notwithstanding the foregoing, operating expenses shall not include the following: a) The cost of decorating, redecorating, special cleaning, or other services not provided on a regular basis to all tenants of the Building. b) Any costs associated with the initial interior or exterior landscaping and the purchase, rental or maintenance of sculpture, paintings, or other objects purporting to be art for the Building and Common Areas. c) Landlord's general overhead except to the extent it is expended in direct connection with the management and operation of the Building. d) Wages, salaries, fees, and fringe benefits paid to administrative or executive personnel or officers or partners of Landlord. e) Any charge for depreciation or amortization (except as specifically noted herein) of the Building or equipment. 24 f) All costs relating to activities for the solicitation and execution of leases for space in the Building. g) All costs for which Tenant or any other tenant in the Building is being charged other than pursuant to similar "operating costs" clauses. h) Except as provided in section i., the cost of structural repairs and/or replacements including the cost of correcting defects in the construction of the Building or other structures which are a part of the project and the related equipment and any other costs that are considered to be of a capital nature under generally accepted accounting principles consistently applied, including, but not limited to, capital improvements, capital repairs, capital equipment, capital tools, and other capital items. i) Any such capital improvements made to reduce operating expenses may be amortized over the longest useful life of improvement on a straight line basis. The amount amortized in any year shall be an amount not to exceed the amount of the net reduction or operating cost savings resulting in such year from the improvements. j) Costs of initial cleaning of, and rubbish removal from, the Building to be performed prior to final completion of construction of the Building or Common Areas. k) The cost of any repair made by Landlord because of the total or partial destruction of the Building or the condemnation of a portion of the Building. l) Repairs, alterations, additions, improvements or replacements made to rectify or correct any defect in the design, materials or workmanship of the Building or Common Areas. m) Repairs or replacements covered by warranties or guaranties to the extent of service or payment thereunder. n) Any insurance premium to the extent that Landlord is entitled to be reimbursed for it by Tenant pursuant to Tenant's Lease or by any tenant of the Building pursuant to a similar lease other than pursuant to causes comparable to this "operating costs" clause and any insurance premium increase caused by re-rating of the Building caused by other tenants' uses. o) The cost of any items for which Landlord is reimbursed by insurance or otherwise compensated by a tenant or another party other than by tenants of the Building pursuant to clauses similar to this "operating costs" clause. 25 p) Any operating cost representing an amount paid to Landlord or a related corporation, entity or person which is in excess of the amount which would be paid in the absence of such a relationship. q) The cost of any work or services performed for or facilities furnished to any tenant of the Building to a greater extent or in a manner more favorable to such tenant than performed or furnished to tenant. r) Costs, including costs of plans, construction, permit, license and inspection costs, incurred with respect to the installation of tenant improvements made for tenants in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Building. s) The cost of regular and overtime wages and salaries or any other expenses to Landlord in curing its defaults or performing work expressly provided in this Lease to be borne at Landlord's expense. t) Any costs, fines, or penalties incurred due to violation by the Landlord of any law or other governmental rule or authority. u) Damage and repairs necessitated by the negligence or willful misconduct of Landlord or Landlord's employees, contractors or agents. v) Promotional and advertising expense. w) Attorney's, accountants and other professionals fees and expenses incurred in connection with: negotiations or disputes with tenants, other occupants, or prospective tenants or other occupants; accounting, legal or other professional fees relating to the ownership, construction, sale or any litigation relating to the Building or the Project except as specifically provided in this Lease. x) Finance charges, interest and other payments on any mortgages and/or other debt encumbering the Building or Common Areas, or obligation in the nature of a mortgage or other project financing and rental payments on any ground lease or other underlying lease. y) Rental payments incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except operating/maintenance equipment not affixed to the Building or Common Areas which is used in providing janitorial or similar services. z) The costs resulting from Landlord's default or from the default of any other tenant. 26 aa) The costs for any activity (including but not limited to legal fees) associated with the removal, correction or clean up of toxic or hazardous waste in the Building, Premises or future expansion areas or the project. bb) Costs relating to compliance with laws regarding CFC's and HCFC's. cc) Any costs associated with modifications made to the Building in order to comply with the requirements of laws including without limitation the Americans with Disabilities Act. dd) Any property management fee (or similar operating agreement fee) shall be as charged as an operating expense to all other Building tenants, but in no event shall be in excess of 5% of all Base Rent and Additional Rent payable by Tenant to Landlord hereunder and shall include all costs associated with the delivery of such service including, but not limited to, the property management office and all other building personnel except certified building engineer(s) and janitorial services. ee) Any charge for Landlord's income tax, excess profit tax, franchise tax, gross receipts, or like tax on Landlord's business or resulting from Tenant's lease with Landlord. ff) Except on a temporary basis (not to exceed one (1) month) in cases of emergency or except for items as to which Tenant shall specifically agree in advance in writing, the costs of renting or leasing capital items, the cost of which could not be amortized as an operating expense under (i) above but such costs may be included in amortization of capital improvements made to reduce operating expenses to the extent permitted in section i. gg) Auditing fees. hh) The cost of subscriptions, political donations, professional fees (except as specifically provided in the Lease), travel costs, automobile allowances, entertainment and all other dues and donations. ii) Insurance expense and costs incurred for other than Building Operations (including without limitation rent insurance, Directors and Officers insurance and personal general liability insurance for any employee of Landlord). jj) Insurance any charges that would result in Landlord collecting in excess of one hundred percent (100%) of all Operating Expenses. kk) No profit or administrative charges shall be included in Operating Expenses. 27 2.4 LATE PAYMENT CHARGE. If the monthly rental payment or any other payment due from Tenant to Landlord is not received by Landlord on or before the due date thereof, Landlord shall be entitled to exercise any remedy for nonpayment provided in this Lease and, in addition, if such payment is not received on or before five (5) days after the due date, a late payment charge of five percent (5%) of such past due amount shall become due and payable by Tenant in addition to such amounts owed under this Lease. 2.5 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance premiums paid by Landlord for the Building is caused by Tenant's use of the Premises or if Tenant vacates the Premises and causes an increase in such premiums, then Tenant shall pay as additional rent the amount of such increase to Landlord. 2.6 HOLDING OVER. In the event that Tenant does not vacate the Premises upon the expiration or termination of this Lease, Tenant shall be a tenant at will for the holdover period and all of the terms and provisions of this Lease shall be applicable during that period, except that Tenant shall pay Landlord as base rental for the period of such holdover an amount equal to one and one half (1.5) times the base rent which would have been payable by Tenant had the holdover period been a part of the original term of this Lease, together with all additional rent as provided in this Lease. Tenant agrees to vacate and deliver the Premises to Landlord upon Tenant's receipt of notice from Landlord to vacate. The rental payable during the holdover period shall be payable to Landlord on demand. No holding over by Tenant, whether with or without the consent of Landlord, shall operate to extend the term of this Lease. ARTICLE 3. OCCUPANCY AND USE 3.1 USE. Tenant warrants and represents to Landlord that the Premises shall be used and occupied only for the purpose as set forth in Section 1.6. Tenant shall occupy the Premises, conduct its business and control its agents, employees, invitees and visitors in such a manner as is lawful, reputable and will not create a nuisance. Tenant shall not permit any operation which emits any odor or matter which intrudes into other portions of the Building, use any apparatus or machine which makes undue noise or causes vibration in any portion of the Building or otherwise interfere with, annoy or disturb any other lessee in its normal business operations or Landlord in its management of the Building. Tenant shall neither permit any waste on the Premises nor allow the Premises to be used in any way which would in the opinion of Landlord, be extra hazardous on account of fire or which would in any way increase or render void the fire insurance on the Building. 3.2 SIGNS. No sign of any type or description shall be erected, placed or painted in or about the Premises or project except those signs submitted to Landlord in writing and approved by Landlord in writing, and which signs are in conformance with Landlord's sign criteria established for the project, attached hereto as Exhibit E. 3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Tenant, at Tenant's sole cost and expense, shall comply with all laws, ordinances, orders, rules and regulations of state, federal, municipal or other agencies or bodies having jurisdiction over the use, condition or 28 occupancy of the Premises. Tenant will comply with the rules and regulations of the Building adopted by Landlord, including those attached hereto as Exhibit F. Landlord shall have the right at all times to change and amend the rules and regulations in any reasonable manner as may be deemed advisable for the safety, care, cleanliness, preservation of good order and operation or use of the Building or the Premises. All changes and amendments to the rules and regulations of the Building will be sent by Landlord to Tenant in writing and shall thereafter be carried out and observed by Tenant. Landlord agrees to enforce any such rules and regulations in a non-discriminatory manner. 3.4 WARRANTY OF POSSESSION. Landlord warrants that it has the right and authority to execute this Lease, and Tenant, upon payment of the required rents and subject to the terms, conditions, covenants and agreements contained in this Lease, shall have possession of the Premises during the full term of this Lease as well as any extension or renewal thereof. Landlord shall not be responsible for the acts or omissions of any other lessee or third party that may interfere with Tenant's use and enjoyment of the Premises. 3.5 RIGHT OF ACCESS. Landlord or its authorized agents shall at any and all reasonable times upon reasonable verbal notice have the right to enter the Premises to inspect the same, to show the Premises to prospective purchasers or lessees, and to alter, improve or repair the Premises or any other portion of the Building, however Landlord agrees to not show the Premises to prospective Lessee's prior to six (6) nine (9) months before lease expiration unless otherwise permitted. Landlord shall have the right to use any and all means which Landlord may deem proper to open any door in an emergency without liability therefor. Tenant shall permit Landlord to erect, use, maintain and repair pipes, cables, conduits, plumbing, vents and wires in, to and through the Premises as often and to the extent that Landlord may now or hereafter deem to be necessary or appropriate for the proper use, operation and maintenance of the Building. 3.6 ACCEPTANCE. Upon substantial completion of Landlord's work, Landlord and Tenant shall schedule a walkthrough inspection of the Premises and shall mutually agree upon a list of punchlist items. Landlord shall diligently proceed to complete such punchlist items. Subject to completion of such punchlist, the commencement by Tenant of any business in the Premises shall constitute an acknowledgment that the Premises are in the condition called for in this Lease and that Landlord has performed all of Landlord's work. ARTICLE 4. UTILITIES AND SERVICE 4.1 BUILDING SERVICES. Tenant shall pay when due, all charges for utilities furnished to or for the use or benefit of Tenant or the Premises. Tenant shall have no claim for rebate of rent on account of any interruption in service unless caused by Landlord or Landlord's agent negligence or misconduct. 4.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to Tenant's property or personal injury caused by criminal acts or entry by unauthorized persons into the Premises or the Building. 29 ARTICLE 5. REPAIRS AND MAINTENANCE 5.1 LANDLORD REPAIR. Landlord shall not be required to make any improvements, replacements or repairs of any kind or character to the Premises or the Building during the term of this Lease except as are set forth in this Section. Landlord shall maintain only the roof, foundation, parking and common areas, the structural soundness of the exterior walls, doors, corridors, and other structures serving the Premises, provided, that Landlord's cost of maintaining, replacing and repairing the items set forth in this Section are operating expenses subject to the additional rent provisions in Section 2.2 and 2.3. Landlord shall not be liable to Tenant, except as expressly provided in this Lease, for any damage or inconvenience, and Tenant shall not be entitled to any abatement or reduction of rent (except if caused by Landlord or Landlord's agent negligence or willful misconduct) by reason of any repairs, alterations or additions made by Landlord under this Lease. 5.2 TENANT REPAIRS. Tenant shall, at all times throughout the term of this Lease, including renewals and extensions, and at its sole expense, keep and maintain the Premises in a clean, safe, sanitary and first class condition and in compliance with all applicable laws, codes, ordinances, rules and regulations. Tenant's obligations hereunder shall include, but not be limited to, the maintenance, repair and replacement, if necessary, of all heating, ventilation, air conditioning, lighting and plumbing fixtures and equipment, fixtures, motors and machinery, all interior walls, partitions, doors and windows, including the regular painting thereof, all exterior entrances, windows, doors and docks and the replacement of all broken glass. When used in this provision, the term "repairs" shall include replacements or renewals when necessary, and all such repairs made by the Tenant shall be equal in quality and class to the original work. The Tenant shall keep and maintain all portions of the Premises and the sidewalk and areas adjoining the same in a clean and orderly condition, free of accumulation of dirt, rubbish, snow and ice. If Tenant fails, refuses or neglects to maintain or repair the Premises as required in this Lease after notice shall have been given Tenant, in accordance with this Lease, Landlord may make such repairs without liability to Tenant for any loss or damage that may accrue to Tenant's merchandise, fixtures or other property or to Tenant's business by reason thereof, and upon completion thereof, Tenant shall pay to Landlord all costs plus ten percent (10%) for overhead incurred by Landlord in making such repairs upon presentation to Tenant of bill therefor. 5.3 TENANT DAMAGES. Tenant shall not allow any damage to be committed on any portion of the Premises or Building or common areas, and at the termination of this Lease, by lapse of time or otherwise, Tenant shall deliver the Premises to Landlord in as good condition as existed at the Commencement Date of this Lease, ordinary wear and tear excepted. The cost and expense of any repairs necessary to restore the condition of the Premises shall be borne by Tenant. 30 ARTICLE 6. ALTERATIONS AND IMPROVEMENTS 6.1 LANDLORD IMPROVEMENTS. If construction to the Premises is to be performed by Landlord prior to or during Tenant's occupancy, Landlord will complete the construction of the improvements to the Premises in accordance with plans and specifications agreed to by Landlord and Tenant, which plans and specifications are made a part of this Lease by reference on Exhibits C and D. Any changes or modifications to the approved plans and specifications shall be made and accepted by written change order or agreement signed by Landlord and Tenant and shall constitute an amendment to this Lease. Landlord warrants that the Premises and any such improvements completed by Landlord shall comply with all applicable laws, rules and regulations including ADA at the time of occupancy by Tenant. 6.2 TENANT IMPROVEMENTS. Tenant shall not make or allow to be made any alterations or physical additions in or to the Premises without first obtaining the written consent of Landlord, which consent may in the sole and absolute discretion of Landlord be denied. Any alterations, physical additions or improvements to the Premises made by Tenant shall at once become the property of Landlord and shall be surrendered to Landlord upon the termination of this Lease; provided, however, Landlord, at its option, may require Tenant to remove any physical additions and/or repair any alterations in order to restore the Premises to the condition existing at the time Tenant took possession, all costs of removal and/or alterations to be borne by Tenant. This clause shall not apply to moveable equipment or furniture owned by Tenant, which may be removed by Tenant at the end of the term of this Lease if Tenant is not then in default and if such equipment and furniture are not then subject to any other rights, liens and interests of Landlord. Tenant shall have the right to make non-structural alterations to the Premises under $10,000.00 without obtaining Landlord's written approval. However, Tenant may elect to submit any such plans to Landlord and request Landlord's approval at that time to not be responsible to remove such alteration upon Lease Expiration. Tenant shall be permitted to install security systems and phone systems and remove same at the termination of the Lease. ARTICLE 7. CASUALTY AND INSURANCE 7.1 SUBSTANTIAL DESTRUCTION. If all or a substantial portion of the Premises or the Building should be totally destroyed by fire or other casualty, or if the Premises or the Building should be damaged so that rebuilding cannot reasonably be completed within one hundred eighty (180) working days after the date of written notification by Tenant to Landlord of the destruction, this Lease shall terminate at the option of either party by written notice to the other party within sixty (60) days following the occurrence, and the rent shall be abated for the unexpired portion of the Lease, effective as of the date of the written notification. 7.2 PARTIAL DESTRUCTION. If the Premises should be partially damaged by fire or other casualty, and rebuilding or repairs can reasonably be completed within one hundred eighty (180) working days from the date of written notification by Tenant to Landlord of the destruction, this Lease shall not terminate, and Landlord shall at its sole risk and expense proceed with reasonable diligence to rebuild or repair the Building or other improvements to substantially 31 the same condition in which they existed prior to the damage. If the Premises are to be rebuilt or repaired and are untenantable in whole or in part following the damage, and the damage or destruction was not caused or contributed to by act or negligence of Tenant, its agents, employees, invitees or those for whom Tenant is responsible, the rent payable under this Lease during the period for which the Premises are untenantable shall be adjusted to such an extent as may be fair and reasonable under the circumstances. In the event that Landlord fails to complete the necessary repairs or rebuilding within one hundred eighty (180) working days from the date of written notification by Tenant to Landlord of the destruction, Tenant may at its option terminate this Lease by delivering written notice of termination to Landlord, whereupon all rights and obligations under this Lease shall cease to exist. 7.3 PROPERTY INSURANCE. Landlord shall not be obligated in any way or manner to insure any personal property (including, but not limited to, any furniture, machinery, goods or supplies) of Tenant upon or within the Premises, any fixtures installed or paid for by Tenant upon or within the Premises, or any improvements which Tenant may construct on the Premises. Tenant shall maintain property insurance on its personal property and shall also maintain plate glass insurance. Tenant shall have no right in or claim to the proceeds of any policy of insurance maintained by Landlord even if the cost of such insurance is borne by Tenant as set forth in Article 2. 7.4 WAIVER OF SUBROGATION. Anything in this Lease to the contrary notwithstanding, Landlord and Tenant hereby waive and release each other of and from any and all right of recovery, claim, action or cause of action, against each other, their agents, officers and employees, for any loss or damage that may occur to the Premises, the improvements of the Building or personal property within the Building, by reason of fire or the elements, regardless of cause or origin, including negligence of Landlord or Tenant and their agents, officers and employees. Landlord and Tenant agree immediately to give their respective insurance companies which have issued policies of insurance covering all risk of direct physical loss, written notice of the terms of the mutual waivers contained in this Section. 7.5 HOLD HARMLESS. Neither party shall be liable to the other's employees, agents, invitees, licensees or visitors, or to any other person, for an injury to person or damage to property on or about the Premises caused by any act or omission of either party, its agents, servants or employees, or of any other person entering upon the Premises under express or implied invitation by either party, or caused by the improvements located on the Premises becoming out of repair, the failure or cessation of any service provided by Landlord (including security service and devices), or caused by leakage of gas, oil, water or steam or by electricity emanating from the Premises. Both parties agree to indemnify and hold harmless the other party of and from any loss, attorney's fees, expenses or claims arising out of any such damage or injury. 7.6 PUBLIC LIABILITY INSURANCE. Tenant shall during the term hereof keep in full force and effect at its expense a policy or policies of public liability insurance with respect to the Premises and the business of Tenant, on terms and with companies approved in writing by Landlord, in which both Tenant and Landlord shall be covered by being named as insured parties under reasonable limits of liability not less than $1,000,000, or such greater coverage as 32 Landlord may reasonably require, combined single limit coverage for injury or death. Such policy or policies shall provide that thirty (30) days' written notice must be given to Landlord prior to cancellation thereof. Tenant shall furnish evidence satisfactory to Landlord at the time this Lease is executed that such coverage is in full force and effect. ARTICLE 8. CONDEMNATION 8.1 SUBSTANTIAL TAKING. If all or a substantial part of the Premises are taken for any public or quasi-pubic use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and the taking would prevent or materially interfere with the use of the Premises for the purpose for which it is then being used, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease effective on the date physical possession is taken by the condemning authority. Tenant shall have no claim to the condemnation award or proceeds in lieu thereof, except that Tenant shall be entitled to a separate award for the cost of removing and moving its personal property. 8.2 PARTIAL TAKING. If a portion of the Premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and this Lease is not terminated as provided in Section 8.1 above, the rent payable under this Lease during the unexpired portion of the term shall be adjusted to such an extent as may be fair and reasonable under the circumstances. Tenant shall have no claim to the condemnation award or proceeds in lieu thereof, except that Tenant shall be entitled to a separate award for the cost of removing and moving its personal property. ARTICLE 9. ASSIGNMENT OR SUBLEASE 9.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or assign, in whole or in part, its rights and obligations under this Lease and in the Building. Any such sale, transfer or assignment shall operate to release Landlord from any and all liabilities under this Lease arising after the date of such sale, assignment or transfer. 9.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this Lease, or allow it to be assigned, in whole or in part, by operation of law or otherwise (including without limitation by transfer of a majority interest of stock, merger, or dissolution, which transfer of majority interest of stock, merger or dissolution shall be deemed an assignment) or mortgage or pledge the same, or sublet the Premises, in whole or in part, without the prior written consent of Landlord, which shall not be unreasonably withheld or delayed and in no event shall say such assignment or sublease ever release Tenant or any guarantor from any obligation or liability hereunder. Notwithstanding anything in this Lease to the contrary, in the event of any assignment or sublease, any option or right of first refusal granted to Tenant shall not be assignable by Tenant to any assignee or sublessee. No assignee or sublessee of the Premises or any portion thereof may assign or sublet the Premises or any portion thereof. 33 9.3 CONDITIONS OF ASSIGNMENT. If Tenant desires to assign or sublet all or any part of the Premises, it shall so notify Landlord at least thirty (30) days in advance of the date on which Tenant desires to make such assignment or sublease. Tenant shall provide Landlord with a copy of the proposed assignment or sublease and such information as Landlord might request concerning the proposed sublessee or assignee to allow Landlord to make informed judgments as to the financial condition, reputation, operations and general desirability of the proposed sublessee or assignee. Within fifteen (15) days after Landlord's receipt of Tenant's proposed assignment or sublease and all required information concerning the proposed sublessee or assignee, Landlord shall have the following options: (1) cancel this Lease as to the Premises or portion thereof proposed to be assign or sublet; (2) consent to the proposed assignment or sublease, and, if the rent due and payable by any assignee or sublessee under any such permitted assignment or sublease (or a combination of the rent payable under such assignment or sublease plus any bonus or any other consideration or any payment incident thereto) exceeds the rent payable under this Lease for such space, after recovering all direct and indirect costs associated with such assignment or Sublease, Tenant shall pay to Landlord 50% of all such excess rent and other excess consideration within ten (10) days following receipt thereof by Tenant; or (3) refuse, in its sole and absolute discretion and judgment, to consent to the proposed assignment or sublease, which refusal shall be deemed to have been exercised unless Landlord gives Tenant written notice providing otherwise. Upon the occurrence of an event of default, if all or any part of the Premises are then assigned or sublet, Landlord, in addition to any other remedies provided by this Lease or provided by law, may, at its option, collect directly from the assignee or sublessee all rents becoming due to Tenant by reason of the assignment or sublease, and Landlord shall have a security interest in all properties on the Premises to secure payment of such sums. Any collection directly by Landlord from the assignee or sublessee shall not be construed to constitute a novation or a release of Tenant or any guarantor from the further performance of its obligations under this Lease. 9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to any recorded mortgage presently existing or hereafter created upon the Building and to all existing recorded restrictions, covenants, easements and agreements with respect to the Building. Landlord is hereby irrevocably vested with full power and authority to subordinate Tenant's interest under this Lease to any first mortgage lien hereafter placed on the Premises, and Tenant agrees upon demand to execute additional instruments subordinating this Lease as Landlord may require. If the interests of Landlord under this Lease shall be transferred by reason of foreclosure or other proceedings for enforcement of any first mortgage or deed of trust on the Premises, Tenant shall be bound to the transferee (sometimes called the "Purchaser") at the option of the Purchaser, under the terms, covenants and conditions of this Lease for the balance of the term remaining, including any extensions or renewals, with the same force and effect as if the Purchaser were Landlord under this Lease, and, if requested by the Purchaser, Tenant agrees to attorn to the Purchaser, including the first mortgagee under any such mortgage if it be the Purchaser, as its Landlord. Notwithstanding the foregoing, Tenant shall not be disturbed in its possession of the Premises so long as Tenant is not in default hereunder. 9.5 TENANT'S STATEMENTS. Tenant agrees to furnish, from time to time, within ten (10) days after receipt of a request from Landlord or Landlord's mortgagee, a statement certifying, if applicable, which may indicate exceptions thereto the following: Tenant is in 34 possession of the Premises; the Premises are acceptable; the Lease is in full force and effect; the Lease is unmodified; Tenant claims no present charge, lien, or claim of offset against rent; the rent is paid for the current month, but is not prepaid for more than one month and will not be prepaid for more than one month in advance; there is no existing default by reason of some act or omission by Landlord; and such other matters as may be reasonably required by Landlord or Landlord's mortgagee. Tenant's failure to deliver such statement, in addition to being a default under this Lease, shall be deemed to establish conclusively that this Lease is in full force and effect except as declared by Landlord, that Landlord is not in default of any of its obligations under this Lease, and that Landlord has not received more than one month's rent in advance. Tenant agrees to furnish, from time to time, however no more frequently than annually, within ten (10) days after receipt of a request from Landlord, a current financial statement of Tenant, certified as true and correct by Tenant. ARTICLE 10. LIENS 10.1 LANDLORD'S LIEN. As security for payment of rent, damages and all other payments required to be made by this Lease, Tenant hereby grants to Landlord a lien upon all property of Tenant now or subsequently located upon the Premises. If Tenant is in default in the payment of any rentals, damages or other payments required to be made by this Lease or is in default of any other provision of this Lease, Landlord may enter upon the Premises, by picking or changing locks if necessary, and take possession of all or any part of the personal property, and may sell all or any part of the personal property at a public or private sale, in one or successive sales, with or without notice, to the highest bidder for cash, and, on behalf of Tenant, sell and convey all or part of the personal property to the highest bidder, delivering to the highest bidder all of Tenant's title and interest in the personal property sold. The proceeds of the sale of the personal property shall be applied by Landlord toward the reasonable costs and expenses of the sale, including attorney's fees, and then toward the payment of all sums then due by Tenant to Landlord under the terms of this Lease. Any excess remaining shall be paid to Tenant or any other person entitled thereto by law. ARTICLE 11. DEFAULT AND REMEDIES 11.1 DEFAULT BY TENANT. The following shall be deemed to be events of default ("Default") by Tenant under this Lease: (1) Tenant shall fail to pay when due any installment of rent or any other payment required pursuant to this Lease; (2) Tenant shall abandon any substantial portion of the Premises; (3) Tenant shall fail to comply with any material term, provision or covenant of this Lease, other than the payment of rent, and the failure is not cured within ten (10) days after written notice to Tenant unless in the case of a non-monetary default and such default may not be cured within such period, Tenant has proceeded with reasonable promptness after written notice from Landlord and has continued with such effort to cure the default as soon as practicable; (4) Tenant shall file a petition or if an involuntary petition is filed against Tenant, or becomes insolvent, under any applicable federal or 35 state bankruptcy or insolvency law or admit that it cannot meet its financial obligations as they become due; or a receiver or trustee shall be appointed for all or substantially all of the assets of Tenant; or Tenant shall make a transfer in fraud of creditors or shall make an assignment for the benefit of creditors; or (5) Tenant shall do or permit to be done any act which results in a lien being filed against the Premises or the Building and/or project of which the Premises are a part, for which Tenant has made no provision to eliminate such lien through an escrow agreement or bond. In the event that an order for relief is entered in any case under Title 11, U.S.C. (the "Bankruptcy Code") in which Tenant is the debtor and: (A) Tenant as debtor-in-possession, or any trustee who may be appointed in the case (the "Trustee") seeks to assume the Lease, then Tenant, or Trustee if applicable, in addition to providing adequate assurance described in applicable provisions of the Bankruptcy Code, shall provide adequate assurance to Landlord of Tenant's future performance under the Lease by depositing with Landlord a sum equal to the lesser of twenty-five percent (25%) of the rental and other charges due for the balance of the Lease term of six (6) months' rent ("Security"), to be held (without any allowance for interest thereon) to secure Tenant's obligations under the Lease, and (B) Tenant, or Trustee if applicable, seeks to assign the Lease after assumption of the same, then Tenant, in addition to providing adequate assurance described in applicable provisions of the Bankruptcy Code, shall provide adequate assurance to Landlord of the proposed assignee's future performance under the Lease by depositing with Landlord a sum equal to the Security to be held (without any allowance or interest thereon) to secure performance under the Lease. Nothing contained herein expresses or implies, or shall be construed to express or imply, that Landlord is consenting to assumption and/or assignment of the Lease by Tenant, and Landlord expressly reserves all of its rights to object to any assumption and/or assignment of the Lease. Neither Tenant nor any Trustee shall conduct or permit the conduct of any "fire", "bankruptcy", "going out of business" or auction sale in or from the Premises. 11.2 REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of a Default as defined above Landlord may elect either (i)to cancel and terminate this Lease and this Lease shall not be treated as an asset of Tenant's bankruptcy estate, or (ii) to terminate Tenant's right to possession only without canceling and terminating Tenant's continued liability under this Lease. Notwithstanding the fact that initially Landlord elects under (ii) to terminate Tenant's right to possession only, Landlord shall have the continuing right to cancel and terminate this Lease by giving three (3) days' written notice to Tenant of such further election, and shall have the right to pursue any remedy at law or in equity that may be available to Landlord. In the event of election under (ii) to terminate Tenant's right to possession only, Landlord may, at Landlord's option, enter into the Premises and take and hold possession thereof, without such entry into possession terminating this Lease or releasing Tenant in whole or in part from Tenant's obligation to pay all amounts hereunder for the full stated term. Upon such reentry, Landlord may remove all persons and property from the Premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant, without becoming liable for any loss or damage which may be occasioned thereby. Such reentry shall be conducted in the following manner: without resort to judicial process or notice of any kind if Tenant has abandoned or voluntarily surrendered possession of the Premises; and, 36 otherwise, by resort to judicial process. Upon and after entry into possession without termination of the Lease, Landlord may, but is not obligated to, relet the Premises, or any part thereof, to any one other than the Tenant, for such time and upon such terms as Landlord, in Landlord's sole discretion, shall determine. Landlord may make alterations and repairs to the Premises to the extent deemed by Landlord necessary or desirable. Upon such reentry, Tenant shall be liable to Landlord as follows: A For all attorneys' fees incurred by Landlord in connection with exercising any remedy hereunder; B. For the unpaid installments of base rent, additional rent or other unpaid sums which were due prior to such reentry, including interest and late payment fees, which sums shall be payable immediately. C. For the installments of base rent, additional rent, and other sums falling due pursuant to the provisions of this Lease for the period after reentry during which the Premises remain vacant, including late payment charges and interest, which sums shall be payable as they become due hereunder. D. For all expenses incurred in releasing the Premises, including leasing commissions, attorneys fees, and costs of alteration and repairs, which shall be payable by Tenant as they are incurred by Landlord; and E. While the Premises are subject to any new lease or leases made pursuant to this Section, for the amount by which the monthly installments payable under such new lease or leases is less than the monthly installment for all charges payable pursuant to this Lease, which deficiencies shall be payable monthly. Notwithstanding Landlord's election to terminate Tenant's right to possession only, and notwithstanding any reletting without termination, Landlord, at any time thereafter, may elect to terminate this Lease, and to recover (in lieu of the amounts which would thereafter be payable pursuant to the foregoing, but not in diminution of the amounts payable as provided above before termination), as damages for loss of bargain and not as a penalty, an aggregate sum equal to the amount by which the rental value of the portion of the term unexpired at the time of such election is less than an amount equal to the unpaid base rent, percentage rent, and additional rent and all other charges which would have been payable by Tenant for the unexpired portion of the term of this Lease, which deficiency and all expenses incident thereto, including commissions, attorneys' fees, expenses of alterations and repairs, shall be due to Landlord as of the time Landlord exercises said election, notwithstanding that the term had not expired. If Landlord, after such reentry, leases the Premises, then the rent payable under such new lease shall be conclusive evidence of the rental value of the unexpired portion of the term of this Lease. If this Lease shall be terminated by reason of the bankruptcy or insolvency of Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate, as liquidated 37 damages for loss of bargain and not as a penalty, the amount determined by the immediately preceding paragraph. 11.3 LANDLORD'S RIGHT TO PERFORM FOR ACCOUNT OF TENANT. If Tenant shall be in Default under this Lease, Landlord may cure the Default at any time after 10 days written notice from Landlord for the account and at the expense of Tenant. If Landlord cures a Default on the part of Tenant, Tenant shall reimburse Landlord upon demand for any amount expended by Landlord in connection with the cure, including, without limitation, attorney's fees and interest. 11.4 INTEREST AND ATTORNEY'S FEES. In the event of a Default by Tenant: (1) if a monetary default, interest shall accrue on any sum due and unpaid at the rate of the lesser of twelve percent (12%) per annum or the highest rate permitted by law and, if Landlord places in the hands of an attorney the enforcement of all or any part of this Lease, the collection of any rent due or to become due or recovery of the possession of the Premises, Tenant agrees to pay Landlord's costs of collection, including reasonable attorney's fees for the services of the attorney, whether suit is actually filed or not. 11.5 ADDITIONAL REMEDIES, WAIVERS, ETC. A. The rights and remedies of Landlord set forth herein shall be in addition to any other right and remedy now and hereafter provided by law. All rights and remedies shall be cumulative and not exclusive of each other. Landlord may exercise its rights and remedies at any times, in any order, to any extent, and as often as Landlord deems advisable without regard to whether the exercise of one right or remedy precedes, concurs with or succeeds the exercise of another. B. A single or partial exercise of a right or remedy shall not preclude a further exercise thereof, or the exercise of another right or remedy from time to time. C. No delay or omission by Landlord in exercising a right or remedy shall exhaust or impair the same or constitute a waiver of, or acquiesce to, a Default. D. No waiver of a Default shall extend to or affect any other Default or impair any right or remedy with respect thereto. E. No action or inaction by Landlord shall constitute a waiver of a Default. F. No waiver of a Default shall be effective unless it is in writing and signed by Landlord. 38 ARTICLE 12. RELOCATION ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES 13.1 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE PARTIES: THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN WRITING IN THIS LEASE. 13.2 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT. 13.3 LIMITATION OF WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OR MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. ARTICLE 14. MISCELLANEOUS 14.1 ACT OF GOD. Landlord shall not be required to perform any covenant or obligation in this Lease, or be liable in damages to Tenant, so long as the performance or non-performance of the covenant or obligation is delayed, caused or prevented by an act of God, force majeure or by Tenant. 39 14.2 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors and assigns. It is hereby covenanted and agreed that should Landlord's interest in the Premises cease to exist for any reason during the term of this Lease, then notwithstanding the happening of such event this Lease nevertheless shall remain unimpaired and in full force and effect, and Tenant hereunder agrees to attorn to the then owner of the Premises. 14.3 RENT TAX. If applicable in the jurisdiction where the Premises are issued, Tenant shall pay and be liable for all rental, sales and use taxes or other similar taxes, if any, levied or imposed by any city, state, county or other governmental body having authority, such payments to be in addition to all other payments required to be paid to Landlord under the terms of this Lease. Any such payment shall be paid concurrently with the payment of the rent, additional rent, operating expenses or other charge upon which the tax is based as set forth above. 14.4 CAPTIONS. The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of any Section. 14.5 NOTICE. All rent and other payments required to be made by Tenant shall be payable to Landlord at the address set forth in Section 1.5. All payments required to be made by Landlord to Tenant shall be payable to Tenant at the address set forth in Section 1.5, or at any other address within the United States as Tenant may specify from time to time by written notice. Any notice or document required or permitted to be delivered by the terms of this Lease shall be deemed to be delivered (whether or not actually received) when deposited in the United States Mail, postage prepaid, certified mail, return receipt requested, addressed to the parties at the respective addresses set forth in Section 1.5. 14.6 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature does not constitute a reservation of space or an option to lease. This Lease is not effective until execution by and delivery to both Landlord and Tenant. 14.7 CORPORATE AUTHORITY. If Tenant executes this Lease as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby personally represent and warrant that Tenant is a duly authorized and existing corporation, that Tenant is qualified to do business in the state in which the Premises are located, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation Is authorized to do so. In the event any representation or warranty is false, all persons who execute this Lease shall be liable, individually, as Tenant. 14.8 HAZARDOUS SUBSTANCES. Tenant shall not bring or permit to remain on the Premises or the Building any asbestos, petroleum or petroleum products, explosives, toxic materials, or substances defined as hazardous wastes, hazardous materials, or hazardous substances under any federal, state, or local law or regulation ("Hazardous Materials"). Tenant's violation of the foregoing prohibition shall constitute a material breach and default hereunder and 40 Tenant shall indemnify, hold harmless and defend Landlord from and against any claims, damages, penalties, liabilities, and costs (including reasonable attorney fees and court costs) caused by or arising out of (i) a violation of the foregoing prohibition or (ii) the presence or any release of any Hazardous Materials on, under, or about the Premises or the Building during the term of the Lease. Tenant shall clean up, remove, remediate and repair any soil or ground water contamination and damage caused by the presence and any release of any Hazardous Materials in, on, under, or about the Premises or the Building during the term of the Lease in conformance with the requirements of applicable law. Tenant shall immediately give Landlord written notice of any suspected breach of this paragraph; upon learning of the presence of any release of any Hazardous Materials, and upon receiving any notices from governmental agencies pertaining to Hazardous Materials which may affect the Premises or the Building. The obligations of Tenant hereunder shall survive the expiration or earlier termination, for any reason, of this Lease. To the best of Landlord's knowledge, the Premises does not contain any hazardous substances as of the Lease Commencement Date. 14.9 SEVERABILITY. If any provision of this Lease or the application thereof to any person or circumstances shall be invalid or unenforceable to any extent, the remainder of this Lease and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 14.10 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease and, if as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the right, title and interest of Landlord in the Building as the same may then be encumbered and neither Landlord nor any person or entity comprising Landlord shall be liable for any deficiency. In no event shall Tenant have the right to levy execution against any property of Landlord nor any person or entity comprising Landlord other than its interest in the Building as herein expressly provided. 14.11 BROKERAGE. Landlord and Tenant each represents and warrants to the other that there is no obligation to pay any brokerage fee, commission, finder's fee or other similar charge in connection with this Lease including expansions, options and renewals, other than fees due to Welsh Companies, Inc. and Woodbridge Partners which are the responsibility of Landlord. Each party covenants that it will defend, indemnify and hold harmless the other party from and against any loss or liability by reason of brokerage or similar services alleged to have been rendered to, at the instance of, or agreed upon by said indemnifying party. Notwithstanding anything herein to the contrary, Landlord and Tenant agree that there shall be no brokerage fee or commission due on expansions, options or renewals by Tenant. 14.12 NOTIFICATION TO TENANT. Landlord hereby notifies Tenant that the person authorized to execute this Lease and manage the Premises is Hoyt Properties, Inc. which has been appointed to act as the agent in leasing management and operation of the Building for owner and is authorized to accept service of process and receive or give receipts for notices and demands on behalf of Landlord. Landlord reserves the right to change the identity and status of its duly authorized agent upon written notice to Tenant. 41 14.13 EXHIBITS. Reference is made to the following Exhibits which are attached hereto and made a part hereof: Exhibit A Plan of Demised Premises Exhibit B Legal Description Exhibit C Floorplan and Tenant Finish Specifications Exhibit D Schedule of Additional Leasehold Improvements Exhibit E Sign Restrictions Exhibit F Rules and Regulations Exhibit G Restrictive Covenants ARTICLE 15. SIGNATURES SIGNED effective the day and year first above written: LANDLORD TENANT PLYMOUTH PARTNERS II INSIGNIA SYSTEMS, INC. (A MINNESOTA GENERAL PARTNERSHIP) (A MINNESOTA CORPORATION) By: /s/ Steven B. Hoyt By: /s/ John R. Whisnant Its: General Partner Its: VP-Finance Date: 10/12/98 Date: 10/9/98 42 RIDER TO LEASE DATED OCTOBER 5, 1998 BY AND BETWEEN PLYMOUTH PARTNERS II (A MINNESOTA GENERAL PARTNERSHIP), AS LANDLORD AND INSIGNIA SYSTEMS, INC. (A MINNESOTA CORPORATION), AS TENANT INTERPRETATION OF RIDER: The Lease is hereby modified and supplemented. Wherever there exists a conflict between the Lease and this Rider, the provisions of this Rider shall control. ARTICLE 15 - LETTER OF CREDIT Within five (5) days after execution of the lease by both parties, and as a condition precedent to Landlord's obligations to commence improvement of the Premises, Tenant, at Tenant's sole cost and expense, shall deliver to Landlord an irrevocable, unconditional, standby letter of credit in the amount of $240,000.00 (such letter of credit together with any other renewal or replacement letters of credit delivered or to be delivered by Tenant hereunder shall be referred to herein collectively as the "Letter of Credit"). Any Letter of Credit (including any renewal or replacement letter of credit) described hereunder shall be in form and substance, and issued by a United States bank or a United States agency of a foreign bank, in either case authorized to conduct business in Minnesota and reasonably acceptable to Landlord (the "Issuer"). The Letter of Credit shall be maintained throughout the period from the date of issuance until the termination of the Lease Agreement, except as hereinafter agreed. To the extent, Tenant has not been in default of this Lease, such Letter of Credit shall be reduced to $160,000.00 on April 1, 2000 and further reduced to $80,000.00 on April 1, 2001. On April 1, 2002, provided no draw in pending in connection with any statement delivered to Issuer by Landlord pursuant to this Article 15, Tenant shall be entitled to a full release of the Letter of Credit and Landlord or Issuer shall return the Letter of Credit to Tenant. Tenant shall periodically renew the Letter of Credit to assure that it is maintained throughout the entirety of said period; provided that any single Letter of Credit may have a term or maturity of twelve (12) months or more as determined by Tenant from the date it is issued and any such periodic Letter of Credit must be extended, renewed and/or replaced with a new Letter of Credit at least thirty (30) days prior to the maturity date of the preceding periodic Letter of Credit. Notwithstanding any contrary provision herein, if, at any time, Tenant defaults in its obligations under this Lease beyond the applicable cure period therefor, if any, Landlord may draw upon the Letter of Credit, which remedy shall be in addition to any other remedy which may be elected by Landlord hereunder. No draw by Landlord under the Letter of Credit shall be deemed a waiver of, or be deemed to have cured, any default by Tenant under any provision of the Lease; provided that a draw by Landlord shall be applied to delinquent obligations of Tenant under the Lease and, if so applied, shall be deemed to have cured Tenant's default in the payment of such obligations to the extent the proceeds of the draw are applied to cover the delinquent payment obligations. The funds drawn by Landlord under the Letter of Credit shall be nonrefundable and shall remain the property of Landlord. To obtain the draw under the Letter of Credit, Landlord shall deliver to the Issuer (with a copy to Tenant) an original statement signed by a person who purports to be an authorized representative of Landlord stating that Landlord has given Tenant at least ten (10) days prior notice of Landlord's intention to draw on the Letter of Credit and that Landlord is entitled to draw on the Letter of Credit in the amount thereof in accordance with the terms 43 of this Lease and the Letter of Credit. No claim or demand of set-off, deduction, or default under the Lease shall be deemed an estoppel or defense to any draw under the Letter of Credit. The delivery of the Letter of Credit to Landlord and the drawing upon the Letter of Credit by Landlord shall be in addition to all other rights and remedies available to Landlord under the Lease, or arising at law or in equity, and shall not be in substitution or replacement thereof. ARTICLE 16 - SATELLITE DISH To the extent Tenant requires a satellite dish on the Building, Landlord agrees to not withhold such approval provided Tenant meets all requirements of the City and any other applicable requirement for the installation of such equipment. The installation of a satellite dish or any such equipment shall not cause Tenant's Base Rent to increase. The installation and removal of any satellite dish and equipment shall be under the supervision of Landlord and Tenant agrees to remove such dish and equipment upon expiration of the Lease. LANDLORD TENANT PLYMOUTH PARTNERS II INSIGNIA SYSTEMS, INC. (A MINNESOTA GENERAL PARTNERSHIP) (A MINNESOTA CORPORATION) By: /s/Steven B. Hoyt By: John R. Whisnant Its: General Partner Its: VP-Finance Date: 10/12/98 Date: 10/9/98 44 EXHIBIT "A" (BUILDING PICTURE) 45 EXHIBIT "B" LEGAL DESCRIPTION Lots 1, 2 and 3, Block 1, Plymouth Technology Park 2nd Addition 46 EXHIBIT C INSIGNIA SYSTEMS, INC. ESTIMATE (REVISION #2) BASIS OF BUDGET, SEPTEMBER 23, 1998 PAGE 1 OF 5 1. This estimate is based on Sheet A1 dated September 15, 1998, 1998 by Architects Professional Association. 2. This estimate specifically includes: A. Concrete: 1) Infill utility trench with concrete to match existing floor, approximately 3,600 SF of floor area. B. Carpentry: 1) Provide 8 FL of closet rod and shelf. 2) Provide 2 plastic laminate vanities. C. Doors, Frames & Hardware: 1) Thirty-three (33) hollow metal frames. 2) Five (5) hollow metal doors. 3) Thirty (30) non-rated, plain sliced, red oak wood doors. 4) One (1) non-rated, plain sliced, red oak wood bi-fold door. 5) Provide Schlage passage hardware on all doors. D. Drywall: 1) Provide demising walls to deck between office/warehouse of office/printing, sheetrock on each side with sound insulation. 2) Provide partitions to ceiling grid at all interior office partitions. 3) Provide sheetrock on existing framing and insulation at window wall locations within the office area. 4) Provide taping to deck on warehouse side of demising wall. 5) Provide taping to deck on new walls in printing room. E. Miscellaneous Metal: 1) Allowance of $1,500 for any required steel reinforcing at rooftop units. F. Rooftop Fencing: 1) Allowance of $1,00 for fencing around two (2) rooftop units. 47 INSIGNIA SYSTEMS, INC. ESTIMATE (REVISION #2) BASIS OF BUDGET, SEPTEMBER 23, 1998 PAGE 2 OF 5 G. Glazing: 1) Provide non-insulated, uncoated glass at new entry vestibule. H. Painting: 1) Paint all gypsum board walls at office areas with two coats of latex eggshell. 2) Finish doors, frames and railings at rear entry. 3) Paint warehouse side of new demising wall to deck. 4) Paint new demising wall in the printing room to deck. 5) Provide 54" type II vinyl wallcovering with an allowance of $8.00 per lineal yeard at reception and board room. I. Acoustical Ceiling: 1) Suspension System at 10' AFF - 2x4 intermediate duty #511 series by Chicago Metallic. 2) Lay-in Panel - 2' x 4' x 3/4" scored 2' x 2' revealed edge mineral tile by USG> J. Ceramic Tile: 1) Provide 4" x 4" standard grade ceramic wall tile, and 1" x 1" standard grade floor at two (2) bathroom locations as shown on plans. 2) Provide standard grade 6" x 6" quarry tile at one (1) vestibule location. K. Carpet and Carpet Base: 1) Provide glued down carpet and carpet base at a $14.00 per yard installed allowance. L. Specialties: 1) Provide five (5) floor mount toilet partitions. 2) Provide toilet accessories as shown on the plans. 3) Provide loading dock equipment. * One (1) Kelly "FX" Automatic Dockleveler Model FX 6 X 8. * Size to be 6 W x 8L. * Capacity to be 25,000 lbs. (ANSI-MH 14.1 - 87/CS-202-56). * Includes two (2) laminated dock bumpers. * Brush weatherseals. * Kelly Tufseal Dockseal - Model #DSH 200. * Projection to be 10". * Basic material to be 40 oz. Vinyl. * Color to be black. * New Pit Construction. * Includes 8 PC Steel curb angle set. 48 INSIGNIA SYSTEMS, INC. ESTIMATE (REVISION #2) BASIS OF BUDGET, SEPTEMBER 23, 1998 PAGE 3 OF 5 M. HVAC: 1) Project design and coordination. 2) Furnish four heating and cooling rooftop units with outdoor air economizers, thermostats and smoke detectors. The units will have a total capacity of 36.5 tons. 3) Spot the roof curbs. 4) Roofing of penetrations made during HVAC installation. 5) Rig the units on the roof. 6) Fabricate and install the shet metal air distribution system and diffusers. 7) Air balancing. 8) Gas piping and fittings. 9) Start and test the equipment. 10) Permits, fees, taxes and freight. N. Plubing: 1) Plumbing permits and approved plumbing drawings. 2) Installation in compliance with all codes and ordinances. 3) Roofing of penetrations made during plumbing instalation. 4) Plumbing fixtures shall meet ADA requirements. a) Five (5) water closets, floor set, tank type. b) One (1) urinal, wall hung, flush valve. c) Four (4) lavatories, self rimming type, single lever handle faucet d) One (1) electric water cooler, wall hung, compact, standard cabinet. e) One (1) mop sink, floor set, 24 x 24, Chicago 897. f) Two (2) floor drains. g) One (1) water heater, electric, twenty gallon O. Fire Protection: 1) Add and drop 84 new chrome plated semi recessed sprinklers through the new ceiling. 2) All sprinklers will be installed in a symmetrical pattern but will not necessarily be installed in the center of the ceiling tiles or centered between other ceiling fixtures. 3) All required spinkler permits and approvals. P. Electrical: 148 2 x 4 layins 57 8" two lamp strips 15 Exit lights 49 INSIGNIA SYSTEMS, INC. ESTIMATE (REVISION #2) BASIS OF BUDGET, SEPTEMBER 23, 1998 PAGE 4 OF 5 60 Single pole switches in the offices 2 Single pole switches in the warehouse 119 Duplex receptacles in the offices (includes no GFI receptacles in the bathrooms) 1 Duplex receptacle at the panel 60 Phone ring and string openings 1 400 amp 480 volt panel in the space 1 400 amp CT, meter and disconnect in the main electrical room 1 75 kV transformer 1 200 amp 208 volt panel 4 RTU 1 PRV 1 1500 watt water heater Q. Final Cleaning of the Office Area 3. Alternates A. Provide airconditioning in the warehouse area with two (2) 10-ton rooftop units, 20 tons total. Add $30,383 B. Provide one (1) floor mounted janitor sink in the printing area. Add $ 995 C. Provide plastic laminate base and upper cabinets and one (1) sink in the lunch room. Each base cabinet will have one shelf and two drawers. Add $ 8,840 D. Provideplastic laminate base cabinet with one (1) sink in the board room. Each base cabinet will have one shelf and two drawers. Add $ 2,615 E. Provide one (1) aluminum exit dor at grid line #1 to match base building finish. Add $ 2,070 F. Provide 8' chain link fence in warehouse area as shown on plans. Add $ 1,513 G. Electrical wiring of owner's equipment. 1 30 amp 208 volt 3 phase panel in the phone room. 6 IG receptacles on dedicated circuits in the phone room. 1 30 amp receptacle. 9 dedicated receptacles in the lunch room. 1 stove hook-up. 2 connection of printer control panels to power. No other wiring concerned with the printers in included. No wiring of the exhaust system in included. 2 heater units wired to the connection point on the units. 50 INSIGNIA SYSTEMS, INC. ESTIMATE (REVISION #2) BASIS OF BUDGET, SEPTEMBER 23, 1998 PAGE 5 OF 5 No control wiring is included. 30 indistrial 8' 2 lamp strips in the printing room with two switches. 1 Compressor in the room next to the mechanical room. Power only, no control wiring. 1 motorized projection screen. 17 Parabolic 2 x 4' flourecent lay-in fixtures in the reception room and in the conference room. 8 Recessed cans in the conference room. 1 Dimmmer in the conference room. 12 Recessed cans in the training room. 2 Dimmers in the training room. 1 Reconnection of the receptionist desk. Add $ 30,906 4. This estimate specifically excludes: A. Any cost that may be incurred due to the presence of hazardous materials in the work area. B. Any fire alarm systems other than sprinklers. C. Any warehouse exhaust system. D. Any sheetrock in the warehouse other than the demising wall. E. Any sheetrock on the window walls in the printing room. F. Moving any furniture. G. Any appliances. H. Any window treatments. I. Any SAC or WAC charges. J. Wiring tenant furniture. 5. All work will be done during regular working hours (7:00 a.m. to 4:00 p.m., Monday through Friday). 6. This estimate is subject to change as the scope of the work and the design are finalized. 7. This budget is valid until November 2, 1998. 51 EXHIBIT "D" SCHEDULE OF ADDITIONAL LEASEHOLD IMPROVEMENTS The following indicate clarifications to the Leasehold Improvements and further indicate what Landlord is responsible to pay for and provide to Tenant. 1) The doors shall be 3' 0" x 7' 0" solid core, sliced red oak as shall be the bi-fold doors. 2) All ceiling heights in office area shall be 10'. 3) Ceiling tile shall be 2' x 4' Armstrong "second look". 4) All office walls or other interior walls abutting the window mullions shall be equipped with a neoprene gasket or other effective sound transmission barrier to prevent sound transmission between the respective offices. 5) All drywall shall be taped and sanded and shall receive 2 coats of latex eggshell with the exception of the reception area and boardroom which shall receive vinyl wall covering. 6) Carpet allowance shall be $14.00 per square yard, installed. 7) There shall be no other permits, fees or charges of any kind or nature from the local municipality including, but not limited to SAC, WAC, etc. 8) There shall be no charges from Landlord for supervision of the construction. 9) Landlord shall furnish all code required signage for the Premises such as exiting signs, etc. 10) Landlord shall furnish one (1) premium grade of Kelly or Rite-Hite dock leveler with door seal. 11) All sheetrock walls in the warehouse and printing areas shall be taped, sanded and painted. 12) All walls separating the office area (excluding the print area office) from the warehouse and printing areas shall contain sound insulation and shall run to the roof deck. 13) Landlord shall furnish and install five (5) water closets, floor set tank type. 14) Landlord shall provide opening in wall and string and conduit above ceiling grid, however Tenant shall be responsible for the cost of installing the wiring and providing the jack. Any additional items or improvements shall be the responsibility of Tenant and shall be at the sole cost of Tenant. 52 EXHIBIT "E" SIGN CRITERIA FOR PLYMOUTH TECHNOLOGY PARK Landlord shall provide one (1) rectangular non-illuminated site sign identifying Plymouth Technology Park. The sign will be appropriately 4'x 8' and mounted on a 3' x 8' brick base. One (1) rectangular non-illuminated sign structure approximately 3' x 6' mounted on a 3' x 6' brick base will be provided for each building to be shared for tenant identification. Landlord shall provide single color vinyl Tenant copy. Landlord shall also provide vinyl address lettering on both the front and rear entrances to Tenant's Demised Premises. Any special Tenant logo or colors shall be at Tenant's sole cost. Any additional Tenant signage on the front or rear entrance shall be done in good taste within city code and shall be at the sole cost of the Tenant. 53 EXHIBIT "F" BUILDING RULES AND REGULATIONS 1. Any sign, lettering, picture, notice or advertisement installed on or in any part of the Premises and visible from the exterior or interior common area of the Building, or visible from the exterior of the Premises, shall be installed at Lessee's sole cost and expense, and in such manner, character and style as Lessor may approve in writing. Anything herein to the contrary not withstanding, approval as to signs shall be subject to Lessor's approval which may be withheld in Lessor's sole discretion. In the event of a violation of the foregoing by Lessee, Lessor may remove the same without any liability and may charge the expense incurred by such removal to Lessee. 2. No awning or other projection shall be attached to the outside walls of the Building. No curtains, blinds, shades or screens visible from the exterior Premises, shall be attached to or hung in, or used in connection with any such curtains, blinds, shades, screens or other fixtures must be of a quality, type, design and color, and attached in the manner approved by Lessor. 3. Lessee, its employees, customers, invitees and guests shall not obstruct sidewalks, entrances, passages, corridors, vestibules, halls or stairways in and about the Building which are used in common with other tenants and their employees, customers, guests and invitees, and which are not a part of the Premises of Lessee. Lessee shall not place objects against glass partitions or doors or windows which would be unsightly from the Building corridors or from the exterior of the Building and will promptly remove any such objects upon notice from Lessor. 4. Lessee shall not make excessive noises, cause disturbances or vibrations or use or operate any electrical or mechanical devices that omit excessive sound or other waves or disturbances or create obnoxious odors, any of which may be offensive to the other tenants and operation of any device equipment, radio, television broadcasting or reception from or within the Building aerials or similar devices inside or outside of the Premises or on the Building. 5. Lessee shall not waste electricity, water or air conditioning furnished by Lessor, if any, and shall cooperate fully with Lessor to ensure the most effective operation of the Building's heating and air conditioning systems. 6. Lessee assumes responsibility for protecting its space from theft, robbery, and pilferage, which includes keeping doors locked and other means of entry to the Premises closed and secured after normal business hours. 54 7. In no event shall Lessee bring into the Building flammables, such as gasoline, kerosene, naphtha and benzene, or explosives or any other article of intrinsically dangerous nature except as permitted by law. If, by reason of the failure by Lessee to comply with the provisions of this subparagraph, any insurance premium for all or part of the Building shall at any time be increased, Lessee shall make immediate payment of the whole of the increased premium, without waiver of any of Lessor's other rights or law or in equity for Lessee's breach of this Lease. 8. Lessee shall comply with all applicable federal, state and municipal laws, ordinances and regulations, and building rules and shall not directly or indirectly make any use of the Premises which may be prohibited by any of the foregoing or which may be dangerous to persons or property or may increase the cost of insurance or require additional insurance coverage. 9. Lessor shall have the right to prohibit any advertising by Lessee which in Lessor's reasonable opinion tends to impair the reputation of the Building Complex or its desirability as a building complex for office/warehouse use, and upon written notice from Lessor, Lessee shall refrain from or discontinue such advertising. 10. The Premises shall not be used for cooking (as opposed to heating of food), lodging, sleeping or for any immoral or illegal purpose. 11. Lessee and Lessee's employees, agents, visitors and licensees shall observe faithfully and comply strictly with the foregoing Rules and Regulations and such other further appropriate rules and regulations as Lessor or Lessor's agent may from time to time adopt. Reasonable notice of any additional rules and regulations shall be given in such manner as Lessor may reasonably elect. 12. Unless expressly permitted by the Lessor, no additional locks or similar devices shall be attached to any door or window and no keys other than those provided by the Lessor shall be made for any door. If more than two keys for one lock are desired by the Lessee, the Lessor may provide the same upon payment by the Lessee. Upon termination of this Lease or of the Lessee's possession, the Lessee shall surrender all keys of the Premises and shall explain to the Lessor all combination locks on safes, cabinets and vaults. 13. Any carpeting cemented down shall be installed with a releasable adhesive. In the event of a violation of the foregoing by Lessee, Lessor may charge the expense incurred by such removal to Lessee. 14. The restrooms, drinking fountains and other plumbing fixtures shall not be used for any purpose other than those for which they are constructed, and no sweepings, rubbish, rags, coffee grounds or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the Lessee who, or whose employees, agents, visitors or licensees have caused the same. No person shall waste water by interfering or tampering with the faucets or otherwise. 55 15. No electric or other wires for any purpose shall be brought into leased Premises without Lessor's written permission specifying the manner in which same may be done. Lessee shall not overload any utilities serving the Premises. 16. No dog or other animal shall be allowed in the Building. 17. All loading, unloading, or delivery of goods, supplies or disposal of garbage or refuse shall be made only though entryways for such purposes. Lessee shall be responsible for any damage to the Building or the property of its employees or others and injuries sustained by any person whomsoever resulting from the use or moving of such articles in or out of the Premises, and shall make all repairs and improvements required by Lessor or governmental authorities in connection with the use or moving of such articles. 18. All safes, equipment or other heavy article shall be carried in our out of the Premises only in such manner as shall be prescribed in writing by Lessor, and Lessor shall in all cases have the right to specify the proper position of any such safe, equipment or other heavy article, which shall only be used by Lessee in a manner which will not interfere with or cause damage to the Premises or Building in which they are located, or to the other tenants or occupants of said Building. Lessee shall be responsible for any damage to the building or other property of its employees or others and injuries sustained by any person whomsoever resulting form the use or moving of such articles in or out of the Premises, and shall make all repairs and improvements required by Lessor or governmental authorities in connection with the use or moving of such articles. 19. Canvassing, soliciting and peddling in or about the Building Complex is prohibited and each Lessee shall cooperate to prevent the same. 20. Wherever in these Building Rules and Regulations the word "Lessee" occurs, it is understood and agreed that it shall mean Lessee's associates, employees, agents, clerks, invitees and visitors. Wherever the word "Lessor" occurs, it is understood and agreed that it shall mean Lessor's assignees, agents, clerks and visitors. 21. Lessor shall have the right to enter the Premises at hours convenient to the Lessee for the purpose of exhibiting the same to prospective tenants within the one hundred eighty (180) day period prior to the expiration of this Lease, and may place signs advertising the leased Premises for rent on the exterior of said Premises at any time within said period. 22. Lessee, its employees, customers, invitees and guests shall, when using the parking facilities in and around the Building, observe and obey all signs regarding fire lanes and no parking zones, and when parking always park between the designated lines. Lessor reserves the right to tow away, at the expense of the owner, any vehicle which is improperly parked or parked in a no parking zone. All vehicles shall be parked at the sole risk of the owner, and Lessor assumes no responsibility for any damage to or loss of vehicles. No vehicles shall be parked overnight. 56 23. In case of invasion, mob, riot, public excitement, or other commotion, Lessor reserves the right to prevent access to the Building during the continuance of the same by closing the doors or otherwise, for the safety of the tenant or the protection of the Building and the property therein. Lessor shall in no case be liable for damages for any error or other action taken with regard to the admission to or exclusion for the Building of any person. 24. All entrance doors to the Premises shall be locked when the Premises are not in use. All common corridor doors, if any, shall also be closed during times when the air conditioning equipment in the Building is operating so as not to dissipate the effectiveness of the system or place an overload thereon. 25. Lessor reserves the right at any time and from time to time to rescind, alter or waive, in whole or in part, any of these Rules and Regulations when it is deemed necessary, desirable, or proper, in Lessor's judgment, for its best interest or for the best interest of the tenants of the Building. 57 EXHIBIT "G" RESTRICTIVE CONVENANTS Plymouth Partners II, a Minnesota general partnership, the owner of the property legally described on Exhibit A attached hereto (the "Property") does hereby declare that the Property shall be subject to the following Restrictive Covenants which shall be binding on all subsequent owners of the Property and each owner shall accept title subject thereto: 1. Trash Disposal Facilities. There shall be no outsie trash disposal facilities located on the Property. 2. Duration. These Restrictive Covenants run with the land and shall be binding on all parties and persons claiming under them for a period to, and including, December 31, 2027, after which time, said Restrictive Covenants shall extend themselves automatically for successive periods of ten years each unless an instrument signed by a majority of the then owners of the Property has been recorded whereby said Restrictive Covenants are changed in whole or in part. 3. Enforcement. Enforcement of these Covenants shall be by proceedings at law and equity either to restrain violation or to recover damages against any person or persons violating or attemptint to violate the same. IN WITNESS WHEREOF, Plymouth Partners II has executed this document as of this 17th day of June, 1997. PLYMOUTH PARTNERS II, A Minnesota general partnership By: /s/ Steven B. Hoyt Its: Partner 58 EX-10.12 3 FIRST AMENDMENT TO FINANCING AGREEMENT EXHIBIT 10.12 FIRST AMENDMENT TO FINANCING AGREEMENT THIS FIRST AMENDMENT TO FINANCING AGREEMENT (this "Amendment"), made and entered into as of September 30, 1998, is by and between INSIGNIA SYSTEMS, INC., a Minnesota corporation (the "Borrower"), and U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC., formerly known as Republic Acceptance Corporation, (the "Lender"). RECITALS 1. The Lender and the Borrower entered into a Financing Agreement dated as of December 29, 1997 (The "Financing Agreement"): and 2. The Borrower desires to amend certain provisions of the Financing Agreement to add a provision regarding letters of credit and also desires to temporarily suspend the availability of Advances under the Financing Agreement, subject to reinstatement on the terms and subject to the conditions hereof; and 3. The Lender is willing to amend the Financing Agreement and to temporarily suspend the availability of Advances thereunder without terminating the business relationship between the Lender and the Borrower under the Financing Agreement, all on the terms and subject to the conditions hereof. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: Section 1. Capitalized Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Financing Agreement, unless the context shall otherwise require. Section 2. Amendments. The Financing Agreement is hereby amended as follows: 2.1 THE ADVANCES. Section 2.1 of the Financing Agreement is amended by adding thereto the following new Section 2.1(c): 2.1(c) Letters of Credit. Until the second anniversary of the date of this Agreement the Lender agrees the Borrower may cause to be issued through an Affiliate of the Lender, in the sole and absolute discretion of such Affiliate, standby or documentary letters of credit, provided, however, that the total amount of all unexpired letters of credit and unreimbursed draws under letters of credit (the "LC Obligations") shall not at any time exceed $240,000 and the total amount of the outstanding principal balance of the Advances under clauses 2.1(a) and 2.1(b) plus 125% of the LB Obligations (the "Total Revolving Outstandings") shall not at any time exceed $3,000,000. If issued, all letters of credit shall be subject to a 1% 59 fee payable to the issuer, and the Borrower will execute such applications, security or pledge agreements and other documents required by Lender's Affiliate and shall pay the Lender's and such Affiliate's fees and expenses related to such letters of credit. Each letter of credit shall be for a period not to exceed, but may be renewable annually for additional one year periods not to exceed three years in the aggregate. Any draw under a letter of credit may, at the option of the Lender, be repaid through an Advance, which the lender may make, and which the Borrower is obligated to repay, even though (a) any agreement of the Lender to make Advances in its sole discretion may have expired or terminated, (b) the Borrower is at that time the debtor in any bankruptcy, reorganization or insolvency proceedings, or (c) the Total Revolving Outstandings exceed the availability under the most recent Borrowing Base Certificate or $3,000,000. Section 3. Suspension of Availability. The Borrower and the Lender agree that, except for the availability of letters of credit under Section 2.1(C) and for Advances to reimburse the Lender for draws under such letters of credit which the Lender may make to repay its Affiliate that is or may be the issuer of any such letters of credit, the availability of Advances under the Financing Agreement shall be temporarily suspended once the Borrower repays the outstanding Advances and all accrued interest thereon, on or after the date of this Amendment. During the period of such suspended availability (the "Suspension Period") the Borrower agrees that the representations, warranties, affirmative and negative covenants of the Financing Agreement shall still apply, however, (i) the Borrower need not submit any reports to the Lender except the reports required by Sections 5.1(a) and 5.1(b), and (ii) the Borrower need not pay to the Lender any monthly minimum interest or other fees, except the Annual Fee required under Section 2.6, the Lender's legal fees and costs of collection, if any, and any Termination Fee required under Article VII of the Financing Agreement if the Borrower gives notice of termination under such Article (provided that the provisions of Article VII shall continue to apply after the Suspension Period and shall apply for an additional period equal to the length of the Suspension Period as though the Suspension Period had never intervened). The Suspension Period shall not be deemed a termination of the Financing Agreement. The Borrower may reinstate the availability of Advances under the Financing Agreement upon forty-five days written notice to the Lender. Upon receipt of such notice from the Borrower, the Lender may conduct a collateral audit and make such other searches and examinations as the Lender deems reasonably necessary, all at the Borrower's expense. The reinstatement of the availability of Advances is subject to the Lender's sole and absolute discretion. Section 4. Effectiveness of Amendments. The amendments contained in this Amendment shall become effective upon delivery by the Borrower of, and compliance by the Borrower with, the following: 4.1 This Amendment, duly executed by the Borrower. 4.2 A copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary or Assistant Secretary, along with a certification by such Secretary or Assistant Secretary (i) certifying that there has been no amendment to the Articles of Incorporation or Bylaws of the Borrower since true and accurate copies of the same were last delivered to the Lender, and (ii) identifying each officer of the Borrower authorized to execute this Amendment and any other instrument or agreement executed by the Borrower in connection with this Amendment, and certifying as to specimens 60 of such officer's signature and such officer's incumbency in such offices as such officer holds. 4.3 The Borrower shall have satisfied such other conditions as reasonably specified by the Lender or counsel to the Lender. Section 5. Representations: Acknowledgements. The Borrower hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Financing Agreement, and in any and all other Loan Documents of the Borrower, are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Financing Agreement, and (b) the Borrower is in compliance with all covenants and agreements of the Borrower as set forth in the Financing Agreement and in any and all other Loan Documents of the Borrower. The Borrower represents and warrants that the Borrower has the power and legal right and authority to enter into this Amendment and has duly authorized as appropriate the execution and delivery of this Amendment and other agreements and documents executed and delivered by the Borrower in connection herewith or therewith by proper corporate action. The Borrower acknowledges and agrees that its obligations to the Lender under the Financing Agreement exist and are owing without offset, defense or counterclaim assertable by the Borrower against the Lender. The Borrower further acknowledges and agrees that its obligations to the Lender under the Financing Agreement, as amended, constitute "Obligations" within the meaning of the Security Agreement and are secured by the Security Agreement. Section 6. Affirmation, Further References. Except as expressly modified under this Amendment, all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under the Financing Agreement, the Security Agreement, and any and all other Loan Documents entered into with respect to the obligations under the Financing Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrower. All references in the Financing Agreement to "this Agreement," "herein," "hereof," and similar references, and all references in the other Loan Documents to the "Agreement," shall be deemed to refer to the Agreement, as amended by this Amendment. Section 7. Merger and Integration, Superseding Effect. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and her merged into it all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. Section 8. Severability. Whenever possible, each provision of this Amendment and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment or any other statement, instrument or 61 transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. Section 9. Successors. This Amendment shall be binding upon the Borrower and the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Lender and the successors and assigns of the Lender. Section 10. Legal Expenses. The Borrower agrees to reimburse the Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorneys' fees and legal expenses of Dorsey & Whitney, counsel for the Lender) incurred in connection with the Financing Agreement, this Amendment, and all other documents negotiated, prepared and executed in connection with this Amendment. Section 11. Headings. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. Section 12. Counterparts. This Amendment may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to this Amendment may execute any such agreement by executing a counterpart of such agreement. Section 13. Governing Law. The Amendment Documents shall be governed by the internal laws of the State of Minnesota, without giving effect to conflict of law principles thereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. INSIGNIA SYSTEMS, INC. By: /s/ John R. Whisnant Title: VP-Finance U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. By: /s/ Scott Sousek Title: Vice President 62 EX-23 4 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-60243) and Registration Statements (Form S-8 No. 33-47003 and Form S-8 No. 33-92376) pertaining to the 1990 Stock Plan and in Registration Statements (Form S-8 No. 33-75372 and Form S-8 No. 33-92374) pertaining to Employee Stock Purchase Plan of Insignia Systems, Inc. of our report dated February 5, 1999, with respect to the financial statements and schedule of Insignia Systems, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ Ernst & Young LLP Minneapolis, Minnesota March 29, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 DEC-31-1998 0 1,120,100 1,376,021 96,000 1,210,500 3,798,405 3,242,409 (2,972,303) 4,068,511 1,566,585 0 0 0 (15,048,069) 0 4,068,511 8,703,604 8,703,604 4,670,419 7,429,454 0 0 113,672 (3,415,579) 0 0 0 0 0 (3,415,579) (.44) 0
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