-----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, BIYjEzzFzT8lvi2Zr2wIOU3cFpM6dmu/4BB03fcQ0RqqOrbQvm12M1tDlPjTDtlR +eiJt1gHl63A3q8PjF2C8w== 0000912057-97-015178.txt : 19970502 0000912057-97-015178.hdr.sgml : 19970502 ACCESSION NUMBER: 0000912057-97-015178 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970131 FILED AS OF DATE: 19970501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERRILL CORP CENTRAL INDEX KEY: 0000790406 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 410946258 STATE OF INCORPORATION: MN FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14082 FILM NUMBER: 97593760 BUSINESS ADDRESS: STREET 1: ONE MERRILL CIRCLE STREET 2: ENERGY PARK CITY: ST PAUL STATE: MN ZIP: 55108 BUSINESS PHONE: 6126464501 FORMER COMPANY: FORMER CONFORMED NAME: MERRILL CORP/FA DATE OF NAME CHANGE: 19930915 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ COMMISSION FILE NUMBER: 0-14082 MERRILL CORPORATION (Exact name of Registrant as specified in its charter) MINNESOTA 41-0946258 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) ONE MERRILL CIRCLE ST. PAUL, MINNESOTA 55108 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 646-4501 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ As of April 23, 1997, 7,915,900 shares of Common Stock of the Registrant were outstanding, and the aggregate market value of the Common Stock of the Registrant as of that date (based upon the last reported sale price of the Common Stock at that date by the Nasdaq National Market) excluding outstanding shares owned beneficially by officers and directors, was approximately $142,871,000. DOCUMENTS INCORPORATED BY REFERENCE This Report does not repeat important information that you can find in selected pages of our Annual Report to Shareholders for the year ended January 31, 1997 (Annual Report) and in our Proxy Statement for our Annual Meeting on May 20, 1997 (Proxy Statement). The SEC allows us to "incorporate by reference" portions of these documents, which means that we can disclose important information to you by referring you to other documents which are legally considered to be a part of this Report. We encourage you to read the referenced pages in the Annual Report and Proxy Statement for a more thorough understanding of our company and business. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I................................................................................. 1 ITEM 1. BUSINESS..................................................................... 1 ITEM 2. PROPERTIES................................................................... 8 ITEM 3. LEGAL PROCEEDINGS............................................................ 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 9 PART II................................................................................ 9 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 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.................................. 10 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................................................... 10 PART III............................................................................... 10 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 10 ITEM 11. EXECUTIVE COMPENSATION...................................................... 10 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 10 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 11 PART IV................................................................................ 11 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K............ 11 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE...................... 13 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS....................................... 14 SIGNATURES............................................................................. 15 EXHIBIT INDEX.......................................................................... 16
PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Merrill Corporation provides a full range of typesetting, printing, document management and reproduction, distribution and marketing communication services to financial, legal, funds and corporate markets. Our headquarters are in St. Paul, Minnesota and we have 29 locations in major cities across the United States, including six regional printing plants. In addition, we have distribution operations in St. Cloud, Minnesota and Monroe, Washington. We also service financial and corporate printing clients internationally with joint venture operations in Canada, Europe and Asia, and through arrangements with printing companies in many cities around the world. Since February 1, 1996, we have acquired three businesses. On March 29, 1996, we bought FMC Resource Management Corporation (FMC) near Seattle. FMC is a manufacturing, distribution and inventory management business. On April 15, 1996, we purchased selected assets of The Corporate Printing Company, Inc. and its related companies and partnerships (CPC), a New York financial and corporate printer. CPC had offices in New York, Washington, D.C. and Maryland. On February 21, 1997, we bought most of the assets of Roald Marth Learning Systems, Inc. which used the name Superstar Computing (Superstar). Superstar provides computer systems and training to the real estate industry. On May 17, 1996, we combined our Canadian financial and corporate business with certain assets of Quebecor Printing, Inc. into a joint venture known as Quebecor Merrill Canada, Inc. On October 25, 1996, we sold $35 million of Senior Notes through a private placement. The proceeds were used to reduce our short-term bank line of credit that we had used to finance the FMC and CPC acquisitions earlier in the year. On November 25, 1996, we replaced our existing revolving credit agreement with a $40 million revolving credit agreement with a group of banks. The new agreement expires on November 29, 1999. Merrill Corporation is a Minnesota corporation that was organized in 1968 under the name "K.F. Merrill Company." Our main offices are at One Merrill Circle, Energy Park, St. Paul, Minnesota 55108, telephone (612) 646-4501. Unless it does not make sense in the sentence, when we use "Company," "Merrill," "our" or "we," those terms also include our subsidiaries, Merrill/New York Company, Merrill/Magnus Publishing Corporation, Merrill Corporation, Canada, Merrill/ May, Inc., Merrill International, Inc, Merrill Real Estate Company, FMC Resource Management Corporation and Merrill/ Superstar Computing Company. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Since we started in 1968, Merrill's revenues, operating profits and assets have come from one business segment: we have provided document typesetting, printing, management and reproduction, distribution and marketing communication services for the financial, legal, funds and corporate markets. Please refer to pages 12 to 27 of our 1997 Annual Report to Shareholders for more information. That information is part of our disclosure in this Report. (c) NARRATIVE DESCRIPTION OF BUSINESS We are a document management and services company; we use advanced computer and telecommunication technology to provide a full range of services to our customers. These services include typesetting, printing, electronic document formation, reproduction, facilities management, distribution and marketing communication services. We market these services through the following product sectors: financial, funds, document management services and managed communications. 1 CATEGORIES OF SERVICE We divide our revenue into four groups: Financial, Corporate, Document Management Services and Commercial and Other work. The following table shows the percentage of revenue Merrill has produced in each of those groups for our past three fiscal years:
YEAR ENDED JANUARY 31, ------------------------------------- CATEGORY OF SERVICE 1997 1996 1995 - --------------------- ----------- ----------- ----------- Financial............ 40.6% 36.1% 33.4% Corporate............ 27.6% 29.5% 33.4% Document Management Services............ 11.2% 12.9% 9.9% Commercial and Other............... 20.6% 21.5% 23.3% ----- ----- ----- Total............ 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- -----
FINANCIAL AND CORPORATE GENERAL The Financial revenue category includes the production and distribution of time-sensitive, transactional financial documents, such as registration statements, prospectuses and other printed materials that are part of business financings and acquisitions. Merrill's Corporate revenue category includes the production and distribution of corporate documents that our clients provide at regular intervals. Corporate revenue includes documents marketed through both our financial and funds product sectors. Some examples are annual and quarterly reports and proxy materials for companies. Other examples are registration statements, compliance and marketing materials for unit investment trusts and mutual funds. We use the same technology and people to provide both Financial and Corporate printing services. We are a service-oriented company. The production of financial and corporate documents requires rapid typesetting, printing and electronic conversion services that are available twenty-four hours per day and tailored to the exacting demands of our customers. We receive information directly from our customers in various forms, including typed or handwritten pages, tapes, faxes, disks, modems, Internet-based files, and direct links from customers' computers. The information may come into one of our offices, which will transmit it by fax or direct electronic connection (modem) to our centralized production facilities for processing into a typeset or electronic document. Each document typically goes through many cycles of proofreading and editing. Each version of a document is typeset or converted to an electronic format required by the SEC (EDGAR), and distributed to the people drafting it, including corporate executives, investment bankers, attorneys and accountants. If the drafters are in different cities, the proofs must be delivered simultaneously to different parts of the country. Just before the final version of a financial or corporate document is completed, the drafting group will usually meet in one of our conference rooms in our offices. These "in-houses" are one of the most time-critical services that we provide. In-house sessions require the accurate and rapid turnaround of the edited pages and expert knowledge of the documents and filing requirements of the SEC. We also need to provide a comfortable and pleasant environment for the many hours of drafting. After the customers have made their final changes, we quickly prepare an electronic submission for filing through EDGAR. We also create paper copies of the document and exhibits for filing with the SEC and other regulatory authorities. The document is then printed, collated, bound and distributed in booklet form. We can also produce material electronically for distribution via the Internet in PDF or HTML formats (computer coding that makes it possible to look at pages of text on a computer screen). "HUB AND SPOKE" NETWORK We use computers and telecommunication technology to create a "hub and spoke" network for Merrill's financial and corporate services, linking our typesetting centers in St. Paul and suburban Baltimore (the hubs) with our 22 service facilities in the United States (the spokes). We also have the 2 technology to link the hubs directly to our customers and to our international partners and affiliates. CENTRAL COMPUTERIZED PRODUCTION FACILITY. Merrill has computer systems in our central production facility located in St. Paul that work with communication technology and software we have developed. We use computers, communication controllers, text entry and editing stations, laser typesetting equipment, and a number of special purpose computer subsystems for data conversion and information management. Each critical piece of equipment in the system has at least one back-up device. We designed the computer systems to be high-performance, reliable, and secure. The concentration of equipment and typesetting personnel in a central facility has been a key Merrill strategy to reduce overhead and labor costs, train people more effectively, and use our resources efficiently. In addition, with the growth of the Company, a second hub in suburban Baltimore has given us regional focus and stronger backup in case of a disaster to the St. Paul hub. We believe we benefit more quickly from new technologies that have decreased costs and improved the quality of our service, since new technologies and methods in the hub facilities immediately benefit the spoke facilities. We also believe that we are better able to allocate our typesetting resources when and where our customers need them. NATIONAL COMMUNICATIONS NETWORK. Merrill has a self-contained telecommunications network connecting our service facilities with the hubs. We transmit documents and production control information electronically among our offices. The network consists of digital lines connecting each of our service facilities with the hubs, automated data switching and routing equipment and the software that controls the communications. Designed to operate continuously, the network is highly efficient and reliable. We have back-up service for each section of the network, in case any or all of it fails to operate. SERVICE FACILITIES. Merrill staffs service facilities with sales, administrative, customer service, production, duplication and distribution personnel. The service facilities have conference rooms with support staff, office equipment and amenities to give our customers a comfortable work environment in which to meet, write and revise their documents. The service facilities have photo-imaging equipment to produce high quality images using the electronic information received from the hubs. Within minutes of completion, we can transmit documents to one or more service facilities for distribution. MERRILLLINK-TM-. We developed the MERRILLLINK system to connect our hubs to other locations through the use of portable printing devices in the client's office or at our smaller sales offices. We can edit typeset pages and provide proof distribution to remote locations throughout the world. MERRILLLINK lets us do business almost anywhere. The system is particularly helpful in our financial work where our customers require a quick turnaround. INTERNATIONAL SERVICE. Merrill and Burrups, Ltd., a London-based financial printing company, jointly market international financial transaction business worldwide. Both companies work together to give customers integrated document typesetting, printing and distribution services wherever the document originates or needs to be delivered. Besides London, Burrups has full service facilities in Frankfurt, Luxembourg, Paris, and Tokyo for use in our joint international service. We also market and service financial and corporate documents in Canada through a joint venture with Quebecor Printing, Inc., a large commercial printer based in Montreal. Quebecor Merrill Canada, Inc. has full service facilities in Calgary, Montreal, Toronto, and Vancouver. We have also established relationships with financial printing companies in thirty-six countries who provide services to us on an "as needed" basis. We have the software and hardware for electronic communications between our production hubs and the 3 international service facilities. With this electronic connection and the MERRILLLINK system, we can transmit high-quality typeset documents for printing and distribution in Europe, Asia, the Middle East, Africa, the Pacific Rim and Latin America without the time delays and costs of air shipment. THE JOB CONTROL SYSTEM. We coordinate the activities of our service facilities through our own Job Control System (JCS). This system tracks each document from the time we receive it through production and billing. Information can be sent to and retrieved from the JCS by any service facility and can be immediately read in the hubs. During the production phase, the JCS assigns job numbers and tracks information about the document, such as dates and the times at which proofs are due, style and job specifications, messages regarding the job and last-minute changes. Distribution of drafts is a critical task in the preparation of financial documents, and the JCS simplifies this task. It keeps a current address list for each job, the history of the distribution, and the method of delivery for each proof. We also use the production information collected in the JCS for billing. EDGAR The SEC now requires public companies or their agents to file most disclosure information in an electronic format through EDGAR, rather than in paper. This electronic format, usually in ASCII, includes additional submission information and coding "tags" embedded in the document. The SEC uses this embedded information to analyze the document and to help the public retrieve these disclosures. EDGAR filings are generally delivered by modem on a telephone line, but may be delivered on magnetic computer tape or by diskette. We convert SEC forms and exhibit documents from standard word processing and other computer formats to the EDGAR format and we then assemble these documents for electronic filing with the SEC. Merrill has been involved in all stages of EDGAR's development. We wrote software that enables us to prepare documents in single source files and file the electronic version of financial and corporate documents quickly. "Single source files" mean we make only one set of corrections to alter both the electronic and print files -- reducing the chance of inconsistency. We have a dedicated data line directly to the SEC's computers, which avoids busy signals and other tie-ups. In addition, we have trained our staff extensively to coordinate the preparation of these EDGAR filings. We keep participants informed of EDGAR developments by publishing quarterly Merrill's EDGAR ADVISOR-TM-, a newsletter for distribution to lawyers, corporate executives and other readers. We conduct seminars throughout the country on EDGAR. Customers may call our toll-free EDGAR information line. We also publish a variety of reference materials on EDGAR rules, forms, and procedures. We have experienced increased demand for EDGAR filing services in both our financial and corporate categories of services. Many public companies choose not to manage their own EDGAR filings and use outside services to meet EDGAR filing requirements. We believe that our full array of EDGAR services will continue to enhance the need for our other time-sensitive document services. DOCUMENT MANAGEMENT SERVICES Merrill provides comprehensive document management services for our customers. We work both on an ongoing basis, which can include management of the client's entire photocopying, typesetting, imaging and/or mailroom facilities, and on a transactional basis, which includes photocopying and electronic imaging services on an as needed basis. We offer comprehensive office photocopying, typesetting and mailroom facility management services to our customers in Document Service Centers (DSCs) within their offices. These services involve providing for a client's document management needs, including on-site employees, equipment and management of the operation. We typically enter into three-year agreements with our clients to provide a range of services at their location. We help our customers determine their needs, and 4 provide the equipment, staff, and management to meet those needs. Since most of our DSCs are located in cities where we have our own full-service facilities, we can provide back-up capacity and personnel to our DSC customers as needed. The transactional business includes document reproduction for projects that are time-sensitive or otherwise require special service, such as photocopying documents for large litigation matters. We produce the photocopies at our own service facilities or we place photocopying equipment and personnel at the client's office. Document reproduction services require rapid turnaround and availability twenty-four hours per day. Our document reproduction customers typically have several boxes of documents that may be in file folders, stapled or on varying sizes of paper. We take apart, photocopy and reassemble the original documents and copies as instructed by the client. We also provide sequential numbering, binding and imaging services for these documents, if requested. Photocopying projects range from single copies of short documents to very complicated tasks. Our full-service facilities include document management equipment and personnel. Each service facility is equipped with high-performance photocopying equipment. We make efficient use of this equipment by performing project photocopying during times when the equipment would otherwise be idle. We also operate document reproduction facilities in Century City (Los Angeles area) and Union, New Jersey. COMMERCIAL AND OTHER SERVICES GENERAL The Commercial and Other revenue category includes document services performed by our Merrill/May, Inc. (Merrill/ May) and FMC Resource Management Corporation (FMC) subsidiaries, as well as revenue from the production of other commercial documents, including health care provider directories, price catalogs, insurance industry annual reports, sample ballots, directories, and technical manuals from electronic information supplied by customers. Merrill/May provides custom marketing communication services to corporate customers and demand printing and distribution services designed to promote the corporate identity of large, national customers with multiple franchisees, members, divisions or affiliated organizations, including real estate companies, fast food restaurants, and credit card companies. FMC provides manufacturing, distribution, and inventory management services of marketing items for large, geographically diverse companies, such as department stores. MANAGED MARKETING COMMUNICATIONS We provide demand printing and distribution of "corporate identity" materials -- brochures, business cards, even clothing that carries the distinctive marks and symbols of those corporations. We call this managed marketing communications. Merrill/ May's customers are usually large, national customers with multiple franchisees, members, divisions or affiliated organizations (member organizations). Like Merrill/May, FMC provides manufacturing, distribution, and inventory management services, such as commercial printing, business forms, digital printing, display items, collateral materials, (i.e. hangers, pricetags, and point of purchase signage), and gift certificates for large companies with multiple locations and departments that are seeking consistency throughout the organization. Merrill/May can produce multi-color, highly technical, commercial quality printed materials. We develop, produce, and prepare a catalog of the printed products, which includes other promotional merchandise produced by third parties. We also distribute the client-specific catalogs to the client's member organizations. To our real estate customers, we also offer computer training and technology services. Merrill/May develops direct relationships with the individual member organizations, which are often independently owned and operated and make their own print purchasing decisions. We use a sophisticated 5 order entry system, including a large inbound telemarketing staff, to receive and process orders. A member organization or an individual can place an order by mail, fax or toll free number. Our customer service representative processing the order will have access to the client's purchase history (if an existing client) and can suggest reordering certain items, cross-sell complementary items or alert the client to current specials. Merrill/ May accepts major credit cards and payment is typically made upon placing the order. We produce printed materials in large quantities, which we warehouse pending receipt of an order. Products ordered from a catalog typically require additional "personalizing" for the ordering member organization. They are checked for quality, packaged and shipped. Promotional merchandise (point of purchase, advertising specialty, premiums and incentives) included in a catalog that are produced by third parties are generally shipped directly by the manufacturer to the ordering member organization. Merrill/May uses a materials handling system with automated handling, order consolidation and shipping. Most orders are filled within four days of receipt. Our centralized production and fulfillment benefits both the national account client and its member organizations. The national account client can control the use of its trademarks and enjoy the economies of mass production. The members, the ultimate consumers of Merrill/May's services, receive quality products, fast delivery and prices that we believe are competitive with prices charged by local print shops. Merrill/May's customers are located in all fifty states and Canada, with limited shipments to Mexico, Puerto Rico, Australia, New Zealand, France and England. Merrill/May also provides custom marketing communications and publishing services, primarily to financial services companies, media organizations, retailers and the health care industry. The types of custom publications we produce include magazines, tabloids, newsletters, booklets and catalogs used by customers for their marketing purposes. We work with customers in the design, editorial content and lists for these publications. We typeset, print and mail the publications. Most often, we operate on annual contracts for this work. Our commercial typesetting business provides full document services, including camera, pre-press and printing services for one- or multi-color publications. These commercial printing projects, like financial and corporate printing, require a high level of attention to detail, quick turnaround times, and responsive customer service. We believe that offering a high level of specialty service is a competitive advantage in certain niches of the commercial printing business. PRINTING SERVICES We currently operate printing plants in St. Paul, Los Angeles, Chicago, Dallas and New Jersey. We have found it advantageous to operate printing presses at these locations to service our financial printing customers, and service a portion of our recurring corporate and commercial printing business. Corporate and commercial printing is generally more predictable in volume and less time-sensitive in nature than financial printing. Because we use the presses for both types of printing, we retain the flexibility to meet the immediate demands of financial printing. In all markets, we have identified several printers capable of meeting our production needs on an "as required" basis. We use associated printers when we need additional capacity in markets where we do not own presses, when special printing equipment is needed, or when we have overflow work. We generally select associated printers on a job-by-job basis, based upon considerations of price, availability and suitability of press equipment. We also operate a printing plant in St. Cloud, Minnesota, for our specialized color printing services. SEE BUSINESS -- COMMERCIAL AND OTHER SERVICES -- MANAGED MARKETING COMMUNICATIONS ABOVE. 6 MARKETING AND CUSTOMERS We market our services through the following product sectors: - Financial (includes transaction and compliance documents) - Funds - Document Management Services - Managed Communications We sell our products and services nationwide through a direct sales organization operating from our service facilities and sales offices. We market in Canada through employees of our joint venture, Quebecor Merrill Canada Inc. Internationally, we sell with Burrups, Ltd. through the direct sales by employees of each company. We market managed communications through direct sales teams based in St. Cloud, Minneapolis/St. Paul, San Francisco and the Seattle area. We direct our financial and corporate printing services to executives of corporations whose securities are or are about to be publicly traded. We also sell to the advisers to those companies -- corporate finance underwriters, municipal bond underwriters, and attorneys, as well as others who require fast and accurate typesetting. Funds services are marketed to mutual fund and unit investment trust managers. We sell our commercial printing services primarily to corporations, associations, insurance companies and legal, institutional and governmental publishers, and market our document management services primarily to lawyers, paralegals, law office administrators, and legal departments of corporations. We market our demand printing and distribution services to large, national customers with multiple franchisees, members, divisions or affiliated organizations and our custom publication services to financial service companies (such as banks, credit unions and insurance companies), television and radio stations and networks, trade associations, manufacturers and vacation travel industries. We sell computer training and technology services to real estate agents through industry networking, telemarketing and other direct marketing methods. As of April 15, 1997, we employed 230 full-time salespeople to market typesetting, printing, publishing, distribution and document management and reproduction services. Our salespeople solicit business from existing and prospective customers. Together with the customer service representatives, the sales team helps coordinate our services and provides advice and assistance to customers. COMPETITION Merrill competes with many domestic and international companies in the financial and corporate printing industries, including two principal U.S.-based competitors, Bowne & Co., Inc. and R.R. Donnelley & Sons Company. Both Bowne and Donnelley are major competitors in most of our financial and corporate printing markets. We also compete for complex, large-run typesetting work with a number of other computer typesetting firms, and we compete for medium-run printing work with a number of commercial web press printers. In the managed communications business, we believe our primary competitors are local print shops and marketing service firms, including advertising agencies, custom publication printers, direct mail firms, and television, radio, newspapers, magazine and other media organizations. We also compete with computer training organizations and computer retailers. In our document management services businesses, we compete with three nationwide service companies -- Xerox Corporation, Pitney Bowes and IKON -- and a number of smaller local companies. We also compete with litigation support services vendors and a large number of photocopying and imaging shops, including privately-owned shops as well as franchise operations. Competition in this part of our business is intense and is based principally on service, price, speed, accuracy, technological capability and established relationships. We believe that Merrill competes favorably with our competitors. 7 EMPLOYEES As of April 15, 1997, we had 2,751 full-time employees and 53 part-time employees. None of our employees is covered by a collective bargaining agreement. We consider our employee relations to be good. Merrill's senior management and certain technical personnel have substantial experience and expertise in the document services industry. We consider the retention of these employees to be important to our continued success. We compete intensely with others in the industry to attract and retain qualified salespeople. However, we believe that we are able to provide incentives sufficient to minimize the loss of key salespeople and to attract productive new salespeople for both replacement and expansion of our sales team. Many salespeople are under employment contracts of varying terms with us. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Substantially all of our revenue, operating profit and identifiable assets are based in the United States. ITEM 2. PROPERTIES We lease all of our facilities, except two. We own Merrill/May's main facility in St. Cloud that includes approximately 123,000 square feet. We also own the Energy Park Business Center in St. Paul. This space consists of approximately 150,000 square feet in two buildings adjacent to our principal production and administrative office facility. We maintain several of our corporate and administration departments in these buildings along with the prepress and reprographics departments. We believe that owning these buildings allows us to plan our expansion more efficiently. All of the approximately 91,000 square feet of space available for lease is currently leased to other businesses. Our main office in St. Paul includes 47,000 square feet and is leased from the Port Authority of the City of St. Paul. The terms of our agreements with the Port Authority are in a facilities lease and land lease, both dated October 1, 1985, which require us to pay rent to the Port Authority in the amounts of $24,069 per month and $3,431 per month, respectively, for terms expiring on November 30, 2005. Each lease grants us the option to purchase the property at the end of the term. Under the facilities lease, we may purchase the building for $254,500 and the land for $167,140 at the end of the lease terms. Our New York City full service facility consists of approximately 102,000 square feet of leased space on three floors of a building in Greenwich Village. We are required to pay rent in the amount of $57,385 per month for a term expiring on October 31, 2014. We also lease service facilities, sales offices and warehouse space in other cities, with space ranging from 200 square feet to 77,000 square feet. These leases have expiration dates ranging from June 1997 to May 2005 under which we make monthly payments aggregating approximately $363,000, including rental fees, real estate taxes and operating expenses. We make a continuing effort to keep all of our properties and facilities modern, efficient and adequate for our operating needs. ITEM 3. LEGAL PROCEEDINGS We do not know of any important legal, governmental, administrative or other matters that would significantly affect Merrill's business or property. 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not ask our shareholders to vote on anything during the fourth quarter of fiscal year 1997. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Merrill, their ages, the year they became executive officers and the offices held as of April 28, 1997 are as follows:
YEAR FIRST ELECTED OR APPOINTED AS AN NAME AGE EXECUTIVE OFFICER TITLE - ----------------------- --- ----------------- ------------------------------------------ John W. Castro 48 1980 President and Chief Executive Officer Rick R. Atterbury 43 1981 Executive Vice President Steven J. Machov 46 1987 Vice President, General Counsel and Secretary Kathleen A. Larkin 37 1993 Vice President -- Human Resources Kay A. Barber 46 1995 Vice President -- Finance, Chief Financial Officer, Treasurer
Our executive officers are elected by the Board of Directors. The officers serve one-year terms that begin with their election at the first meeting of the Board of Directors after the annual meeting of shareholders. Their terms end at the same meeting the following year. The President and Chief Executive Officer appoints other officers who serve at his discretion. There are no family relationships between any of the executive officers or directors. There has been no change in position of any of the executive officers during the past five years, except as we explain below: Mr. Atterbury was elected Executive Vice President in 1996. He previously served as Vice President -- Operations. Mr. Machov was elected Vice President in May 1993. Ms. Larkin joined Merrill in April 1993 as Manager of Human Resources and was appointed Vice President -- Human Resources in December 1993. From February 1987 to March 1993, Ms. Larkin was Employee Relations Manager for The Gillette Company, a personal care products manufacturer. Ms. Barber joined Merrill in August 1995 as Vice President -- Finance, Chief Financial Officer and Treasurer. From January 1993 to August 1995, Ms. Barber was Vice President, Finance and Controller for Growing Healthy, Inc., a frozen baby food company. From March 1991 to August 1992, she served as Director, Planning and Financial Analysis for NeXT Computer, Inc., a computer hardware and software company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Please refer to the section called "Quarterly Stock Price Comparison" on page 11 of our 1997 Annual Report for additional important information about Merrill's stock price. That information is part of our disclosure in this Report. You should review this information carefully. Merrill did not sell any unregistered securities from November 1, 1996 through January 31, 1997. 9 ITEM 6. SELECTED FINANCIAL DATA The financial information in the table on page 27 of our 1997 Annual Report should be reviewed. It is part of our disclosure in this Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Please review the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 to 11 of our 1997 Annual Report. It is part of our disclosure in this Report and analyzes our financial performance over the last few years. You should review this information carefully. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our "Consolidated Financial Statements" on pages 12 to 27 (including the unaudited information in the "Quarterly Financial Data" section on page 26) and the Report of Independent Accountants on page 28 of our 1997 Annual Report are part of our disclosure in this Report. You should review this information carefully. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) DIRECTORS OF THE REGISTRANT. Please review the information under the captions "Election of Directors -- Information About Nominees" and "Other Information About Nominees" on pages 5 and 6 of our 1997 Proxy Statement. It is part of our disclosure in this Report. You should review this information carefully. (b) EXECUTIVE OFFICERS OF THE REGISTRANT. Information concerning Merrill's Executive Officers is included in this Report under Item 4A, "Executive Officers of the Registrant." (c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 22 of our 1997 Proxy Statement is part of our disclosure in this Report. You should review this information carefully. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Election of Directors -- Directors' Compensation" on pages 7 and 8 and "Executive Compensation" on pages 8 to 15, (excluding the "Comparative Stock Performance" graph on page 13), of our 1997 Proxy Statement is part of our disclosure in this Report. You should review this information carefully. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Security Ownership of Certain Beneficial Owners and Management" on pages 3 and 4, and "Election of Directors -- Information About Nominees" on 10 page 5 of our 1997 Proxy Statement is part of our disclosure in this Report. You should review this information carefully. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial statements: The following Financial Statements are part of our disclosure in this Report and are found on the following pages in our 1997 Annual Report: Consolidated Balance Sheets as of January 31, 1997 and 1996 -- page 12. Consolidated Statements of Operations for the years ended January 31, 1997, 1996 and 1995 -- page 13. Consolidated Statements of Cash Flows for the years ended January 31, 1997, 1996 and 1995 -- page 14. Consolidated Statements of Changes in Shareholders' Equity for the years ended January 31, 1997, 1996 and 1995 -- page 15. Notes to Consolidated Financial Statements -- pages 16-26. Report of Independent Accountants -- page 28. 2. Financial statement schedules: The following supplemental schedule and report of independent accountants are part of our disclosure in this Report and should be read together with the consolidated financial statements in the 1997 Annual Report we refer to above (page numbers refer to pages in this Report):
PAGE ----- Report of Independent Accountants............................................................ 13 Supplemental Schedule: II Valuation and Qualifying Accounts................................................................................. 14
We are omitting all other schedules either because the information does not apply or the information is in the consolidated financial statements or related notes. 3. Exhibits: The exhibits to this Report are listed in the Exhibit Index on pages 16 to 18 of this Report. If you were a shareholder on April 1, 1997, you may request copies of any of these exhibits by writing to: Investor Relations, Merrill Corporation, One Merrill Circle, St. Paul, Minnesota 55108. We may charge a small handling fee for the copies. The following is a list of each management contract or compensatory plan or arrangement we need to file as an exhibit to this Report: A. Employment Agreement between John Castro and the Company (this was made part of our disclosure in Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1989 (File No. 0-14082)). 11 B. Amendment to Employment Agreement between John Castro and the Company (this was made part of our disclosure in Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994 (File No. 0-14082)). C. Employment Agreement between Rick R. Atterbury and the Company (this was made part of our disclosure in Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991 (File No. 0-14082)). D. Amendment to Employment Agreement between Rick R. Atterbury and the Company (this was made part of our disclosure in Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1994 (File No. 0-14082)). E. 1987 Omnibus Stock Plan, as amended (this was made part of our disclosure in Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991 (File No. 0-14082)). F. 1993 Stock Incentive Plan, as amended (this is included with this filing). G. Option Agreement between Ronald N. Hoge and the Company (this was made part of our disclosure in Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 (File No. 0-14082)). H. 1996 Non-Employee Director Plan (this is included with this filing). (b) REPORTS ON FORM 8-K: No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended January 31, 1997. 12 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Our report on the consolidated financial statements of Merrill Corporation has been incorporated by reference in this Form 10-K from page 28 of the 1997 Annual Report to Shareholders of Merrill Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a)2. of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. St. Paul, Minnesota March 25, 1997 13 SCHEDULE II MERRILL CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JANUARY 31, 1997, 1996 AND 1995 (IN THOUSANDS)
COLUMN C -------------------- COLUMN B ADDITIONS COLUMN D ---------- -------------------- ---------- COLUMN E COLUMN A BALANCE AT CHARGED DEDUCTIONS ----------- - -------------------------------------------------- BEGINNING CHARGED TO OTHER FROM BALANCE AT DESCRIPTION OF YEAR TO INCOME ACCOUNTS RESERVES END OF YEAR - -------------------------------------------------- ---------- --------- -------- ---------- ----------- Year Ended January 31, 1995 Valuation account deducted from assets to which it applies -- Allowance for doubtful accounts............... $2,294 $2,038 $177(A) $1,679(B) $2,830 ---------- --------- -------- ---------- ----------- ---------- --------- -------- ---------- ----------- Allowance for unbillable inventories.......... $ 495 $ 183(C) $ 312 ---------- ---------- ----------- ---------- ---------- ----------- Year Ended January 31, 1996 Valuation account deducted from assets to which it applies -- Allowance for doubtful accounts............... $2,830 $1,486 $ 26(A) $ 797(B) $3,545 ---------- --------- -------- ---------- ----------- ---------- --------- -------- ---------- ----------- Allowance for unbillable inventories.......... $ 312 $ 250 $ 562 ---------- --------- ----------- ---------- --------- ----------- Year Ended January 31, 1997 Valuation account deducted from assets to which it applies -- Allowance for doubtful accounts............... $3,545 $2,861 $ 61(A) $ 440(B) $6,027 ---------- --------- -------- ---------- ----------- ---------- --------- -------- ---------- ----------- Allowance for unbillable inventories.......... $ 562 $2,678 $3,240 ---------- --------- ----------- ---------- --------- -----------
- ------------------------ (A) Recoveries on accounts previously written off. (B) Uncollectible accounts written off and adjustments to the allowance. (C) Adjustments to the allowance account to reflect estimated net realizable value at year-end. 14 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. (REGISTRANT) MERRILL CORPORATION BY (SIGNATURE) /s/ JOHN W. CASTRO (NAME AND TITLE) John W. Castro, President and Chief Executive Officer (DATE) April 30, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. BY (SIGNATURE) /s/ JOHN W. CASTRO (NAME AND TITLE) John W. Castro, President and Chief Executive Officer (Principal Executive Officer) and Director (DATE) April 30, 1997 BY (SIGNATURE) /s/ KAY A. BARBER (NAME AND TITLE) Kay A. Barber, Vice President -- Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) (DATE) April 30, 1997 BY (SIGNATURE) /s/ ROBERT F. NIENHOUSE (NAME AND TITLE) Robert F. Nienhouse, Director (DATE) April 30, 1997 BY (SIGNATURE) /s/ RICHARD G. LAREAU (NAME AND TITLE) Richard G. Lareau, Director (DATE) April 30, 1997 BY (SIGNATURE) /s/ PAUL G. MILLER (NAME AND TITLE) Paul G. Miller, Director (DATE) April 30, 1997 BY (SIGNATURE) /s/ RICK R. ATTERBURY (NAME AND TITLE) Rick R. Atterbury, Director (DATE) April 30, 1997 BY (SIGNATURE) /s/ RONALD N. HOGE (NAME AND TITLE) Ronald N. Hoge, Director (DATE) April 30, 1997 BY (SIGNATURE) (NAME AND TITLE) James R. Campbell, Director (DATE) April 30, 1997 BY (SIGNATURE) /s/ FREDERICK W. KANNER (NAME AND TITLE) Frederick W. Kanner, Director (DATE) April 30, 1997
15 MERRILL CORPORATION EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED JANUARY 31, 1997
ITEM NO. DESCRIPTION METHOD OF FILING - ----------- -------------------------------------------------- -------------------------------------------------- 3.1 Articles of Incorporation of the Company This was made part of our disclosure in Exhibit 3.1 to the Company's Registration Statement on Form S-1 (File No. 33-4062) 3.2 Amendments to Articles of Incorporation as of June This was made part of our disclosure in Exhibit 20, 1986 and March 27, 1987 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1987 3.3 Restated Bylaws of the Company This was made part of our disclosure in Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1990 10.1 Employment Agreement between Rick R. Atterbury and This was made part of our disclosure in Exhibit the Company, dated as of February 1, 1987, as 10.2 to the Company's Annual Report on Form 10-K amended for the fiscal year ended January 31, 1991 10.2 Amendment to Employment Agreement between Rick R. This was made part of our disclosure in Exhibit Atterbury and the Company, dated as of April 29, 10.3 to the Company's Annual Report on Form 10-K 1994. for the fiscal year ended January 31, 1994 10.3 Facilities Lease dated October 1, 1985 between the This was made part of our disclosure in Exhibit Port Authority of the City of Saint Paul as 10.17 to the Company's Registration Statement on lessor and the Company as lessee Form S-1 (File No. 33-4062) 10.4 Land Lease dated October 1, 1985 between the Port This was made part of our disclosure in Exhibit Authority of the City of Saint Paul as lessor and 10.18 to the Company's Registration Statement on the Company as lessee Form S-1 (File No. 33-4062) 10.5 Credit Agreement dated as of November 25, 1996 This was made part of our disclosure in Exhibit among First Bank, N.A., as Agent and as a Bank, 10.2 to the Company's Quarterly Report on Form Norwest Bank Minnesota, N.A., and the Company. 10-Q for the fiscal quarter ended October 31, 1996 10.6 Note Purchase Agreement, dated as of October 25, This was made part of our disclosure in Exhibit 1996 10.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1996 10.7 1987 Omnibus Stock Plan, as amended This was made part of our disclosure in Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1991 10.8 Employment Agreement between John Castro and the This was made part of our disclosure in Exhibit 10 Company dated as of February 1, 1989 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1989
16
ITEM NO. DESCRIPTION METHOD OF FILING - ----------- -------------------------------------------------- -------------------------------------------------- 10.10 Amendment to Employment Agreement between John This was made part of our disclosure in Exhibit Castro and the Company dated as of April 29, 10.9 to the Company's Annual Report on Form 10-K 1994. for the fiscal year ended January 31, 1994 10.11 1993 Incentive Stock Plan, as amended Included with this filing electronically 10.12 Option Agreement dated as of July 1, 1991 between This was made part of our disclosure in Exhibit Ronald N. Hoge and the Company 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1993 10.13 Asset Purchase Agreement, dated as of December 31, This was made part of our disclosure in Exhibit 1993 among the Company, Merrill Acquisition 2.1 to the Company's Current Report on Form 8-K Corporation, May Printing Company and dated December 31, 1993. Shareholders of May Printing Company. 10.14 Loan Agreement, dated as of July 1, 1990 between This was made part of our disclosure in Exhibit May Printing Company and Minnesota Agricultural 10.13 to the Company's Annual Report on Form 10-K and Economic Development Board, amended as of for the fiscal year ended January 31, 1994 December 31, 1993. 10.15 Guaranty of Loan Obligations of May Printing This was made part of our disclosure in Exhibit Company by the Company in favor of Minnesota 10.14 to the Company's Annual Report on Form 10-K Agricultural and Economic Development Board, for the fiscal year ended January 31, 1994 dated as of December 31, 1993. 10.16 Guaranty Agreement of the obligations of Merrill This was made part of our disclosure in Exhibit Acquisition Corporation by the Company in favor 10.15 to the Company's Annual Report on Form 10-K of May Printing Company, and Thomas May and James for the fiscal year ended January 31, 1994 Scott May, dated as of December 31, 1993. 10.17 Stock Purchase Agreement, dated March 28, 1996, by This was made part of our disclosure in Exhibit and among the Company and the Shareholders of FMC 2.1 to the Company's Current Report on Form 8-K Resource Management Corporation dated April 15, 1996
17
ITEM NO. DESCRIPTION METHOD OF FILING - ----------- -------------------------------------------------- -------------------------------------------------- 10.18 Asset Purchase Agreement, dated April 15, 1996, by This was made part of our disclosure in Exhibit and among the Company, Merrill/New York Company 10.22 to the Company's Annual Report on Form 10-K and The Corporate Printing Company, Inc., CPC for the fiscal year ended January 31, 1996. Communications, Inc., CPC Reprographics, Inc., The Corporate Printing Company International, Ltd., CP International Holdings, Inc., CPC Management Services, Inc., The Corporate Printing Company International SNC, The Corporate Printing Company International PTE Ltd., Oakland Composition Limited Partnership, and the Shareholders of the above Affiliated Companies. (Omitted from this Agreement, as filed, are the exhibits listed in the List of Exhibits included at the beginning of the Agreement. The Company will furnish supplementally a copy of any such omitted exhibits to the Commission upon request.) 10.19 1996 Non-Employee Director Plan Included with this filing electronically 10.20 Lease dated as of May 1, 1994 between The Rector, Included with this filing electonically. Church-Wardens, and Vestrymen of Trinity Church in the City of New York, as landlord and The Corporate Printing Company, Inc, as lessee, assignor to Merrill/New York Company. (Omitted from this Lease, as filed, are the floor plan exhibits listed in the Exhibits and Other Attachments included at the beginning of the Agreement. The Company will furnish supplementally a copy of any such omitted exhibits to the Commission upon request.) 11.1 Computation of per share earnings Included with this filing electronically 13.1 Portions of Annual Report to Shareholders Included with this filing electronically 21.1 Subsidiaries of the Company Included with this filing electronically 23.1 Consent of Independent Accountants Included with this filing electronically 27.1 Financial Data Schedule Included with this filing electronically
18 EX-10.11 2 EXHIBIT 10.11 MERRILL CORPORATION 1993 STOCK INCENTIVE PLAN (AS AMENDED EFFECTIVE JANUARY 13, 1997) 1. PURPOSE OF PLAN. The purpose of the Merrill Corporation 1993 Stock Incentive Plan (the "Plan") is to advance the interests of Merrill Corporation (the "Company") and its shareholders by enabling the Company and its Subsidiaries to attract and retain persons of ability to perform services for the Company and its Subsidiaries by providing an incentive to such individuals through equity participation in the Company and by rewarding such individuals who contribute to the achievement by the Company of its economic objectives. 2. DEFINITIONS. The following terms will have the meanings set forth below, unless the context clearly otherwise requires: 2.1 "ADVERSE ACTIONS" mean the actions described in Section 12.5 of the Plan. 2.2 "BOARD" means the Board of Directors of the Company. 2.3 "BROKER EXERCISE NOTICE" means a written notice pursuant to which a Participant, upon exercise of an Option, irrevocably instructs a broker or dealer to sell a sufficient number of shares or loan a sufficient amount of money to pay all or a portion of the exercise price of the Option and/or any related withholding tax obligations and remit such sums to the Company and directs the Company to deliver stock certificates to be issued upon such exercise directly to such broker or dealer. 2.4 "CHANGE IN CONTROL" means an event described in Section 11.1 of the Plan. 2.5 "CODE" means the Internal Revenue Code of 1986, as amended. 2.6 "COMMITTEE" means the group of individuals administering the Plan, as provided in Section 3 of the Plan. 2.7 "COMMON STOCK" means the common stock of the Company, par value $.01 per share, or the number and kind of shares of stock or other securities into which such Common Stock may be changed in accordance with Section 4.3 of the Plan. 2.8 "DISABILITY" means the disability of the Participant such as would entitle the Participant to receive disability income benefits pursuant to the long-term disability plan of the Company or Subsidiary then covering the Participant or, if no such plan exists or is applicable to the Participant, the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code. 2.9 "ELIGIBLE RECIPIENTS" means all employees (including, without limitation, officers and directors who are also employees) of the Company or any Subsidiary and any non-employee consultants and independent contractors of the Company or any Subsidiary. 2.10 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2.11 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any date (or, if no shares were traded or quoted on such date, as of the next preceding date on which there was such a trade or quote), the mean between the reported high and low sale prices of the Common Stock as reported on the NASDAQ National Market System. 2.12 "INCENTIVE AWARD" means an Option, Restricted Stock Award or Performance Unit granted to an Eligible Recipient pursuant to the Plan. 2.13 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that qualifies as an "incentive stock option" within the meaning of Section 422 of the Code. A-1 2.14 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not qualify as an Incentive Stock Option. 2.15 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock Option. 2.16 "PARTICIPANT" means an Eligible Recipient who receives one or more Incentive Awards under the Plan. 2.17 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient pursuant to Section 8 of the Plan to receive a payment from the Company, in the form of stock, cash or a combination of both, upon the achievement of established performance goals. 2.18 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that are already owned by the Participant or, with respect to any Incentive Award, that are to be issued upon the grant, exercise or vesting of such Incentive Award. 2.19 "RESTRICTED STOCK AWARD" means an award of Common Stock granted to an Eligible Recipient pursuant to Section 7 of the Plan that is subject to the restrictions on transferability and the risk of forfeiture imposed by the provisions of such Section 7. 2.20 "RETIREMENT" means termination of employment or service pursuant to and in accordance with the regular (or, if approved by the Board for purposes of the Plan, early) retirement/pension plan or practice of the Company or Subsidiary then covering the Participant, provided that if the Participant is not covered by any such plan or practice, the Participant will be deemed to be covered by the Company's plan or practice for purposes of this determination. 2.21 "SECURITIES ACT" means the Securities Act of 1933, as amended. 2.22 "SUBSIDIARY" means any entity that is directly or indirectly controlled by the Company or any entity in which the Company has a significant equity interest, as determined by the Committee. 2.23 "TAX DATE" means the date any withholding tax obligation arises under the Code for a Participant with respect to an Incentive Award. 3. PLAN ADMINISTRATION. 3.1 THE COMMITTEE. So long as the Company has a class of its equity securities registered under Section 12 of the Exchange Act, the Plan will be administered by a committee (the "Committee") consisting solely of not less than two members of the Board who are "disinterested persons" within the meaning of Rule 16b-3 under the Exchange Act. To the extent consistent with corporate law, the Committee may delegate to any officers of the Company the duties, power and authority of the Committee under the Plan pursuant to such conditions or limitations as the Committee may establish; provided, however, that only the Committee may exercise such duties, power and authority with respect to Eligible Recipients who are subject to Section 16 of the Exchange Act. Each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan will be conclusive and binding for all purposes and on all persons, and no member of the Committee will be liable for any action or determination made in good faith with respect to the Plan or any Incentive Award granted under the Plan. 3.2 AUTHORITY OF THE COMMITTEE. (a) In accordance with and subject to the provisions of the Plan, the Committee will have the authority to determine all provisions of Incentive Awards as the Committee may deem necessary or desirable and as consistent with the terms of the Plan, including, without limitation, the following: (i) the Eligible Recipients to be selected as Participants; (ii) the nature and extent of the Incentive Awards to be made to each Participant (including the number of shares of Common Stock to be subject to each Incentive Award, any exercise price, the manner in which Incentive Awards will vest or become exercisable and whether Incentive Awards will be granted in tandem A-2 with other Incentive Awards) and the form of written agreement, if any, evidencing such Incentive Award; (iii) the time or times when Incentive Awards will be granted; (iv) the duration of each Incentive Award; and (v) the restrictions and other conditions to which the payment or vesting of Incentive Awards may be subject. In addition, the Committee will have the authority under the Plan in its sole discretion to pay the economic value of any Incentive Award in the form of cash, Common Stock or any combination of both. (b) The Committee will have the authority under the Plan to amend or modify the terms of any outstanding Incentive Award in any manner, including, without limitation, the authority to modify the number of shares or other terms and conditions of an Incentive Award, extend the term of an Incentive Award, accelerate the exercisability or vesting or otherwise terminate any restrictions relating to an Incentive Award, accept the surrender of any outstanding Incentive Award or, to the extent not previously exercised or vested, authorize the grant of new Incentive Awards in substitution for surrendered Incentive Awards; provided, however that the amended or modified terms are permitted by the Plan as then in effect and that any Participant adversely affected by such amended or modified terms has consented to such amendment or modification. No amendment or modification to an Incentive Award, however, whether pursuant to this Section 3.2 or any other provisions of the Plan, will be deemed to be a regrant of such Incentive Award for purposes of this Plan. (c) In the event of (i) any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, extraordinary dividend or divestiture (including a spin-off) or any other change in corporate structure or shares, (ii) any purchase, acquisition, sale or disposition of a significant amount of assets or a significant business, (iii) any change in accounting principles or practices, or (iv) any other similar change, in each case with respect to the Company or any other entity whose performance is relevant to the grant or vesting of an Incentive Award, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) may, without the consent of any affected Participant, amend or modify the vesting criteria of any outstanding Incentive Award that is based in whole or in part on the financial performance of the Company (or any Subsidiary or division thereof) or such other entity so as equitably to reflect such event, with the desired result that the criteria for evaluating such financial performance of the Company or such other entity will be substantially the same (in the sole discretion of the Committee or the board of directors of the surviving corporation) following such event as prior to such event; provided, however, that the amended or modified terms are permitted by the Plan as then in effect. 4. SHARES AVAILABLE FOR ISSUANCE. 4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as provided in Section 4.3 of the Plan, the maximum number of shares of Common Stock that will be available for issuance under the Plan will be 1,500,000 shares. Notwithstanding any other provisions of the Plan to the contrary, no Participant in the Plan may be granted any Options, or any other Incentive Awards with a value based solely on an increase in the value of the Common Stock after the date of grant, relating to more than 100,000 shares of Common Stock in the aggregate in any fiscal year of the Company (subject to adjustment as provided in Section 4.3 of the Plan); provided, however, that a Participant who is first appointed or elected as an officer, hired as an employee or retained as a consultant by the Company or who receives a promotion that results in an increase in responsibilities or duties may be granted, during the fiscal year of such appointment, election, hiring, retention or promotion, Options or such other Incentive Awards relating to up to 200,000 shares of Common Stock (subject to adjustment as provided in Section 4.3 of the Plan). 4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are issued under the Plan or that are subject to outstanding Incentive Awards will be applied to reduce the maximum number of shares of Common Stock remaining available for issuance under the Plan. Any shares of Common A-3 Stock that are subject to an Incentive Award that lapses, expires, is forfeited or for any reason is terminated unexercised or unvested and any shares of Common Stock that are subject to an Incentive Award that is settled or paid in cash or any form other than shares of Common Stock will automatically again become available for issuance under the Plan. Any shares of Common Stock that constitute the forfeited portion of a Restricted Stock Award, however, will not become available for further issuance under the Plan. 4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off) or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) will make appropriate adjustment (which determination will be conclusive) as to the number and kind of securities available for issuance under the Plan and, in order to prevent dilution or enlargement of the rights of Participants, the number, kind and, where applicable, exercise price of securities subject to outstanding Incentive Awards. 5. PARTICIPATION. Participants in the Plan will be those Eligible Recipients who, in the judgment of the Committee, have contributed, are contributing or are expected to contribute to the achievement of economic objectives of the Company or its Subsidiaries. Eligible Recipients may be granted from time to time one or more Incentive Awards, singly or in combination or in tandem with other Incentive Awards, as may be determined by the Committee in its sole discretion. Incentive Awards will be deemed to be granted as of the date specified in the grant resolution of the Committee, which date will be the date of any related agreement with the Participant. 6. OPTIONS. 6.1 GRANT. An Eligible Recipient may be granted one or more Options under the Plan, and such Options will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may designate whether an Option is to be considered an Incentive Stock Option or a Non-Statutory Stock Option. 6.2 EXERCISE PRICE. The per share price to be paid by a Participant upon exercise of an Option will be determined by the Committee in its discretion at the time of the Option grant but will not be less than 100% of the Fair Market Value of one share of Common Stock on the date of grant. 6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at such times and in such installments as may be determined by the Committee in its sole discretion at the time of grant; provided, however, that no Option may be exercisable after 10 years from its date of grant. 6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares to be purchased upon exercise of an Option will be paid entirely in cash (including check, bank draft or money order); provided, however, that the Committee, in its sole discretion and upon terms and conditions established by the Committee, may allow such payments to be made, in whole or in part, by tender of a Broker Exercise Notice, Previously Acquired Shares or by a combination of such methods. 6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in whole or in part from time to time, subject to the conditions contained in the Plan and in the agreement evidencing such Option, by delivery in person, by facsimile or electronic transmission or through the mail of written notice of exercise to the Company (Attention: Secretary) at its principal executive office in St. Paul, Minnesota and by paying in full the total exercise price for the shares of Common Stock to be purchased in accordance with Section 6.4 of the Plan. A-4 7. RESTRICTED STOCK AWARDS. 7.1 GRANT. An Eligible Recipient may be granted one or more Restricted Stock Awards under the Plan, and such Restricted Stock Awards will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Restricted Stock Awards as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or a Subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. 7.2 RIGHTS AS A SHAREHOLDER; TRANSFERABILITY. Except as provided in Sections 7.1, 7.3 and 12.3 of the Plan, a Participant will have all voting, dividend, liquidation and other rights with respect to shares of Common Stock issued to the Participant as a Restricted Stock Award under this Section 7 upon the Participant becoming the holder of record of such shares as if such Participant were a holder of record of shares of unrestricted Common Stock. 7.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines otherwise in its sole discretion (either in the agreement evidencing the Restricted Stock Award at the time of grant or at any time after the grant of the Restricted Stock Award), any dividends or distributions (including regular quarterly cash dividends) paid with respect to shares of Common Stock subject to the unvested portion of a Restricted Stock Award will be subject to the same restrictions as the shares to which such dividends or distributions relate. In the event the Committee determines not to pay such dividends or distributions currently, the Committee will determine in its sole discretion whether any interest will be paid on such dividends or distributions. In addition, the Committee in its sole discretion may require such dividends and distributions to be reinvested (and in such case the Participants consent to such reinvestment) in shares of Common Stock that will be subject to the same restrictions as the shares to which such dividends or distributions relate. 7.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred to in this Section 7, the Committee may place a legend on the stock certificates referring to such restrictions and may require the Participant, until the restrictions have lapsed, to keep the stock certificates, together with duly endorsed stock powers, in the custody of the Company or its transfer agent or to maintain evidence of stock ownership, together with duly endorsed stock powers, in a certificateless book-entry stock account with the Company's transfer agent. 8. PERFORMANCE UNITS. An Eligible Recipient may be granted one or more Performance Units under the Plan, and such Performance Units will be subject to such terms and conditions, consistent with the other provisions of the Plan, as may be determined by the Committee in its sole discretion. The Committee may impose such restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of such Performance Units as it deems appropriate, including, without limitation, that the Participant remain in the continuous employ or service of the Company or any Subsidiary for a certain period or that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain performance goals or criteria. The Committee will have the sole discretion either to determine the form in which payment of the economic value of vested Performance Units will be made to the Participant (i.e., cash, Common Stock or any combination thereof) or to consent to or disapprove the election by the Participant of the form of such payment. 9. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. 9.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event a Participant's employment or other service with the Company and all Subsidiaries is terminated by reason of death, Disability or Retirement: A-5 (a) All outstanding Options then held by the Participant will become immediately exercisable in full and will remain exercisable for a period of one year (three months in the case of Retirement) after such termination (but in no event after the expiration date of any such Option); (b) All Restricted Stock Awards then held by the Participant will become fully vested; and (c) All Performance Units then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units. 9.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT. (a) In the event a Participant's employment or other service is terminated with the Company and all Subsidiaries for any reason other than death, Disability or Retirement, or a Participant is in the employ or service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the Company (unless the Participant continues in the employ or service of the Company or another Subsidiary), all rights of the Participant under the Plan and any agreements evidencing an Incentive Award will immediately terminate without notice of any kind, and no Options then held by the Participant will thereafter be exercisable, all Restricted Stock Awards then held by the Participant that have not vested will be terminated and forfeited, and all Performance Units then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units; provided, however, that if such termination is due to any reason other than termination by the Company or any Subsidiary for "cause," all outstanding Options then held by such Participant will remain exercisable to the extent exercisable as of such termination for a period of three months after such termination (but in no event after the expiration date of any such Option). (b) For purposes of this Section 9.2, "cause" (as determined by the Committee) will be as defined in any employment or other agreement or policy applicable to the Participant or, if no such agreement or policy exists, will mean (i) dishonesty, fraud, misrepresentation, embezzlement or deliberate injury or attempted injury, in each case related to the Company or any Subsidiary, (ii) any unlawful or criminal activity of a serious nature, (iii) any intentional and deliberate breach of a duty or duties that, individually or in the aggregate, are material in relation to the Participant's overall duties, or (iv) any material breach of any employment, service, confidentiality or noncompete agreement entered into with the Company or any Subsidiary. 9.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other provisions of this Section 9, upon a Participant's termination of employment or other service with the Company and all Subsidiaries, the Committee may, in its sole discretion (which may be exercised at any time on or after the date of grant, including following such termination), cause Options (or any part thereof) then held by such Participant to become or continue to become exercisable and/or remain exercisable following such termination of employment or service and Restricted Stock Awards and Performance Units then held by such Participant to vest and/or continue to vest or become free of transfer restrictions, as the case may be, following such termination of employment or service, in each case in the manner determined by the Committee; provided, however, that no Option may remain exercisable beyond its expiration date. 9.4 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the Committee otherwise determines in its sole discretion, a Participant's employment or other service will, for purposes of the Plan, be deemed to have terminated on the date recorded on the personnel or other records of the Company or the Subsidiary for which the Participant provides employment or other service, as determined by the Committee in its sole discretion based upon such records. 10. PAYMENT OF WITHHOLDING TAXES. 10.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct from future wages of the Participant (or from other amounts that may be due and owing to the Participant from the A-6 Company or a Subsidiary), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related tax requirements attributable to an Incentive Award, including, without limitation, the grant, exercise or vesting of, or payment of dividends with respect to, an Incentive Award or a disqualifying disposition of stock received upon exercise of an Incentive Stock Option, or (b) require the Participant promptly to remit the amount of such withholding to the Company before taking any action, including issuing any shares of Common Stock, with respect to an Incentive Award. 10.2 SPECIAL RULES. The Committee may, in its sole discretion and upon terms and conditions established by the Committee, permit or require a Participant to satisfy, in whole or in part, any withholding or employment-related tax obligation described in Section 10.1 of the Plan by electing to tender Previously Acquired Shares or a Broker Exercise Notice, or by a combination of such methods. 11. CHANGE IN CONTROL. 11.1 CHANGE IN CONTROL. For purposes of this Section 11.1, a "Change in Control" of the Company will mean (a) the sale, lease, exchange or other transfer of substantially all of the assets of the Company (in one transaction or in a series of related transaction) to a person or entity that is not controlled by the Company, (b) a merger or consolidation to which the Company is a party if the shareholders of the Company immediately prior to effective date of such merger or consolidation do not have "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) immediately following the effective date of such merger or consolidation of more than 80% of the combined voting power of the surviving corporation's outstanding securities ordinarily having the right to vote at elections of directors, or (c) a change in control of the Company of a nature that would be required to be reported pursuant to Section 13 or 15(d) of the Exchange Act, whether or not the Company is then subject to such reporting requirements, including, without limitation, such time as (i) any person becomes after the effective date of the Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20% or more of the combined voting power of the Company's outstanding securities ordinarily having the right to vote at elections of directors, or (ii) individuals who constitute the Board on the effective date of the Plan cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the effective date of the Plan whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors comprising the Board on the effective date of the Plan will, for purposes of this clause (ii), be considered as though such persons were a member of the Board on the effective date of the Plan. 11.2 ACCELERATION OF VESTING. Without limiting the authority of the Committee under Section 3.2 of the Plan, if a Change in Control of the Company occurs, then, if approved by the Committee in its sole discretion either in an agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, (a) all Options will become immediately exercisable in full and will remain exercisable for the remainder of their terms, regardless of whether the Participants to whom such Options have been granted remain in the employ or service of the Company or any Subsidiary; (b) all outstanding Restricted Stock Awards will become immediately fully vested; and (c) all Performance Units then held by the Participant will vest and/or continue to vest in the manner determined by the Committee and set forth in the agreement evidencing such Performance Units. 11.3 CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company occurs, then the Committee, if approved by the Committee in its sole discretion either in an agreement evidencing an Incentive Award at the time of grant or at any time after the grant of an Incentive Award, and without the consent of any Participant effected thereby, may determine that some or all Participants holding outstanding Options will receive, with respect to some or all of the shares of Common Stock subject to such Options, as of the effective date of any such Change in Control of the Company, cash in an amount equal to the excess of the Fair Market Value of such shares immediately prior to the effective date of such Change in Control of the Company over the exercise price per share of such Options. A-7 11.4 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in Section 11.2 or 11.3 of the Plan to the contrary, if, with respect to a Participant, the acceleration of the vesting of an Incentive Award as provided in Section 11.2 or the payment of cash in exchange for all or part of an Incentive Award as provided in Section 11.3 (which acceleration or payment could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code), together with any other payments which such Participant has the right to receive from the Company or any corporation that is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then the payments to such Participant pursuant to Section 11.2 or 11.3 will be reduced to the largest amount as will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that if such Participant is subject to a separate agreement with the Company or a Subsidiary which specifically provides that payments attributable to one or more forms of employee stock incentives or to payments made in lieu of employee stock incentives will not reduce any other payments under such agreement, even if it would constitute an excess parachute payment, then the limitations of this Section 11.4 will, to that extent, not apply. 12. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY. 12.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or limit in any way the right of the Company or any Subsidiary to terminate the employment or service of any Eligible Recipient or Participant at any time, nor confer upon any Eligible Recipient or Participant any right to continue in the employ or service of the Company or any Subsidiary. 12.2 RIGHTS AS A SHAREHOLDER. As a holder of Incentive Awards (other than Restricted Stock Awards), a Participant will have no rights as a shareholder unless and until such Incentive Awards are exercised for, or paid in the form of, shares of Common Stock and the Participant becomes the holder of record of such shares. Except as otherwise provided in the Plan, no adjustment will be made for dividends or distributions with respect to such Incentive Awards as to which there is a record date preceding the date the Participant becomes the holder of record of such shares, except as the Committee may determine in its discretion. 12.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the laws of descent and distribution or as otherwise expressly permitted by the Plan, no right or interest of any Participant in an Incentive Award prior to the exercise or vesting of such Incentive Award will be assignable or transferable, or subjected to any lien, during the lifetime of the Participant, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise. A Participant will, however, be entitled to designate a beneficiary to receive an Incentive Award upon such Participant's death, and in the event of a Participant's death, payment of any amounts due under the Plan will be made to, and exercise of any Options (to the extent permitted pursuant to Section 9 of the Plan) may be made by, the Participant's legal representatives, heirs and legatees. 12.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended to modify or rescind any previously approved compensation plans or programs of the Company or create any limitations on the power or authority of the Board to adopt such additional or other compensation arrangements as the Board may deem necessary or desirable. 12.5 RESTRICTIONS REGARDING EMPLOYMENT OR SERVICE. (a) Notwithstanding anything in the Plan to the contrary, in the event that a Participant, prior to or following such Participant's voluntary termination of employment or other service with the Company or any Subsidiary, takes Adverse Actions with respect to the Company or any Subsidiary, the Committee in its sole discretion will have the authority (by so providing in the agreement evidencing the Incentive Award at the time of grant) to terminate immediately all rights of the Participant under the Plan and any agreement evidencing Incentive Awards than held by the Participant without notice of any kind. In addition, to the extent that a Participant A-8 takes such Adverse Actions during the period beginning 12 months prior to, and ending 12 months following, the date of such voluntary employment or service termination, the Committee in its sole discretion will have the authority (by so providing in the agreement evidencing the Incentive Award at the time of grant) to rescind the exercise or vesting of any Incentive Awards of the Participant that were exercised or became vested during such period and to require the Participant to pay to the Company, within 10 days of receipt from the Company of notice of such rescission, the amount of any gain realized or payment received as a result of such rescinded exercise or vesting. Such payment will be made in cash (including check, bank draft or money order) or, with the Committee's consent, shares of Common Stock with a Fair Market Value on the date of payment equal to the amount of such payment. The Company will be entitled to withhold and deduct from future wages of the Participant (or from other amounts that may be due and owing to the Participant from the Company or a Subsidiary) or make other arrangements for the collection of all amounts necessary to satisfy such payment obligation. (b) For purposes of this Section 12.5, an "Adverse Action" will mean any action by a Participant that the Committee, in its sole discretion, determines to be adverse to the interests of the Company or any Subsidiary, including, without limitation, (i) disclosing confidential information of the Company or any Subsidiary to any person not authorized by the Company to receive it, (ii) engaging, directly or indirectly, in any commercial activity that in the judgment of the Committee competes with the business of the Company or any Subsidiary, or (iii) interfering with the relationships of the Company or its Subsidiaries with their respective employees and customers. 13. SECURITIES LAW AND OTHER RESTRICTIONS. Notwithstanding any other provision of the Plan or any agreements entered into pursuant to the Plan, the Company will not be required to issue any shares of Common Stock under this Plan, and a Participant may not sell, assign, transfer or otherwise dispose of shares of Common Stock issued pursuant to Incentive Awards granted under the Plan, unless (a) there is in effect with respect to such shares a registration statement under the Securities Act and any applicable state securities laws or an exemption from such registration under the Securities Act and applicable state securities laws, and (b) there has been obtained any other consent, approval or permit from any other regulatory body which the Committee, in its sole discretion, deems necessary or advisable. The Company may condition such issuance, sale or transfer upon the receipt of any representations or agreements from the parties involved, and the placement of any legends on certificates representing shares of Common Stock, as may be deemed necessary or advisable by the Company in order to comply with such securities law or other restrictions. 14. PLAN AMENDMENT, MODIFICATION AND TERMINATION The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem advisable in order that Incentive Awards under the Plan will conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that no amendments to the Plan will be effective without approval of the stockholders of the Company if stockholder approval of the amendment is then required pursuant to Rule 16b-3 under the Exchange Act, Section 422 of the Code or the rules of the National Association of Securities Dealers, Inc. No termination, suspension or amendment of the Plan may adversely affect any outstanding Incentive Award without the consent of the affected Participant; provided, however, that this sentence will not impair the right of the Committee to take whatever action it deems appropriate under Sections 4.3 and 11 of the Plan. 15. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan is effective as of January 18, 1993, the date it was adopted by the Board. The Plan will terminate at midnight on January 18, 2003, and may be terminated prior to such time to by Board A-9 action, and no Incentive Award will be granted after such termination. Incentive Awards outstanding upon termination of the Plan may continue to be exercised, or become free of restrictions, in accordance with their terms. 16. MISCELLANEOUS 16.1 GOVERNING LAW. The validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Minnesota. 16.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the benefit of the successors and permitted assigns of the Company and the Participants. A-10 EX-10.19 3 EXHIBIT 10.19 MERRILL CORPORATION 1996 NON-EMPLOYEE DIRECTOR PLAN 1. PURPOSE OF PLAN. The purpose of the Merrill Corporation 1996 Non-Employee Director Plan (the "Plan") is to advance the interests of Merrill Corporation (the "Company") and its shareholders by enabling the Company to attract and retain the services of experienced and knowledgeable non-employee directors and to increase the proprietary interests of such non-employee directors in the Company's long-term success and progress and their identification with the interests of the Company's shareholders. 2. DEFINITIONS. The following terms will have the meanings set forth below, unless the context clearly otherwise requires: 2.1 "ANNUAL OPTION" means the right to purchase shares of Common Stock pursuant to Section 5.1(b) of the Plan. 2.2 "BOARD" means the Board of Directors of the Company. 2.3 "CODE" means the Internal Revenue Code of 1986, as amended. 2.4 "COMMITTEE" means the group of individuals administering the Plan, as provided in Section 3 of the Plan. 2.5 "COMMON STOCK" means the common stock of the Company, par value $0.01 per share, or the number and kind of shares of stock or other securities into which such Common Stock may be changed in accordance with Section 4.3 of the Plan. 2.6 "DISABILITY" means the disability of an Eligible Director such as would entitle the Eligible Director to receive disability income benefits pursuant to the long-term disability plan of the Company then covering the Eligible Director or, if no such plan exists or is applicable to the Eligible Director, the permanent and total disability of the Eligible Director within the meaning of Section 22(e)(3) of the Code. 2.7 "ELIGIBLE DIRECTORS" means all directors of the Company who are not employees of the Company or any subsidiary of the Company. 2.8 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. 2.9 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of any date (or, if no shares were traded on such date, as of the next preceding date on which there was such a trade), the average of the reported high and low sales prices of the Common Stock as reported by the Nasdaq National Market. 2.10 "INCENTIVE AWARDS" means Options and Retainer Stock. 2.11 "OPTIONS" means the One-Time Options and Annual Options. 2.12 "ONE-TIME OPTION" means the right to purchase shares of Common Stock pursuant to Section 5.1(a) of the Plan. 2.13 "RETAINER STOCK" means shares of Common Stock granted to an Eligible Director pursuant to Section 6 of the Plan. 2.14 "SECURITIES ACT" means the Securities Act of 1933, as amended. 3. PLAN ADMINISTRATION. The Plan will be administered by a committee (the "Committee") consisting solely of two or more members of the Board. All questions of interpretation of the Plan will be determined by the Committee, each determination, interpretation or other action made or taken by the Committee pursuant to the provisions of the Plan will be conclusive and binding for all purposes and on all persons, and no member of the Committee will be liable for any action or determination made in good faith with respect to the Plan or any Incentive Award granted under the Plan. The Committee, however, will have no power to determine the eligibility for participation in the Plan, the number of shares of Common Stock to be subject to Incentive Awards, or the timing, pricing or other terms and conditions of Incentive Awards. 4. SHARES AVAILABLE FOR ISSUANCE. 4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as provided in Section 4.3 of the Plan, the maximum number of shares of Common Stock that will be available for issuance under the Plan will be 200,000 shares. The shares available for issuance under the Plan shall be authorized but unissued shares. 4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are issued under the Plan or that are subject to outstanding Incentive Awards will be applied to reduce the maximum number of shares of Common Stock remaining available for issuance under the Plan. Any shares of Common Stock that are subject to an Option that lapses, expires, or for any reason is terminated unexercised will automatically again become available for issuance under the Plan. 4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, divestiture or extraordinary dividend (including a spin-off) or any other change in the corporate structure or shares of the Company, the Committee (or, if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) will make appropriate adjustment (which determination will be conclusive) as to the number and kind of securities available for issuance under the Plan and, in order to prevent dilution or enlargement of the rights of Eligible Directors, the number, kind and, where applicable, exercise price of securities subject to outstanding Incentive Awards. 5. OPTIONS. 5.1 GRANT. (a) At such time as new Eligible Directors are first elected or appointed to the Board to fill new directorships or to fill vacancies, such Eligible Directors will be granted automatically, on a one-time basis on the date of such election or appointment, a non-statutory stock option to purchase 10,000 shares of Common Stock (subject to adjustment as provided in Section 4.3 of the Plan). 2 (b) Commencing with the annual meeting of shareholders of the Company that first occurs following the date that an Eligible Director is first elected or appointed to the Board, each Eligible Director who is elected or re-elected to the Board at an annual meeting of shareholders will be granted automatically, on the date of each such annual meeting, a non- statutory stock option to purchase 3,000 shares of Common Stock (subject to adjustment as provided in Section 4.3 of the Plan). 5.2 EXERCISE PRICE OF OPTIONS. The per share price to be paid by an Eligible Director upon exercise of an Option will be 100% of the Fair Market Value of one share of Common Stock on the date of grant. The total purchase price of the shares to be purchased upon exercise of an Option must be paid entirely in cash (including check, bank draft or money order). 5.3 EXERCISABILITY AND DURATION OF OPTIONS. Each One-Time Option will become exercisable, on a cumulative basis, with respect to 20% of the shares originally subject to such One-Time Option on each anniversary of the date of grant of such One-Time Option. Each Annual Option will become exercisable in full six months following the date of grant of such Annual Option. Each Option will expire and will no longer be exercisable 10 years following the date of grant of such Option. 5.4 MANNER OF EXERCISE OF OPTIONS. An Option may be exercised by an Eligible Director in whole or in part from time to time, subject to the conditions contained in the Plan and in the agreement evidencing such Option, by delivery in person, by facsimile (with written confirmation) or through the mail of written notice of exercise to the Company at its principal executive office in St. Paul, Minnesota and by paying in full the total exercise price for the shares of Common Stock to be purchased in accordance with Section 5.2 of the Plan. 6. RETAINER STOCK. Commencing with the date of the annual meeting of shareholders of the Company to be held in 1996 and continuing on the date of each succeeding annual meeting of shareholders of the Company, each Eligible Director who continues to serve in such capacity following such annual meeting will receive, as part of such Eligible Director's annual retainer for the ensuing year, such number of shares of Common Stock (rounded to the nearest whole share) as equals $6,000 divided by the average of the Fair Market Value of one share of Common Stock for the 10 trading days immediately preceding the date of such annual meeting. 7. TERMINATION OF SERVICE AS A DIRECTOR. 7.1 TERMINATION DUE TO DEATH OR DISABILITY. In the event an Eligible Director's service as a director of the Company is terminated by reason of death or Disability, all outstanding Options then held by such Eligible Director will become immediately exercisable in full and will remain exercisable for a period of one year after such death or Disability (but in no event after the expiration date of any such Options). 7.2 TERMINATION FOR REASONS OTHER THAN DEATH OR DISABILITY. In the event an Eligible Director's service as a director of the Company is terminated for any reason other than death or Disability, all outstanding Options then held by such Eligible Director will remain exercisable to the extent exercisable as of such termination for a period of three months after such termination (but in no event after the expiration date of any such Options). 3 7.3 DATE OF TERMINATION. An Eligible Director's service as a director of the Company will, for purposes of the Plan, be deemed to have terminated on the date recorded on the personnel or other records of the Company, as determined by the Committee based upon such records. 8. RIGHTS OF ELIGIBLE DIRECTORS; TRANSFERABILITY OF INTERESTS. 8.1 SERVICE AS A DIRECTOR. Nothing in the Plan will interfere with or limit in any way the right of the shareholders to terminate an Eligible Director's service as a director of the Company at any time, and neither the Plan, nor the granting of an Incentive Award nor any other action taken pursuant to the Plan, will constitute or be evidence of any agreement or understanding, express or implied, that the shareholders will retain an Eligible Director as a director of the Company for any period of time or at any particular rate of compensation. 8.2 RIGHTS AS A SHAREHOLDER. An Eligible Director will have no rights as a shareholder unless and until Retainer Stock is issued or an Option is exercised and the Eligible Director becomes the holder of record of such shares. Except as otherwise provided in the Plan, no adjustment will be made for dividends or distributions with respect to Incentive Awards as to which there is a record date preceding the date the Eligible Director becomes the holder of record of such shares. 8.3 RESTRICTIONS ON TRANSFER OF INTERESTS. Except pursuant to testamentary will or the laws of descent and distribution or as otherwise expressly permitted by the Plan, no right or interest of any Eligible Director in an Option prior to the exercise of such Option will be assignable or transferable, or subjected to any lien, during the lifetime of the Eligible Director, either voluntarily or involuntarily, directly or indirectly, by operation of law or otherwise. An Eligible Director will, however, be entitled to designate a beneficiary to receive an Option upon such Eligible Director's death, and in the event of an Eligible Director's death, payment of any amounts due under the Plan will be made to, and exercise of any Options (to the extent permitted pursuant to Section 7 of the Plan) may be made by, the Eligible Director's legal representatives, heirs and legatees. 8.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is intended to modify or rescind any previously approved compensation plans or programs of the Company or create any limitations on the power or authority of the Board to adopt such additional or other compensation arrangements as the Board may deem necessary or desirable. 9. SECURITIES LAW AND OTHER RESTRICTIONS. Notwithstanding any other provision of the Plan or any agreements entered into pursuant to the Plan, the Company will not be required to issue any shares of Common Stock under this Plan, and an Eligible Director may not sell, assign, transfer or otherwise dispose of shares of Common Stock issued in connection with an Incentive Award granted under the Plan, unless (a) there is in effect with respect to such shares a registration statement under the Securities Act and any applicable state securities laws or an exemption from such registration under the Securities Act and applicable state securities laws, and (b) there has been obtained any other consent, approval or permit from any other regulatory body which the Committee, in its sole discretion, deems necessary or advisable. The Company may condition such issuance, sale or transfer upon the receipt of any representations or agreements from the parties involved, and the placement of any legends on certificates representing shares of Common Stock, as may be deemed necessary or advisable by the Company in order to comply with such securities law or other restrictions. 4 10. PLAN AMENDMENT, MODIFICATION AND TERMINATION The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend the Plan from time to time in such respects as the Board may deem advisable in order that Incentive Awards granted under the Plan will conform to any change in applicable laws or regulations or in any other respect the Board may deem to be in the best interests of the Company; provided, however, that (a) no amendments to the Plan will be effective without approval of the shareholders of the Company if shareholder approval of the amendment is then required pursuant to Rule 16b-3 under the Exchange Act or the rules of the Nasdaq National Market, and (b) to the extent prohibited by Rule 16b-3 of the Exchange Act, the Plan may not be amended more than once every six months. No termination, suspension or amendment of the Plan may adversely affect any outstanding Incentive Award without the consent of the affected Eligible Director; provided, however, that this sentence will not impair the right of the Committee to take whatever action it deems appropriate under Section 4.3 of the Plan. 11. EFFECTIVE DATE AND DURATION OF THE PLAN The Plan will be effective as of the date it is adopted by the shareholders of the Company. The Plan will terminate at midnight on May 21, 2001 but may be terminated prior thereto by Board action. No Incentive Awards may be granted after such termination, but Options outstanding upon termination of the Plan may continue to be exercised in accordance with their terms. 12. MISCELLANEOUS 12.1 GOVERNING LAW. The validity, construction, interpretation, administration and effect of the Plan and any rules, regulations and actions relating to the Plan will be governed by and construed exclusively in accordance with the laws of the State of Minnesota, notwithstanding any conflicts of law principles. 12.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to the benefit of the successors and permitted assigns of the Company and the Eligible Directors. 5 EX-10.20 4 EXHIBIT 10.20 Lease dated as of May 1, 1994 between The Rector, Church-Wardens, and Vestrymen of Trinity Church in the City of New York, Landlord and The Corporate Printing Company, Inc. -------------------------- 225 Varick Street -------------------------- TABLE OF CONTENTS
Page ---- FIRST: Use . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECOND: Rent . . . . . . . . . . . . . . . . . . . . . . . . . . 2 THIRD: Repairs, Machinery, Cleaning and Waste . . . . . . . . . 2 FOURTH: Alterations and Fixtures . . . . . . . . . . . . . . . . 3 FIFTH: Compliance with Governmental Rules and Regulations . . . 5 SIXTH: Compliance with Landlord's Rules . . . . . . . . . . . . 5 SEVENTH: Plate Glass . . . . . . . . . . . . . . . . . . . . . . 6 EIGHTH: Care of Sidewalks . . . . . . . . . . . . . . . . . . . 6 NINTH: Landlord's Access to the Premises . . . . . . . . . . . 6 TENTH: Electric Current; Live Steam . . . . . . . . . . . . . . 6 ELEVENTH: Condemnation and Demolition . . . . . . . . . . . . . . 8 TWELFTH: Mechanic's Liens . . . . . . . . . . . . . . . . . . . . 8 THIRTEENTH: Subordination . . . . . . . . . . . . . . . . . . . . . 9 FOURTEENTH: Certificate of Occupancy . . . . . . . . . . . . . . . . 9 FIFTEENTH: Vaults . . . . . . . . . . . . . . . . . . . . . . . . . 10 SIXTEENTH: Liquors . . . . . . . . . . . . . . . . . . . . . . . . 10 SEVENTEENTH: Fire and Fire Insurance . . . . . . . . . . . . . . . . 10 EIGHTEENTH: Change in Use of Premises, Subletting and Assignment . . 11 NINETEENTH: Waiver and Surrender; Remedies Cumulative . . . . . . . 15 TWENTIETH: Representations as to Premises, Certificate of Occupancy and Use . . . . . . . . . . . . . . . . . . . 16 TWENTY-FIRST: Limitations of Landlord's Liability . . . . . . . . . . 16 TWENTY-SECOND: Indemnity by Tenant . . . . . . . . . . . . . . . . . . 17 TWENTY-THIRD: Notices . . . . . . . . . . . . . . . . . . . . . . . . 18 TWENTY-FOURTH: Insolvency . . . . . . . . . . . . . . . . . . . . . . . 18 TWENTY-FIFTH: Remedies of the Landlord on Default, Performance . . . . 18 TWENTY-SIXTH: Surrender at Expiration . . . . . . . . . . . . . . . . 20 TWENTY-SEVENTH: Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . 21 TWENTY-EIGHTH: Tenant's Deposit . . . . . . . . . . . . . . . . . . . . 21 TWENTY-NINTH: Elevators, Heat . . . . . . . . . . . . . . . . . . . . 23 THIRTIETH: Water and Sewer Rents . . . . . . . . . . . . . . . . . 24 THIRTY-FIRST: Sprinkler Maintenance . . . . . . . . . . . . . . . . . 24 i Page ---- THIRTY-SECOND: Insurance . . . . . . . . . . . . . . . . . . . . . . . 25 THIRTY-THIRD: Default Under Other Leases . . . . . . . . . . . . . . . 25 THIRTY-FOURTH: Work to be Done by Landlord . . . . . . . . . . . . . . 25 THIRTY-FIFTH: Trading with the Enemy . . . . . . . . . . . . . . . . . 25 THIRTY-SIXTH: Marginal Notes . . . . . . . . . . . . . . . . . . . . . 25 THIRTY-SEVENTH: . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (a) Real Estate and CPI Escalation . . . . . . . . . . . . . . . . . . 25 (b) Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (c) Statements for the Tenant . . . . . . . . . . . . . . . . . . . . 27 (d) Computation of Increase in Rent Payable by the Tenant . . . . . . 28 (e) Inspection of Books . . . . . . . . . . . . . . . . . . . . . . . 28 (f) Decreases in Real Estate Taxes or Index . . . . . . . . . . . . . 28 (g) Real Estate Tax Refunds . . . . . . . . . . . . . . . . . . . . . 29 THIRTY-EIGHTH: Arrangements with Respect to the Eleventh Floor . . . . 29 THIRTY-NINTH: Free Rent . . . . . . . . . . . . . . . . . . . . . . . 30 FORTIETH: [Intentionally Omitted] . . . . . . . . . . . . . . . . 31 FORTY-FIRST: Conditional Termination of Existing Leases . . . . . . . 31 FORTY-SECOND: Tenant's Use of Elevator . . . . . . . . . . . . . . . . 32 FORTY-THIRD: Tenant's Installation of Air Conditioning Equipment . . 33 FORTY-FOURTH: Eighth Floor Option Space . . . . . . . . . . . . . . . 34 FORTY-FIFTH: Loading Dock . . . . . . . . . . . . . . . . . . . . . . 34 FORTY-SIXTH: Tenant's Obligation to Improve the Premises . . . . . . 34 FORTY-SEVENTH: Right to Cancel Third Floor Lease . . . . . . . . . . . 34 FORTY-EIGHTH: Broker . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXHIBITS AND OTHER ATTACHMENTS - ------------------------------- Exhibit A . . . . . Portion of Basement Exhibit B . . . . . Portion of 8th Floor Exhibit C . . . . . Entire 10th Floor Exhibit D . . . . . Entire 11th Floor Exhibit E . . . . . Entire 12th Floor Exhibit F . . . . . Portion of 10th Floor to be Subleased to Four Color Litho, Inc. Exhibit G . . . . . Vacant 11th Floor Space Exhibit H . . . . . Automatic Passenger Elevator to be used by Tenant Exhibit I . . . . . Manual Freight Elevator to be used by Tenant Exhibit J . . . . . Area on roof where Tenant's air conditioning equipment may be installed Exhibit K . . . . . 8th Floor Option Space Exhibit L . . . . . Tenant's Loading Dock Exhibit M . . . . . Location of Tenant's Trade Machinery and Equipment
ii Page ---- Work Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . WS-1 Rules and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . R-1 Certificate of Occupancy . . . . . . . . . . . . . . . . . . . . . . . . CO-1
iii THIS LEASE made as of the first day of May, 1994 between The Rector, Church-Wardens and Vestrymen of Trinity Church in the city of New York, a religious corporation (hereafter referred to as "the Landlord"), having its offices at 74 Trinity Place, Borough of Manhattan, City, County and State of New York, and The Corporate Printing Company, Inc., a New York corporation (hereafter referred to as "the Tenant"), having its place of business at 225 Varick Street, Borough of Manhattan, City, County and State of New York. W I T N E S S E T H: That the Landlord hereby lets and leases to the Tenant, and the Tenant hereby takes and hires from the Landlord, the following described space: a portion of the basement, a portion of the 8th floor, the entire 10th floor, the entire 11th floor and the entire 12th floor as hatched in red on the diagrams attached hereto and made part hereof and marked Exhibit "A", "B", "C", "D", and "E", respectively, (such space is hereafter referred to as "the premises") in the building known by street number as No. 225 Varick Street in the Borough of Manhattan, City, County and State of New York (hereafter referred to as "the building"), with the privilege to the Tenant of using (subject to such rules and regulations as the Landlord shall from time to time prescribe) the necessary entrances and appurtenances to the premises, reserving to the Landlord all other portions of the building not herein specifically demised, for a term to commence on the first day of November, 1994, at noon, Standard Time, and to expire on the thirty-first day of October, 2014, at noon, Standard Time (or until such term shall sooner cease and expire or be terminated as hereafter provided), at the fixed rent at the annual rates as follows:
Annual Rate Period of Fixed Rent ------ ----------- November 1, 1994 to October 31, 2001 . . . . $ 688,619.00 November 1, 2001 to October 31, 2009 . . . . $1,180,038.00 November 1, 2009 to October 31, 2014 . . . . $1,412,525.00
Such fixed rent is payable at the offices of the Landlord in equal monthly installments equal to 1/12th of the rent at the annual rates as above prescribed for the respective periods in which they are payable, in advance without demand therefor an installment equal to the amount of the rent payable under this lease for the first month of the term for which rent is payable upon the execution hereof by the Tenant, and thereafter, on the first day of each month during said term, in lawful money of the United States, plus, (i) when due or demanded, such as shall be provided hereafter are payable by the Tenant as additional rent, and (ii), should the Tenant at the commencement of the term of this lease be in default in the payment of rent to the Landlord pursuant to the terms of any prior lease with the Landlord, or with a predecessor in interest of the Landlord, the amount of such arrears, which the Landlord may at its option and without notice thereof to the Tenant, add to any monthly installments of rent due under this lease. The Landlord agrees to give the Tenant notice of any default under the prior lease no later than November 12, 1994. As of May 12, 1994, the Tenant was not in default in the payment of rent or additional rent under the terms of the existing prior lease between the Landlord and the Tenant. THE ABOVE LETTING IS UPON THE FOLLOWING COVENANTS AND CONDITIONS, each and every one of which the Tenant covenants and agrees with the Landlord to keep and perform, and the Tenant agrees that the covenants herein contained on the part of the Tenant to be performed shall be deemed conditional limitations, as well as covenants and conditions: -1- FIRST: USE. (a) The Tenant shall use the premises only for offices, storage and the operation of Tenant's general printing business including the use of printing presses photocopying, document reproduction, info wiring and any use or activity incidental thereto. (b) If any portion of the premises consists of basement space, such portion shall be used only for storage purposes. (c) No auction sale and no other sale of all or substantially all of the Tenant's property, stock, fixtures and machinery, except a sale made in connection with an assignment of this lease to another tenant for which the Landlord's consent shall have been obtained, shall be held at the premises unless the provisions of Article Twenty-Ninth (b) of this lease shall have been complied with. SECOND: RENT. (a) The Tenant shall pay the rent and additional rent as provided in this lease. (b) If any installment or installments of rent or additional rent or any service charge shall not be paid within fifteen (15) days following the date on which the same shall be due and payable pursuant of this lease, provided that the Tenant has failed to pay such amount within ten (10) days after receipt of written notice from the Landlord, then, in addition to, and without waiving or releasing, any other rights and remedies of the Landlord, the Tenant shall pay to the Landlord a late charge of one and one (1%) percent per month computed (on the basis of a 30-day month) from the date of such notice from the Landlord to the date of payment of the installment on the amount of each such installment or installments, as liquidated damages for Tenant's failure to make prompt payment, and the same may be collected on demand as additional rent in accordance with the provisions of Article Twenty-Third of this lease. THIRD: REPAIRS, MACHINERY, CLEANING AND WASTE. (a) The Tenant shall take good care of the premises and the fixtures, appurtenances, equipment and facilities therein and shall make, as and when needed, all repairs in and about the premises required to keep them in good order and condition reasonable wear and tear and damage by casualty except covered by insurance maintained by the Landlord; such repairs to be equal in quality of the original work provided that the Tenant shall not be obligated for structural or exterior repairs to the building or for repairs to the systems and facilities of the building for the use or service of tenants generally, other than fixtures, appurtenances, equipment and facilities in the premises, except where structural or exterior repairs or repairs to such systems and facilities are made necessary by reason of one or more of the occurrences described below in clauses (i) through (iv) of this Article Third (a). Should the Tenant fail to repair any condition in or about the premises or the fixtures, appurtenances, equipment and facilities therein which is of such a nature that its neglect would result in damage or danger to the building, its fixtures, appurtenances, facilities and equipment, or to its occupants (of which nature the Landlord shall be the judge) or, in the case of repairs of any other nature, should the Tenant have failed to make the required repairs or to have begun in good faith, the work necessary to make them within five business days after notice from the Landlord of the condition requiring repair, the Landlord may, in either such case, immediately enter the premises and make the required repairs at the expense of the Tenant. The Landlord may make, at the expense of the Tenant, any repairs to the building or to its fixtures, appurtenances, facilities or equipment, whether of a structural or any other nature, which are required by reason of damage or injury due (i) to the negligence or the improper acts of the Tenant or its employees, agents, licenses or visitors; (ii) to the moving, into or out of the building, of property being delivered to or taken from the premises; (iii) to the installation, repair or removal of -2- the property of the Tenant in the premises; or (iv) to the faulty operation of any machinery, equipment, or facility installed in the premises by or for the Tenant. The Tenant will pay the cost of any repairs made by the Landlord pursuant to this paragraph upon presentation of bills therefor, or the Landlord may, at its option, add such amounts to any installment or installments of rent due under this lease and collect the same as additional rent. The liability of the Tenant under this Article Third shall survive the expiration or other termination of this lease. (b) If the Tenant shall install or maintain machinery or manufacturing equipment of any description in the premises, the operation of which produces noise or vibration which is transmitted beyond the premises and the Landlord deems it necessary that the noise or vibration of such machinery or equipment be diminished, eliminated, prevented or confined to the premises, the Landlord may give written notice to the Tenant, requiring that the Tenant provide and install rubber or other approved settings for absorbing, preventing or decreasing the noise or vibration of such machinery or equipment within fifteen (15) days. The judgment of the Landlord of the necessity of such installation shall be conclusive, and the installation shall be made in such manner and of such material as the Landlord may direct. Should the Tenant fail to comply with such request within fifteen (15) days, the Landlord, provided ten (10) days notice is afforded Tenant, may do the work necessary to absorb, prevent or decrease the noise or vibration of such machinery or equipment and the Tenant will pay to the Landlord the cost of such work upon demand or such cost may, at the option of the Landlord, be added to any installment or installments of rent under this lease and shall be payable by the Tenant as additional rent. (c) The premises shall be kept clean and in order by the Tenant, at the Tenant's expense, and to the satisfaction of the Landlord. The Tenant shall, at its own expense, clean the interior and exterior surfaces of the windows at such times as the windows become dirty (however, not more often than two times per year) to a degree which, in the judgment of the Landlord, adversely affects the appearance of the building or the premises. Such window cleaning shall be done in a manner which complies with the requirements of this lease and all applicable laws and regulations. The Tenant shall, at its own expense, remove from the building any and all rubbish, refuse and waste originating in the premises of the Tenant or cause the same to be removed. The removal of such refuse, rubbish and waste shall be subject to such results and regulations as to time and manner of removal as, in the judgment of the Landlord, are necessary for the proper operation of the building. In the event that the Tenant shall fail to clean the windows or remove its refuse, rubbish and waste, provided ten (10) days notice is afforded Tenant, such cleaning or removal may be done by the Landlord, and the Tenant shall pay to the Landlord the actual and reasonable cost of the cleaning of the windows or the removal of any of the Tenant's refuse, rubbish and waste from the building. Bills for the same shall be rendered by the Landlord to the Tenant at such times as the Landlord may elect and shall be due and payable within ten (10) days from when rendered, and the amount of such bills shall be deemed to be, and be paid as, additional rent. Should the Landlord clean the windows or remove the rubbish of the Tenant and of other tenants, the cost of such cleaning or removal shall be apportioned as between the Tenant and such other tenants respectively on the basis of the number of windows or the respective approximate quantities of such rubbish and waste as the case may be. The Landlord's apportionment of such respective quantities shall be conclusive on the parties. FOURTH: ALTERATIONS AND FIXTURES. (a) The Tenant shall not make any alteration, addition or improvement in or upon the premises cost of which exceeds $50,000, (excluding painting, wall covering, floor covering or other interior decoration), nor incur any expense therefor, without having first obtained the written -3- consent of the Landlord therefor which shall not be unreasonably withheld or delayed and such approval shall be deemed granted if Tenant is not notified in writing of the Landlord's basis for withholding such approval within ten (10) days of notifying Landlord thereof. If the Tenant shall desire to make alterations, decorations, additions or improvements to fit out the premises for the Tenant's use which will not adversely affect the structure of the building or the operation of any of the systems or facilities of the building for the use of all tenants or violate the requirements of government hereafter referred to and if the Tenant shall furnish the Landlord with the Tenant's plans and specifications for the proposed alteration, decoration, addition or improvement in sufficient detail to permit the Landlord to determine that the same will comply with the requirements of this subdivision (a), the Landlord's approval will not be unreasonably withheld or delayed and such approval shall be deemed granted if Tenant is not notified in writing of the Landlord's basis for withholding such approval within ten (10) days of notifying Landlord thereof. Whenever any alterations, decorations, additions or improvements of the premises are made by the Tenant, the Tenant shall not, knowingly, employ or permit to be employed therein any labor which will cause strikes or labor troubles with other employees in the building employed by the Landlord or its contractors. All alterations, decorations, additions or improvements shall be made and installed in a good and workmanlike manner and shall comply with all requirements, by law, regulation or rule, of the Federal, State and City Governments and all subdivisions and agencies thereof, and with the requirements of the New York Fire Insurance Exchange, New York Board of Fire Underwriters and all other bodies exercising similar functions, and shall conform to any particular requirements of the Landlord, which shall be reasonably expressed in its consent for the making of any such alterations, decorations, additions, and improvements. Any such work once begun shall be completed with all reasonable dispatch, but shall be done at such time an in such manner as not to interfere with the occupancy of any other tenant or the progress of any work being performed by or on account of the Landlord. If requested to do so by the Tenant in connection with the Landlord's approval of any alteration, decoration, addition or improvement, the Landlord will advise the Tenant whether the alteration, decoration, addition or improvement will be required to be removed by the Tenant at the expiration or earlier termination of this lease or may remain upon the premise to become the property of the Landlord. If no such advice is given by the Landlord, the provision of subdivision (b) of this Article Fourth shall apply. (b) All alterations, decorations, additions or improvements, which may be made or installed in or upon the premises (whether made during or prior to the term of this lease or during the term of any prior lease of the premises by the Landlord, the Tenant or any previous tenant), except the furniture, trade equipment of any kind, trade fixtures, stock in trade, and like personal property of the Tenant, shall be conclusively deemed to be part of the freehold and the property of the Landlord, and shall remain upon the premises, and, upon the expiration or any termination of the term of this lease, shall be surrendered therewith as a part thereof, unless the Landlord shall, prior to the expiration or termination of the term, notify the Tenant that any or all of such alterations, decorations, additions or improvements shall be removed, in which event, the Tenant shall remove the same in accordance with the Landlord's notice at its own cost and expense at of prior to the expiration or termination of the term. The Tenant, at or prior to the expiration or any termination of the term of this lease shall, at its own expense, remove all its furniture, trade fixtures, stock in trade and like personal property. The Tenant shall restore and repair, at its own cost and expense, any damage or disfigurement of the premises occasioned by any such removals or remaining ten (10) days after notice to Tenant after such removals, so as to leave the premises in good order and condition or, the Landlord, at its option, may do such restoration and repair and the Tenant will pay the cost thereof upon demand. -4- If any furniture, trade fixtures, stock in trade or other personal property of the Tenant shall not be removed at the expiration or any termination of this lease, the Landlord, at the Landlord's option, may treat the same as having been irrevocably abandoned, in which event the Tenant shall have no further right, title or interest therein and the Landlord may remove the same from the premises, disposing of them in any way which the Landlord sees fit to do, and the Tenant shall, on demand, pay to the Landlord the actual and reasonable expense incurred by the Landlord for the removal thereof, as well as the cost of any restoration of the premises above provided. The Tenant's obligations under this subdivision (b) of this Article Fourth shall survive the expiration of this lease. (c) The Landlord may at any time during the term of this lease change the arrangement or location of the entrances or passageways, doors and doorways, and the corridors, elevators, stairs, toilets (except for toilets on floors where the Tenant leases the entire floor) or other parts of the building used by the public or in common by the Tenant and other tenants (including, without limitation, the conversion of elevators from a manually operated to an automatic self-service basis) provided no such change in arrangement shall materially reduce the size of the premises or materially impair access to the premises, and may alter the staffing of the building and the scale and manner of the operation thereof, provided that the services to which the Tenant is entitled as specified in this lease are not diminished and may alter the facilities, fixtures, appurtenances and equipment of the building as it may deem the same advisable, or as it may be required so to do by any governmental authority, law, rule or regulation. The Landlord may, after reasonable notice, change the name, street number or designation by which the building is commonly known. To the extend any portion of the premises becomes unuseable for Tenant's business, due to Landlord's work, the rent and additional rent shall abate with respect thereto. FIFTH: COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. The Tenant shall promptly comply, at the Tenant's own expense, with all laws, ordinances, regulations and requirements of the City, State and Federal Governments, and all subdivisions and agencies thereof, and the New York Fire Insurance Exchange, the New York Board of Fire Underwriters, and of any fire insurance rating organization, and of all other departments, bureaus, officials, boards and commissions with regard to the premises or the use thereof by the Tenant, provided that the Tenant shall not be required to make alterations or additions to the premises, except where the same are required by reason of the nature of the Tenant's use of the premises, the manner in which it business is carried on in the premises or a failure on the part of the Tenant to conform to the provisions of this lease. The Tenant will not permit the maintenance of any nuisance upon the premises or permit its employees, licensees or visitors to do any illegal act therein, or in and about the building. If any such law, ordinance, regulation or requirement shall not be promptly complied with by the Tenant, then the Landlord may after providing Tenant with ten (10) days prior notice, at its option, enter upon the premises to comply therewith, and should any fine or penalty be imposed for failure to comply therewith or by reason of any such illegal act, the Tenant agrees that the Landlord may, at its option, pay such fine or penalty, which the Tenant agrees to repay to the Landlord, with interest from the date of payment, as additional rent. SIXTH: COMPLIANCE WITH LANDLORD'S RULES. The Tenant and the Tenant's employees, and any other persons subject of the control of the Tenant, shall well and faithfully observe all the rules and regulations annexed hereto, and also any and all reasonable rules and regulations affecting the premises, the building or the equipment, appurtenances, facilities and services thereof, hereafter promulgated by the Landlord. The Landlord may at any time, and from time to time, prescribe and regulate the -5- placing of safes, machinery, quantities of merchandise and other things, and regulate which elevator and entrance shall be used by the Tenant's employees, and for the Tenant's shipping; and may make such other and further rules and regulations as in its reasonable judgment may, from time to time, be needed or desirable for the safety, care or cleanliness of the building and for the preservation of good order therein. The type and location of the Tenant's trade machinery and equipment is indicated on Exhibit "M" hereto and the Landlord approves the location of such machinery and equipment. SEVENTH: PLATE GLASS. [Intentionally Omitted] EIGHTH: CARE OF SIDEWALKS. [Intentionally Omitted] NINTH: LANDLORD'S ACCESS TO THE PREMISES. (a) The Tenant shall, without in any way affecting the Tenant's obligations hereunder, and without constituting any eviction, permit the Landlord and its agents: (i) during regular business hours on reasonable prior notice; to enter the premises and have access thereto, for the purpose of inspecting or examining them during regular business hours on reasonable prior notice; (ii) to enter the premises to make repairs and alterations, and to do any work on the premises and any work in connection with excavation or construction on any adjoining premises or property (including, but not limited to, the shoring up of the building) and to take in any of the foregoing instances, any space needed therefor; and (iii) during the six months preceding the termination hereof, to place and maintain thereon the usual "for rent" notices. The Tenant shall permit the Landlord to erect and maintain ducts, pipes and conduits in and through the premises, provided such are "boxed-in". In the exercise of the rights of the Landlord reserved under clause (ii) or under the next preceding sentence of this subdivision (a) of Article Seventh the Landlord will do so in a manner which minimizes the interference with the Tenant's use of the premises so far as practicable and where ducts, pipes or conduits are to be erected through the premises will locate them along walls or ceilings wherever practicable. The Landlord will exercise its rights under the preceding sentence in a manner which will no unnecessarily interfere with the operation of the Tenant's business or disfigure or impair the usefulness of the premises. (b) If the Tenant or an officer or authorized employee of the Tenant shall not be personally present to open and permit an entry into said premises, at any time, when for any reason an entry therein shall be necessary or permissible hereunder, the Landlord or the Landlord's agents, may, in the case of an emergency of the Tenant's repeated refusal to grant the Landlord access, enter the same by a master key, or may forcibly enter the same without rendering the Landlord or such agents liable therefor (if during such entry the Landlord shall accord reasonable care to the Tenant's property) and without in any manner affecting the obligations and covenants of this lease and in no event shall any such entry by the Landlord or its agents be deemed an acceptance of a surrender of this lease, either expressed or implied, nor a waiver by the Landlord of any covenant of this lease on the part of the Tenant to be performed. TENTH: ELECTRIC CURRENT; LIVE STEAM. (a) Electric current is to be supplied by the Landlord. The Tenant covenants and agrees to purchase the Tenant's requirements therefor at the premises from the Landlord or the Landlord's designated agent at 110% of the rates set forth in the rate schedule of Consolidated Edison Company of New York, Inc. applicable to the building (or the conjunctional group in which the building is included), plus any sales or use tax or other governmental charge or levy; provided, however, that if such rate schedule includes any adjustment for time-of-day for either demand or consumption, the rate applicable to the Tenant's demand for and consumption of electricity, shall be -6- that specified for the peak period. The calculation of the rate shall include the effect of all direct and indirect charges which affect the cost of the electricity, including without limitation, consumption charges, demand charges and fuel cost escalation charges. In the event that the Tenant is required to pay New York City or New York State tax on any amount payable pursuant to this paragraph (a), then the amount payable by the Tenant hereunder for electricity shall be reduced by the amount of such taxes; provided, however, that in the event that the Landlord continues to own the building, in no event shall such amount, as so reduced, be less than 105% of the rates set forth in the rate schedule of Consolidated Edison Company of New York, Inc. applicable to the building. (b) Where more than one meter measures the service of the Tenant in the building, the service rendered through each meter may be computed and billed separately in accord with the rates herein provided for. No current shall be furnished until the equipment of the Tenant has been approved by the proper authorities, and after such approval, no changes shall be made in such equipment which would cause an increase in consumption beyond the capacity available to the premises. The Tenant shall pay, upon demand, the bills for electric current furnished and the use of meters. The Tenant shall comply with such rules, regulations and contract provisions as are customarily prescribed by public service corporations supplying such services, for consumption similar to that of the Tenant. Landlord shall repair and maintain all risers, feeders and other electrical equipment used to supply electricity to the tenants in the building generally and to replace same at its own expense when necessary. (c) Provided electrical service is discontinued to all tenants in the building, The Landlord may discontinue the supply of electric current under subdivision (a) at any time on sixty (60) days' notice to the Tenant without being liable to the Tenant therefor or without in any way affecting this lease or the liability of the Tenant hereunder or causing the diminution of rent, and the same shall not be deemed to be a lessening or diminution of services within the meaning of any law, rule, or regulation now or hereafter enacted, promulgated, or issued. Should the Landlord give such notice of discontinuance, the Tenant shall make the Tenant's own arrangements to receive such service direct from such public utility corporation serving the building and the Landlord shall permit the Landlord's wires, conduits and meters, to the extent to which they are safely available for such use and to the extent to which they may be used under any applicable governmental regulations or the regulations of such public utility, to be used for the purpose. Should any additional or other wiring, conduits, meters or any other or different distribution equipment be required in order to permit the Tenant to receive such service directly from the public utility, the same will be installed as the Landlord shall elect, either by the Landlord, at the sole cost and expense of the Tenant, or by the Tenant at the Tenant's sole cost and expense, except that the Landlord shall pay any fee required to permit the building to be connected to the electrical distribution system of Consolidated Edison. In the case of central distribution equipment which is used in connection with the distribution or metering of current supplied to the Tenant and other tenants of the building, and which is required to be installed under governmental regulations or the regulation of such utility, the cost of installation thereof will be prorated among the several tenants, serviced through the distribution facility in the proportion which their average consumption of electric current over the next preceding period of not less than six months' duration bears to the total consumption of electric current by all tenants during such period, and the Tenant shall pay to the Landlord the Tenant's share of such cost of installation, apportioned as above, within ten (10) days following receipt of a statement showing the cost of the distribution equipment and the manner in which the cost has been allocated to the Tenant. Should the supply of electric current by the Landlord be discontinued, but -7- not as a result of the Landlord's election to discontinue the supply of current, then the Tenant shall, at the Tenant's expense, install all wiring, metering and distribution facilities which are required in order to permit the Tenant to purchase the Tenant's requirements for electric current for the premises from such utility and may discontinue the use of the Landlord's electric wires, cables, meters and distribution facilities. All such facilities installed by the Tenant shall be installed in a workmanlike way which complies with applicable governmental regulations and the regulations of the public utility. The Landlord will in any such case permit any pipe-chases or channels available in the building to be used by the Tenant for the Tenant's cables and conduits, to the extent that the same may be available and may be safely used for the purpose. (d) The Landlord shall not in any way be liable or responsible to the Tenant for any loss or damage or expense which the Tenant may sustain or incur if either the quantity or character of electric service is changed or is no longer available or suitable for the Tenant's requirements, provided such is not caused by any action of the Landlord, nor shall the Landlord be in any way responsible for any interruption of service due to breakdowns, repairs, malfunction of electrical equipment or any other cause relating to electrical service which is beyond the Landlord's reasonable control. (e) If there be any facilities for the supply of live steam in the building, such steam shall be supplied to the Tenant only if separate agreements are made therefor and pursuant to such arrangements. In the event that such separate agreements shall be made, the appropriate provisions of this Article Tenth shall be applicable thereto. ELEVENTH: CONDEMNATION AND DEMOLITION. If the premises or any part thereof shall be taken or condemned for any public or quasi public use, this lease and the term hereby granted shall terminate on the date when title vests in the condemnor and the Tenant shall have no claim for the value of any unexpired portion of the term of the lease. If any other part of the building shall be so taken and such taking shall, in the judgment of the Landlord, make the operation of the building impractical, unprofitable or uneconomical (even though no part of the premises be taken), the Landlord may, at its option, give to the Tenant, at any time after the vesting of title and prior to the actual taking of possession, thirty (30) days' notice of intention to terminate this lease, and upon the date designated in such notice, this lease and the term hereby granted shall terminate. In no event shall any condemnation award be apportioned, and the Tenant hereby assigns to the Landlord all right and claim to any part of such award, but the rent, and all other sums payable by the Tenant, shall be apportioned as of the date of any such termination of this lease, provided that nothing contained in the foregoing portion of this Article Eleventh shall be deemed to prevent the Tenant's making claim for and retaining an award for the damage to or loss of value of its trade fixtures, unexpired term of the lease, or from making claim for and retaining any award which may be made to the Tenant for Tenant's moving expenses if, and to the extent that, the award to be claimed and retained by the Tenant is independent of and does not result in a diminution of the award to the Landlord for the taking of the land, building and the Landlord's other property. TWELFTH: MECHANIC'S LIENS. The Tenant will not permit, during the term hereby granted, any mechanic's or other lien or order for payment of work, labor, services, or materials furnished or to be furnished to Tenant to attach to or affect the premises or any portion thereof, and agrees that no such lien or order shall under any circumstances attach to or affect the fee, leasehold or other estate of the Landlord herein, or the building. The Tenant's obligation to keep the premises in repair, and any right of the Tenant to make alterations therein, and the Landlord's consent to -8- make any alterations or improvements, shall not be construed as the permission, consent or request of the Landlord to the furnishing of any such work, labor or materials within the meaning of any present or future lien law. Notice is hereby given that the Tenant has no power, authority or right to do any act or to make any contract which may create, or be the foundation for, any lien upon the fee or leasehold estate of the Landlord in the premises or upon the land or buildings of which they are a part of the improvements now erected or hereafter to be erected upon the premises or the land or building of which the premises are a part; and if any such mechanic's or other lien or order shall be filed against the premises or the land or building of which the premises are a part, the Tenant shall, within thirty (30) days thereafter, discharge said lien or order by payment, deposit or by bond fixed in a proper proceeding according to law. If the Tenant shall fail to take such action, or shall not cause such lien or order to be discharged within thirty (30) days after receipt of notice of the filing thereof, the Landlord may pay the amount of such lien or discharge the same by deposit or by bond or in any other manner according to law, and pay any judgment recovered in any action to establish or foreclose such lien or order, and any amount so paid, together with the expenses incurred by the Landlord, including all attorneys' fees and disbursements incurred in any defense of any such action, bonding or other proceeding, shall be deemed additional rent. THIRTEENTH: SUBORDINATION. (a) This lease, and all the rights of the Tenant hereunder, are and shall be subject and subordinate to any and all mortgages or liens, now existing or hereafter created, either in whole or in part on the building, or the land on which it stands, and also to any and all other mortgages covering other lands or lands and buildings, which may now or hereafter be consolidated with any mortgage or mortgages upon the building and the land on which it stands or which may be consolidated and spread to cover the building and such land and any such other lands or lands and buildings, and any extension, renewal or modification of any such mortgages, and to any and all underlying leases of record, or hereafter to be recorded, against the building or the land on which it stands, and any extensions, renewals or modification hereof. The Landlord represents that the building and the land on which it is located are not subject to the lien of any mortgage or to any underlying ground lease. The Landlord shall obtain from any future mortgagee or from any future lessor of any underlying lease, an agreement to the effect that, so long as the Tenant shall not be in default under the terms of this lease, the Tenant shall not be made party to any proceeding to foreclose the mortgage or to terminate the underlying lease; and that the Tenant's possession of the premises under the term of this lease, shall not be terminated or disturbed as a result of the foreclosure of any mortgage or termination of any underlying lease. The Tenant agrees it will execute any agreement consistent with the foregoing provisions which may be required to confirm the subordination of this lease subject to the non-disturbance provisions above outlined. In any such agreement the The Tenant shall agree that, in the event that the mortgagee shall succeed to the rights of the Landlord herein named, or if any Landlord of any underlying lease shall succeed to the position or the Landlord under this lease, then the Tenant will recognize such successor Landlord as the Landlord of this lease and pay the rent and attorn to and perform the provisions of this lease for the benefit of any such successor Landlord. FOURTEENTH: CERTIFICATE OF OCCUPANCY. The Tenant shall immediately discontinue any use of the demised premises, which may, at any time, be claimed or declared by the City or State of New York or other governmental authority to be in violation of or contrary to the certificate of occupancy of the building, or by reason of which any attempt may be made to penalize the Landlord or require the Landlord to secure any certificate of occupancy other than the one, if any, now issued for the building. -9- FIFTEENTH: VAULTS. Landlord represents and warrants to Tenant that the premises do not include any vault space, and Tenant shall not be responsible for the payment of any vault charge or tax, if any, imposed by any governmental authority. SIXTEENTH: LIQUORS. Neither the Tenant nor any occupant of the premises or of any part thereof shall at any time during the continuance of the term, sell, traffic in, expose for sale, dispense or give away, upon any part of the premises, any strong or spirituous liquor, wine, ale or beer, or take or have a license for such sale. The provisions of this Article Sixteenth will not be deemed violated by a continuation of the Tenant's practice of affording hospitality to customers employing its printing services, including the service of alcoholic beverages; it being understood that there will be no dispensing in any way of alcoholic beverages to any employees of the Landlord or to any part of the public other than the customers of the Tenant's printing services. SEVENTEENTH: FIRE AND FIRE INSURANCE. (a) If the premises shall be damaged by fire, action of the elements or other casualty or cause which is within the risks covered by insurance carried by the Landlord, the Tenant shall give immediate notice thereof to the Landlord, and said damage shall be repaired by the Landlord, at the Landlord's expense, with all reasonable speed, making due allowance for delay due to labor troubles, settlement of loss and other causes beyond the control of the Landlord, and the Tenant shall, in every reasonable way, facilitate the making of such repairs, and (unless the fire shall be due to the negligence or other fault of the Tenant or its employees) the rent (and the additional rent) shall be suspended during such period as the premises shall have been rendered wholly untenantable and, in the event that the premises are rendered partially untenantable, the rent shall be abated during such period, in the proportion which the area of the premises which is rendered untenantable bears to the area of the whole premises, but no damage to the premises or the building by fire, or other cause, however extensive, shall terminate this lease, or give the Tenant the right to quit and surrender the premises, or impair any obligation of the Tenant hereunder, except with respect to the payment of rent (and with respect thereto the extent above provided) and except that (i) if the damage shall be so extensive that the Landlord shall determine to demolish or substantially alter the building, the Landlord may at any time within thirty (30) days following the occurrence of the damage give to the Tenant thirty (30) days' notice of intention to terminate this lease; (ii) if the damage to the premises is substantial so that the whole or substantially the whole of the premises is rendered untenantable by the Tenant and the Landlord does not repair the damage to the premises and, in fact, commence repair within thirty (30) days of such notice so that the premises are again usable by the Tenant within a period of not more than 120 days following the occurrence of the damage subject to delays due to causes of the kinds described in Article Thirty-Fourth of this lease, the Tenant may cancel this lease by notice given within ten (10) days following the expiration of the said 30-day period for the Landlord's notice of election to repair. If notice of election to terminate this lease shall be given as above provided, then, upon the date for termination designated in any such notice this lease and the term hereby granted shall terminate and the rent shall be apportioned as of the date of the damage or as of such later date as the Tenant may actually surrender possession. Nothing herein contained shall be deemed to obligate the Landlord to restore the Tenant's trade fixtures, stocks, furnishings or other property remaining the property of the Tenant. (b) The Tenant further agrees not to permit any act to be done or anything brought into or kept upon the premises which will void or avoid the insurer's liability under any contract of fire insurance on the building or its contents or increase the rate of insurance upon the building. Should the fire insurance rate on the building be increased beyond the present rate, by reason of -10- Tenant's failure to comply with the terms hereof, the Tenant agrees to pay to the Landlord, on demand, the additional cost of such insurance, or, at the option of the Landlord, the same may be added to any installment of rent and be payable as additional rent. The schedule of the makeup of a rate issued by an authorized rating organization shall be conclusive evidence of the facts therein stated and of the items in the rate applicable to the premises. (c) The Landlord, as to the premises, and the Tenant, as to the improvements made therein at the Tenant's expense and all of the Tenant's stock, trade fixtures and other property in the premises, hereby release one another from all liability for any loss or damage caused by fire or any of the risks enumerated in standard extended coverage insurance. This release is conditioned upon the inclusion in their respective policies of insurance of a provision stating that such release shall not adversely affect said policies or prejudice any right of the insured to recover thereunder. The Landlord and Tenant agree that their respective insurance policies will include the aforesaid provision so long as the same is obtainable without extra cost or if extra cost be charged, so long as the party for whose benefit the clause is obtained shall pay such extra cost. If extra cost shall be chargeable therefor the party so affected shall advise the other thereof and of the amount of the extra cost and the other party at its election may pay the same or decline to so pay in which event the release from liability given to said party by this Article Seventeenth (c) shall be deemed to be withdrawn and of no force and effect. (d) The parties hereto shall each use their best efforts to procure and maintain in force and effect an appropriate clause in, or endorsement on, any fire or extended coverage insurance covering the demised premises and the building and the personal property, fixtures and equipment located therin or thereon, pursuant to which the insurance companies waive subrogation, provided such waiver is procurable without additional premium, and, having obtained such clause or endorsement of waiver or subrogation, every party hereby agrees that it will not make any claims against or seek to recover from the other for any loss or damage to its property or of others, covered by such fire and extended coverage insurance; provided, however, that the release, discharge, exoneration and covenant not to sue herein contained shall be limited to the terms and provisions of the waiver of subrogation clauses and/or endorsements and shall be co--extensive therewith. If such waiver of subrogation shall be procurable only by payment of an additional premium therefor, notice of such requirement shall be furnished to the other party and if such other party fails to pay such additional premium, then the provisions hereof shall not be applicable to such other party. EIGHTEENTH: CHANGE IN USE OF PREMISES, SUBLETTING AND ASSIGNMENT. (a) The use to be made of the premises by the Tenant and the identity of the Tenant being among the inducements to the making of this lease by the Landlord, the Tenant shall not, except in accordance with the terms of this Article, (i) use or permit the premises or any part thereof to be used for any purposes other than those specified in the lease, (ii) sublet or underlet the premises or any part thereof, (iii) permit the premises or any part thereof to be occupied by anyone other than the Tenant or it officers or employees, (iv) mortgage or encumber; this lease or any interest therein, (v) assign or transfer, by operation of law or otherwise, this lease or any interest therein. (b) The Tenant shall not, without having first obtained the Landlord's prior written consent thereto, (i) use or permit the premises or any part thereof to be used for any purposes other than those specified in the lease, or (ii) mortgage or encumber this lease or any interest therein. The Landlord agrees that if, in connection with a proposed assignment of the lease or subletting of the premises, the Tenant requests a change in the purposes for which the premises may be used, the Landlord will not unreasonably -11- withhold its consent, bearing in mind that the Landlord is a religious institution.. (c) The Tenant shall not, except in accordance with the provisions of paragraphs (d) through (l) of this Article, (i) assign or transfer, by operation of law or otherwise, this lease or any part therein, (ii) sublet or underlet the premises or any part thereof, or (iii) permit the premises or any part thereof to be occupied by anyone other than the Tenant or its officers or employees. (d) If the Tenant shall desire to assign this lease or to sublet the whole or any part of the premises or to permit the premises to be occupied by any person other than the Tenant, the Tenant will notify the Landlord as to (i) the action which the Tenant proposes; (ii) the portion of the premises with respect to which the Tenant proposes to take such action (the "Affected Premises"); (iii) the name and business address of the proposed assignee, sublessee or occupant (the "Proposed Undertenant"), (iv) the name and residence address of the officers and principal stockholders of the Proposed Undertenant, if a corporation is involved or the names and residence addresses of the general partners thereof if a partnership or joint venture is involved; (v) the information, in reasonable detail, as to the Proposed Undertenant which is required to permit the Landlord to make the determinations described in paragraph (h) below; (vi) the terms upon which the Tenant proposes to assign this lease or sublet the premises or permit the premises to be occupied by the Proposed Undertenant (including the terms under which any additions, alterations or decorations are to be made to the Affected Premises and the terms on which the Proposed Undertenant is to buy or lease any fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property from the Tenant; and (vii) the name and address of any real estate broker or other person to whom a commission may be owed by any person in connection with such assignment, subleasing or occupation. (The Tenant's notice of desire to assign, sublease or permit occupancy of the Affected Premises by others, with the information prescribed above is hereafter referred to as a "Tenant's Subleasing Notice"). (e) By written notice executed by the Landlord and delivered to the Tenant within thirty (30) days following receipt of the Tenant's Subleasing Notice (for the purposes hereof such notice shall not be deemed to have been received by the Landlord until all of the information required by paragraph (d) above shall have been furnished to the Landlord), the Landlord shall and if the Landlord fails to respond in such 30 day period, the Landlord will be deemed to have consented to the subletting or assignment requested by the Tenant. (f) In the event of a proposed assignment of this lease or the subleasing or occupation of the entire premises subject to this lease for the then remaining balance of the term of this lease, (i) the Landlord may elect to require the Tenant to surrender the premises to the Landlord and terminate this lease with respect to the premises on the last day of the second complete calendar month following the Tenant's Subleasing Notice and comply with the provisions of this lease respecting surrender at the end of the term not later than such date or (ii) the Landlord may give its consent to any such assignment, sublease or occupation. Any subletting or occupancy by a third party as a consequence of which 25% or less in an area of the Premises shall remain in occupancy by the Tenant herein named may, at the Landlord's option, be considered a subleasing of the whole of the Premises. The Landlord will not elect to require the Tenant to surrender the premises and will not unreasonably withhold its consent to an assignment or subleasing proposed by the Tenant in connection with the sale of all or substantially all of the business operations and assets of the Tenant. -12- (g) In the event of a proposed subleasing or occupation of all or any portion of the premises subject to this lease for the then remaining balance term of this lease, (i) the Landlord may elect to require the Tenant to surrender to the Landlord and vacate the Affected Premises not later than the date upon which the proposed subleasing or occupation is proposed to commence and comply on such date with the provisions of this lease as to surrender at the expiration of the term with respect to the Affected Premises, and the Tenant shall, at its expense, erect the partitioning required to separate the Affected Premises from the remainder of the premises, create any doors required to provide an independent means of access to the Affected Premises from elevators and lavatories and to segregate the wiring and meters and electric current facilities, so that the Affected Premises may be used as a unit for commercial purposes, separate from the remainder of the premises remaining in occupation of the Tenant; in which event the rent and all additional rent payable under this lease shall be reduced proportionately with the diminution in the area of the premises upon surrender of the Affected Premises; or (ii) the Landlord may give its consent to any such sublease or occupation. (h) In the case of an assignment or subletting, the Landlord shall be under no obligation to consent thereto or to select one of the alternatives set forth in paragraph (f) above, unless the Landlord's investigation of the financial standing of the proposed assignee discloses that there is no reason to doubt the financial ability of the assignee to carry out its obligations under this lease for the balance of the term and the Landlord's investigation of the manner in which the proposed assignee conducts its business indicates that the assignee will conduct its business in the premises in conformity with the requirements of this lease or that there will be no interference with the orderly conduct of their business and the enjoyment of their premises by other tenants in the building. In the case of a sublease or occupation, the Landlord shall be under no obligation to consent thereto or select one of the alternatives set forth in paragraph (f) or (g) above, as the case may be, unless the Landlord's investigation of the nature of the business of the proposed sublessee or occupant or the manner in which the proposed sublessee or occupant will conduct such business indicates that there is no reason to doubt that such business will be conducted in conformity with the requirements of this lease and that the use of the premises by the proposed sublessee or occupant will not result in damage to or deterioration of the premises or the building, or interfere with the orderly conduct of their businesses and the enjoyment of their premises by other tenants in the building. The Landlord shall be under no obligation to consent to any assignment of this lease or any subletting or occupation of the premises to or by any person other than the Tenant unless the criteria set forth in this paragraph are satisfied. In the event of any assignment or subleasing, the Landlord will not unreasonably withhold its consent to any requested change in uses applicable to the premises, bearing in mind that the Landlord is a religious organization and, as such may consider certain uses inappropriate. (i) If the Landlord's Subleasing Notice shall be to the effect that the Landlord elects that the Affected Premises be surrendered, then the Affected Premises shall be surrendered in accordance with clause (i) of paragraph (f) or (g) above, as the case may be, and any work required to be done to separate the Affected Premises from the remainder shall be commenced promptly following the Tenant's receipt of the Landlord's Subleasing Notice and carried on with diligence and conformity. (j) No consent given by the Landlord shall be deemed to permit any act except the act to which it specifically refers, or to render unnecessary any subsequent consent, and any assignment or subletting of the premises shall not relieve the Tenant or any mesne assignee from any obligations, duty or covenant under this lease, and in all cases a violation of any of the covenants or -13- duties or obligations under this lease by a subtenant or assignee shall, in addition, be deemed to be the act of the Tenant herein. No assignment, transfer, mortgage, encumbrance, subletting or arrangement in respect of the occupancy of the premises shall create any right in the assignee, transferee, mortgagee, subtenant or occupant, unless the consent of the Landlord shall first have been obtained, and unless, if an assignment is involved, the transferee or assignee shall have delivered an agreement duly executed by the assignee shall have delivered an agreement duly executed by the assignee or transferee wherein the assignee or transferee assumes and agrees to pay or otherwise keep and perform the obligations of the Tenant in this lease or, if a sublease is involved wherein the sublessee agrees that any act or omission by the sublessee which, if performed or omitted by the Tenant under this lease would be a default thereunder shall also be a default under the provisions of the sublease. Any assignee by accepting an assignment shall nevertheless be conclusively deemed to have assumed this lease and all obligations already accrued or to accrue thereunder and further to have agreed to fully and duly perform all the Tenant's covenants herein contained. If the Tenant shall, at any time, be in default in the payment of rent after applicable notice, the Landlord shall have the right to collect rent from any assignee, undertenant or occupant, and credit the same to the account of the Tenant, and no such collection shall constitute a waiver of the foregoing covenant or the acceptance of anyone other than the Tenant, as Tenant or shall otherwise release, impair or otherwise affect any obligation of the Tenant under this lease. Immediately following the execution and delivery of any assignment of this lease or any subleasing of the premises or an agreement as to the occupancy thereof, the Tenant will furnish a duplicate of the instrument in question to the Landlord. (k) Subject to paragraphs (j) and (l) of this Article and to continued compliance with Article First of this lease, the Tenant is authorized to sublease portions of the premises to a subsidiary corporation or corporations or to a corporation or other entity affiliated with the Tenant, without compliance with the provisions of paragraph (c) through (g) of this Article. A subsidiary corporation shall mean and include a corporation of which the Tenant owns and holds at least a majority of each class of stock which is authorized to vote at the time when the sublease is executed. An affiliated corporation shall mean and include a corporation which is owned and controlled by the corporation which owns and controls the Tenant by ownership of at least a majority of each such class of stock. Before making any sublease to any such subsidiary or affiliated corporation, the Tenant shall certify to the Landlord the manner in which such subsidiary or affiliated corporation is related to and controlled by the Tenant and the purposes for which the subleased premises will be used. (l) Anything herein to the contrary notwithstanding, the Tenant may not assign this lease or sublet or permit the occupancy by any other party of all or any part of the demised premises at any time when the Tenant has not paid any rent and additional rent when it is payable. The Tenant shall furnish the Landlord with a counterpart (which may be a conformed or reproduced copy) of each sublease, assignment or agreement of occupancy made hereunder within ten (10) days after the date of its execution. Tenant shall remain fully liable for the performance of all of Tenant's obligations hereunder notwithstanding anything provided for herein, and without limiting the generality of the foregoing, shall remain fully responsible and liable to Landlord for all acts and omissions of any subtenant, assignee or occupant or anyone claiming under or through any such person which shall be in violation of any of the obligations of this lease and any such violation shall be deemed to be a violation by Tenant. Tenant shall pay Landlord on demand any expense which Landlord may reasonably be required to incur in acting upon request for consent pursuant to this Article. (m) Notwithstanding anything else in this Article, the Landlord shall have the right to condition its consent to any -14- proposed sublease of all or a portion of the premises on the following: (i) The Tenant shall not be in default in the payment of rent or the performance of any other of its obligations under this lease. (ii) The Tenant shall have delivered to the Landlord a Tenant's Subleasing Notice as required by Subparagraph (d) above. (iii) The Tenant shall have complied with the provisions of paragraphs (j) and (l) of this Article. (iv) The Tenant shall grant the Landlord a security interest in the sublease and the rents payable thereunder and shall take all necessary steps required to perfect such security interest. (v) The sublease shall include a provision to the effect that if the Landlord shall notify the sublessee that the Tenant is in default in the payment of rent or the performance of its other obligations under this lease the sublessee shall, if so requested by the Landlord pay all rent and other amounts due under the sublease directly to the Landlord. (n) At the request of the Landlord, the Tenant will furnish to the Landlord, within ten (10) days of receipt of a request therefor, a certificate executed in the name and on behalf of the Tenant, confirming that, except as previously consented to in writing by the Landlord or as otherwise specifically set forth in such certificate, the Tenant has not (i) used or permitted the premises or any part thereof to be used for any purposes other than those specified in this lease, (ii) mortgaged or encumbered this lease or any interest therein, (iii) assigned or transferred, by operation of law or otherwise, this lease or any interest therein, (iv) sublet or underlet the premises or any part thereof, or (v) permitted the premises or any part thereof to be occupied by anyone other than the Tenant or its officers or employees. With respect to any exception to clauses (i) through (v) above which the Landlord has not previously consented to in writing, the Landlord in its sole discretion, may either consent thereto (which consent may be subject to any conditions specified by the Landlord) or exercise the rights and remedies available to the Landlord under the terms of this lease. (o) Notwithstanding anything to the contrary herein, provided that the Tenant complies with the other provisions of this Article Eighteenth, the Tenant shall have the right to enter into a sublease with Four Color Litho, Inc. relating to a portion of the premises on the 10th floor all of which portion shall be contiguous and the aggregate areas of such portions shall not exceed 3,878 sq. ft., as hatched in red on the diagram attached hereto and marked Exhibit "F", then in each such case, the Landlord shall not have the right, as provided in clause (i) of paragraph (g) of this Article, to require the Tenant to surrender the portion of the premises in question. NINETEENTH: WAIVER AND SURRENDER; REMEDIES CUMULATIVE. No consent or waiver of any provision hereof or acceptance of any surrender shall be implied from any act or forbearance by the Landlord. No agreement purporting to accept a surrender of this lease, or to modify, alter, amend or waive any term or provision thereof, shall have any effect or validity whatever, unless the same shall be in writing, and executed by the Landlord and by the Tenant, and be duly delivered, nor shall the delivery of any keys to anyone have any legal effect, any rule or provision of law to the contrary notwithstanding. Any consent, waiver or acceptance of surrender, in writing, and properly executed and delivered as aforesaid, shall be limited to the special instance for which it is -15- given, and no superintendent or employee, other than an officer of the Landlord or of its managing agent, and no renting representative shall have any authority to accept a surrender of the premises, or to make any agreement or modification of this lease, or any of the terms and provisions hereof. No provision of any lease made by the Landlord to any other tenant of the building shall be taken into consideration in any manner whatever in determining the rights of the Tenant herein. No payment by the Tenant or receipt by the Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the stipulated rent, nor shall any endorsement on any check, nor any letter accompanying any such payment of rent, be deemed an accord and satisfaction (unless an agreement to accept a lesser amount be signed by the Landlord), but the Landlord may accept such payment without prejudice to the Landlord's full right to recover the balance of such rent to institute summary proceedings therefor. The receipt by the Landlord of any rent, or additional rent or of any other sum of money which may be payable under this lease, or of any portion thereof, shall not be deemed a waiver of the right of the Landlord to enforce the payment of any sum of any kind previously due or which may thereafter become due under this lease, or of the right to forfeit this lease by such remedies as may be appropriate, or to terminate this lease or to exercise any of the rights and remedies reserved to the Landlord hereunder, and the failure of the Landlord to enforce any covenant or condition (although the Tenant shall have repeatedly or continuously broken the same without objection from the Landlord) shall not stop the Landlord at any time from taking any action with respect to such breach which may be authorized by this lease, or by law, or from enforcing said covenant or any other covenant or condition on the occasion of any subsequent breach or default. In the event of any continuing breach by the Tenant, the Landlord shall have the right of injunction. The various rights, remedies, powers and elections of the Landlord, as provided in this lease or created by law, are cumulative, and none of them shall be deemed to be exclusive of the others, or of such other rights, remedies, powers or elections as are now or may hereafter be conferred upon the Landlord by law. TWENTIETH: REPRESENTATIONS AS TO PREMISES, CERTIFICATE OF OCCUPANCY AND USE. The Tenant represents to the Landlord that the Tenant has made, or caused to be made, a careful inspection of the premises and that the Tenant has made an examination of the certificate of occupancy of the building and that the area and present condition of the premises are in all respects satisfactory to the Tenant, except (if at all) as may herein otherwise be expressly stated in the memorandum of repairs or decorations to be done by the Landlord attached to this lease, and that the Tenant has determined that the use of the premises, as set forth in this lease, is consistent with the uses permitted under the certificate of occupancy. The Tenant acknowledges that no representations or promises have been made by the Landlord or the Landlord's agents with respect to the premises or the building or the certificate of occupancy thereof, except as in this lease set forth. The statements contained in this lease regarding the use of the premises by the Tenant shall not be deemed a representation or warranty by the Landlord that such use is lawful or permitted by the certificate of occupancy of the building. TWENTY-FIRST: LIMITATIONS OF LANDLORD'S LIABILITY. (a) The Tenant shall make no claim upon the Landlord for abatement of rent, constructive eviction, rescission, or otherwise, and the Landlord shall be exempt from all liability, except for injuries to the Tenant's person or property which are due to the negligence of the Landlord, its agents, servants or employees in the management of the premises or the real property of which the demised premises are a part, for or on account of any annoyance, inconvenience, interference with business, or other damage, caused by: (i) any interruption, malfunction or curtailment of the operation of the elevator service, heating plant, sprinkler system, gas, water, -16- sewer or steam supply, plumbing, machinery, electric equipment or other appurtenances, facilities, equipment and conveniences in the building, whether such interruption, malfunction or curtailment be due to breakdowns, or repairs, or strikes or inability to obtain electricity, fuel or water due to any such cause or any other cause beyond the Landlord's control; (ii) any work of repair, alteration or replacement done by or on behalf of the Landlord or the Tenant, pursuant to the provisions of this lease; (iii) any water, rain, snow, steam, gas, electricity or other element, which may enter, flow from or into the premises or any part of the building, or any noise or vibration audible in, or transmitted to, the premises; (iv) any vermin; (v) any falling paint, plaster or cement; (vi) any interference with light or with other easements or incorporeal hereditaments; (vii) any latent defect or deterioration in the building or the appurtenances thereof, whether or not the Landlord shall have been notified of any condition allegedly causing same; (viii) any zoning ordinance or other acts of governmental or public authority now or hereafter in force; and (ix) any act or omission of any other occupant of the building or other person temporarily therein. The Tenant will not hold the Landlord liable for any loss or theft of, or damage to, any property in the premises done or caused by any employee, servant, or agent of the Landlord who is invited into the premises by the Tenant, nor for the loss, damage or theft of any property stored or left in the basement or in any other part of the building, which is not enclosed within the premises or of any property, left with any employee of the Landlord, notwithstanding such theft, loss or damage may occur through carelessness or negligence of the Landlord's employees; and the Tenant agrees that any employee in entering the premises at the invitation of the Tenant or accepting custody of property shall be then deemed the agent of the Tenant or other person at whose instance he may be acting, and not the agent of the Landlord. Employees are not permitted to receive or accept packages or property for account of Tenants. Storerooms or storage space for personal property (if provided) are provided gratuitously by the Landlord, and the use of same shall be at the Tenant's risk and the Tenant will not hold the Landlord liable for any loss of or damage to person or property therein or thereby. Nothing in this lease contained shall impose any obligation upon the Landlord with respect to any real property other than the building, whether said other real property be owned by the Landlord or otherwise, or shall in any way limited the Landlord's right to build upon or otherwise use said other real property in such manner as the Landlord may see fit. The Tenant shall make no claim upon the Landlord for abatement of rent, constructive eviction or rescission, and the Landlord shall have no liability by reason of the Landlord's failure to enforce the provisions of the lease to any other tenant against such other tenant. Nothing in the preceding sentence shall prohibit the Tenant from making any claim for physical damage or personal injury which results from the negligence of the Landlord. (b) Any right and authority reserved by and granted to the Landlord under this lease to enter upon and make repairs in the premises shall not be taken as obligating the Landlord to inspect and to repair the premises and the Landlord hereby assumes no responsibility or liability for the care, inspection, maintenance, supervision, alteration or repair of the premises except as herein specifically provided. The Tenant assumes possession and control of the premises and exclusively the whole duty of care and repair thereof, except as herein specifically provided, and the duty of care, if any, owed by the Tenant to persons on the sidewalk and in the corridors of the building. TWENTY-SECOND: INDEMNITY BY TENANT. Subject to Article Seventeenth, paragraph (c), The Tenant hereby indemnifies and agrees forever to save harmless the Landlord against any and all liabilities, penalties, claims, damages, expenses (including attorneys' and counsel fees) or judgments, arising from injury to person or property of any kind, occasioned wholly or in part by the Tenant's failure to perform or abide by any of the covenants of -17- this lease or occasioned wholly or in part by any act or acts, omission or omissions of the Tenant, or of the employees, customers, agents, assigns or under-tenants of the Tenant, or based on any matter or thing growing out of the Tenant's use or occupation of the premises or any part of the building. TWENTY-THIRD: NOTICES. Any notice which is to be given by either party to the other pursuant to this lease shall be in writing and shall be given by registered or certified mail, return receipt requested, by deposing the notice, enclosed in an envelope addressed to the Landlord or Tenant at its address given in this lease or at the premises, in any United States Post Office, postage and registry or certification fees prepaid. Any notice shall be deemed to have been given on the second day after the date when such notice is deposited in the United States Post Office. All notices, under this lease shall be in writing. TWENTY-FOURTH: INSOLVENCY. If, at any time after the execution and delivery of this lease, the Tenant shall be adjudicated a bankrupt, or if the Tenant shall make any assignment for the benefit of creditors, or attempt to take the benefit of any insolvency law, or if a petition or answer to reorganize the Tenant shall be approved by any court or judge, or if a petition or answer for a composition or extension shall be filed by the Tenant, or if a receiver or trustee shall be appointed for the Tenant's property, or if the Tenant's interest in this lease shall be attached or levied upon or shall devolve upon or pass to any party other than the Tenant (whether such event occurs prior to subsequent to the commencement of the term or Tenant's entry into possession) such event shall be conclusively deemed a default hereunder, and the Landlord shall have the right to terminate this lease in the manner hereinafter provided, as if such event were a breach by the Tenant of one of the covenants of this lease. In the event of such termination, the Tenant or any person claiming under, by or through the Tenant, by virtue of any statute or of an order of any court, shall not be entitled to possession or to remain in possession of the demised premises but shall forthwith quit and surrender same. Exclusive of and in addition to any other rights or remedies the Landlord may have through any other portion or provision of this lease or by virtue of any rule of law or statute, said Landlord may keep and retain, as liquidated damages, any rent, security, deposit or other moneys or consideration received by the Landlord from the Tenant, or others on behalf of the Tenant. Also, in the event of termination of this lease as aforesaid, the Landlord shall be entitled, as and for liquidated damages from the Tenant for breach of the unexpired term of this lease, to an amount equal to the difference between the rental value of the remainder of the term at the time of termination and the actual rent reserved, both discounted to present worth at the rate of six per cent (6%) per annum. If at any time within a reasonable period following the date of the termination of the lease, as aforesaid, the premises should be re-rented by the Landlord, the rent realized by any re-letting shall be deemed PRIMA FACIE to be the rental value. In the event of the occurrence of any of the above-mentioned events of default occasioned solely through the invocation by the Tenant or by third parties of the laws of the State of New York, judicial or statutory, as distinguished from the invocation of Federal laws relating to bankruptcy, reorganization, or otherwise, the Landlord, in addition to the foregoing, may accelerate the full amount of rent reserved for the remainder of the lease, and the same shall forthwith become due and payable to the Landlord. Nothing herein provided shall be deemed to prevent or restrict the Landlord from proving and receiving as liquidated damages herein the maximum permitted by any rule of law or statute prevailing when such damages are to be proved, whether they be greater or less than those referred to above. TWENTY-FIFTH: REMEDIES OF THE LANDLORD ON DEFAULT, PERFORMANCE. (a) If the Tenant shall default in the full and due performance of any covenant of this lease, the Landlord shall have -18- the right, upon ten (10) days' notice to the Tenant (unless a shorter period of notice or provision for the performance of such work without notice is elsewhere established), to perform the same for the account of the Tenant, and in such event all workmen employed by the Landlord shall be deemed the agents of the Tenant, and any reasonable payment made, and expense incurred, by the Landlord in this connection, shall forthwith become due and payable by the Tenant to the Landlord. If the Landlord is compelled to incur any expenses, including reasonable attorneys' fees in instituting, prosecuting or defending any action or proceeding instituted by reason of any default of the Tenant hereunder, the sum or sums so paid by the Landlord with all interest, costs and damages shall be deemed immediately due to the Landlord upon demand. Any and all sums payable by the Tenant to the Landlord which are unpaid for ten (10) days following the due date thereafter shall bear interest at the rate of twelve per centum (12%) per annum from the due date to the date of actual payment, and any and all such sums (except the rent hereinabove expressly reserved) shall be deemed to be additional rent for the period prior to such due date, and the Landlord shall have the same remedies for default in the payment of such additional rent as for default in the payment of the rent expressly reserved. (b) In the event that under the provisions of this lease the Landlord shall have the privilege of performing any covenant in respect of which the Tenant may be in default and of recovering the expenses so involved from the Tenant as additional rent or otherwise, such remedy shall not be the exclusive remedy of the Landlord but the Landlord may, at its option, treat such default as a breach of substantial obligation of this lease and shall have all the other remedies in respect thereof provided in this or any other Article of this lease. (c) If the Tenant shall violate or default in the full and due performance of any covenant, provision or condition of this lease (other than the covenant to pay the rent or any additional rent), or if any of the events specified in the Article of this lease numbered Twenty-Fourth and headed "Insolvency" shall occur, the Landlord will give to the Tenant thirty (30) days' notice of such violation, default or misconduct. In the event that (i) the Tenant shall default in the payment of the rent or of any additional rent, or (ii) in the event that the Tenant, after notice thereof as above provided, shall fail to stop any violation or fully cure or remedy any default or terminate any misconduct under this lease (or in the event that the default is of a nature such that the steps required to cure or remedy the same fully cannot reasonably be completed within thirty (30) days, then if the Tenant shall not have commenced and have diligently and continuously prosecuted the steps necessary to cure or remedy such default) the Landlord may give to the Tenant fifteen (15) days' notice of its intention to terminate this lease, and, in such event, on the fifteenth day following the giving of such notice this lease and the term hereby granted shall terminate and expire as fully and completely as if that day were the date herein expressly fixed for the expiration of the term, and the Tenant shall thereupon quit and surrender the premises into the possession of the Landlord, but the Tenant shall nevertheless remain liable for deficiency in future rent and for any other defaults hereunder, as hereinafter provided. If the Tenant shall default in the payment of the rent, or any additional rent herein mentioned, or of any part of either, or if this lease shall be terminated by the notice last above provided for, the Landlord may immediately, or at any time thereafter, re-enter the premises and remove all persons and property therefrom, either by summary dispossess proceedings, or by any suitable action or proceeding at law, or by force, or otherwise, without being liable to indictment, prosecution or damages therefor, and re-possess and enjoy the premises, together with all additions, alterations, installations and improvements, and no entry by the Landlord shall be deemed an acceptance of surrender. Upon any such re-entry, the Landlord may re-let the premises or any part or parts thereof, and -19- for such term or terms as to the Landlord may seem wise, even though the same extend beyond the date herein expressly fixed for the expiration of the term. Any such re-letting shall, at the Landlord's option, be either for the Landlord's own account, or as the agent for the Tenant. If the Landlord shall re-let as the agent of the Tenant, the Landlord shall receive the rents and apply the same, first, to the payment of all expenses which the Landlord shall have incurred by reason of the Tenant's default and in connection with such re-entry and re-letting, including, but not by way of limitation, legal expenses, brokers' commissions, and the cost of reasonable repairs, redecoration and alterations, and, secondly, to the fulfillment of the covenants of the Tenant herein contained, and the surplus, if any, existing at the date herein expressly fixed for the expiration of the term, shall be paid to the Tenant, but the Tenant shall be entitled to no such payment until said date. So long as the premises, or any part thereof, shall not be re-let, or shall be re-let by the Landlord as the agent of the Tenant, the Tenant shall remain liable for the full and due performance of all the covenants of this lease, and the Tenant hereby agrees to pay to the Landlord, as damages for any default hereunder, until the date herein expressly fixed for the expiration of the term, the equivalent of the amount of all the rent and additional rent reserved herein, less the net avails of re-letting, as hereinbefore defined, if any, and the same shall be due and payable by the Tenant to the Landlord on the several rent days above specified, that is, upon each of the said rent days the Tenant shall pay to the Landlord the amount of deficiency then existing, and shall not be entitled to withhold any such payment until the date herein expressly fixed for the expiration of the term. In lieu of the foregoing, the Landlord, at its option, shall be entitled, as and for liquidated damages from the Tenant for breach of the unexpired term of this Lease, to an amount equal to the difference between the rental value of the remainder of the term at the time of termination and the actual rent reserved, both discounted to present worth at the rate of four percent (4%) per annum. The liability of the Tenant shall survive the issuance of a final order and warrant of dispossess, and re-entry by the Landlord, and any other termination of this lease for default of the Tenant, and the granting by the Landlord of a new lease of the premises to another tenant, and the Tenant hereby waives any defense which might be predicated upon any of said acts or events. The Tenant hereby expressly waives (i) any and all right to regain possession of said premises or to reinstate or redeem this lease as provided by the Real Property Actions & Proceedings Law (and as said law may be amended), or any such right which is or may be given by any other statute, law or decision now or hereafter in force; (ii) the service of any notice demanding rent or stating an intention to re-enter; or any similar right which is or may be given by any statute, law or decision now or hereafter in force; (iii) any and all rights of redemption and all other rights to regain possession or to reinstate this lease (in case the Tenant shall be dispossessed or ejected by, or pursuant to judgment, order, execution or warrant of any court or judge). Except as provided in Section 259-c of the Real Property Law with respect to an action for personal injury or property damage between the parties hereto, the Tenant waives and will waive all right to trial by jury in any summary proceedings and in any other proceeding or action at law hereafter instituted by the Landlord against the Tenant in respect of this lease, and also in any action or proceeding between the parties hereto for any cause; and it is hereby agreed, that in any of such events, the matter in dispute shall be tried before a judge without a jury. In the event the Landlord shall commence any action or summary proceeding for non-payment of rent or other breach of covenant or condition, the Tenant hereby agrees not to interpose any counter-claim of whatever nature or description in any such action or proceeding, except for any counterclaim which would as a matter of law, be waived, except for any counterclaim which would as a matter of law, be waived. The words "re-enter" and "re-entry" as used in this lease are not -20- restricted to their technical legal meaning. TWENTY-SIXTH: SURRENDER AT EXPIRATION. Upon the expiration or any termination of the term of this lease, the Tenant shall quit and surrender the demised premises, together with any fixtures, equipment or appurtenances installed in the premises at the commencement of this lease, and any alterations, decorations, additions and improvements which are not to be removed in compliance with the provisions of Article Fourth hereof, to the Landlord, in good order and condition, ordinary wear and any unavoidable casualty fully covered by insurance carried by the Landlord excepted. The Tenant shall remove all its furnishings, trade fixtures, stock in trade and like personal property in accord with the requirements of Article Fourth, so as to leave the premises broom-clean and in an orderly condition. If the last day of the term of this lease falls on Sunday, this lease shall expire on the business day immediately preceding. The Tenant's obligation to observe and perform this covenant shall survive the expiration or other termination of the term of this lease. TWENTY-SEVENTH: QUIET ENJOYMENT. The Landlord covenants that, if the Tenant shall duly keep and perform all the terms and conditions hereof, the Tenant shall peaceably and quietly have, hold and enjoy the premises for the term aforesaid, subject, however, to ground leases, underlying leases and mortgages as hereinbefore described, and to the lien, rights and estate by virtue of unpaid taxes of any government having jurisdiction of the premises of which the herein demised premises are a part. If the Landlord shall hereafter sell, exchange or lease the entire building or the land and building wherein the premises are located, subject to this lease, or, being the lessee thereof, shall assign its lease, the grantee, lessee, or assignee thereof, as the case may be, shall, without further agreement by any party, be conclusively deemed to be the Landlord of this lease and to have assumed and undertaken to carry out all of the obligations hereof on the part of the Landlord to be performed, and the Tenant does hereby release the above-named Landlord from any claim or liability arising or accruing hereunder subsequent to such transfer of ownership or possession, for breach of the covenant of quiet enjoyment, or otherwise to the extent that such liabilities have been assumed in writing by the new Landlord. TWENTY-EIGHT: TENANT'S DEPOSIT. (a) The Tenant has deposited with the Landlord the sum of $298,562.89 (of which an aggregate of $51,635.93 is on hand as security deposits for Tenant's and Express Reprographics, Inc.'s existing leases), to secure the faithful performance by the Tenant of all the terms, conditions, covenants and agreements of this lease, and to make good to the Landlord any damage which it may sustain by reason of any act or omission of the Tenant. The Landlord agrees that, provided that, on November 1, 1998, the Tenant is not in default in the payment of fixed rent, additional rent or any other amount due under this lease, the Landlord will reduce the security deposit by $99,520.96. The Landlord shall segregate the said security deposit as a trust fund not to be mingled with other funds of the Landlord, and if, during the term of this lease, the Landlord shall sell, exchange or lease the entire building, subject to this lease, or, being the lessee thereof, shall assign its lease, the Landlord shall have the right to pay or transfer the said deposit to such grantee, lessee, or assignee, as the case may be, pursuant to written assignment as provided in Article Twenty-Fifth, and, in such event, the Landlord shall be released from all responsibility and liability in connection therewith, and the Tenant will look solely to said grantee, lessee, or assignee for its return. The aforesaid security deposit shall be deposited with a bank or trust company, savings bank or savings and loan association, and the Landlord shall advise the Tenant of the name and address thereof and such shall be deposited in an interest-bearing account. The Tenant shall be entitled to the payment of any interest earned upon such deposit less the amount equal to 1% per annum of the deposit, -21- to which the Landlord shall be entitled as administration expense, shall be added to the amount of the deposit. The Tenant's interest in said deposit shall not be assigned or encumbered without the written consent of the Landlord, and within thirty (30) days after the expiration of the term, the amount of said deposit shall be repaid to the Tenant, less any proper charges against the same, as hereinabove or hereinafter provided. If the Tenant shall at any time be in default with respect to any payment of rent or of additional rent or of any other payment due from the Tenant to the Landlord under this lease beyond any applicable notice and grace period the Landlord may, at its option, apply such portion of said deposit as may be adequate to cure such default, including, but not by way of limitation, interest, costs, fees and other expenses, paid or incurred by the Landlord, as permitted under the terms of this lease, and thereafter such portion so applied shall be free from any claim by the Tenant for its return. If the Landlord shall re-enter, pursuant to the provisions of this lease (other than in the event of insolvency in which event the provisions of Article Twenty-Fourth of the lease shall apply), and shall re-let the premises for its own account, the entire said deposit shall immediately be and become the absolute property of the Landlord, as fixed, liquidated and agreed damages, and not as a penalty, it being impossible in such event to ascertain the exact amount of the damage which the Landlord may thus sustain, but unless the Landlord shall so re-let the premises for its own account, the Landlord shall continue to hold the said deposit, as security for the performance of the Tenant's obligations, until the date herein expressly fixed for the expiration of the term, and apply the same from time to time to the unpaid obligations of the Tenant, under the same terms and conditions as if the said lease were still in full force and effect. No termination of this lease or re-entry by the Landlord for default of the Tenant shall entitle the Tenant to the return of any part of said deposit, nor shall the retention of such deposit, after such re-entry, impair or otherwise affect the Tenant's liability to the Landlord during the balance of the term originally provided for. If, at any time, the said deposit shall be diminished, by reason of the Landlord's having applied any part thereof in accordance with the provisions of this paragraph, the Tenant shall pay over to the Landlord upon demand, the equivalent of such decrease, to be added to said deposit and to be held and applied in accordance with the provisions of this paragraph. (b) In lieu of delivering cash as the Deposit, the Tenant may deliver to Landlord an unconditional, irrevocable, letter of credit (such letter of credit or any extension or replacement thereof, being hereinafter referred to as the "Letter of Credit") issued by a New York Clearing House bank, in substance satisfactory to the Landlord, which Letter of Credit is to be held by Landlord in accordance with the terms described in paragraph (a) above. In the event that the Landlord receives notice from the Bank or Tenant that the Letter of Credit is not being renewed or in the event that Tenant has not delivered a replacement Deposit or a similar Letter of Credit to Landlord by thirty (30) days before the expiration of the Letter of Credit, then Landlord shall be entitled to present the Letter of Credit for immediate payment of the then potential amount available pursuant to the Letter of Credit, and such amount of the Letter of Credit shall become the Deposit hereunder and shall be held, applied and returned by Landlord in accordance with the terms provided by the Lease for the holding, application and return of the Deposit. If the Letter of Credit is not being renewed but Tenant does deliver a replacement Deposit or a similar Letter of Credit by thirty (30) days before expiration of the Letter of Credit, then Landlord shall not thereafter be entitled to present the expiring Letter of Credit for payment of any amounts. (c) At Tenant's request, any cash or cash equivalent held by Landlord as part of the security deposit, which is in excess of that required to be held by Landlord pursuant to paragraph (a) which has not been or is not in the process of being -22- applied pursuant to the provisions of paragraph (a) of this Article, shall be returned promptly to Tenant. If Landlord is holding a Letter of Credit as part of the security deposit and provided Landlord has not presented for payment such Letter of Credit, upon delivery of a substitute Letter of Credit in the appropriate amount and which otherwise satisfies the requirements of paragraph (b) of this Article, the Landlord shall deliver to Tenant the Letter of Credit being replaced. TWENTY-NINTH: ELEVATORS, HEAT. (a) Except on Saturdays and Sundays, and on holidays recognized as legal holidays by State or Federal Government, the Landlord shall furnish, between the hours of eight a.m. and six p.m., elevator service with the elevators now in the building, and sufficient heat during the cold season to heat the premises. The Landlord shall have one automatic elevator in service and available for the Tenant's use at all other times. The Landlord may suspend such automatic passenger service, if it should become necessary or proper so to do, at any time only if use thereof is unsafe or necessary repairs must be completed. The Landlord shall restore such service within a reasonable time, making due allowance for labor troubles, acts of God, or any cause beyond the Landlord's control. (b) The Landlord shall be entitled to refuse to furnish passenger or freight elevator service in connection with any sale at auction of the Tenant's fixtures, machinery, stock in trade and other property or a sale in any other manner of all or substantially all of such property unless the Landlord shall have been given not less than two (2) days' notice of the intention to hold the auction or other sale and unless the Landlord shall be given an undertaking by a person, firm or corporation of satisfactory financial resources wherein the Landlord shall be indemnified against (i) all reasonable expense incurred by the Landlord in connection with the removal by purchasers of any property sold to them at the auction or other sale, (ii) all reasonable expense for removal or storage of any property sold at the auction or other sale which is not removed by the purchaser within two (2) days following the later to occur of the termination of the lease or the date of such sale, and (iii) all reasonable expenses which the Landlord may incur after the termination of the lease for the removal of property not sold and waste and rubbish from the premises. (c) In addition to the elevator service described in this Article Twenty-Ninth, the Landlord will maintain in service and available for the use of the Tenant, one passenger elevator at all times on all days of the week, including Saturdays, Sundays and legal holidays. In the event that the Tenant requires freight elevator service on Saturdays, Sundays, federal and state holidays and all holidays recognized by the unions representing Landlord's building personnel or during hours in addition to those prescribed under this Article Twenty-Ninth, the Landlord will furnish the additional elevator service upon notice of the Tenant's need there for. Such notice may be written or oral and shall be given as long a time as practicable prior to the time when the additional freight elevator service is required. The Tenant will pay for any additional freight elevator service furnished after the hours prescribed in this Article Twenty-Ninth at the prevailing rate per hour as established from time-to-time by the Landlord for such service at the building or in the buildings of the Landlord, generally, for each hour during which the additional service is supplied (currently $41.50 per hour). (d) In the event that the Tenant requires heat either after 6:00 p.m. on a weekday, or on any Saturday, Sunday or holiday recognized by the union represented the porters employed at the building, the Landlord will furnish such additional heat as requested by the Tenant in a written request delivered to the Building Manager no later than 4:00 p.m. on the date on which after hours heat is requested or on the day preceding the Saturday, -23- Sunday or holiday in question. The Tenant will pay for any such additional heat and the charge shall be an amount equal to the product obtained by multiplying (x) the Landlord's good faith estimate of the number of gallons of fuel oil consumed to provide such overtime heat by (y) the price per gallon paid by the Landlord for its most recent purchase of fuel oil at the building. There shall be no additional labor charge for Landlord's employees required to provide such heat. (e) All charges for additional freight elevator service and heat shall be payable when billed and in the event of default of payment therefor, the Landlord may refuse further service and the amount unpaid shall be deemed additional rent for which the Landlord shall have all the remedies for collection herein specified with respect to rent. The failure on the part of the Landlord to furnish such additional elevator service or heat, if due to breakdowns, repairs, maintenance, strikes, or other causes beyond the control of the Landlord, shall involve no liability on the part of the Landlord nor shall it constitute an eviction. (f) The Tenant shall for a period of ninety (90) days after receipt of any invoice for any change pursuant to this Article. have the right to inspect the records and books of the Landlord insofar as they relate to the calculation of such change. THIRTIETH: WATER AND SEWER RENTS. (a) The Tenant shall pay for all hot and cold water used on the premises and the Tenant's proportionate share of the cost of regular water used for lavatory purposes in any lavatories used by Tenant in common with other tenants at the Landlord's cost, without a profit. In the event that the Tenant shall use water for any industrial purpose or any purpose other than usual lavatory purposes, the Tenant shall, at its own expense, install a meter or meters for the measurement of the quantity of water thus consumed and keep the same in good working order. With respect to water used for lavatory purposes, whether on the premises or in lavatories used by the Tenant in common with other tenants, if the quantity of water so used is measured by a meter which measures the consumption of water by other tenants, the Tenant shall pay its proportionate share of all water so consumed. Such proportionate part shall be fixed in accord with the number of persons occupying the premises and the number of persons occupying all premises using water which is measured by such meter. In the event that there shall be a separate meter which measures the use of water by the Tenant for lavatory purposes, the Tenant will pay for the water so shown to have been used and the cost of maintenance of such meter. All payments for water shall be due when billed to the Tenant. The Landlord is not under obligation to supply hot water and, if hot water is supplied, the Landlord may at any time without notice discontinue such supply (except for hot water for the lavatories which shall not be discontinued) without constituting an eviction or without incurring any liability or disability therefor. (b) The Tenant shall pay its proportionate share of the New York City sewer rents apportioned to the Tenant's consumption of water at the premises. The apportionment of the sewer rent to the premises shall be made in accord with the measurement or apportionment of water consumed at the premises as in this lease hereinbefore provided. The sewer rents shall be billed with the water charges and the Landlord shall have the same remedies for the collection thereof provided in the case of charges for water. THIRTY-FIRST: SPRINKLER MAINTENANCE. The Tenant shall pay to the Landlord the Tenant's proportionate share of the cost of regular maintenance, operation and rental of the automatic fire alarm supervisory service and manual alarm and sprinkler system now installed in the building and the premises (currently estimated to be $1,171 per annum). The Tenant's proportionate share of such cost shall be the fraction of the annual expenditures of the Landlord for such purposes, of which the numerator is the rentable -24- THIRTY-SEVENTH: (a) REAL ESTATE AND CPI ESCALATION. In order (i) to adjust, during the term of this lease, for increases in the expenses of the Landlord for Real Estate Taxes, the Tenant shall pay to the Landlord, as additional rent, the Tenant's Proportionate Share of any increases in such Real Estate Taxes, and (ii) to adjust for increases in other operating expenses of the Landlord, the Tenant shall pay to the Landlord, as additional rent, the CPI Adjustments for Increases in Other Operating Expenses, namely the amount by which the Base Rent Allocated to Other Operating Expenses is increased by application to the Base Rent Allocated to Other Operating Expenses of increases in the Index over the Base Index, all as computed as set forth below in this Article; PROVIDED, HOWEVER, that the increases in the CPI Adjustment for Increases in Other Operating Expenses shall not, on average (computed on an annual basis), exceed an amount equal to 4% per annum multiplied by the then applicable fixed rent set forth on the first page of this lease. Capitalized words or expressions used above are defined in subparagraph (b) below. (b) DEFINITIONS. As used in this Article the following capitalized words or expressions shall have the meanings ascribed to them below: 1. "Real Estate Taxes" shall mean and include the expenditures of the Landlord for taxes or assessments payable by the Landlord upon or with respect to the building and the land upon which it is located, imposed by Federal, State and local government (plus all expenditures for fees and expenses incurred in the course of obtaining a reduction in any tentative assessed valuation), and all taxes imposed by any such authority relating to the maintenance and operation of the building, but shall not include income, franchise, inheritance or capital stock taxes. 2. "Base Rent Allocated to Other Operating Expenses" shall mean an amount equal to 75% of the fixed annual rent prescribed on page 1 of this lease, as such rent may be payable from time to time. 3. "Increases in Real Estate Taxes" shall mean the amount by which Real Estate Taxes in any Subsequent Year exceed Real Estate Taxes for the Base Year. 4. "CPI Adjustment for Increases in Other Operating Expenses" shall mean the amount obtained by multiplying the Base Rent Allocated to Other Operating Expenses by the percentage by which the Index, as last published on the date next prior to the Computation Date and the Index as last published on the date next prior to each anniversary date of the Computation Date, shall exceed the Base Index; PROVIDED, HOWEVER, that the increases in the CPI Adjustment for Increases in Other Operating Expenses shall not, on average (computed on an annual basis), exceed an amount equal to 4% per annum multiplied by the then applicable fixed rent set forth on the first page of this lease. 5. "Index" shall mean the "Consumer Price Index for All Urban Consumers" "(1982-84 = 100)" specified for "All Items," relating to New York City and published by the Bureau of Labor Statistics of the United States Department of Labor. In the event the Index shall hereafter be converted to a different standard reference base or otherwise revised, the determination of the CPI Adjustment for Increases in Other Operating Expenses shall be made on the basis of such conversion factor, formula or table for converting the Index as may be published by the Bureau of Labor Statistics, or, if said Bureau shall not publish the same, then with the use of such conversion factor, formula or table as may be published by Prentice-Hall, Inc., or, failing such publication, by any other nationally recognized publisher of similar statistical -26- information. In the event either Index shall cease to be published, then, for the purposes of this Article, there shall be substituted for the Index such other index as Landlord and Tenant shall agree upon, and, if they are unable within ninety (90) days after the Index ceases to be published, such matter shall be determined in New York City by arbitration in accordance with the Rules of the American Arbitration Association. 6. "Base Index" shall mean the Index as last published prior to October 1, 1994. 7. "CPI Comparative Statement" shall mean a statement, in writing, signed by the Landlord, or, on its behalf, by an officer of any corporation acting as its managing agent, showing (i) a comparison of (a) Real Estate Taxes for the Base Year with (b) Projected Real Estate Taxes for a Subsequent Year (which shall be the same calendar year as the year of the Computation Date used in such CPI Comparative Statement), (ii) the Base Rent Allocated to Other Operating Expenses and the CPI Adjustment for Increases in Other Adjustment for Increases in Other Operating Expenses for such Subsequent Year, and (iii) if the Tenant paid additional rent pursuant to this Article with respect to the immediately preceding Subsequent Year, any adjustment necessitated by a variance between the Projected Real Estate Taxes for such Subsequent Year (as shown in the last previous CPI Comparative Statement) and the actual Real Estate Taxes for such Subsequent Year (as shown in the current CPI Comparative Statement). 8. "Base Year" shall mean the 12 month period commencing July 1, 1995 and ending June 30, 1996. 9. "Subsequent Year" shall mean any calendar year following the Base Year, falling wholly or partly within the term of the Tenant under this lease and the calendar year following the year in which the term of this lease terminates. 10. "Computation Date" shall mean the first day of October, 1995, and, in Subsequent Years, its anniversary date. 11. "Projected Real Estate Taxes" shall mean the Landlord's estimate (which in any event must be reasonable in the light of past experience) of Real Estate Taxes for a particular Subsequent Year. 12. "Tenant's Proportionate Share" shall mean a fraction, of which the numerator shall be the number of Rentable Square Feet of Area of the premises occupied by the Tenant and the denominator shall be 90% of the total number of Rentable Square Feet of Area in the entire building. 13. "Rentable Square Feet of Area" shall mean, as to basement and ground floor space, the number of net square feet of the area thereof and, as to all floors above the ground floor, shall mean the number of gross square feet of the area thereof. (c) STATEMENTS FOR THE TENANT. On or before November 1, 1995, and on or before that day in each Subsequent Year, the Landlord will furnish a CPI Comparative Statement to the Tenant. The failure of the Landlord to furnish a CPI Comparative Statement shall be without prejudice to the right of the Landlord to furnish a CPI Comparative Statement until December 31 of each subsequent year. Every CPI Comparative Statement furnished by the Landlord pursuant to this Article shall be conclusive and binding upon the Tenant unless (i) within sixty (60) days after the receipt of such CPI Comparative Statement Tenant shall notify Landlord that it -27- payable on account of any CPI Adjustment for Increases in Other Operating Expenses, and that no decrease om the amount of the CPI Adjustment for Increases in Other Operating Expenses shall in any way reduce any additional rent payable on account of any Increase in Real Estate Taxes. (g) REAL ESTATE TAX REFUNDS. The Tenant's Proportionate Share of any rebates, refunds, or abatements of Real Estate Taxes received by Landlord subsequent to payment of taxes by Tenant shall, after the deduction of all costs and expenses incurred in connection therewith, be refunded to the Tenant on a pro rata basis within ten (10) days of receipt thereof by Landlord. Any such rebate, refund of abatement realized by Landlord prior to payment by Tenant shall result in an immediate reduction in Tenant's pro rata share of Real Estate Taxes then due to Landlord. THIRTY-EIGHTH: ARRANGEMENTS WITH RESPECT TO THE ELEVENTH FLOOR. (a) Under the terms of this lease the Landlord is obligated to the lease the entire eleventh floor to the Tenant. However, as of the date of the execution of this lease, only the portion of the eleventh floor indicated in Exhibit "G" hereto is vacant (the "Vacant 11th Floor Space"); the balance of the eleventh floor (the "Occupied 11th Floor Space") is leased to three tenants pursuant to leases which expire after November 1, 1994, (the date of the commencement of the term of this lease). With respect to the Vacant 11th Floor Space, the Tenant is granted the privilege of occupying such space free of rent, commencing on the date of execution of this lease and ending on October 31, 1994, all subject to the terms and conditions set forth in Article Thirty-Ninth of this lease. With respect to the Occupied 11th Floor Space the Tenant is granted the privilege of occupying such space free of rent, commencing seven (7) days after the Landlord has obtained possession of such space and ending on October 31, 1994, all subject to the terms and conditions set forth in Article Thirty-Ninth of this lease. (b) The Landlord agrees that, on or before October 31, 1994, the Landlord shall have entered into agreements ("Surrender Agreements") with each of the current three tenants leasing portions of the Occupied 11th Floor Space providing for the lease relating to the Occupied 11th Floor Space leased by such tenant to be terminated on or before March 31, 1995 and for each such tenant to surrender to the Landlord no later than that date the portion of the Occupied 11th Floor Space leased by such Tenant. (c) In the event that the Landlord has not notified the Tenant by November 1, 1994 that it has entered into agreements with the three tenants leasing portions of the Occupied 11th Floor Space contemplated by paragraph (b) above, the Tenant shall have the right by written notice delivered to the Landlord on or before November 8, 1994 to terminate this lease, in which case provided that the Tenant has paid all amounts due under this lease through October 31, 1994, (i) this lease shall be deemed terminated as of November 1, 1994, (ii) the Conditionally Terminated Prior Tenant Leases and the Conditionally Terminated Reprographics Lease (both, as defined in Article Forty-First of this lease) shall be automatically reinstated and shall be in full force and effect, as of November 1, 1994 and (iii) the Tenant shall immediately surrender to the Landlord any premises leased hereunder but not leased by the Tenant pursuant to the Conditionally Terminated Prior Tenant Leases. In the event that the Tenant does not terminate this lease on or before November 8, 1994,as permitted by this paragraph (c), then the Tenant shall have no further right to terminate this lease by reason of the failure of the Landlord to lease to the Tenant any portion of the Occupied 11th Floor Space leased to any current tenant of such space which did not execute a Surrender Agreement (the "Unterminated 11th Floor Space"); and the Landlord and the Tenant shall promptly execute an amendment to this lease (i) to reflect that the premises on the 11th floor to be leased pursuant to this lease do not include the Unterminated 11th Floor Space and -29- (ii) to reduce the fixed rent payable pursuant to this to reflect that the Unterminated 11th Floor Spaces not being leased hereunder. (d) In the event that the Landlord has not, by July 1, 1995, tendered to the Tenant for occupancy pursuant to this lease all of the Occupied 11th Floor Space (other than the Unterminated 11th Floor Space), the Tenant shall have the right by written notice delivered to the Landlord on or before July 8, 1995 to terminate this lease, in which case provided that the Tenant has paid all amounts due under this lease through June 30, 1995, (i) this lease shall be deemed terminated as of July 1, 1995, (ii) the Conditionally Terminated Prior Tenant Leases and the Conditionally Terminated Reprographics Lease (both, as defined in Article Forty-First of this lease) shall be automatically reinstated and shall be in full force and effect, as of July 1, 1995, and (iii) the Tenant shall immediately surrender to the Landlord any premises leased hereunder but not leased by the Tenant pursuant to the Conditionally Terminated Prior Tenant Leases. In the event that the Tenant does not terminate this lease on or before July 8, 1995, as permitted by this paragraph (d), then the Tenant shall have no further right to terminate this lease by reason of the failure of the Landlord to lease to the Tenant any portion of the Occupied 11th Floor Space leased to any current tenant of such space which is not surrendered by such current tenant by June 30, 1995; and the Landlord and the Tenant shall promptly execute an amendment to this lease (i) to reflect that the premises on the 11th floor be leased pursuant to this lease do not include any such unsurrendered space and (ii) to reduce the fixed rent payable pursuant to this to reflect that such unsurrendered space is not being leased hereunder. THIRTY-NINTH: ELEVENTH FLOOR FREE RENT. (a) With respect to the Vacant 11th Floor Space, the Tenant is hereby granted the privilege of occupying such space subject to all of the terms, covenants and conditions of this lease, including but not limited to, the payment of any service charges for electric current, water, sprinkler maintenance and any overtime elevator or heat service and to the payment of any additional rent payable pursuant to the provisions of paragraph Thirty-Seventh of this lease but not otherwise free of the payment of fixed rent, net of (i) the amortization of certain amounts and (ii) the effect of the free-rent period provided in Article Thirty-Eighth hereof (which net free rent with respect to the Vacant 11th Floor accrues, after November 1, 1994, at the rate of $19,338.48 per month) during the following periods: (i) during the period beginning with the tender of possession of the premises by the Landlord to the Tenant at any time prior to the commencement of the term of this lease and ending on October 31, 1994 the date prior to the commencement of the term; (ii) during the period of the term of this lease commencing on November 1, 1994 and ending on April 30, 1995; and (iii) during the period of the term of this lease commencing on November 1, 1995 and ending on April 30, 1996. (b) With respect to any portion of the Occupied 11th Floor Space, the Tenant is hereby granted the privilege of occupying such space subject to all of the terms, covenants and conditions of this lease, including but not limited to, the payment of any service charges for electric current, water, sprinkler maintenance and any overtime elevator or heat service and to the payment of any additional rent payable pursuant to the provisions of paragraph Thirty-Seventh of this lease but otherwise free of the payment of fixed rent net of (i) the amortization of certain amounts and (ii) the effect of the free-rent period provided in Article Thirty-Eighth hereof (which net free rent with respect to the Occupied 11th Floor Space accrues, after November 1, 1994, at the rate of $4,286.52 per month) during the following periods: -30- (xx) if such portion of the Occupied 11th Floor Space is tendered by Landlord to the Tenant for possession prior to August 1, 1994, then the periods during which fixed rent is not payable with respect to such portion shall be the periods specified in clauses (i), (ii) and (iii) of paragraph (a) above; (yy) if such portion of the Occupied 11th Floor Space is tendered by Landlord to the Tenant for possession on or after August 1, 1994 and prior to November 1, 1994, then the periods during which fixed rent is not payable with respect to such portion shall be as follows: (i) during the period beginning of the date of tender of possession of such portion of the Occupied 11th Floor Space and ending on October 31, 1994 (the "Pre-Commencement Date Free Rent Period"); (ii) during the period of the term of this lease commencing on November 1, 1994 and ending on April 30, 1995; and (iii) during the period of the term of this lease commencing on May 1, 1995 and continuing that number of days which is equal to (aa) 90 minus (bb) the number of days in the Pre-Commencement Date Free Rent Period; and (iv) during the period specified in clause (iii) of paragraph (a) above; (zz) If such portion of the Occupied 11th Floor Space is tendered by Landlord to the Tenant for possession after November 1, 1994, then the periods during which fixed rent is not payable with respect to such portion shall be as follows: (i) during the period of the term of this lease commencing on the date of the tender of possession of such portion of the Occupied 11th Floor Space and ending 270 days after such date of tender; and (ii) during the period of the term of this lease referred to in clause (iii) of paragraph (a) above. (c) With respect to all of the premises leased pursuant to this lease, the Tenant is hereby granted the privilege of occupying such premises subject to all of the terms, covenants and conditions of this lease, including but not limited to, the payment of any service charges for electric current, water, sprinkler maintenance and any overtime elevator or heat service and to the payment of any additional rent payable pursuant to the provisions of Paragraph Thirty-Seventh of this lease but otherwise free of the payment of fixed rent (i) during the period commencing January 1, 2001 and ending March 31, 2001 and (ii) during the period commencing January 1, 2009 and ending March 31, 2009. (d) The right to occupy the premises free of rent during the periods set forth in paragraphs (a), (b) and (c) of this Article First shall be subject to the condition that the Tenant shall not default in the payment of any other fixed rent, of any additional rent or any other charge due under this lease or in the performance of the other terms, covenants and conditions thereof beyond any applicable notice and grace periods if any. In the event of any such default, then fixed rent shall be payable during the period in which the Tenant would otherwise be entitled to the use of the premises free of fixed annual rent. Any such payment shall be paid within ten (10) days following demand and shall constitute additional rent under this lease. FORTIETH: [Intentionally Omitted] -31- FORTY-FIRST: CONDITIONAL TERMINATION OF EXISTING LEASES. (a) Effective at noon on November 1, 1994, the leases listed below (the "Conditionally Terminated Prior Leases") between the Landlord and the Tenant shall be modified so that the term of the Tenant in the premises leased under the Prior Tenant Leases shall, on a conditional basis and subject to being reinstated as set forth in paragraph (c) below, terminate and come to an end, as if said date were the date originally specified for the expiration of the term thereof: (i) Lease dated as of December 15, 1986 between the Landlord and the Tenant, as amended by the Agreement dated as of October 10, 1987 and the Agreement dated as of April 19, 1990; (ii) Lease dated as of September 12, 1985 between the Landlord and Baron Dapoigny Inc., ("BDl"), assigned by BDI to the Tenant pursuant to the Assignment of Lease dated as of July 1, 1991, as extended by the letter agreement dated as of November 11, 1992; and (iii) Letter agreement between the Landlord and the Tenant, pursuant to which the Tenant leased premises on the 11th floor of the building on a month-to-month basis. (b) Effective at noon on November 1, 1994, the lease dated as December 15, 1986 between the Landlord and CPC Reprographics, Inc. (formerly Express Reprographics, Inc.), as amended by the Agreement dated as of September 7, 1989 (the "Conditionally Terminated Reprographics Lease"), which relates to premises on the 10th floor of the building, shall be modified so that the term of the Tenant in the premises leased under such lease shall, on a conditional basis and subject to being reinstated as set forth in paragraph (c) below, terminate and come to an end, as if said date were the date originally specified for the expiration of the term thereof. (c) In the event that, in accordance with the terms and conditions of Article Thirty-Eight of this lease, the Tenant elects to terminate this lease as of November 1, 1994 or June 1, 1995, then such election, without any further action by the Landlord or the Tenant, the Conditionally Terminated Prior Leases and the Conditionally Terminated Reprographics Lease, shall automatically be reinstated and shall be and remain in full force and effect, effective as of the date on which this lease is terminated. FORTY-SECOND: TENANT'S USE OF ELEVATOR. (a) During the hours of 12:00 midnight to 6:00 a.m. and from 6:00 p.m. to 12:00 midnight on each weekday and from 12:00 midnight to 12:00 midnight on Saturday and Sunday and on each holiday recognized by the union representing the porters employed at the building, the Tenant shall have the exclusive use, and shall take complete charge of, the automatic passenger elevator marked in red on the floor plan annexed to this lease designated as Exhibit "H", (the "Overtime Passenger Elevator"), solely for use transporting passengers. The Tenant understands that the Overtime Passenger Elevator will not service the Tenant's basement or 3rd floor premises. (b) The Tenant shall have the exclusive use, and shall take complete charge of, the manually operated freight elevator marked in red on the floor plan annexed to this lease designated as Exhibit "I", (the "Exclusive Freight Elevator"), solely for use transporting of freight. (The "Overtime Passenger Elevator and the Exclusive Freight Elevator are hereinafter collectively referred to as the "Private Elevators".) The Tenant agrees that the Exclusive Freight Elevator shall only be operated by certain designated employees of the Tenant, all of whom shall be fully qualified as elevator operators, designated in a written notice to the Landlord, and reasonably acceptable to the Landlord. -32- (c) The Landlord shall modify the control panel of the Overtime Passenger Elevator so that during the hours specified in paragraph (a) above, it will service only the 1st, 8th, 10th, 11th and 12th floors of the building. The Landlord shall maintain the Private Elevators, at its own cost and expense, except that the Tenant shall bear all costs and expenses of repairs or non-routine maintenance which, in the judgment of the Landlord, results from the negligence or misuse in the operation of the Private Elevators by the Tenant or any employee or agent of the Tenant. (d) In the event that the operation of the Exclusive Freight Elevator by the Tenant shall be the occasion of labor troubles or threat of labor troubles involving the other building or other tenants' premises (of which the Landlord shall be the judge) the Landlord may notify the Tenant of such fact and if the Tenant shall wish to continue the exclusive use of the Exclusive Freight Elevator, the Landlord may cause the Exclusive Freight Elevator to be operated by its own employees, in which case the Tenant will pay to the Landlord the cost of the operators in monthly installments as additional rent. (e) The Tenant agrees to indemnify and hold harmless the Landlord from any and all liabilities, obligations, losses, claims, suits or actions resulting from or arising out of the use and operation of the Private Elevators by the Tenant or its employees or agents. The Tenant agrees to provide and keep in full force and effect liability insurance written by insurance companies approved by the Landlord naming the Tenant and the Landlord as insured thereunder which shall be in the amount of at least $3,000,000 for claims arising from personal injury from any one casualty or accident involving either the Private Elevators and for at least $1,000,000 for property damage arising from any one casualty or accident involving either the Private Elevators. FORTY-THIRD: TENANT'S INSTALLATION OF AIR CONDITIONING EQUIPMENT. (a) The Landlord confirms its agreement in principle to permit the Tenant, at its cost and expense, to install air conditioning equipment in the area in the northwest corner of the roof of the building indicated by the hatching in Exhibit "J" hereto for the purpose of air conditioning and premises leased by the Tenant pursuant to this lease. Final approval of the installation of such air conditioning equipment shall be subject to the following conditions: (i) The size and type of such air conditioning equipment and its exact location on the roof, as well as the location of any related ducts, shall be subject to the Landlord's prior approval; (ii) Prior to the installation of the air conditioning equipment and any related ducts, the Tenant will furnish the Landlord with plans and specifications as contemplated by Article Fourth of this lease and, if the Landlord so requests, a report of a certified engineer with respect to the ability of the roof to support the weight of the air conditioning equipment; (b) The Tenant shall comply with the requirements of such Article Fourth in connection with the installation of the air conditioning equipment and any related duct work. (c) The Tenant shall bear all costs and expenses related to (x) the purchase, installation, repair, maintenance and operation of the air conditioning equipment, as well as any related duct work and controls, (y) the maintenance of the roof of the building in the area in which the air conditioning equipment is installed and the maintenance of the waterproof integrity of any penetration in the roof necessitated by the installation of the air conditioning equipment or any related duct work. -33- cancel the Lease, not less than sixty (60) days prior to the date of cancellation specified in such notice (the "Specified Termination Date"). If the Tenant shall give such notice, the Tenant will quit, vacate and surrender the premises in accord with the provisions of the Third Floor Lease relating to surrender at the expiration of the term. The Tenant shall not have the foregoing option if, at the time when the notice of termination is given or on the Specified Termination Date, the Tenant shall be in default in the payment of rent or additional rent or in the performance of the Tenant's other obligations under the Third Floor Lease. (b) In the event that, in accordance with the terms and conditions of Article Thirty-Eighth of this lease, the Tenant elects to terminate this lease as of November 1, 1994, or July 1, 1995, then such election, without any further action by the Landlord or the Tenant, the Third Floor Lease shall automatically be reinstated and shall be and remain in full force and effect, effective as of the date on which this lease is terminated. FORTY-EIGHTH: Broker. Each party hereto represents that, except for Edward S. Gordon Company, Inc. ("Gordon"), represented by David W. Levinson, no broker, licensed or otherwise was involved in the making of this lease or brought the premises to the attention of the Tenant and that all of the negotiations respecting this lease were conducted with and through the offices of the Landlord. The Landlord agrees that it shall be responsible for any commission payable to Mr. Levinson and Gordon, and agrees to indemnify and reimburse the Tenant for any expenses including legal fees incurred by the Tenant in the event of an action brought by Gordon against the Tenant, which results from the failure of the Landlord to pay the aforesaid commission to Gordon and Levinson. If the foregoing representation is breached, the breaching party agrees to indemnify and hold the other harmless from any and all costs and expenses, including without limitation, such other party's legal fees and expenses paid or incurred by such other party in connection with any claim by a broker, co-broker and/or finder claiming through or under the breaching party in connection with this lease. IN WITNESS WHEREOF, this agreement, (including the Rules and Regulations and Work Sheet attached hereto) has been signed and sealed by the parties hereto, the day and year first above written. Attest THE RECTOR, CHURCH-WARDENS, AND As to Landlord: VESTRYMEN OF TRINITY CHURCH IN THE CITY OF NEW-YORK By: /s/ Daniel Paul Matthews ----------------------------------- Daniel Paul Matthews, Rector /s/ (Signature Illegible) By: /s/ Jeffrey L. Smith - --------------------------------- ----------------------------------- Executive Vice President of Director of Leasing Real Estate By: /s/ (Signature Illegible) ----------------------------------- Finance Department Attest THE CORPORATE PRINTING COMPANY, As to Tenant: INC. /s/ Barbara Jolly By: /s/ Jeffrey Goldberg - --------------------------------- ----------------------------------- Executive VP-Finance -35- The provisions of Articles Thirty-Eighth and Forty-First are accepted and agreed to, and the undersigned hereby assigns and transfers to the Tenant all of its right, title and interest in and to the security deposit of $9,613.23 deposited by the undersigned pursuant to the terms of the lease referred to in paragraph (b) of Article Forty-First: EXPRESS REPROGRAPHICS, INC. By: /s/ Jeffrey Goldberg ----------------------------------- Executive VP-Finance -36- Subject to the foregoing provisions the Landlord reserves the right, after according reasonable consideration to the Tenant's wishes in the matter, to make all decisions as to the time or times when, the order and style in which said work is to be done, and the labor or materials to be employed therefore. The work shall be done, unless the Landlord otherwise directs, during the usual working hours observed by the trades in question. It is stipulated and agreed that in case the Landlord is prevented from commencing, prosecuting or completing said work, due to the Landlord's inability to obtain or difficulty in obtaining the labor or materials necessary therefor, or due to any governmental requirements or regulations relating to the priority or national defense requirements, or due to any other cause beyond the Landlord's control, the Landlord shall not be liable to the Tenant for damages resulting therefrom, nor shall the Tenant be entitled to any abatement or reduction of rent by reason thereof, nor shall the same give rise to a claim in the Tenant's favor that such failure constitutes actual, constructive, total or partial eviction from the demised premises. Any reimbursement called for by this Work Sheet shall only be made upon presentation to the Landlord by the Tenant of invoices marked "Paid in Full" or other evidence of payment satisfactory to the Landlord, together with copies of waivers of liens executed by all contractors, subcontractors, materialmen or others involved with the work in question. THE RECTOR, CHURCH-WARDENS AND VESTRYMEN OF TRINITY CHURCH IN THE CITY OF NEW-YORK, Landlord. By: /s/ Jeffrey L. Smith ----------------------------------- Director of Leasing THE CORPORATE PRINTING CO., INC., Tenant By: /s/ Jeffrey Goldberg ----------------------------------- Title: Executive VP-Finance WS-2 RULES AND REGULATIONS 1. The Tenant shall not clean, nor require, permit or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the Labor Law or of the Rules of the Board of Standards and Appeals, or of any other board or body having or asserted jurisdiction; 2. All machinery shall be kept in approved settings, sufficient to absorb any shock and prevent any noise, vibration or annoyance in the building of which the demised premises are a part and shall be provided with oil pans between such machinery and the floor beneath it, sufficient to prevent the seepage of oil on or into the floors; 3. No acid that in any way may injure any of the pipes or plumbing equipment in the building shall be poured or allowed to drain into the pipes or plumbing equipment thereof, but shall in the event that the building is provided with an acid line be poured or allowed to drain only therein, or if there be no acid line, shall be neutralized in a manner satisfactory to the Landlord. No substance which may cause any objectionable odor shall be left in the demised premises; 4. During the cold season, the windows shall be kept closed to maintain the temperature of the demised premises and to prevent any freezing thereof, or of any equipment or appliance therein; 5. All trucks, vehicles or conveyances used by the Tenant in the demised premises shall have rubber-tired wheels; 6. The Tenant's employees, except clerical or executive help, shall, if the Landlord so directs, at all times use only the combination passenger and freight elevator, if any, in going into or coming out of the demised premises; 7. No sign or lettering shall be inscribed on any door, wall or window of the demised premises which is visible from the street or the portion of the building used in common by other tenants except such as may be approved in writing by the Landlord or its agents or designee; 8. No additional locks or bolts shall be placed anywhere upon or within the demised premises or any on rooms therein, unless duplicate keys thereto be given to the Landlord and all such keys must, on the termination of this lease, be surrendered to the Landlord; 9. The Landlord may exclude any persons visiting or attempting to visit the premises between 7 P.M. and 8 A.M. and on Saturdays, Sundays and the holidays recognized as such by the state or federal government unless such person shall be equipped with a pass signed by the Tenant and unless such person shall sign his name and the premises which he is to visit on the night report. 10. The sanitary and safety facilities used solely by the Tenant or by the Tenant in common with other occupants of the building of which the demised premises are a part shall be used only for the purposes for which they were constructed; 11. No signs, signals, devices, displays, sounds or advertisements visible or audible from the street or from the halls and other parts of the building used in common by the Tenant and other tenants shall be inscribed, erected or maintained unless the kind, style, location and manner thereof shall have been approved in writing by the Landlord and if any sign, signal, sound display or advertising be erected, made or inscribed without such approval, the Landlord may remove the same and charge the cost of R-1 so doing to the Tenant as additional rent. Any sign or display which may be installed by the Tenant shall be kept in good order and repair and in a neat and attractive condition. The Landlord reserves the right to use the roof and outside walls surrounding the premises for sign purposes. The Landlord may remove any sign or signs or displays in order to paint the premises or any part of the building, or make any repairs, alterations or improvements in or upon the premises or any part of the building, or any part thereof, provided it causes the same to be removed and replaced at the Landlord's expense, whenever the said painting, repairs, alterations or improvements shall have been completed; 12. No advertising which, in the opinion of the Landlord, tends to impair the reputation of the building or its desirability as a loft or office building, shall be published or caused to be published by the Tenant and, upon notice from the Landlord, the Tenant shall refrain from or discontinue such advertising; 13. Awnings, antennae, aerials, ventilating and air-conditioning apparatus or other projections from the window or outside walls of the demised premises shall not be erected or installed. All air-conditioning apparatus installed in windows shall be so arranged that condensate does not drain on the outside of the building wall or into the street; 14. The lights, skylights, entrances, passages, courts, elevators, stairways, loading platforms, halls or any part of the building intended for the use in common by the Tenant and the other occupants thereof shall not be obstructed or encumbered (whether by means of storing of materials and skids or otherwise). In the event of any such encumbrance or obstruction, the Landlord may, after not less than five (5) days' prior written notice to the Tenant, remove the material causing such encumbrance or obstruction and cause it to be stored and charge the cost of doing so to the Tenant. No courtyard or yard appurtenant to the premises or the building shall be used for parking vehicles of any kind; 15. No part of the premises or the building shall be marked, painted, drilled into, or in any way defaced. No laying of linoleum, or other similar floor covering so that the same shall come in direct contact with the floor of the demised premises shall be made; and if linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water. Cements and other similar adhesive material shall not be used. Removal of any alterations, decorations or improvements in compliance with paragraph Fourth of this lease shall include the removal of all linoleum, lining and adhesive material; 16. No part of the demised premises shall be used in a manner or for a purpose that is substantially objectionable to the Landlord or to another tenant, or which in the reasonable judgment of the Landlord, might cause structural injury to the building; 17. The Tenant's employees shall not stand or loiter around the hallways, stairways, elevators, front, roof or any other part of the building used in common by the occupants thereof; 18. No load shall be placed upon any floor of the building exceeding the floor load per square foot area which such floor was designed to carry, and all loads shall be evenly distributed. The Landlord reserves the right to prescribe the weight and position of all safes, machinery and other personal property in the premises which must be placed so as to distribute their weight; 19. Nothing shall be thrown out of the windows or doors, or down the passages or skylights of the building, nor shall any of them be covered, obstructed or encumbered. No improper noises shall be made in the building, nor shall birds or animals be R-2 brought therein; 20. Where freight elevators are provided by the building and are in operation, all deliveries shall be made to or from the demised premises exclusively by means of such elevators; 21. Anyone doing janitorial work for the Tenant shall at all times be subject to order and direction by the superintendent of the building, although he shall not be the servant of either the superintendent or the Landlord; 22. No peddling, soliciting or canvassing shall be permitted in the premises or by the Tenant's employees elsewhere in the building; 23. The Landlord may prescribe, and from time to time vary, the time for any removals or deliveries from or into the premises, at any time, and such prescriptions shall apply whether or not the material so removed or received is the property of the Tenant. Removals or deliveries of safes, machinery and any other heavy or bulky matter shall be done only upon written authorization of the Landlord and only in such manner and by such persons as may be acceptable to the Landlord, and the Landlord may require any further assurances or agreements or indemnity from the Tenant and the movers to that effect. The Landlord reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations or the lease of which these Rules and Regulations are a part; 24. The Tenant shall not permit its servants, employees, agents, visitors or licensees at any time to bring or keep upon the premises any inflammable, combustible or explosive fluid, chemical or substance or cause or permit any unusual or objectionable odors to be produced upon or emanate from the premises; 25. Except as contemplated by Article Forty-Second, The passenger and service elevators, other than automatic self-service elevators, if any, shall be operated only be employees of the Landlord, and must not in any event be interfered with by the Tenant, his servants, employees, agents, visitors or licesees. Manned freight elevators will be operated only during such hours as the Landlord may from time to time determine; 26. The Tenant shall not use any other method of heating than that supplied by the Landlord; 27. If the premises consist of basement space, or if any merchandise of the Tenant is stored in the basement portion of the building, all such merchandise shall, at the Tenant's own cost and expense, be placed entirely on skids or platforms, which will raise such merchandise at least six inches from the floor; 28. No drilling in floors, walls or ceilings shall be done except in compliance with paragraph Fourth of this lease and no such drilling shall be done during usual business hours unless authorized by the Landlord in writing; 29. No vending machine shall be installed or permitted to remain in the premises unless the Landlord shall first have given its specific written authorization for the installation of each such machine. The Tenant shall not authorize or permit any vendor of sandwiches, coffee, or other foods, candies or beverages to enter the premises for the purpose of soliciting sales of such wares to the Tenant's employees. The Landlord agrees that it will not discriminate against the Tenant in enforcing the rules and regulations set forth herein. R-3 [Exhibit "A" Floor Plan] [Exhibit "B" Floor Plan] [Exhibit "C" Floor Plan] [Exhibit "D" Floor Plan] [Exhibit "E" Floor Plan] [Exhibit "F" Floor Plan] [Exhibit "G" Floor Plan] [Exhibit "H" Floor Plan] [Exhibit "I" Floor Plan] [Exhibit "J" Floor Plan] [Exhibit "K" Floor Plan] [Exhibit "L" Floor Plan] ASSIGNMENT AND ASSUMPTION OF LEASE AGREEMENT THIS AGREEMENT is made as of April 15, 1996 by THE CORPORATE PRINTING COMPANY, INC., a New York corporation ("Assignor") to MERRILL/NEW YORK COMPANY, a Minnesota corporation ("Assignee"). WHEREAS, Assignee desires to assume Assignor's obligations under those certain leases and subleases (collectively, the "Leases") described on Schedule I annexed hereto and made a part hereof and Assignor is willing to assign unto Assignee all of Assignor's right, title and interest in, to and under the Leases upon and subject to the terms hereof; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Assignor and Assignee hereby agree as follows: EFFECTIVE as of the date of this Agreement, Assignor hereby assigns to Assignee without recourse, representation or warranty, except as may be set forth in that certain Asset Purchase Agreement dated as of April 15, 1996 by and among CPC Management Services, Inc., The Corporate Printing Company, Inc., CPC Communications, Inc., CPC Reprographics, Inc., The Corporate Printing Company International, Ltd., CP International Holdings, Inc., The Corporate Printing Company International SNC, The Corporate Printing Company International Pte. Ltd., and Oakland Composition Limited Partnership (collectively the "Affiliated Companies"). Merrill Corporation, Merrill/New York Company and Shareholders of the Affiliated Companies (and subject to all liens, encumbrances, tenancies and occupancies existing on the date hereof) all right, title and interest of Assignor in, to and under the Leases and Assignee hereby assumes all of Assignor's obligations under the Leases and agrees to indemnify and hold Assignor forever harmless from any liability arising thereunder and in connection therewith which arise from and after the date of this Agreement. TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns, from the date hereof for all the rest of the years mentioned in each of the respective Leases, subject to the rents, covenants, conditions and provisions therein also mentioned. THIS AGREEMENT may be executed by the parties hereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, Assignor and Assignee have executed this Agreement as of the date and year above written. THE CORPORATE PRINTING COMPANY, INC. By: /s/ George L. Shifrin --------------------------------- Name: Title: MERRILL/NEW YORK COMPANY By: /s/ Steven J. Machov --------------------------------- Name: Title: SCHEDULE 1 1. Sublease Agreement dated as of November 1, 1993, by and between Dechert Price & Rhoads, as sublessor, and The Corporate Printing Company, Inc., as sublessee. 2. Office Lease dated December 21, 1987 by and between 15th & K Associates, as lessor, and Corporate Printing Corporation, Inc., as lessee. 3. Lease dated as of May 1, 1994 between The Rector, Church-Wardens, and Vestrymen of Trinity Church in the City of New York, as landlord, the The Corporate Printing Company, Inc., as Tenant. 4. Lease of a Condominium Unit dated August 18, 1994 between Zikade Handels Anstalt, as landlord, and The Corporate Printing Co., Inc. EX-11.1 5 EXHIBIT 11.1 Exhibit 11.1 MERRILL CORPORATION SCHEDULE OF COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
FOR THE YEARS ENDED JANUARY 31, ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- Primary Net income.............................................................. $ 17,839,451 $ 10,662,199 $ 11,982,785 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common shares outstanding during the period................................................................. 7,896,080 7,752,532 7,568,380 Add common equivalent shares relating to outstanding options to purchase common stock using the treasury stock method.................. 246,224 192,614 425,853 ------------- ------------- ------------- Total common and common equivalent shares outstanding............... 8,142,304 7,945,146 7,994,233 ------------- ------------- ------------- ------------- ------------- ------------- Primary income per common share........................................... $2.19 $1.34 $1.50 ------------- ------------- ------------- ------------- ------------- ------------- Fully diluted Net income.............................................................. $ 17,839,451 $ 10,662,199 $ 11,982,785 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common shares outstanding during the period................................................................. 7,896,080 7,752,532 7,568,380 Add common equivalent shares relating to outstanding options to purchase common stock using the treasury stock method.................. 318,538 196,731 425,759 ------------- ------------- ------------- Total common and common equivalent shares outstanding............... 8,214,618 7,949,263 7,994,139 ------------- ------------- ------------- ------------- ------------- ------------- Fully diluted income per common share.................................... $2.17 $1.34 $1.50 ------------- ------------- ------------- ------------- ------------- -------------
EX-13.1 6 EXHIBIT 13.1 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations constitute FORWARD-LOOKING statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such FORWARD-LOOKING statements involve known and unknown risks, uncertainties or achievements of the Company which may cause actual results to be materially different from any future results, performance or achievements expressed or implied by such FORWARD-LOOKING statements. These risks and uncertainties include, but are not limited to, the effect of economic and financial market conditions, government security reporting regulations, paper costs and the integration and performance of recent acquisitions. RESULTS OF OPERATIONS The following table sets forth, for the years indicated, the percentage relationship to revenue of certain items in the Company's consolidated statements of operations and the percentage changes in the dollar amounts of such items in comparison to the prior years.
For the Years Ended January 31, ------------------------------------------------------- % Increase (Decrease) ------------------------ Percentage of Revenues 1997 1996 1995 ------------------------ VS. vs. vs. 1997 1996 1995 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- Revenues Financial 40.6% 36.1% 33.4% 62% 12% 3% Corporate 27.6 29.5 33.4 35 (9) 26 Document management services 11.2 12.9 9.9 26 35 38 Commercial and other 20.6 21.5 23.3 38 (5) 120 - --------------------------------------------------------------------------- 100.0 100.0 100.0 44 4 30 Cost of revenues 64.3 67.6 67.3 37 4 37 Gross profit 35.7 32.4 32.7 59 3 19 Selling, general and administrative expenses 25.4 24.5 23.5 50 8 29 Operating income 10.3 7.9 9.2 87 (10) (1) Interest expense (1.2) (0.4) (0.5) 275 (2) 249 Other income, net 0.1 0.1 0.2 (23) (36) 48 Income before provision for income taxes 9.2 7.6 8.9 74 (12) (4) Provision for income taxes 4.1 3.3 3.9 82 (12) 4 Net income 5.1 4.3 5.0 67 (11) (9) - ----------------------------------------------------------------------------------------------------------
6 REVENUE - Merrill Corporation is engaged in one line of business - providing paper and electronic document services. The Company divides its revenues into four categories of service: financial, corporate, document management services, and commercial and other. The percentage of revenue attributable to each category of service is set forth in the chart below. Revenue in the financial category generally reflects the level of transactional activity in the capital markets. Financial encompasses many types of transactions, and some types of transactions tend to increase when others are out of favor. However, a prolonged reduction in the overall level of financial transactions could be expected to have a negative impact on this revenue category. The corporate category encompasses required regulatory compliance and mutual fund documentation and other repetitive work, and is typically not significantly affected by capital market fluctuations. Revenue in the document management services and commercial and other categories tend to follow general economic trends. FISCAL YEAR 1997 VS. FISCAL YEAR 1996 - Revenues for fiscal year 1997 increased 44 percent over the previous year. The financial revenue category experienced a 62 percent increase in revenue over last year. This increase was driven by the inclusion of nine months of operations from The Corporate Printing Company acquisition in April 1996, as well as strong financial market activity throughout fiscal year 1997. This financial market activity continues to be strong and should result in continued growth for the financial revenue category for the first quarter of fiscal year 1998. International revenues, which are included in the financial revenue category, represented less than 5 percent of consolidated revenues and approximated fiscal year 1996 international revenues. Management does not anticipate significant fluctuations in the relative percentage of international revenues during fiscal year 1998. Corporate revenue increased 35 percent when compared to fiscal year 1996. This increase is attributed to a strong demand for EDGAR services and growth in mutual fund market share plus long-term mutual fund clients gained from The Corporate Printing Company acquisition. Document management services revenues grew 26 percent in fiscal year 1997, reflecting continued growth in the number of document service centers, which totaled 64 at January 31, 1997, and the offering of new services such - ------------------------------------------------------------------------------- PERCENTAGE OF REVENUES BY SERVICE 1997 1996 1995 - ------------------------------------------------------------------------------- Financial 40.6% 36.1% 33.4% Corporate 27.6 29.5 33.4 Document management services 11.2 12.9 9.9 Commercial and other 20.6 21.5 23.3 7 as records management and on-demand digital print services. The commercial and other category experienced a 38 percent increase in revenue during the year. The growth is primarily the result of including 10 months of operations of FMC Resource Management Corporation, which was acquired in March 1996, and election- related ballot work, which was lower in the off-election year of fiscal 1996. Merrill/May revenues were up slightly from fiscal year 1996 revenues. Management anticipates that, with the addition of new customer programs and operational efficiency improvements, Merrill/May revenues and operating results will improve during fiscal year 1998. FISCAL YEAR 1996 VS. FISCAL YEAR 1995 - Revenues for fiscal year 1996 increased 4 percent to $245 million. The financial revenue category growth was 12 percent reflecting improved financial market activity during the last half of fiscal year 1996. Document management services revenues increased 35 percent during fiscal year 1996, driven by the addition of 18 new document service centers, bringing the total number of document service centers to 50. Revenue growth from the financial and document management services categories was offset by declines in revenue from the corporate and commercial and other revenue categories. A 9 percent decrease in corporate revenues reflects the absence of a few significant, one-time mutual fund projects. The Company did not bid on these low-margin projects after the last half of fiscal year 1995. Commercial and other revenues were down slightly from fiscal 1995 levels, primarily from an off-election year for ballot printing. FISCAL YEAR 1995 VS. FISCAL YEAR 1994 - Revenues increased 30 percent in fiscal year 1995 to $237 million. Approximately half of the revenue increase was attributed to the inclusion of a full year of operations of May Printing Company, which was acquired in December 1993. The May Printing acquisition was primarily responsible for the 120 percent increase in revenues in our commercial and other category. Also contributing to the revenue growth was the near doubling in the number of document service centers. Corporate revenues grew 26 percent in fiscal year 1995, principally from increased mutual fund documentation services and growth in the number of companies using electronic filing services to comply with the Securities and Exchange Commission's EDGAR program. Financial category revenues were virtually flat compared to fiscal year 1994 levels as rising interest rates and resulting uncertainty in the financial markets caused a dramatic mid-year reduction in the volume of capital market transactions. GROSS PROFIT - Fiscal year 1997 gross profit increased to approximately 36 percent compared to 32 percent in fiscal year 1996. The increase in gross profit is attributed to the significant increase in the volume of financial transaction documents during the year. Financial transaction business generally results in higher margins when compared to the other service categories offered by the Company. The general increase in the volume of work across all service categories also contributed to the increase in gross profit as the Company maximized the utilization of its operating resources. 8 Gross profit in fiscal year 1996 decreased slightly when compared to fiscal year 1995 gross profit. Financial margins during the last half of fiscal year 1996 improved as the volume of financial work increased. Financial margins, however, were lower than in prior years as a result of continued competitive pricing pressures. Overall gross profit was also affected by the increase in document management service revenue, which typically generates lower margins than the Company's more traditional businesses. The reduction in gross profit percentage in fiscal 1995 versus 1994 was caused primarily by the sharp reduction in financial printing volume during the second half of the fiscal year, which led to intense price competition. Also contributing to the decrease was the growth in the Company's document management services business which has historically realized lower gross margins than the Company's other businesses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and administrative expenses have increased in each of the last three fiscal years. The increase in these expenses in fiscal year 1997 was attributed to integration costs associated with the fiscal year 1997 acquisition from The Corporate Printing Company and acquisition of FMC Resource Management Corporation, the related goodwill amortization, continued expansion of the Company's sales and marketing activities and incentive compensation. The increase in selling, general and administrative expenses in fiscal year 1996 was a result of the continued expansion of the Company's sales and marketing organization, increased market penetration in existing offices and the marketing of new services. In addition, our commercial and other businesses continued to incur higher selling expenses to add more national clients and increase marketing efforts to promote its service. The increase in fiscal year 1995 was attributed to the inclusion of a full year of expenses from Merrill/May, together with the goodwill amortization associated with that acquisition, and the increase in provision for losses on trade receivables resulting from aborted securities offerings as a result of poor market conditions. INTEREST EXPENSE - Average short-term borrowings under the Company's bank line of credit were approximately $30,117,000, $2,221,000 and $710,000 in fiscal years 1997, 1996 and 1995, respectively. The significant increase in the average short-term borrowings during 1997 resulted from financing the Company's acquisition from The Corporate Printing Company and acquisition of FMC Resource Management Corporation with the bank line of credit for approximately six months of fiscal year 1997. Interest expense for fiscal year 1997 was significantly higher than for fiscal year 1996, which is attributed to the financing of the acquisitions noted above, and the increased need for working capital to support the strong financial transaction activity. Fiscal year 1996 interest expense remained relatively stable compared to fiscal year 1995. Fiscal year 1995 interest expense was up over the previous year as a result of cash expended and debt assumed in connection with the December 1993 acquisition of May Printing Company and interest expense associated with the Internal Revenue Service audits discussed on the next page. 9 PROVISION FOR INCOME TAXES - The effective tax rate for fiscal year 1997 was 45 percent, compared to 43 percent for fiscal years 1996 and 1995. The effective rates were higher than the statutory federal rate of 35 percent primarily because of state income taxes and the impact of increased non-deductible business entertainment expenses incurred in conjunction with the additional financial revenues previously discussed. The increase in the effective tax rate for fiscal year 1995 versus 1994 was also affected by a provision for additional taxes payable of approximately $650,000 for fiscal years 1992, 1993 and 1994, resulting from an Internal Revenue Service audit of those years. The effective income tax rate in future years is expected to approximate 45 percent. IMPACT OF INFLATION - The Company does not believe that inflation has had a significant impact on the results of its operations. LIQUIDITY AND CAPITAL RESOURCES Working capital at January 31, 1997, increased to $69.2 million from $39.4 million a year ago, reflecting the growth from acquisitions and strong sales activity during the entire year when compared to fiscal year 1996 activity. The increase in sales activity resulted in a corresponding increase in trade receivables and work-in-process inventories at January 31, 1997. Capital expenditures for the year were $9.2 million and were primarily related to reprographics and computer-based production equipment. Cash and cash equivalents decreased to $5.2 million and borrowings under the Company's line of credit were $5.9 million at January 31, 1997. During the fourth quarter of fiscal year 1997, the Company replaced its line of credit with a new $40 million line of credit which expires on November 29, 1999. Long-term obligations at January 31, 1997, were 30.8 percent of total capitalization compared to 7.7 percent at January 31, 1996. The significant increase in long-term obligations to capitalization is a result of financing The Corporate Printing Company and FMC Resources Management Corporation acquisitions with privately placed $35 million unsecured senior notes during the third quarter of fiscal year 1997. The notes require semi- annual principal payments commencing in 1999, maturing in 2006, and bear an annual interest rate of 7.463 percent. The Company expects capital expenditures in fiscal year 1998 to range from $15 million to $20 million for computer and production equipment and facility expansion and remodeling. Approximately $4.7 million of this amount is committed at this time. Working capital at January 31, 1996, increased to $39.4 million from $31.5 million at January 31, 1995, reflecting a rise in sales activity during the fourth quarter, as compared to sales activity during the fourth quarter of fiscal year 1995. The increase in sales activity contributed to corresponding increases in year-end accounts receivable and work-in-process inventory balances. Capital expenditures for fiscal year 1996 were $12.5 million, of which $5.5 million represented the purchase of two administration buildings in St. Paul which were previously partially leased. Other capital expenditures were principally for production equipment and office remodeling and furnishings. Cash and cash equivalents increased to $12.1 million at January 31, 1996, and borrowings under the Company's bank line of credit were $6 million. Long-term obligations to total capitalization were 7.7 percent at January 31, 1996, compared to 10.2 percent a year ago. 10 The Company has historically been working-capital intensive, but in recent years has increased its needs for technology and production equipment. The Company generally has been able to generate sufficient cash flow from operations to fund its capital needs. At January 31, 1997, the Company's principal internal sources of liquidity were cash and cash equivalents and cash flow from operations. The Company has available a $40 million unsecured bank line of credit expiring on November 29, 1999, under which there were $5.9 million of borrowings at January 31, 1997. Management anticipates that these sources will satisfy its needs for fiscal year 1998. NEW ACCOUNTING STANDARD In March 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share information. The Company will compute and present earnings per share information in accordance with this standard for year-ending January 31, 1998, reporting. The Company does not anticipate that this standard will have a significant impact on reported earnings per share. QUARTERLY STOCK PRICE COMPARISON Merrill Corporation shares are traded on The NASDAQ Stock Market under the symbol MRLL. The table below sets forth the range of high and low sales prices per share as reported by The NASDAQ Stock Market. These prices do not include adjustments for retail markups, markdowns or commissions. There were approximately 1,750 shareholders of record and non-objecting beneficial owners of the Company's common stock at the close of trading on April 1, 1997. The Company paid quarterly dividends of $.03 per share in fiscal 1997 and 1996, totaling approximately $948,000 and $931,000, respectively. First Second Third Fourth Stock Price Per Share Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- FY1997 High 22 26 1/2 24 1/2 24 3/4 Low 14 1/2 18 1/4 19 20 1/2 FY1996 High 20 21 1/4 19 1/2 20 3/4 Low 14 3/4 15 3/4 15 3/4 14 1/4 - -------------------------------------------------------------------------------- 11 CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- As of January 31, --------------------- (IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996 - -------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 5,161 $ 12,074 Trade receivables, less allowance for doubtful accounts of $6,027 and $3,545, respectively 81,733 48,566 Work-in-process inventories 24,958 10,898 Other inventories 4,878 5,235 Other current assets 9,933 2,463 - -------------------------------------------------------------------------------- Total current assets 126,663 79,236 Property, plant and equipment, net 34,717 31,681 Goodwill, net 34,030 10,528 Other assets 6,587 4,076 - -------------------------------------------------------------------------------- Total assets $201,997 $125,521 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable to banks $ 5,950 $ 6,000 Current maturities of long-term debt 645 770 Current maturities of capital lease obligations 307 538 Accounts payable 20,387 17,598 Accrued expenses 30,154 14,951 - -------------------------------------------------------------------------------- Total current liabilities 57,443 39,857 Long-term debt, net of current maturities 40,880 4,525 Capital lease obligations, net of current maturities 1,849 1,929 Other liabilities 5,665 1,476 - -------------------------------------------------------------------------------- Total liabilities 105,837 47,787 - -------------------------------------------------------------------------------- Commitments and contingencies (Notes 3, 5 and 10) Shareholders' equity Common stock, $.01 par value: 25,000,000 shares authorized; 7,932,524 shares and 7,855,783 shares, respectively, issued and outstanding 79 78 Undesignated stock: 500,000 shares authorized; no shares issued Additional paid-in capital 17,858 16,324 Retained earnings 78,223 61,332 - -------------------------------------------------------------------------------- Total shareholders' equity 96,160 77,734 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $201,997 $125,521 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 12 CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
For the Years Ended January 31, -------------------------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1997 1996 1995 - -------------------------------------------------------------------------------------- Revenues $353,769 $245,306 $236,878 Cost of revenues 227,478 165,765 159,462 - -------------------------------------------------------------------------------------- Gross profit 126,291 79,541 77,416 Selling, general and administrative expenses 89,946 60,079 55,680 - -------------------------------------------------------------------------------------- Operating income 36,345 19,462 21,736 Interest expense (4,124) (1,099) (1,120) Other income, net 263 343 538 - -------------------------------------------------------------------------------------- Income before provision for income taxes 32,484 18,706 21,154 Provision for income taxes 14,645 8,044 9,171 - -------------------------------------------------------------------------------------- Net income $ 17,839 $ 10,662 $ 11,983 - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- Net income per common and common equivalent share: Primary $ 2.19 $ 1.34 $ 1.50 Fully diluted $ 2.17 $ 1.34 $ 1.50 - -------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding: Primary 8,142,304 7,945,146 7,994,233 Fully diluted 8,214,618 7,949,263 7,994,139 - --------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 13 CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
For the Years Ended January 31, ------------------------------- (IN THOUSANDS) 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Operating activities Net income $17,839 $10,662 $11,983 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 10,825 9,724 8,651 Amortization of intangible assets 2,581 1,088 1,127 Provision for losses on trade receivables 2,861 1,486 2,038 Provision for unbillable inventories 2,678 250 (183) Deferred income taxes (6,555) (2,583) (2,390) Change in deferred compensation 401 582 600 Changes in operating assets and liabilities, net of effects from business acquisitions Trade receivables (18,499) (10,768) (1,946) Work in process inventories (11,667) (4,141) 4,997 Other inventories 583 (709) (540) Other current assets (1,718) 315 (31) Accounts payable (3,720) 1,594 (126) Accrued expenses 11,365 2,142 (368) Income taxes 1,530 (89) (380) - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 8,504 9,553 23,432 Investing activities Purchase of property, plant and equipment (9,216) (12,487) (10,085) Business acquisitions, net of cash acquired (26,010) (993) Other (564) (727) (553) - ------------------------------------------------------------------------------------------------ Net cash used in investing activities (35,790) (13,214) (11,631) Financing activities Borrowings on notes payable to banks 139,050 51,700 28,100 Repayments on notes payable to banks (139,100) (45,700) (30,700) Proceeds from issuance of long-term debt 35,000 Principal payments on long-term debt and capital lease obligations (15,164) (1,243) (2,273) Dividends paid (948) (931) (908) Tax benefit realized upon exercise of stock options 328 1,451 863 Other equity transactions, net 1,207 491 526 - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 20,373 5,768 (4,392) - ------------------------------------------------------------------------------------------------ (Decrease) increase in cash and cash equivalents (6,913) 2,107 7,409 Cash and cash equivalents, beginning of year 12,074 9,967 2,558 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of year $ 5,161 $12,074 $ 9,967 - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ Supplemental cash flow disclosures Income taxes paid $19,253 $ 9,268 $11,088 Interest paid 2,866 880 1,019
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 14 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended January 31, 1997, 1996, 1995 ------------------------------------------------ Additional Common Paid-in Retained (IN THOUSANDS, EXCEPT PER SHARE DATA) Stock Capital Earnings Total - -------------------------------------------------------------------------------------------------------- Balance, January 31, 1994 $75 $12,996 $40,526 $53,597 - -------------------------------------------------------------------------------------------------------- Exercise of stock options 1 496 497 Tax benefit realized upon exercise of stock options 863 863 Other 29 29 Cash dividends ($.12 per share) (908) (908) Net income 11,983 11,983 - -------------------------------------------------------------------------------------------------------- Balance, January 31, 1995 $76 $14,384 $51,601 $66,061 - -------------------------------------------------------------------------------------------------------- Exercise of stock options 2 1,022 1,024 Tax benefit realized upon exercise of stock options 1,451 1,451 Other (533) (533) Cash dividends ($.12 per share) (931) (931) Net income 10,662 10,662 - -------------------------------------------------------------------------------------------------------- Balance, January 31, 1996 $78 $16,324 $61,332 $77,734 - -------------------------------------------------------------------------------------------------------- Exercise of stock options 1 1,044 1,045 Tax benefit realized upon exercise of stock options 328 328 Other 162 162 Cash dividends ($.12 per share) (948) (948) Net income 17,839 17,839 - -------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1997 $79 $17,858 $78,223 $96,160 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- NATURE OF BUSINESS - The Company provides paper and electronic document services consisting of document typesetting, printing, reproduction, distribution and publishing services to financial, legal, fund and corporate markets worldwide. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant areas which require the use of management's estimates relate to the determination of the allowances for doubtful accounts and obsolete inventories. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. CASH EQUIVALENTS - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. INVENTORIES - Work-in-process, which includes purchased services, materials, direct labor and overhead, is valued at the lower of cost or net realizable value, with cost determined on a specific job-cost basis. Other inventories consist primarily of paper and printed materials and are valued at the lower of cost or market, with cost determined on a specific job-cost basis. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Significant additions or improvements extending asset lives are capitalized; normal maintenance and repair costs are expensed as incurred. Depreciation is determined using the straight-line method over the estimated useful lives of the assets which range from three to 30 years. Amortization of leasehold improvements is recorded on a straight-line basis over the estimated useful lives of the assets or the lease term, whichever is shorter. When assets are sold or retired, related gains or losses are included in the results of operations. GOODWILL - Goodwill recognized in business acquisitions accounted for as purchases is amortized on the straight-line method, principally over 15 years. The Company periodically evaluates the recoverability of unamortized goodwill through measurement of future estimated undiscounted operating unit cash flows. 16 INCOME TAXES - Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the year and the change during the year in deferred tax assets and liabilities. REVENUE RECOGNITION - The Company recognizes revenue when service projects are completed or products are shipped. NET INCOME PER SHARE - Net income per common and common equivalent share is computed by dividing net income by the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during each year. Common stock equivalents result from dilutive stock options computed using the treasury stock method. In March 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings per Share," which the Company will adopt effective for its fiscal 1998 year end reporting. The Company will be required to report basic net income per share based on weighted average common shares outstanding, without considering common equivalent shares, and diluted net income per share based on weighted average common equivalent shares outstanding. Diluted net income per share would be equivalent to the Company's current reporting primary net income per share. STOCK-BASED COMPENSATION - In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation costs for stock options granted to employees are measured as the excess, if any, of the value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Such compensation costs, if any, are amortized on a straight-line basis over the underlying option vesting terms. The Company accounts for stock-based compensation to non-employees using the fair value method prescribed by SFAS No. 123. Compensation costs for stock options granted to non-employees are measured as the excess of the fair value of the option over the amount the holder must pay to acquire the stock. 17 NOTE 2 - SELECTED FINANCIAL STATEMENT DATA - -------------------------------------------------------------------------------- As of January 31, -------------------- (IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Land $ 1,951 $ 1,951 Buildings 11,778 11,389 Equipment 45,250 37,907 Furniture and fixtures 9,655 8,228 Leasehold improvements 9,923 6,831 Construction in progress 659 404 - ------------------------------------------------------------------------------- 79,216 66,710 Less accumulated depreciation and amortization (44,499) (35,029) - ------------------------------------------------------------------------------- $ 34,717 $ 31,681 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- GOODWILL Goodwill $ 38,481 $ 12,597 Less accumulated amortization (4,451) (2,069) - ------------------------------------------------------------------------------- $ 34,030 $ 10,528 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ACCRUED EXPENSES Commissions and compensation $ 17,926 $ 7,906 Retirement plan 3,860 3,620 Other 8,368 3,425 - ------------------------------------------------------------------------------- $ 30,154 $ 14,951 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NOTE 3 - BUSINESS ACQUISITIONS - -------------------------------------------------------------------------------- On April 15, 1996, the Company purchased substantially all of the operating assets and assumed certain liabilities of The Corporate Printing Company, Inc. and Affiliated Group (CPC) for approximately $22.6 million in cash. The Company did not purchase any assets relating to CPC's pressroom and shipping businesses. The purchase price was subsequently reduced by approximately $1.7 million in accordance with terms of the purchase agreement. The agreement includes additional contingent purchase consideration, not to exceed $12 million, based on increases in the average stock price, as defined in the agreement, of the Company's common stock through April 15, 2001. The Company also entered into a five-year non-compete agreement with CPC's principal shareholder that requires payments totaling $3.4 million through April 15, 2001. The principal shareholder is also entitled to an additional $500,000 annually, through March 31, 2001, if the Company maintains certain business of a specified customer. The acquisition has been accounted for as a purchase. The excess of the adjusted purchase price over the estimated fair values of the net tangible and identifiable intangible assets acquired approximated $18.5 million and is being amortized using the straight-line method over 15 years. 18 NOTE 3 - BUSINESS ACQUISITIONS, CONTINUED - -------------------------------------------------------------------------------- On March 28, 1996, the Company purchased all of the outstanding common stock of FMC Resource Management Corporation for $5.4 million in cash and promissory notes for $2.0 million. The agreement calls for additional contingent consideration, not to exceed $4 million, based on annual gross profits of the acquired business through January 31, 2001, as defined in the agreement. The acquisition has been accounted for as a purchase. The excess of the purchase price over the estimated fair values of the net tangible and identifiable intangible assets acquired approximated $6.0 million and is being amortized using the straight-line method over 15 years. Results of the acquired companies' operations have been included in the Consolidated Statements of Operations from their respective dates of acquisitions. Pro forma (unaudited) results of the Company for the years ended January 31, 1997 and 1996 as if the acquisitions had been effective at February 1, 1995 are as follows: For the Years Ended January 31, ------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 - -------------------------------------------------------------------------------- Revenues $376,647 $325,157 Net income 17,047 8,263 Net income per share - primary 2.09 1.04 - -------------------------------------------------------------------------------- NOTE 4 - FINANCING ARRANGEMENTS BANK FINANCING - In November 1996, the Company entered into a new revolving credit agreement with a group of banks that provides for a $40 million unsecured bank line of credit which expires on November 29, 1999. Borrowings under the agreement were $5,950,000 at January 31, 1997, and bear interest at the Agent's reference rate (8.25% at January 31, 1997). Borrowings under the previous revolving credit agreement, at January 31, 1996, were $6 million and bore interest at 8.5%. Under the new agreement, the Company has the option to borrow at the Agent's reference rate, at 1% above the London Interbank Offered Rate (LIBOR) or at 1.0% above a certificate of deposit-based rate, and is required to pay quarterly commitment fees of 0.25% on the unused portion of the line of credit. The weighted average interest rates on borrowings on the line of credit were 7.39%, 8.83% and 7.18% for the years ended 1997, 1996 and 1995, respectively. The revolving credit agreement includes various covenants, including the maintenance of minimum tangible net worth and limitations on the amounts of certain transactions, including payment of dividends. 19 NOTE 4 - FINANCING ARRANGEMENTS, CONTINUED - -------------------------------------------------------------------------------- LONG-TERM DEBT - Long-term debt consisted of the following: As of January 31, ------------------ (IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------------- Unsecured senior notes, bearing interest at 7.463%, with semi-annual interest payments through October 1999, at which time semi-annual principal and interest payments are due through October 2006. The notes have various covenants, including the maintenance of certain financial ratios and limitations on the amount of certain transactions including the payment of dividends. $35,000 Industrial development bonds, due in semi-annual installments including interest ranging from 7.0% to 8.375%, over the life of the bonds with the remaining unpaid balance due on August 1, 2010; collateralized by land, building and equipment with a carrying value of $4,279 at January 31, 1997. 3,525 $ 3,660 Unsecured promissory notes payable due in March 1999. The notes bear interest at LIBOR plus 1.0%, adjustable and payable annually. The interest rate at January 31, 1997 was 6.608%. 2,000 Unsecured promissory note payable in equal installments of $500 on December 31 through 1998. The note bears interest at the prime rate and is payable annually. The prime interest rate at January 31, 1997 and 1996 was 8.25% and 8.5%, respectively. 1,000 1,500 Other notes 135 - -------------------------------------------------------------------------------- 41,525 5,295 Less current maturities (645) (770) - -------------------------------------------------------------------------------- $40,880 $ 4,525 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The aggregate maturities of long-term debt are as follows: (IN THOUSANDS) - -------------------------------------------------------------------------------- 1998 $ 645 1999 655 2000 2,170 2001 5,180 2002 5,195 Thereafter 27,680 - -------------------------------------------------------------------------------- $41,525 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Based on quoted market prices for similar issues, the fair value of long-term debt approximated its reported value at January 31, 1997 and 1996. 20 NOTE 5 - LEASES - -------------------------------------------------------------------------------- The Company leases an office and production facility and the associated land and equipment under capital leases that terminate at various dates through November 30, 2005. Certain leases contain bargain purchase options. A summary of the Company's property under capital leases, which is classified as property, plant and equipment, is as follows: As of January 31, ----------------- (IN THOUSANDS) 1997 1996 - ------------------------------------------------------------------------------- Land $ 333 $ 333 Building 2,439 2,439 Equipment 594 542 Less accumulated amortization (1,129) (856) - ------------------------------------------------------------------------------- $ 2,237 $ 2,458 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The Company also leases office space and equipment under noncancelable operating leases which expire at various dates through October 31, 2014. Rental expense charged to operations was $6,009,000, $5,123,000 and $4,867,000, for the years ended January 31, 1997, 1996 and 1995, respectively. Future minimum rental commitments under noncancelable leases at January 31, 1997, are as follows: Capital Operating (IN THOUSANDS) Leases Leases - -------------------------------------------------------------------------------- 1998 $ 497 $ 5,218 1999 434 3,758 2000 392 2,738 2001 330 2,202 2002 330 1,721 Thereafter 1,265 13,700 - ------------------------------------------------------------------------------- 3,248 $ 29,337 -------- -------- Imputed interest (1,092) Present value of minimum lease payments 2,156 Less current maturities of obligations under capital leases (307) - ------------------------------------------------------------------- Long-term obligations under capital leases $ 1,849 - ------------------------------------------------------------------- - ------------------------------------------------------------------- 21 NOTE 6 - INCOME TAXES - -------------------------------------------------------------------------------- Components of the provision for income taxes are as follows: For the Years Ended January 31, ------------------------------- (IN THOUSANDS) 1997 1996 1995 - -------------------------------------------------------------------------------- Currently payable Federal $17,758 $ 9,203 $ 9,879 State 3,442 1,424 1,682 21,200 10,627 11,561 Deferred (6,555) (2,583) (2,390) - -------------------------------------------------------------------------------- Provision for income taxes $14,645 $ 8,044 $ 9,171 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Temporary differences comprising the net deferred tax asset recognized in the accompanying Consolidated Balance Sheets are as follows: As of January 31, ------------------- (IN THOUSANDS) 1997 1996 - -------------------------------------------------------------------------------- Allowance for doubtful accounts $2,676 $1,383 Deferred compensation 1,382 576 Depreciation and amortization 1,102 351 Insurance reserves 1,001 492 Inventories 300 (2,068) Other, net 980 152 - -------------------------------------------------------------------------------- Net deferred tax asset $7,441 $ 886 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Management expects that the Company will fully realize the benefits attributable to the net deferred tax asset at January 31, 1997. Accordingly, no valuation allowance has been recorded at January 31, 1997. Significant differences between income taxes on income for financial reporting purposes and income taxes calculated using the federal statutory tax rate are as follows: As of January 31, ------------------------------ (IN THOUSANDS) 1997 1996 1995 - -------------------------------------------------------------------------------- Provision for federal income taxes at statutory rate $11,369 $6,547 $7,404 State income taxes, net of federal benefit 1,444 695 1,039 Non-deductible business meeting and entertainment expenses 1,210 778 565 Other 622 24 163 - -------------------------------------------------------------------------------- $14,645 $8,044 $9,171 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 22 NOTE 7 - RETIREMENT PLAN - -------------------------------------------------------------------------------- The Company has a defined contribution retirement plan covering substantially all employees. Contributions to the plan are based on 7% of eligible employee compensation. Costs charged to operations were $3,860,000, $3,620,000 and $3,403,000 for the years ended January 31, 1997, 1996 and 1995, respectively. NOTE 8 - SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- COMMON STOCK - The classes, series, rights and preferences of the undesignated stock may be established by the Company's Board of Directors. No action with respect to such shares has been taken. During fiscal year 1997, the Company's Board of Directors approved the repurchase of up to 750,000 shares of the Company's common stock. No shares were repurchased as of January 31, 1997. STOCK PLANS - Under Company-sponsored incentive and stock option plans, 2,508,000 shares of common stock were reserved for granting of incentive awards to employees in the form of incentive stock options, non-statutory stock options and restricted stock awards, at exercise prices not less than 100% of the fair market value of the Company's common stock on the date of grant. As of January 31, 1997, incentive stock options for 108,666 shares, non-statutory options for 1,813,000 shares and 31,700 restricted stock awards had been granted under the plans, leaving 554,634 shares available for future grants. In May 1996, the shareholders of the Company approved the Company's 1996 Non-employee Director Plan (the Plan) whereby 200,000 shares of common stock are reserved for granting of non-statutory options and awarding of common shares as partial payment to non-employee directors who serve on the Company's Board of Directors. Non-statutory stock options issued under the Plan are granted at an exercise price not less than 100% of the fair market value of the Company's common stock on the date of grant. Compensation expense is recorded when common stock is awarded as partial payment for the director's annual retainer in an amount approximately equal to the fair market value of the Company's common stock on the date of grant. As of January 31, 1997, non-statutory options for 18,000 shares and 1,750 shares of common stock were granted under the plan, leaving 180,250 shares available for future grants. In addition to options granted under the plans above, the Company has granted non-qualified options to directors and consultants at prices equal to or exceeding market value at date of grant. Options granted under all Company- sponsored stock plans generally vest over seven years and expire in 10 years. 23 NOTE 8 - SHAREHOLDERS' EQUITY, CONTINUED - -------------------------------------------------------------------------------- A summary of selected information regarding all stock options for the three years ended January 31, 1997, is as follows: Weighted Average Number of Exercise Price Exercise Price Shares Per Share Per Share - -------------------------------------------------------------------------------- Balance, January 31, 1994 1,022,934 $ 3.37 - 29.50 $12.02 Granted 110,664 14.56 - 29.75 23.64 Exercised (113,134) 3.37 - 17.50 4.39 Canceled (34,500) 3.87 - 17.37 15.17 - -------------------------------------------------------------------------------- Balance, January 31, 1995 985,964 3.37 - 29.75 14.12 Granted 304,500 16.25 - 18.50 16.43 Exercised (278,300) 3.37 - 17.37 3.68 Canceled (84,850) 17.37 - 29.75 20.10 - -------------------------------------------------------------------------------- Balance, January 31, 1996 927,314 4.00 - 29.75 16.92 Granted 546,000 16.25 - 23.94 18.13 Exercised (76,218) 7.37 - 20.75 13.70 Canceled (53,182) 16.25 - 26.50 19.71 - -------------------------------------------------------------------------------- BALANCE, JANUARY 31, 1997 1,343,914 $ 4.00 - 29.75 $17.49 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- At January 31, 1997, the weighted average exercise price and remaining life of the stock options are as follows: Range of exercise prices $4.00-16.50 $17.37-29.75 Total - -------------------------------------------------------------------------------- Total options outstanding 674,450 669,464 1,343,914 Weighted average exercise price $14.72 $20.27 $17.49 Weighted average remaining life 6.7 years 7.8 years 7.2 years Options exercisable 215,550 178,714 394,264 Weighted average price of exercisable options $11.49 $22.22 $16.35 - -------------------------------------------------------------------------------- 24 NOTE 8 - SHAREHOLDERS' EQUITY, CONTINUED - -------------------------------------------------------------------------------- Had the Company used the fair value-based method of accounting for its incentive and stock option plans beginning on February 1, 1995, and charged compensation cost against income, over the vesting period, based on the fair value of options at the date of grant, net income and net income per common share would have been reduced to the following pro forma amounts: For the Years Ended January 31, ------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) 1997 1996 - -------------------------------------------------------------------------------- NET INCOME As reported $17,839 $10,662 Pro forma 17,223 10,444 - -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE - PRIMARY As reported $ 2.19 $ 1.34 Pro forma - primary 2.12 1.31 - -------------------------------------------------------------------------------- The pro forma information above includes only stock options granted in fiscal years 1997 and 1996. Compensation expense under the fair value-based method of accounting will increase in the future as additional stock option grants are considered. The weighted-average grant date fair value of options granted during fiscal years 1997 and 1996 was $9.44 and $8.84, respectively. The weighted-average grant date fair value of options was determined by using the fair value of each option grant, utilizing the Black-Scholes option-pricing model and the following key assumptions: For the Years Ended January 31, ------------------------------- 1997 1996 - -------------------------------------------------------------------------------- Risk free interest rate 6.87% 6.28% Expected life 6 years 6 years Expected volatility 48.85% 49.26% Expected dividend yield 0.68% 0.58% - -------------------------------------------------------------------------------- 25 NOTE 9 - QUARTERLY FINANCIAL DATA (UNAUDITED) - -------------------------------------------------------------------------------- The following is a summary of unaudited quarterly financial data for the years ended January 31, 1997 and 1996:
First Second Third Fourth (IN THOUSANDS EXCEPT PER SHARE DATA) Quarter Quarter Quarter Quarter Total - ----------------------------------------------------------------------------------------- 1997 Revenues $71,200 $87,569 $93,776 $101,224 $353,769 Gross profit 25,170 32,691 32,273 36,157 126,291 Net income 4,245 4,671 4,377 4,546 17,839 Net income per share - primary .54 .57 .53 .55 2.19 Dividends declared per share .03 .03 .03 .03 .12 - ----------------------------------------------------------------------------------------- 1996 Revenues $57,432 $62,703 $62,475 $ 62,696 $245,306 Gross profit 18,616 18,888 20,986 21,051 79,541 Net income 2,076 2,714 3,035 2,837 10,662 Net income per share .26 .34 .38 .36 1.34 Dividends declared per share .03 .03 .03 .03 .12 - -----------------------------------------------------------------------------------------
NOTE 10 - SUBSEQUENT EVENTS - -------------------------------------------------------------------------------- On February 21, 1997, the Company received substantially all operating assets in return for assuming certain liabilities of Roald Marth Learning Systems, Inc., doing business as Superstar Computing. In addition, the agreement requires the Company to pay contingent cash consideration of up to $5 million, dependent on future performance of Superstar Computing, as defined by the purchase agreement. Subsequent to January 31, 1997, the Company repurchased 132,000 shares of its common stock for approximately $3.1 million. 26 SUMMARY OF OPERATING AND FINANCIAL DATA - --------------------------------------------------------------------------------
For the Years Ended January 31, (IN THOUSANDS, EXCEPT EMPLOYEE, --------------------------------------------------------------- PER SHARE DATA AND RATIO) 1997 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------- OPERATING RESULTS Revenues $353,769 $245,306 $236,878 $181,584 $147,716 $125,312 Costs and expenses 321,285 226,600 215,724 159,593 133,552 114,559 Income before provision for income taxes 32,484 18,706 21,154 21,991 14,164 10,753 Provision for income taxes 14,645 8,044 9,171 8,820 5,565 4,308 - ---------------------------------------------------------------------------------------------------- Net income $ 17,839 $ 10,662 $ 11,983 $ 13,348 $ 8,599 $ 6,518 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- PER COMMON SHARE Net income - primary $ 2.19 $ 1.34 $ 1.50 $ 1.67 $ 1.12 $ .86 Net income - fully $ 2.17 $ 1.34 $ 1.50 $ 1.67 $ 1.11 $ .86 Book value $ 12.12 $ 9.90 $ 8.69 $ 7.15 $ 5.36 $ 4.11 FINANCIAL DATA/OTHER Working capital $ 69,220 $ 39,379 $ 31,523 $ 22,528 $ 24,650 $ 17,550 Current ratio 2.2 2.0 2.0 1.6 2.1 1.9 Total assets $201,997 $125,521 $106,470 $100,123 $ 66,042 $ 52,954 Shareholders' equity $ 96,160 $ 77,734 $ 66,061 $ 53,597 $ 39,330 $ 29,116 Return on average shareholders' equity 20.5% 14.8% 20.0% 28.7% 25.1% 25.3% Long-term obligations $ 42,729 $ 6,454 $ 7,522 $ 8,656 $ 2,138 $ 2,230 Long-term obligations to capitalization 30.8% 7.7% 10.2% 13.9% 5.2% 7.1% Number of employees 2,320 1,932 1,739 1,601 1,041 831 - ----------------------------------------------------------------------------------------------------
27 REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors of Merrill Corporation: We have audited the accompanying consolidated balance sheets of Merrill Corporation as of January 31, 1997 and 1996 and the related consolidated statements of operations, cash flows and changes in shareholders' equity for each of the three years in the period ended January 31, 1997. 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 consolidated financial position of Merrill Corporation as of January 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. St. Paul, Minnesota March 25, 1997, except as to the second paragraph of Note 10, for which the date is April 16, 1997. 28 EX-21.1 7 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE COMPANY
JURISDICTION OF NAME INCORPORATION PERCENT OWNED - --------------------------------------------------------------------- --------------- ------------- Merrill/New York Company............................................. Minnesota 100% Merrill/Magnus Publishing Corporation................................ Minnesota 100% Merrill Corporation, Canada ......................................... Ontario 100% Merrill/May, Inc..................................................... Minnesota 100% Merrill International Inc............................................ Minnesota 100% Merrill Real Estate Company.......................................... Minnesota 100% FMC Resource Management Corporation.................................. Washington 100% Merrill/Superstar Computing Company.................................. Minnesota 100%
EX-23.1 8 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement on Forms S-8 of Merrill Corporation (File No. 33-46275, File No. 33-52623 and File No. 333-06897) of our report dated March 25, 1997, except as to the second paragraph of Note 10, for which the date is April 16, 1997, on our audits of the consolidated financial statements of Merrill Corporation as of January 31, 1997 and 1996, and for each of the three years in the period ended January 31, 1997, which report is incorporated by reference in this Annual Report on Form 10-K, and our report dated March 25, 1997, on the related financial statement schedule included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota April 29, 1997 EX-27.1 9 EXHIBIT 27.1 - FDS
5 1,000 YEAR JAN-31-1997 FEB-01-1996 JAN-31-1997 5,161 0 87,760 6,027 29,836 126,663 79,216 44,499 201,997 57,443 43,681 0 0 79 96,081 201,997 353,769 353,769 227,478 227,478 89,946 2,861 4,124 32,484 14,645 17,839 0 0 0 17,839 2.19 2.17
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