-----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, IKQMqZhKEh7llRIIGAI7GVPoTzBIQLb571UCieIA25FCt6hD4OYlkVLH67hOmm1X 1qSaeNCliEbOzeRAK+DXow== 0000897101-03-000183.txt : 20030310 0000897101-03-000183.hdr.sgml : 20030310 20030310162727 ACCESSION NUMBER: 0000897101-03-000183 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGNIA SYSTEMS INC/MN CENTRAL INDEX KEY: 0000875355 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 411656308 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13471 FILM NUMBER: 03598165 BUSINESS ADDRESS: STREET 1: 5025 CHESHIRE LANE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55446 BUSINESS PHONE: 7633926200 MAIL ADDRESS: STREET 1: 5025 CHESHIRE LANE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55346 10-K 1 isig031093_10k.txt INSIGNIA SYSTEMS, INC. FORM 10-K 12-31-2002 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 2002 Commission File Number 0-19380 - -------------------------------------------------------------------------------- INSIGNIA SYSTEMS, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1656308 ------------------------------ --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 6470 Sycamore Court North Maple Grove, MN 55369 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (763) 392-6200 ------------------------------------------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value ------------------------------------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. Yes [ ] No [ X ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2). Yes [ ] No [ X ] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the second quarter (June 28, 2002) was approximately $62,344,000 based upon the last sale price of the registrant's Common Stock on such date. Number of shares outstanding of Common Stock, $.01 par value, as of March 3, 2003, was 12,167,748. DOCUMENTS INCORPORATED BY REFERENCE: Insignia Systems, Inc. Proxy Statement to be filed for the Annual Meeting of Shareholders to be held on May 20, 2003 (Part III - Items 10, 11, 12 and 13) TABLE OF CONTENTS PART I. 1 Item 1. Business..........................................................................................1 Item 2. Properties........................................................................................5 Item 3. Legal Proceedings.................................................................................5 Item 4. Submission of Matters to a Vote of Security Holders...............................................6 Item 4A. Executive Officers of the Registrant..............................................................6 PART II. 7 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........................7 Item 6. Selected Financial Data...........................................................................8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................12 Item 8. Financial Statements and Supplementary Data......................................................13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............28 PART III. 29 Item 10. Directors and Executive Officers of the Registrant...............................................29 Item 11. Executive Compensation...........................................................................29 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................29 Item 13. Certain Relationships and Related Transactions...................................................29 Item 14. Controls and Procedures..........................................................................29 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................30
PART I. Item 1. Business GENERAL Insignia Systems, Inc., (the "Company") markets in-store promotional products, programs and services to retailers and consumer packaged goods manufacturers. Since 1998, the Company has been focusing all of its efforts on providing promotional services through the Insignia Point-Of-Purchase Services (POPS) division of the Company. The Insignia POPS(R) division provides the Insignia POPSign(TM) and VALUStix(R) programs. Insignia's POPSign is a national, account-specific in-store promotion program. Funded by consumer packaged goods manufacturers, the program combines vital product selling information from manufacturers with each retailer's store-specific prices and is displayed on the retailer's unique sign format that includes the retailer's logo, headline and store colors. The combining of manufacturer and retailer information produces a complete "call to action" that gets consumers the information they want and need to make purchasing decisions, while building store and brand equity. For retailers, Insignia's POPSign program is a source of incremental revenue and is the first in-store promotion signing program that delivers a complete "call to action" on a product- and store-specific basis, with all participating retail stores updated weekly. For consumer goods manufacturers, Insignia POPSign program provides access to the optimum retail promotion site for their products - - the retail shelf-edge. In addition, manufacturers benefit from short lead times, micro-marketing capabilities, such as store-specific and multiple language options, and a wide variety of program features and enhancements that provide unique promotion advantages. The Company acquired the VALUStix program through an acquisition in December 2002, which gave the Company the opportunity to expand the offerings in its POPS division. The VALUStix program is a proprietary system that allows retailers and manufacturers to attach coupons and other promotional materials to products that are sold in grocery stores and other retail locations. The VALUStix program can deliver immediately actionable offers and information to shoppers at the point-of-purchase. The Company believes the VALUStix program will complement the POPSign program and expects there will be definite synergies to our existing business. The Company's Internet address is www.insigniasystems.com. The Company intends to make available on its Web site, beginning in April 2003, all of the reports it files with the SEC. Until then, copies can be obtained free of charge by requesting them from Insignia Systems, Inc., 6470 Sycamore Court North, Maple Grove, Minnesota 55359-6032; Attention: CFO; telephone 763-392-6200. INDUSTRY AND MARKET BACKGROUND According to Point-Of-Purchase Advertising International (POPAI), an industry non-profit trade association, more than 70% of brand purchase decisions are being made in-store. As a result, product manufacturers are constantly seeking in-store vehicles to motivate consumers to buy their branded products. Industry studies estimate that manufacturers spend approximately $850 million annually on in-store promotion efforts. The Company's market studies indicate that the shelf-edge sign represents the final and best opportunity for manufacturers to convince the consumer to buy. In fact, a 1996 industry study concluded the shelf is second only to end-aisle displays for in-store effectiveness. Page 1 Many consumers seek product information beyond price in order to make educated buying decisions. The Company's marketing studies indicate the most effective sign contains information supplied by the product manufacturer in combination with the retailer's price and design look. COMPANY PRODUCTS INSIGNIA POPSIGN PROGRAM Insignia's POPSign program is an in-store, shelf-edge point-of-purchase promotional signing program that enables manufacturers to deliver product-specific messages quickly and accurately - in designs and formats that have been pre-approved and supported by participating retailers. Insignia POPSign program delivers vital product selling information from manufacturers, such as product uses and features, nutritional information, advertising tag lines and product images. The brand information is combined with the retailer's store-specific prices and is displayed on the retailer's unique sign format that includes their logo, headline and store colors. Each sign is displayed directly in front of the manufacturer's product in the participating retailer's stores. Insignia's POPSign program offers special features and enhancements, such as Advantage and Custom Advantage flags that allow manufacturers to add visibility and highlight any message at-shelf. Insignia Color POPSign(TM) is a customizable, full-color version of POPSign that delivers image-building full-color graphics. In 2002, the Company introduced Insignia UltraColor(TM), which offers 75 percent more area for the full-color creative than Color POPSigns. Utilizing proprietary technology, the Company collects and organizes the data from both manufacturers and retailers, then formats, prints and delivers the signs to retailers for distribution and display. Store personnel place the signs at the shelf for two-week or four-week display cycles. The Company charges manufacturers for the signs placed, per cycle, and generally per store. Retailers are paid a flat fee per sign, per display cycle, by the Company based upon compliance and retailer-supplied product movement data provided to Insignia. VALUSTIX PROGRAM The VALUStix program is a proprietary system that allows retailers and manufacturers to attach coupons and other promotional materials to products that are sold in grocery stores and other retail locations. Coupons and promotional materials are applied to any product at the point-of-production in pressure sensitive booklets via customized equipment. The booklets can be adhered to all categories of products, including frozen foods, refrigerated foods, dairy products and packaged produce. THE SIGNRIGHT SIGN SYSTEM Prior to 1996, the Company's primary product offering was the Impulse Retail System, a system developed by an independent product design and development firm (the "Developer"). In 1996, the Company replaced the Impulse Retail System with the SIGNright Sign System. In 1998, the Company ceased the active domestic sales of the SIGNright Sign System. Cardstock for the two systems are sold by the Company in a variety of sizes and color that can be customized to include pre-printed custom artwork, such as a retailer's logo. Approximately 9% of 2002 revenues came from the sale of cardstock. The Company expects this percentage to be lower in the future as Insignia POPS revenue increases. STYLUS SOFTWARE In late 1993, the Company introduced Stylus, a PC-based software application used by retailers to produce signs, labels, and posters. The Stylus software allows retailers to create signs, labels and posters by manually entering the information or by importing information from a database. Approximately 2% of 2002 Page 2 revenues came from the sale of Stylus products and maintenance. The Company expects this percentage to be lower in the future as POPS revenue increases. MARKETING AND SALES The Company directly markets the Insignia POPSign program to food and drug manufacturers and retailers. By utilizing the Insignia POPSign program, these manufacturers and retailers can easily accomplish what had previously been either impossible or extremely difficult: tailoring national promotional programs to regional and local needs with minimal effort. In addition to the benefits provided to manufacturers and retailers, Insignia POPSign program provides consumers more information and clearer messages to aid in purchasing decisions. The Company believes its Insignia's POPSign program is the most complete in-store sign promotion program available, benefiting consumer, retailer, and manufacturer. Through April 1998, the Company marketed the SIGNright Sign System through telemarketing by in-house sales personnel and independent sales representatives. In May 1998, the Company discontinued the active sale of the SIGNright Sign System to U.S. customers, but continues to market it through the Company's international distributors covering 20 countries. The Company markets its Stylus software in the United States and internationally primarily through resellers that integrate Stylus as an Open Database Connectivity design and publishing component into their retail data and information management software applications. During 2002, 2001 and 2000, foreign sales accounted for approximately 2%, 4% and 8% of total net sales. The Company expects sales to foreign distributors will be less than 2% of total net sales in 2003. COMPETITION INSIGNIA POPSIGN PROGRAM Our Insignia POPSign program is competing for the marketing expenditures of branded product manufacturers for at-shelf advertising or promotion-related signage. The Insignia POPSign program has two major competitors in its market: News America Marketing In-Store(R), Inc. (News America) and FLOORgraphics(R), Inc. (FLOORgraphics). News America offers a network for in-store advertising, promotion and sales merchandising services. News America has branded their in-store shelf signage products as SmartSource Shelftalk(TM), SmartSource Shelfvision(TM) and SmartSource Price Pop(TM). FLOORgraphics offers a network for in-store advertising and promotion programs. FLOORgraphics has branded their advertising shelf signage product SHELFplus!(R). The main strengths of the Insignia POPSign program in relation to its competitors are: - the linking of manufacturers to retailers at a central coordination point - providing a complete "call to action" - supplying product-specific and store-specific messages at the retail shelf - short lead times Page 3 PATENTS AND TRADEMARKS The Company has developed and is using a number of trademarks, service marks, slogans, logos and other commercial symbols to advertise and sell its products. The Company owns U.S. registered trademarks for Insignia POPS(R), VALUStix(R), Stylus(R) and Insignia Systems, Inc. (R) (and Design). The Company is in the process of obtaining trademark registration in the United States for the trademarks "Insignia Color POPS," "POPS Select," "POPSign," "UltraColor," Insignia E-POPS," and "POPSRx." The barcode which the Company uses on the sign cards for the Impulse and SIGNright Sign Systems was also developed by the Developer, which has granted the Company an exclusive worldwide license of its rights to the barcode. The license requires the Company to pay a royalty of 1% of the net sales price received by the Company on each cardstock or other supply item that bears the barcode used by the Impulse Sign Systems. Although a patent has been issued to the Developer, which covers the use of the barcode, there is no assurance that the Company will be able to prevent other suppliers of cardstock from copying the barcode used by the Company. However, the Company believes that the number, relatively small size and geographic dispersal of Impulse and SIGNright users, their relationship with the Company and the Company's retention of its customer list as a trade secret will discourage other sign card suppliers from offering bar-coded sign cards for use on the Impulse and SIGNright machines. Key employees are required to enter into nondisclosure and invention assignment agreements, and customers, vendors and other third parties also must agree to nondisclosure restrictions prior to disclosure of our trade secrets or other confidential or proprietary information. PRODUCT DEVELOPMENT Product development for Insignia's POPSign program has been conducted internally and includes the proprietary data management and operations system, as well as the current offering of point-of-purchase and other promotion products. Ongoing internal systems enhancements, as well as the development of point-of-purchase and other promotional products, will be conducted utilizing both internal and external resources as appropriate. Product development on the SIGNright Sign System was primarily conducted by the Developer on a contract basis. The Company continues to introduce complementary products such as new cardstock formats, styles and colors. The Company plans no further development to the Stylus software product. CUSTOMERS Kellogg Company and General Mills Company accounted for 13% and 12% of the Company's total net sales for the year ended December 31, 2002. Pillsbury Company accounted for 14% of the Company's total net sales for the year ended December 31, 2001. No customers accounted for greater than 10% of the Company's total net sales for the year ended December 31, 2000. BACKLOG Sales backlog at February 28, 2003 was approximately $15 million, all of which is for delivery during 2003. The orders are believed to be firm but there is no assurance that all of the backlog will actually result in sales. Page 4 SEASONALITY Our results of operations have fluctuated from quarter to quarter due to variations in net sales and operating expenses. We generate a significant portion of our operating income in the fourth quarter of the fiscal year because of seasonal events that affect when our customers purchase Insignia POPSign programs. Any factor that negatively affects our net sales or increases our operating expenses could negatively affect our annual results of operations, and in particular, our annual results. As a result of the seasonality of our business, we may incur losses in a given quarter. In certain quarters we may realize strong sales but due to increased promotional activities and investments in growing the business, experience reduced operating income. Our results of operations fluctuate from quarter to quarter as a result of the following: o The timing of seasonal events for our customers; o The timing of new retail stores being added; o Costs associated with various promotional activities; and o Expenses incurred to support expansion strategies. SUPPLIERS The thermal paper used by the Company in its SIGNright and Impulse thermal sign cards is purchased exclusively from one supplier. While the Company believes that an alternative supplier would be available if necessary, any disruption in the relationship with or deliveries by the current supplier could have an adverse effect on the Company. The Company subcontracts with one vendor for the printing and application of the VALUStix program coupons. Although there are a limited number of printers capable of providing this service, management believes that other printers could provide the coupons on comparable terms. The time required to locate and qualify other printers, however, could cause a delay that may be financially disruptive to the Company. WORKING CAPITAL PRACTICES No special or unusual practices affect the Company's working capital. The Company generally requires payment from its customers within 30 days and pays its vendors within 45-60 days. Given the nature of the Company's business, there are no significant investments in inventory required. EMPLOYEES As of February 28, 2003, the Company had 140 employees, including all full-time and part-time employees. Item 2. Properties - ------------------ The Company is located in approximately 47,000 square feet of office and warehouse space in suburban Minneapolis, Minnesota, which has been leased until January 2010. The Company believes that this facility is meeting the Company's current and foreseeable needs. Item 3. Legal Proceedings - ------------------------- In August 2000, News America Marketing In-Store, Inc., (News America) brought suit against the Company in U.S. District Court in New York, New York. The complaint alleged that News America had exclusive promotional agreements Page 5 with certain grocery store retailers and that the promotional agreements prevented those retailers from contracting for the Company's POPSign program. The complaint also accused the Company of unfair competition, false advertising and interfering with business relationships. The Company denied any wrongful or improper action and brought a counterclaim against News America. This counterclaim alleged that News America had engaged in anti-competitive practices and was attempting to use its dominant position in the market to stifle competition and that News America's use of exclusive dealing clauses and other anti-competitive behavior violate the anti-trust laws and are unenforceable. The case and counterclaim were settled in November 2002. The terms of the settlement agreement are confidential. The settlement did not impact the Company's current operating results, nor is it expected to affect future operating results. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2002. Item 4A. Executive Officers of the Registrant - --------------------------------------------- The names, ages and positions of the Company's executive officers are as follows: Name Age Position - -------------------------------------------------------------------------------- Scott F. Drill 50 President and Chief Executive Officer Gary L. Vars 62 Chairman of the Company and President, POPS Division Denni J. Lester 44 Vice President of Finance, Chief Financial Officer and Treasurer John R. Whisnant 57 Vice President of Administration and Secretary Scott F. Drill has been President and Chief Executive Officer of the Company since February 24, 1998. From 1998 to December 2002, he was also a partner in Minnesota Management Partners (MMP), a venture capital firm located in Minneapolis, Minnesota. Mr. Drill co-founded Varitronic Systems, Inc. in 1983, and was its President and CEO until it was sold in 1996. Prior to starting Varitronics, Mr. Drill held senior management positions in sales and marketing at Conklin Company and Kroy, Inc. Gary L. Vars has been Chairman since March 2001, and President of the POPS Division since December 2002. From September 1998 to December 2002, he held the position of Executive Vice President and General Manager of the POPS Division. Prior to joining the Company in 1998, Mr. Vars spent 22 years as a marketing and business development consultant to Fortune 500 companies. From 1966 to 1976 Mr. Vars held various management positions at the Pillsbury Co., including Director of Marketing and New Product Development, Grocery Products Division. Denni J. Lester has been Vice President of Finance, Chief Financial Officer and Treasurer since December 2002. Prior to joining the Company, Ms. Lester spent 22 years at Grant Thornton LLP, a national public accounting firm, including the most recent nine years as a partner. Ms. Lester is a Certified Public Accountant. John R. Whisnant has been Vice President of Administration and Secretary since December 2002. He was Vice President of Finance and Chief Financial Officer of the Company from October 1995 to December 2002. From June 1994 to September 1995 he was self-employed as a franchise consultant. From June 1992 to June 1994 he served as President of AmericInn, Inc. a motel franchising company. From 1987 to 1992 he served as President of International Market Square, a design center and furniture mart. Mr. Whisnant is a Certified Public Accountant and a licensed attorney in the State of Minnesota. Page 6 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------- Matters ------- MARKET INFORMATION The Company's common stock trades on the Nasdaq National Market System under the symbol ISIG. The following table sets forth the range of high and low bid prices reported on the Nasdaq System. These quotations represent prices between dealers and do not reflect retail market-ups, markdowns or commission. 2002 High Low ------------------------------------------------------- First Quarter $ 9.200 $6.700 Second Quarter 10.150 6.950 Third Quarter 9.210 6.980 Fourth Quarter 11.480 8.100 2001 High Low ------------------------------------------------------- First Quarter $ 9.625 $4.875 Second Quarter 9.750 6.480 Third Quarter 8.840 5.150 Fourth Quarter 8.500 5.400 SALES OF UNREGISTERED SECURITIES On December 18, 2002, the Company completed a private placement of stock and warrants to a small group of accredited investors. The details of the transaction are described in Note 6 to the Company's Audited Financial Statements, included in this report. The transaction was exempt from registration under Rule 506 of Regulation D, and a notice of the sale was filed with the SEC on Form D. APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of February 28, 2003, the Company had one class of Common Stock beneficially held by approximately 2,840 owners. DIVIDENDS The Company has never paid cash dividends on its common stock. The Board of Directors presently intends to retain all earnings for use in the Company's business and does not anticipate paying cash dividends in the foreseeable future. Page 7 Item 6. Selected Financial Data - ------------------------------- (In thousands, except per share amounts.)
For the Years Ended December 31 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Net sales $ 24,821 $ 19,933 $ 12,830 $ 9,287 $ 8,704 Operating income (loss) 543 119 (809) (1,394) (3,396) Net income (loss) 333 121 (824) (1,411) (3,416) Net income (loss) per share: Basic and diluted $ .03 $ .01 $ (.08) $ (.16) $ (.44) Shares used in calculation of Net income (loss) per share: Basic 10,872 10,470 9,880 8,828 7,714 Diluted 11,800 11,540 9,880 8,828 7,714 Working capital $ 7,324 $ 2,883 $ 2,362 $ 1,798 $ 2,232 Total assets 16,722 6,631 5,065 4,043 4,069 Long-term debt and lease obligation - - - - 72 Total shareholders' equity 11,258 3,239 2,612 2,017 2,430
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations ------------- RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items in the Company's Statements of Operations as a percentage of total net sales. Year ended December 31 2002 2001 2000 - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 49.1 53.3 54.9 - -------------------------------------------------------------------------------- Gross profit 50.9 46.7 45.1 Operating expenses: Selling 29.6 29.2 31.9 Marketing 7.8 5.4 5.9 General and administrative 11.3 11.5 13.6 - -------------------------------------------------------------------------------- Total operating expenses 48.7 46.1 51.4 - -------------------------------------------------------------------------------- Operating income (loss) 2.2 0.6 (6.3) Other income (expense) (0.9) - (0.1) - -------------------------------------------------------------------------------- Net income (loss) 1.3% 0.6% (6.4)% - -------------------------------------------------------------------------------- The Company's critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Note 1 to the Financial Statements. These policies have been consistently applied in all material respects and address such matters as revenue recognition, depreciation methods, asset impairment recognition and deferred tax asset valuation allowances. While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported amounts are appropriate in the circumstances. Page 8 FISCAL 2002 COMPARED TO FISCAL 2001 NET SALES. Net sales for the year ended December 31, 2002 increased 24.5% to $24,821,361 compared to $19,933,166 for the year ended December 31, 2001. Service revenues from our POPSign programs for the year ended December 31, 2002 increased 39.1% to $20,114,132 compared to $14,455,158 for the year ended December 31, 2001. The increase was primarily due to a significant increase in the number of POPSign programs sold to manufacturers and partially due to a higher average selling price due to color enhancements to our POPSign program. We expect our POPSign revenues to continue to increase, both in dollar amount and as a percentage of our total net sales. We expect to generate revenues related to our recent VALUStix acquisition, primarily during the second half of the fiscal year. Product sales for the year ended December 31, 2002 decreased 14.1% to $4,707,229 compared to $5,478,008 for the year ended December 31, 2001. The decrease was primarily due to decreasing sales of our other product categories based on decreased demand for those products from our customers. We expect our sales of our other product categories to continue to decline, both in dollar amount and as a percentage of our total net sales. GROSS PROFIT. Gross profit for the year ended December 31, 2002 increased 35.6% to $12,634,871 compared to $9,316,268 for the year ended December 31, 2001. Gross profit as a percentage of total net sales increased to 50.9% for 2002 compared to 46.7% for 2001. Gross profit from our POPSign program revenues for the year ended December 31, 2002 increased 52.6% to $10,090,502 compared to $6,611,436 for the year ended December 31, 2001. The increase was primarily due to a significant increase in volume. Gross profit as a percentage of POPSign program revenues increased to 50.2% for 2002 compared to 45.7% for 2001, primarily due to a higher average selling price due to color enhancements to our POPS programs. We expect our gross profit from our POPS revenues to increase in dollar amount due to an expected increase in our POPS revenues and to decrease somewhat as a percentage of POPS revenue due to additional production equipment obtained during the fourth quarter of 2002 and the increased cost of facilities due to our corporate move in December 2002. Gross profit from our product sales for the year ended December 31, 2002 decreased 5.9% to $2,544,369 compared to $2,704,832 for the year ended December 31, 2001. The decrease was primarily due to decreased sales from our other product categories based on decreased demand for those products from our customers. Gross profit as a percentage of other sales increased to 54.1% for 2002 compared to 49.4% for 2001, primarily due to the write-off of inventory in 2001. We expect the gross profit from the sales of our other product categories to continue to decline in dollar amount and as a percentage of our total gross profit. OPERATING EXPENSES SELLING. Selling expenses for the year ended December 31, 2002 increased 26.5% to $7,354,296 compared to $5,815,454 for the year ended December 31, 2001, primarily due to an increase in the number of sales related employees due to the significant increase in the volume of POPSign program revenues and the related increased commissions expense. Selling expenses as a percentage of total net sales increased to 29.6% in 2002 compared to 29.2% in 2001, primarily due to increase decribed, net of the effect of increased total net sales. We expect selling expenses to continue to increase in dollar amount due to an expected increase in POPS revenues and the addition of employees due to the VALUStix acquisition and to decline somewhat as a percentage of net sales due to the expected increase in total net sales. MARKETING. Marketing expenses for the year ended December 31, 2002 increased 78.0% to $1,921,838 compared to $1,079,684 for the year ended December 31, 2001, primarily due to increased promotion expenses for the POPSign programs, including those related to expanding our program to the retail drug Page 9 industry. Marketing expenses as a percentage of total net sales increased to 7.8% in 2002 compared to 5.4% in 2001, primarily due to the increased promotion expenses, partially offset by the effect of higher net sales during the year. We expect marketing expenses to continue to increase in dollar amount due to expected continued investments in our POPS programs, including those related to the VALUStix program, and to decline somewhat as a percentage of net sales due to an expected increase in total net sales. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the year ended December 31, 2002 increased 22.3% to $2,816,219 compared to $2,302,361 for the year ended December 31, 2001, primarily due to increased legal fees related to the News America litigation that was settled during the fourth quarter of 2002 and expenses related to our corporate move during December 2002. General and administrative expenses as a percentage of total net sales decreased to 11.3% in 2002 compared to 11.5% in 2001, primarily due to the effect of higher total net sales during the year, offset substantially by the effect of the moving expenses and higher legal fees. We expect general and administrative expenses to be similar in dollar amount primarily due to additions to our management team, the VALUStix acquisition and the increased cost of our new facilities, offset by lower legal fees and no moving expenses, and to decline somewhat as a percentage of net sales due to an expected increase in total net sales. OTHER INCOME (EXPENSE). Other expenses of $209,820 for the year ended December 31, 2002 were primarily due to the disposition of assets related to our corporate move and a one-time fee to move to the NASDAQ National Market. NET INCOME. Our net income for the year ended December 31, 2002 was $332,698 compared to $120,830 for the year ended December 31, 2001. FISCAL 2001 COMPARED TO FISCAL 2000 NET SALES. Net sales for the year ended December 31, 2001 increased 55.4% to $19,933,166 compared to $12,830,172 for the year ended December 31, 2000. Service revenues from our POPSign programs for the year ended December 31, 2001 increased 123% to $14,455,158 compared to $6,481,341 for the year ended December 31, 2000. The increase was primarily due to a significant increase in the number of POPSign programs sold to manufacturers. Product sales for the year ended December 31, 2000 decreased 13.7% to $5,478,008 compared to $6,348,831 for the year ended December 31, 2000. The decrease was primarily due to decreasing sales of our other product categories based on decreased demand for those products from our customers. GROSS PROFIT. Gross profit for the year ended December 31, 2001 increased 60.8% to $9,316,268 compared to $5,792,546 for the year ended December 31, 2000. Gross profit as a percentage of total net sales increased to 46.7% for 2001 compared to 45.1% for 2000. Gross profit from our POPSign program revenues for the year ended December 31, 2001 increased 191.4% to $6,611,436 compared to $2,268,688 for the year ended December 31, 2000. The increase was primarily due to a significant increase in volume. Gross profit as a percentage of POPSign revenues increased to 45.7% for 2001 compared to 35.0% for 2000, primarily due to the significant increase in volume. Gross profit from our product sales for the year ended December 31, 2001 decreased 23.2% to $2,704,832 compared to $3,523,858 for the year ended December 31, 2000. The decrease was primarily due to decreased sales from our other product categories based on decreased demand for those products from our customers. Gross profit as a percentage of other sales decreased to 49.4% for 2001 compared to 55.5% for 2000, primarily due to the write-off of inventory in 2001 and the effect of lower sales. Page 10 OPERATING EXPENSES. SELLING. Selling expenses for the year ended December 31, 2001 increased 42.1% to $5,815,454 compared to $4,092,805 for the year ended December 31, 2000, primarily due to increased commissions expense due to the significant increase in total net sales. Selling expenses as a percentage of total net sales decreased to 29.2% in 2001 compared to 31.9% in 2000, primarily due to the increased expenses being more than fully offset by the effect of increased total net sales. MARKETING. Marketing expenses for the year ended December 31, 2001 increased 42.5% to $1,079,684 compared to $757,698 for the year ended December 31, 2000, primarily due to increased promotion expenses for the POPS programs. Marketing expenses as a percentage of total net sales decreased to 5.4% in 2001 compared to 5.9% in 2000, primarily due to the effect of higher total net sales during the year, somewhat offset by the increased expenses. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the year ended December 31, 2001 increased 31.5% to $2,302,361 compared to $1,751,019 for the year ended December 31, 2000, primarily due to legal fees and facility rent. General and administrative expenses as a percentage of total net sales decreased to 11.5% in 2001 compared to 13.6% in 2000, primarily due to the effect of higher total net sales during the year, somewhat offset by the increased expenses. OTHER INCOME (EXPENSE). Other income was $2,061 for the year ended December 31, 2001 compared to other expense of $14,593 for the year ended December 31, 2000, primarily due lower interest expense. NET INCOME. Our net income for the year ended December 31, 2001 was $120,830 compared to a net loss of $823,569 for the year ended December 31, 2000. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations with proceeds from public and private equity placements. At December 31, 2002, working capital was $7,324,154 compared to $2,883,375 at December 31, 2001. During the same period total cash and cash equivalents increased $4,262,133. Net cash provided by operating activities during 2002 was $898,330, primarily due to the net income and the increase in operating liabilities in excess of operating assets. Accounts receivable increased $2,215,296 in 2002 due to increased POPS revenues. Accounts payable increased $1,326,360 as a result of increased payments due to participating retailers, resulting from increased POPS revenue. Deferred revenue increased $925,788 due to the timing of the POPS program cycles at year-end. The Company expects accounts receivable to increase during 2003 as POPS revenue continues to grow. The Company expects inventory levels to remain flat during 2003. Net cash of $3,811,826 was used in investing activities in 2002, primarily due to the $3,056,186 acquisition of the VALUStix business and the purchase of property and equipment of $835,640. Net cash of $7,175,629 was provided by financing activities including $7,687,248 from the issuance of common stock, offset by payments on the line of credit of $511,619. The issuance of common stock included $7,041,340, net of expenses, related to a private placement of 816,100 shares to a small group of accredited investors during December 2002. The remaining amount related to the exercise of stock options and warrants and the issuance of shares related to the employee stock purchase plan. The Company anticipates that its working capital needs will remain consistent with prior years. The Company's $2 million line of credit with a finance institution was paid in full during 2002 and the related Page 11 agreement expired on December 31, 2002. The Company believes that it has sufficient cash resources to fund its current business operations and anticipated growth for the foreseeable future. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION Statements made in this annual report on Form 10-K, in the Company's other SEC filings, in press releases and in oral statements to shareholders and securities analysts, which are not statements of historical or current facts are "forward looking statements." Such forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward looking statements. The words "believes," "expects," "anticipates," "seeks" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date the statement was made. These statements are subject to the risks and uncertainties that could cause actual results to differ materially and adversely from the forward looking statements. These risks and uncertainties include, but are not limited to: we historically have not achieved significant earnings; our results of operations may be subject to significant fluctuations; we face significant competition from other providers of at-shelf advertising or promotion signage; reductions in advertising and promotional expenditures by branded product manufacturers due to changes in economic conditions would adversely affect us; we are dependent on the number of retailer partners; we are dependent on the success of the Insignia POPS program and expansion of the program to the retail drug industry; we may not be able to manage growth effectively; we are dependent on manufacturer partners achieving sales lift; we recently made our first business acquisition and may acquire other businesses; we are dependent on members of management team; we have a significant amount of options and warrants outstanding that could affect market price of our common stock; and the market price of our common stock has been volatile. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Not applicable. Page 12 Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------
INDEX TO FINANCIAL STATEMENTS The following Independent Auditors' Report and Financial Statements thereon are included on the pages indicated: Report of Independent Auditors..............................................................................14 Balance Sheets as of December 31, 2002 and 2001.............................................................15 Statements of Operations for the years ended December 31, 2002, 2001 and 2000...............................16 Statement of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000........................................................................17 Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000................................18 Notes to Financial Statements...............................................................................19
Page 13 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Insignia Systems, Inc. We have audited the balance sheets of Insignia Systems, Inc. as of December 31, 2002 and 2001, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also include the financial statement schedule listed in the Index at Item 15. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Insignia Systems, Inc. at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. /s/Ernst & Young LLP Minneapolis, Minnesota January 31, 2003 Page 14 INSIGNIA SYSTEMS, INC. BALANCE SHEETS
AS OF DECEMBER 31 2002 2001 - --------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,471,581 $ 2,209,448 Marketable securities - 80,000 Accounts receivable - net of $132,000 allowance in 2002 and $174,000 in 2001 5,263,701 2,995,527 Inventories 975,876 843,965 Prepaid expenses 77,248 146,002 - --------------------------------------------------------------------------------------------- Total Current Assets 12,788,406 6,274,942 PROPERTY AND EQUIPMENT: Production tooling, machinery and equipment 2,046,208 1,740,462 Office furniture and fixtures 257,547 243,051 Computer equipment 645,742 517,510 Leasehold improvements 174,143 266,836 - --------------------------------------------------------------------------------------------- Construction-in-progress 50,936 - 3,174,576 2,757,859 Accumulated depreciation and amortization (2,281,838) (2,411,900) - --------------------------------------------------------------------------------------------- Total Property and Equipment 892,738 355,959 - --------------------------------------------------------------------------------------------- OTHER ASSETS: Goodwill 3,041,186 - TOTAL ASSETS $ 16,722,330 $ 6,630,901 - --------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ - $ 511,619 Accounts payable 3,465,746 2,139,386 Accrued liabilities Commission 269,323 247,110 Employee stock purchase plan 246,120 192,624 Other 406,061 149,614 Deferred revenue 1,077,002 151,214 - --------------------------------------------------------------------------------------------- Total Current Liabilities 5,464,252 3,391,567 SHAREHOLDERS' EQUITY: Common stock, par value $.01: Authorized shares - 20,000,000 Issued and outstanding shares - 11,767,255 in 2002 and 10,614,098 in 2001 117,673 106,141 Additional paid-in capital 25,692,131 18,017,617 Accumulated deficit (14,551,726) (14,884,424) - --------------------------------------------------------------------------------------------- Total Shareholders' Equity 11,258,078 3,239,334 - --------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,722,330 $ 6,630,901 - ---------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. Page 15 INSIGNIA SYSTEMS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 2002 2001 2000 - --------------------------------------------------------------------------------------------------------- Services revenues $ 20,114,132 $ 14,455,158 $ 6,481,341 Products sold 4,707,229 5,478,008 6,348,831 - --------------------------------------------------------------------------------------------------------- Total net sales 24,821,361 19,933,166 12,830,172 Cost of services 10,023,630 7,843,722 4,212,653 Cost of goods sold 2,162,860 2,773,176 2,824,973 - --------------------------------------------------------------------------------------------------------- Total cost of sales 12,186,490 10,616,898 7,037,626 - --------------------------------------------------------------------------------------------------------- Gross Profit 12,634,871 9,316,268 5,792,546 OPERATING EXPENSES: Selling 7,354,296 5,815,454 4,092,805 Marketing 1,921,838 1,079,684 757,698 General and administrative 2,816,219 2,302,361 1,751,019 - --------------------------------------------------------------------------------------------------------- Total Operating Expenses 12,092,353 9,197,499 6,601,522 - --------------------------------------------------------------------------------------------------------- Operating Income (Loss) 542,518 118,769 (808,976) OTHER INCOME (EXPENSE): Interest income 51,810 61,895 85,607 Interest expense (61,216) (69,828) (122,053) Other income (expense) (200,414) 9,994 21,853 - --------------------------------------------------------------------------------------------------------- (209,820) 2,061 (14,593) - --------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 332,698 $ 120,830 $ (823,569) - --------------------------------------------------------------------------------------------------------- Net income (loss) per share: Basic $ .03 $ .01 $ (.08) Diluted $ .03 $ .01 $ (.08) - --------------------------------------------------------------------------------------------------------- Shares used in calculation of net income (loss) per share: Basic 10,871,594 10,470,075 9,879,546 Diluted 11,799,837 11,539,760 9,879,546 - ---------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. Page 16 INSIGNIA SYSTEMS, INC. STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Additional ------------ Paid-In Unearned Accumulated Shares Amount Capital Compensation Deficit Total - ------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 9,327,946 $ 93,279 $16,134,002 $ (28,764) $(14,181,685) $ 2,016,832 Employee stock purchase plan 56,537 566 62,755 - - 63,321 Exercise of stock options 135,000 1,350 192,448 - - 193,798 Exercise of stock warrants 767,888 7,679 1,068,896 - - 1,076,575 Stock option repricing - - 66,099 - - 66,099 Amortization of unearned compensation - - - 19,176 - 19,176 Net loss - - - - (823,569) (823,569) - ------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 10,287,371 102,874 17,524,200 (9,588) (15,005,254) 2,612,232 Employee stock purchase plan 51,735 517 153,394 - - 153,911 Exercise of stock options 212,869 2,129 330,351 - - 332,480 Exercise of stock warrants 62,123 621 (621) - - - Stock option repricing - - 10,293 - - 10,293 Amortization of unearned compensation - - - 9,588 - 9,588 Net income - - - - 120,830 120,830 - ------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 10,614,098 106,141 18,017,617 - (14,884,424) 3,239,334 Sale of common stock, net 816,100 8,161 7,033,179 - - 7,041,340 Employee stock purchase plan 43,653 437 192,074 - - 192,511 Exercise of stock options 136,944 1,369 394,240 - - 395,609 Exercise of stock warrants 156,460 1,565 56,223 - - 57,788 Other - - (1,202) - - (1,202) Net income - - - - 332,698 332,698 - ------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2002 11,767,255 $117,673 $25,692,131 $ - $(14,551,726) $11,258,078 - -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. Page 17 Insignia Systems, Inc. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 2002 2001 2000 - -------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income (loss) $ 332,698 $ 120,830 $ (823,569) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 187,720 169,013 150,150 Provision for bad debt expense (52,878) 71,790 45,000 Amortization of unearned compensation - 9,588 19,176 Stock option repricing - 10,293 66,099 Loss on disposal of property and equipment 126,141 - 3,791 Other (1,202) - - Changes in operating assets and liabilities: Accounts receivable (2,215,296) (977,531) (831,699) Inventories (131,911) 398,437 (24,618) Prepaid expenses 68,754 70,791 (142,654) Accounts payable 1,326,360 1,152,811 601,311 Accrued liabilities 332,156 38,884 191,464 Deferred revenue 925,788 (161,858) (80,248) - -------------------------------------------------------------------------------------------------------- Net Cash Provided By (Used In) Operating Activities 898,330 903,048 (825,797) INVESTING ACTIVITIES: Purchases of property and equipment (835,640) (274,919) (184,693) Purchase of marketable securities - - (160,000) Maturities of marketable securities 80,000 80,000 240,000 Cash paid for business acquisition (3,056,186) - - - -------------------------------------------------------------------------------------------------------- Net Cash Used In Investing Activities (3,811,826) (194,919) (104,693) FINANCING ACTIVITIES: Net change in line of credit (511,619) (91,233) (204,168) Proceeds from issuance of common stock, net 7,687,248 486,392 1,333,694 Principal payments on long-term debt - - (81,967) - -------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 7,175,629 395,159 1,047,559 - -------------------------------------------------------------------------------------------------------- Increase in Cash and Cash Equivalents 4,262,133 1,103,288 117,069 Cash and Cash Equivalents at Beginning of Year 2,209,448 1,106,160 989,091 - -------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 6,471,581 $ 2,209,448 $ 1,106,160 - -------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION: Cash paid during the year for interest $ 61,216 $ 69,828 $ 122,053 - --------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. Page 18 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") markets in-store promotional products, programs and services to retailers and consumer packaged goods manufacturers. The Company's products include the Insignia Point-of-Purchase Services (POPS) in-store promotion program, which includes both Insignia POPSign and VALUStix programs, thermal sign card supplies for the Company's SIGNright and Impulse systems, Stylus software and laser printable cardstock and label supplies. BASIS OF PRESENTATION. The Company has included in its financial statements the assets and liabilities recorded in connection with the acquisition of the assets comprising the VALUStix business. The results of operations related to VALUStix since December 23, 2002, the effective date, have been included in the Company's statement of operations. CASH EQUIVALENTS. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value. At December 31, 2002, $5,567,693 was invested in an overnight repurchase account and $817,861 was invested in a short-term money market account. MARKETABLE SECURITIES. Marketable securities are composed of debt securities and are classified as available-for-sale. Available-for-sale securities are carried at fair value, with any unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in other income. ACCOUNTS RECEIVABLE. The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of customers and maintains allowances for potential credit losses which, when realized, have generally been within management expectations. INVENTORIES. Inventories are primarily comprised of Impulse machines, SIGNright machines, sign cards, and accessories. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method and consist of the following: December 31, --------------------------------- 2002 2001 ---- ---- Raw materials $ 328,713 $ 250,788 Finished goods 647,163 593,177 ----------- --------- $ 975,876 $ 843,965 =========== ========= PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: Machinery and equipment 5 years Office furniture and fixtures 3 years Computer equipment 3 years Leasehold improvements are amortized over the shorter of the term of the lease or life of the asset. PRODUCTION TOOLING COSTS. Expenditures relating to the purchase and installation of production tooling are capitalized and amortized over the anticipated useful life of the product. Page 19 GOODWILL. Goodwill represents the excess of the purchase price over the fair value of the assets acquired. The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 "BUSINESS COMBINATIONS," which was effective for all business combinations initiated after June 30, 2001. The statement requires that all business combinations be accounted for under the purchase method and certain intangible assets acquired in business combinations be recorded separately from goodwill if certain requirements are met. The FASB also issued SFAS 142 "GOODWILL AND OTHER INTANGIBLE ASSETS," which was effective January 1, 2002. SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and requires that assets with an indefinite life, such as goodwill, no longer be amortized to earnings, but instead be reviewed for impairment, at least annually or whenever an impairment indicator arises. Management expects to perform a goodwill impairment test annually, which will be done on the basis of the Company as one reporting unit. IMPAIRMENT OF LONG-LIVED ASSETS. The FASB issued SFAS 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS," which was effective January 1, 2002. SFAS 144 supercedes SFAS 121 and further clarifies the accounting for disposals of long-lived assets. The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. INCOME TAXES. Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities. All of the goodwill is deductible for tax purposes. STOCK-BASED COMPENSATION. As described in Note 6, the Company has elected to follow the accounting provisions of Accounting Principles Board Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for stock-based compensation and to furnish the pro forma disclosure required under SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND Disclosure. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. REVENUE RECOGNITION. The Company recognizes revenue associated with equipment, software and sign card sales at the time the products are shipped to customers. Revenue associated with maintenance agreements is recognized ratably over the life of the contract. Revenue associated with Insignia POPS is recognized over the period of service. ADVERTISING COSTS. Advertising costs are charged to operations as incurred. Advertising expenses were approximately $385,000, $336,000 and $221,000 during the years ended December 31, 2002, 2001 and 2000. NET INCOME (LOSS) PER SHARE. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share gives effect to all diluted potential common shares outstanding during the year. Options and warrants to purchase approximately 599,000 and 455,000 shares of common stock with weighted average exercise prices of $11.04 and $7.76 were outstanding at December 31, 2002 and 2001 and were not included in the computation of common stock equivalents because their exercise prices were higher than the average fair market value of the common shares during the reporting period. For the year ended December 31, 2000, the effect of options and warrants was anti-dilutive due to the net loss incurred during the period. Page 20
2002 2001 2000 - -------------------------------------------------------------------------------------------- Denominator for basic net income (loss) per share - weighted averages shares 10,871,594 10,470,075 9,879,546 Effect of dilutive securities: Stock options and warrants 928,243 1,069,685 - - -------------------------------------------------------------------------------------------- Denominator for diluted net income (loss) per share - adjusted weighted average shares 11,799,837 11,539,760 9,879,546
USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. RECLASSIFICATIONS. Certain 2001 and 2000 amounts have been reclassified to conform to the presentation in the 2002 financial statements. 2. ACQUISITION. On December 23, 2002, the Company acquired all of the assets comprising the VALUStix business from Paul A. Richards, Inc., a New York company ("PAR"), for $3,000,000 in cash, plus a five-year royalty based on annual net sales over a threshold amount, pursuant to an Asset Purchase Agreement dated December 23, 2002 between the Company and PAR. PAR is not related to the Company in any manner. The price was determined based on the value of the assets acquired and expectations concerning future sales of the product line. The assets acquired consisted primarily of a turnkey operation related to the VALUStix business and thus most of the purchase price has been allocated to goodwill. In connection with the transaction, the Company also entered into an Employment Agreement with Paul A. Richards that is effective for five years, provides for an annual salary of $150,000 and can be terminated under certain terms and conditions, as defined in the Employment Agreement. Additionally, the Company entered into a Royalty Agreement with PAR that is effective for five years and provides for royalties to be paid to PAR for net sales of VALUStix products, based upon certain annual thresholds and varying rates of royalties, as defined in the Royalty Agreement. The Company funded the cash payment for the acquisition using a portion of the funds received from a private placement of the Company's common stock (see note 6). The acquisition was accounted for as a purchase, and accordingly, results of operations relating to the purchased assets have been included in the statement of operations from the date of acquisition. The purchase price was allocated as follows: Goodwill $3,041,186 Property and equipment 15,000 Contingent royalties will also be recorded as part of the purchase price at the time they are actually incurred. Page 21 Unaudited pro forma results of operations as if the acquisition had occurred as of January 1, 2001 are as follows: Year ended December 31, 2002 2001 ---------------- ----------------- Net sales $ 24,918,112 $20,046,787 Net loss (428,042) (848,536) Net loss per share (.04) (.08) 3. MARKETABLE SECURITIES. Marketable securities consisted of a certificate of deposit, which was pledged as collateral for the building lease agreement. Investments are classified as available-for-sale and are stated at amortized cost, which approximates fair value. As a result no unrealized gains or losses were recognized at December 31, 2001. 4. LINE OF CREDIT. The Company had a $2 million line of credit agreement with a finance institution that expired on December 31, 2002. The amount outstanding under the credit agreement was paid in full during December 2002. The credit agreement required minimum monthly interest amounts and accrued interest at a rate of 2.5% over the bank's reference rate (the reference rate was 5.5% at December 31, 2001) per annum. The Company had pledged as security all inventory, accounts receivable, equipment and general intangibles. 5. COMMITMENTS AND CONTINGENCIES. OPERATING LEASES. The Company conducts its operations in leased facilities and moved to a new location in December 2002. The Company incurred approximately $200,000 of expenses during the year ended December 31, 2002 as a result of its relocation, including the write-off of approximately $132,000 of leasehold improvements and furniture at its former location. The new operating lease is effective until January 2010. The Company also leases equipment under operating lease agreements effective through September 2005. Rent expense under all of these leases was approximately $563,000, $399,000 and $309,000 for the years ended December 13, 2002, 2001 and 2000. Minimum future lease obligations under these leases, excluding operating costs, are approximately as follows for the years ending December 31: 2003 $ 1,125,000 2004 1,154,000 2005 1,014,000 2006 597,000 2007 597,000 Thereafter 1,194,000 LEGAL. In August 2000, News America Marketing In-Store, Inc., (News America) brought suit against the Company in U.S. District Court in New York, New York. The complaint alleged that News America had exclusive promotional agreements with certain grocery store retailers and that the promotional agreements prevented those retailers from contracting for the Company's POPSign program. The complaint also accused the Company of unfair competition, false advertising and interfering with business relationships. The Company denied any wrongful or improper action and brought a counterclaim against News America. This counterclaim alleged that News America had engaged in anti-competitive practices and was attempting to use its dominant position in the market to stifle competition and that News America's use of exclusive dealing clauses and other anti-competitive behavior violate the anti-trust laws and are unenforceable. The case and counterclaim were settled in November 2002. The terms of the settlement agreement are confidential. The settlement did not impact the Company's current operating results, nor is it expected to affect future operating results. Page 22 The Company is subject to various legal proceedings in the normal course of business. Management believes the outcome of these proceedings will not have a material adverse effect on the Company's financial position or results of operations. RETAILER AGREEMENTS. The Company has contracts in the normal course of business with various retailers, some of which provide for minimum annual program levels. If those minimum levels are not met, the Company is obligated to pay the contractual difference to the retailers. During the years ended December 31, 2002, 2001 and 2000 the Company incurred approximately $112,000, $330,000 and $103,000 of costs related to these minimums. The amounts were recorded in Cost of Services in the Statements of Operations. Aggregate minimum commitment amounts under these agreements with retailers are approximately as follows for the years ending December 31: 2003 $ 5,500,000 2004 6,400,000 2005 4,600,000 2006 700,000 6. SHAREHOLDERS' EQUITY. PRIVATE PLACEMENT. On December 18, 2002, the Company closed a private placement of $7,500,000 of common stock to a small group of accredited investors at a price of $9.19 per share, pursuant to a Securities Purchase Agreement. The price represented a 15% discount from the average closing bid price of the Company's common stock over the five days prior to the closing. In connection with this transaction, the Company entered into a Registration Rights Agreement that requires the Company to register the newly issued shares within a prescribed timeframe. The Company also issued warrants to the investors entitling them to purchase an additional 244,827 shares of the Company's common stock at an exercise price of $12.44 per share for a five-year period. The warrants are callable by the Company after one year if, among other conditions, the Company's common stock has traded at 175% of the exercise price for 30 consecutive trading days. Additionally, a warrant to purchase 40,805 shares with the same terms was issued to the Placement Agent. The warrants are all exercisable at December 31, 2002. WARRANTS. In May 1999, the Company issued warrants to non-employee Board members to purchase a total of 150,000 shares of common stock in recognition for services performed as Board members of the Company. The warrants are exercisable at $2.00 per share and expire on September 28, 2004. During 1994, the Company issued five-year warrants to a consultant to purchase a total of 15,000 shares of common stock exercisable at a price of $1.50 per share. During 1999, these warrants were extended to November 22, 2004. In 1998, the Company issued three-year warrants to outside consultants to purchase 70,000 shares of common stock at $1.625 per share. The Company valued these warrants at $58,100 and recognized consulting expense associated with these warrants over the vesting period including $9,588 and $19,176 during the years ended December 31, 2001 and 2000. During 2001, 57,219 of these warrants were exercised and 12,781 of these warrants were cancelled. During 2002, various warrant holders exercised 185,000 warrants at prices ranging from $1.625 to $2.31 to purchase 156,460 net shares of the Company's common stock. The Company received proceeds of $57,788 as a result of these warrant exercises. Page 23 During 2001, various warrant holders executed a cashless exercise of 76,000 warrants at $1.625 to purchase 62,123 net shares of the Company's common stock. During 2000, various warrant holders exercised 767,888 warrants to purchase shares of the Company's common stock at prices ranging from $1.25 to $2.125. The Company received proceeds of $1,076,575 as a result of these warrant exercises. At December 31, 2002, an aggregate of 450,632 warrants are outstanding and exercisable. STOCK OPTIONS. The Company has elected to follow APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its stock-based compensation. In addition, the Company provides pro forma disclosure of stock-based compensation, as measured under the fair value requirements of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. These pro forma disclosures are provided as required under SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE. APB No. 25 requires no recognition of compensation expense for most of the stock-based compensation arrangements provided by the Company, namely, broad-based employee stock purchase plans and option grants where the exercise price is equal to the market value at the date of grant. However, APB No. 25 requires recognition of compensation expense for variable award plans over the vesting periods of such plans, based upon the then-current market values of the underlying stock. In contrast, SFAS No. 123 requires recognition of compensation expense for grants of stock, stock options, and other equity instruments over the vesting periods of such grants, based on the estimated grant-date fair values of those grants. The Company has a Stock Option Plan (the "Option Plan") for its employees and directors. Under the terms of the Option Plan, the Company grants incentive stock options to employees at an exercise price at or above 100% of fair market value on the date of grant. The Option Plan also allows the Company to grant non-qualified options at an exercise price of less than 100% of fair market value at the date of grant. The stock options expire five or ten years after the date of grant and typically vest in one-third increments on the first, second and third anniversaries of the grant date. Page 24 The following tables summarizes activity under the Option Plan:
Plan Shares Plan Weighted Available Options Average Exercise for Grant Outstanding Price Per Share - -------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 12,443 1,284,000 $ 1.38 Reserved 200,000 - - Granted (261,600) 261,600 4.84 Exercised - (135,000) 1.44 Cancelled 54,350 (54,350) 1.50 - -------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 5,193 1,356,250 2.04 Reserved 500,000 - - Granted (582,600) 582,600 7.52 Exercised - (212,869) 1.56 Cancelled 129,165 (129,165) 6.58 - -------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 51,758 1,596,816 3.74 Reserved 250,000 - - Granted (400,800) 400,800 9.36 Exercised - (136,944) 2.86 Cancelled 114,665 (114,665) 7.08 - -------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 15,623 1,746,007 $ 4.88 - --------------------------------------------------------------------------------------------------------------
The number of options exercisable under the Option Plan were: December 31, 2000 849,994 December 31, 2001 911,294 December 31, 2002 1,102,758 The following table summarizes information about the stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable ----------------------------------------------------- ---------------------------------------- Weighted Weighted Weighted Ranges of Average Average Number Average Exercise Number Remaining Exercise Price Exercisable at Exercise Price Prices Outstanding Contractual Life Per Share December 31, 2002 Per share ------------------ ---------------- -------------------- ----------------- ---------------------- ------------------ $0.75 - $1.06 461,333 0.3 years $1.05 461,333 $1.05 1.25 - 2.38 331,416 1.6 years 1.62 313,916 1.63 4.00 - 6.12 190,259 4.5 years 4.65 135,393 4.72 6.35 - 8.97 455,199 8.8 years 7.92 172,049 7.91 9.30 - 11.36 307,600 9.8 years 9.77 20,067 9.30 ------------------ ---------------- -------------------- ----------------- ---------------------- ------------------ $0.75 - $11.36 1,746,007 5.0 years $4.88 1,102,758 $2.89
Options outstanding under the Option Plan expire at various dates during the period January 2003 through December 2012. In electing to continue to follow APB No. 25 for expense recognition purposes, the Company is obliged to provide the expanded disclosures required under SFAS No. 148 for stock-based compensation granted, including, if materially different from reported results, disclosure of pro forma net income (loss) and net income (loss) per share had compensation expense relating to grants been measured under the fair value recognition provisions of SFAS No. 123. Page 25 The weighted average fair values of options granted during the years ended December 31, 2002, 2001 and 2000 were $4.98, $4.63 and $2.58 and were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants during the years ended December 31, 2002, 2001 and 2000: risk-free interest rate of 4.09%, 5.12% and 6.0%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of .784, .898 and .766 and a weighted average expected life of the option of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense on a straight-line basis over the options' vesting period. The Company's pro forma information is as follows: 2002 2001 2000 - ------------------------------------------------------------------------------- Net income (loss) as reported $ 332,698 $ 120,830 $ (823,569) Pro forma effect of stock-based compensation (1,113,786) (661,264) (499,530) ----------- ------------ ------------ Pro forma net (loss) $ (781,088) $ (540,434) $ (1,323,099) Pro forma net (loss) per share $ (.07) $ (.05) $ (.13) These effects may not be representative of the future effects of applying the fair value method. EMPLOYEE STOCK PURCHASE PLAN. The Company has an Employee Stock Purchase Plan (the "Plan") that enables employees to contribute up to 10% of their compensation toward the purchase of the Company's common stock at 85% of market value. During the years ended December 31, 2002, 2001 and 2000, employees purchased 43,653, 51,735 and 56,537 shares under the Plan. At December 31, 2002, 178,986 shares are reserved for future employee purchases of common stock under the Plan. 7. INCOME TAXES. At December 31, 2002, the Company had net operating loss carryforwards of approximately $15,000,000, which are available to offset future taxable income. These carryforwards are subject to the limitations of Internal Revenue Code Section 382. This section provides limitations on the availability of net operating losses to offset current taxable income if an ownership change has occurred as defined by Internal Revenue Code Section 382. These carryforwards will begin expiring in 2005. The Company has established a valuation allowance due to uncertainties regarding the realization of deferred tax assets based on the Company's lack of historical earnings. The Company will continue to assess the valuation allowance and to the extent it is determined that said allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized in the future. Included as part of the Company's net operating loss carryforwards are approximately $1,300,000 in tax deductions that resulted from the exercise of stock options. When these loss carryforwards are realized the corresponding changes in the valuation allowance will be recorded as additional paid-in capital. Page 26 Significant components of the deferred taxes are as follows: As of December 31 2002 2001 - ------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Net operating loss carryforwards $ 5,805,000 $ 5,588,300 Depreciation - 49,400 Accounts receivable allowance 49,000 64,500 Inventory reserve 34,000 64,300 Other 21,000 20,500 - ------------------------------------------------------------------------------- Deferred tax assets 5,909,000 5,787,000 Less valuation allowance (5,909,000) (5,787,000) - ------------------------------------------------------------------------------- Net deferred taxes $ - $ - =============================================================================== 8. EMPLOYEE BENEFIT PLANS. The Company has a Retirement Profit Sharing and Savings Plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to defer up to 15% of their income on a pre-tax basis through contributions to the plan. The Company may make matching contributions with respect to salary deferral at a percentage to be determined by the Company each year. During the years ended December 31, 2002, 2001 and 2000, the Company made no matching contributions. 9. CONCENTRATIONS. MAJOR CUSTOMERS. During the year ended December 31, 2002 two customers accounted for 13% and 12% of the Company's total net sales. At December 31, 2002 these two customers represented 7% and 20% of the Company's total accounts receivable. During the year ended December 31, 2001 another customer accounted for 14% of the Company's total net sales. Although there are a number of customers that the Company sells to, the loss of a major customer could cause a delay in and possible loss of sales, which would adversely affect operating results. EXPORT SALES. Export sales accounted for 2%, 4% and 8% of total net sales during the years ended December 31, 2002, 2001 and 2000. SUPPLIERS. The Company currently buys the components of its products from sole suppliers. Although there are a limited number of manufacturers capable of manufacturing these components, management believes that other manufacturers could adapt to provide the components on comparable terms. The time required to locate and qualify other manufacturers, however, could cause a delay in manufacturing that may be financially disruptive to the Company. The Company subcontracts with one vendor for the printing and application of the VALUStix coupons. Although there are a limited number of printers capable of providing this service, management believes that other printers could provide the coupons on comparable terms. The time required to locate and qualify other printers, however, could cause a delay that may be financially disruptive to the Company. Page 27 10. QUARTERLY FINANCIAL DATA. (Unaudited) Quarterly data for the years ended December 31, 2002 and 2001 was as follows:
YEAR ENDED DECEMBER 31, 2002 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER - ------------------------------------------------------------------------------------------------------------------- Net sales $ 6,015,117 $ 5,822,882 $ 5,075,908 $ 7,907,454 Gross profit 2,940,944 3,032,294 2,239,125 4,422,508 Net income (loss) 319,905 201,713 (499,216) 310,296 Net income (loss) per share: Basic $ .03 $ .02 $ (.05) $ .03 Diluted $ .03 $ .02 $ (.05) $ .03 YEAR ENDED DECEMBER 31, 2001 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER - ------------------------------------------------------------------------------------------------------------------- Net sales $ 5,147,500 $ 4,625,223 $ 3,997,460 $ 6,162,983 Gross profit 2,445,568 2,046,731 1,700,027 3,123,942 Net income (loss) 301,127 (99,173) (492,523) 411,399 Net income (loss) per share: Basic $ .03 $ (.01) $ (.05) $ .04 Diluted $ .03 $ (.01) $ (.05) $ .04
Reclassifications of certain selling and marketing expenses to cost of sales have been made for all periods presented to be consistent with the annual presentation of the Statements of Operations. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------- Financial Disclosures --------------------- None. Page 28 PART III. Item 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- Information concerning Executive Officers of the Company is included in this Annual Report in Item 4A under the caption "Executive Officers of the Registrant." The information required by Item 10 concerning the directors of the Company is incorporated herein by reference to the Company's proxy statement for its 2003 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 11. Executive Compensation - ------------------------------- The information required by Item 11 is incorporated herein by reference to the Company's proxy statement for its 2003 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------ The information required by Item 12 is incorporated by reference to the Company's proxy statement for its 2003 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The information required by Item 13 is incorporated by reference to the Company's proxy statement for its 2003 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 14. Controls and Procedures - --------------------------------- (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer, Scott F. Drill, and Chief Financial Officer, Denni J. Lester, have reviewed the Company's disclosure controls and procedures within 90 days prior to the filing of this report. Based upon this review, these officers believe that the Company's disclosure controls and procedures are effective in ensuring that material information related to the Company is made known to them by others within the Company. (b) Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls during the year covered by this report or from the end of the reporting period to the date of this Form 10-K. Page 29 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- The following financial statements of Insignia Systems, Inc. are included in Item 8: Report of Independent Auditors Balance Sheets as of December 31, 2002 and 2001 Statements of Operations for the years ended December 31, 2002, 2001 and 2000 Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000 Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 Notes to Financial Statements The following schedule of Insignia Systems, Inc. is included in Item 15: Schedule II. Valuation and Qualifying Accounts (a) Exhibits
Exhibit Page Number or Incorporation Number Description By Reference To - ---------------- ---------------------------------------- ------------------------------------------------- 2 Asset Purchase Agreement dated Exhibit 2 of the Registrant's Form 8-K filed December 23, 2002 between Insignia December 31, 2002 Systems, Inc. and Paul A. Richards, Inc. (omitted schedules available upon request) 3.1 Articles of Incorporation of Exhibit 3.1 of the Registrant's Registration Registrant, as amended to date Statement on Form S-18, Reg. No. 33-40765C 3.2 Bylaws, as amended to date Exhibit 3.2 of the Registrant's Registration Statement on Form S-18, Reg. No. 33-40765C 4.1 Specimen Common Stock Certificate of Exhibit 4.1 of the Registrant's Registration Registrant Statement on Form S-18, Reg. No. 33-40765C 4.2 Securities Purchase Agreement dated Exhibit 4.1 of the Registrant's Form 8-K filed December 18, 2002 among Insignia December 31, 2002 Systems, Inc. and the Purchasers 4.3 Registration Rights Agreement dated Exhibit 4.2 of the Registrant's Form 8-K filed December 18, 2002 among Insignia December 31, 2002 Systems, Inc. and the Purchasers 4.4 Form of Warrant dated December 18, Exhibit 4.3 of the Registrant's Form 8-K filed 2002 between Insignia Systems, Inc. December 31, 2002 and the Holders 10.1 Employment Agreement dated December Exhibit 10.1 of the Registrant's Form 8-K filed 23, 2002 between Insignia Systems, December 31, 2002 Inc. and Paul A. Richards 10.2 Royalty Agreement dated December 23, Exhibit 10.2 of the Registrant's Form 8-K filed 2002 between Insignia Systems, Inc. December 31, 2002 and Paul A. Richards, Inc. 10.3 The Company's 1990 Stock Plan, as Exhibit 10.3 of the Registrant's Annual Report amended on Form 10-K for the year ended December 31, 2001 10.4 Certificate of Amendment to 1990 Stock Filed herewith Option Plan 10.5 Lease Agreement between Plymouth Exhibit 10.6 of the Registrant's Annual Report Partners II, and the Company, dated on Form 10-K for the year ended December 31, October 5, 1998 1998 10.6 Lease Agreement between 321 Filed herewith Corporation and the Company, dated October 31, 2002
Page 30
Exhibit Page Number or Incorporation Number Description By Reference To - ---------------- ---------------------------------------- ------------------------------------------------- 10.7 License Agreement between Thomas and Exhibit 10.1 of the Registrant's Registration Lawrence McGourty and the Company Statement on Form S-18, Reg. No. 33-40765C dated January 23, 1990, as amended 10.8 Barcode License and Support Agreement Exhibit 10.2 of the Registrant's Registration between Thomas and Lawrence McGourty Statement on Form S-18, Reg. No. 33-40765C and the Company dated January 23, 1990 10.9 Employee Stock Purchase Plan, as Exhibit 10.9 of the Registrant's Annual Report amended on Form 10-K for the year ended December 31, 2000 23 Consent of Ernst & Young LLP Filed herewith 25 Power of Attorney (See signature page Filed herewith of this Form 10-K) 99.1 Certification of CEO Filed herewith 99.2 Certification of CFO Filed herewith
(b) Reports on Form 8-K The Company filed a report on Form 8-K on December 31, 2002 under Items 2 and 5, to report the acquisition of the assets comprising the VALUStix business and the completion of a private placement of $7,500,000 of common stock. Page 31 SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning Costs and Deductions End of Period Description of Period Expenses Describe - -------------------------------------- ------------ ------------- -------------- --------------- Year ended December 31, 2002 Allowance for doubtful accounts $ 174,194 $(52,878) $(10,684) (1) $ 132,000 Provision for obsolete inventory 46,365 55,000 51,592 (3) 49,773 - --------------------------------------------------------------------------------------------------------------- Year ended December 31, 2001 Allowance for doubtful accounts 106,242 71,790 3,838 (1) 174,194 Provision for normal returns and rebates 15,840 - 15,840 (2) - Provision for obsolete inventory 67,209 33,000 53,844 (3) 46,365 - --------------------------------------------------------------------------------------------------------------- Year ended December 31, 2000 Allowance for doubtful accounts 70,917 45,000 9,675 (1) 106,242 Provision for normal returns and rebates 15,840 - - 15,840 Provision for obsolete inventory 61,960 91,000 85,751 (3) 67,209
- -------------------------------------------------- (1) Uncollectable accounts written off, net of recoveries. (2) Credited to income. (3) Inventory scrapped and disposed of. Page 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: /s/ Scott F. Drill --------------------------- Scott F. Drill President and CEO Dated: March 10, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. Power of Attorney Each person whose signature appears below constitutes and appoints Denni J. Lester his true and lawful attorney-in-fact and agent, acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all said attorney-in-fact and agent, acting alone, or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Title Date - ------------------------------- -------------------------------------------------- ----------------------- /s/ Gary L. Vars Chairman of the Company and March 10, 2003 - --------------------------- President, Insignia POPS Division Gary L. Vars /s/ Scott F. Drill President and Chief Executive Officer (principal March 10, 2003 - --------------------------- executive officer) Scott F. Drill /s/ Denni J. Lester Vice President, Finance, CFO and Treasurer March 10, 2003 - --------------------------- (principal financial officer) Denni J. Lester /s/ Erwin A. Kelen Director March 10, 2003 - --------------------------- Erwin A. Kelen /s/ Donald Kramer Director March 10, 2003 - --------------------------- Donald Kramer /s/ W. Robert Ramsdell Director March 10, 2003 - --------------------------- W. Robert Ramsdell /s/ Gordon F. Stofer Director March 10, 2003 - --------------------------- Gordon F. Stofer /s/ Frank D. Trestman Director March 10, 2003 - --------------------------- Frank D. Trestman
Page 33 CERTIFICATIONS I, Scott F. Drill, certify that: 1. I have reviewed this annual report on Form 10-K of Insignia Systems, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the Company, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 10, 2003 /s/ Scott F. Drill ----------------------------------- Scott F. Drill President and Chief Executive Officer 34 I, Denni J. Lester, certify that: 1. I have reviewed this annual report on Form 10-K of Insignia Systems, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the Company, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 10, 2003 /s/ Denni J. Lester -------------------------- Denni J. Lester Vice President, Finance And Chief Financial Officer 35
EX-10.4 3 isig031093_ex10-4.txt CERTIFICATE OF AMENDMENT EXHIBIT 10.4 CERTIFICATE OF AMENDMENT TO 1990 STOCK PLAN The undersigned, Secretary of Insignia Systems, Inc., hereby certifies that the following resolution was adopted by the Board of Directors on January 27, 2003, and remains in full force and effect: RESOLVED, that for the purpose of allowing all holders of the Company's stock options to pay the exercise price with previously-owned shares, Section 5(d) of the 1990 Stock Option Plan entitled "Stock Options - Method of Exercise" is hereby amended as follows (with the new language in italics): (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. PAYMENT IN FULL OR IN PART FOR THE EXERCISE OF A STOCK OPTION MAY ALSO BE MADE IN THE FORM OF UNRESTRICTED STOCK ALREADY OWNED BY THE OPTIONEE (BASED ON THE MARKET PRICE OF THE STOCK ON THE DATE THE OPTION IS EXERCISED). If the terms of an option so permit, an optionee may elect to pay all or part of the option exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate option exercise price for the shares with respect to which such election is made. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 10. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 4th day of March, 2003. /s/ John R. Whisnant ------------------------------------ John R. Whisnant, Secretary EX-10.6 4 isig031093_ex10-6.txt STANDARD COMMERCIAL LEASE EXHIBIT 10.6 STANDARD COMMERCIAL LEASE ARTICLE 1. BASIC LEASE TERMS 1.1 PARTIES. This lease agreement ("Lease") is entered into this 31st day of October, 2002, by and between 321 Corporation, a Minnesota Limited Liability Corporation ("Landlord") and Insignia Systems, Inc. a Minnesota Corporation ("Tenant"). 1.2 PREMISES. In consideration of the rents, terms, provisions and covenants of this Lease, Landlord hereby leases, lets and demises to Tenant the following described premises ("Premises") as illustrated on Exhibit A attached hereto: approximately 47,000 square feet of office/warehouse space located at 6464 Sycamore Court, Maple Grove, MN 55369, Minnesota ("Building") which consists of approximately 79,937 square feet, as legally described on Exhibit B attached hereto. The square footage of the Premises was calculated by a certified and registered architect in accordance with the ANSI/BOMA standard for measuring floor area publication dated June 7,1996. The improvements to the Premises shall consist of the Schedule of Additional Leasehold lmprovements attached hereto as Exhibit D which shall detail the improvements, if any, to be installed at the expense of Landlord or Tenant, as set forth on Exhibit D. 1.3 TERM. Subject to and upon the conditions set forth herein, the term of this Lease shall commence on January 15, 2003 the "Commencement Date") and shall terminate eighty-four (84) months thereafter on January 14, 2010, unless sooner terminated or extended as hereinafter provided. 1.4 BASE RENT. Base rent is: Month Monthly Base Rent 1-60 $49,741.67 61-84 $49,741.67 plus the percentage increase in the CPI from 1/1/03-- 12/31/07. 1.5 ADDRESSES. Landlord's Address: Tenant's Address: c/o Hoyt Properties, Inc. Insignia Systems, Inc. 708 South Third Street 6464 Sycamore Court Suite 108 Maple Grove, MN 55369 Minneapolis, MN 55415 1.6 PERMITTED USE. General office and warehouse and printing operations. 1.7 SECURITY DEPOSIT. -0- 1.8 PRO RATA SHARE. 58.67% subject to adjustment as provided in Section 2.2 hereof. 1.9 EARLY OCCUPANCY. It is agreed and understood that Tenant shall have Early Occupancy of the Premises on December 1, 2002 for the purpose of facility set-up as well as operating its business. It is also agreed and understood that for such early occupancy period (December 1, 2002 and including January 14, 2003) Tenant shall be under all the terms and conditions of this Lease including providing proof of insurance coverage and converting gas and electrical service to Tenant's account except Tenant shall not be required to pay Base Rent and Operating Expenses. If early occupancy on December 1, 2002 cannot be achieved the Commencement Date shall be extended by the same number of days that it took beyond December 1, 2002. 1.10 RIGHT OF FIRST REFUSAL. Tenant shall have the right of first refusal for any contiguous space that becomes available during the Lease Term. ARTICLE 2. RENT 2.1 BASE RENT. Tenant agrees to pay monthly as base rent during the term of this Lease the sum of money set forth in Section 1.4 of this Lease, which amount shall be payable to Landlord at the address shown above. One monthly installment of rent shall be due and payable on the date of execution of this Lease by Tenant for the first month's rent and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the Rent Commencement Date during the term of this Lease; provided, if the Rent Commencement Date should be a date other than the first day of a calendar month, the monthly rental set forth above shall be prorated to the end of that calendar month, and all succeeding installments of rent shall be payable on or before the first day of each succeeding calendar month during the term of this Lease. Tenant shall pay, as additional rent, all other sums due under this Lease. Notwithstanding anything in this Lease to the contrary, if Landlord, for any reason whatsoever (other than Tenant's default), cannot deliver possession of the Premises to the Tenant on the Rent Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, nor shall the expiration of the term be extended, but all rent shall 2 be abated until Landlord delivers possession. All base rent, additional rent and other sums payable by Tenant pursuant to this Lease are payable without demand and without any reduction, abatement, counterclaims or setoff. 2.2 OPERATING EXPENSES. Tenant shall also pay as additional rent commencing on the Commencement Date, Tenant's pro rata share of the operating expenses of Landlord for the Building and/or project of which the Premises are a part. Landlord may invoice Tenant monthly for Tenant's pro rata share of the estimated operating expenses for each calendar year, which amount shall be adjusted from time-to-time by Landlord based upon anticipated operating expenses. Within ninety (90) days following the close of each calendar year, Landlord shall provide Tenant an accounting showing in reasonable detail all computations of additional rent due under this Section. In the event the accounting shows that the total of the monthly payments made by Tenant exceeds the amount of additional rent due by Tenant under this Section, the accounting shall be accompanied by evidence of a credit to Tenant's account. In the event the accounting shows that the total of the monthly payments made by Tenant is less than the amount of additional rent due by Tenant under this Section, the accounting shall be accompanied by an invoice for the additional rent. Notwithstanding any other provision in this Lease, during the year in which this Lease terminates, Landlord, prior to the termination date, shall have the option to invoice Tenant for Tenant's pro rata share of the operating expenses based upon the previous year's operating expenses. If this Lease shall terminate on a day other than the last day of a calendar year, the amount of any additional rent payable by Tenant applicable to the year in which the termination shall occur shall be prorated on the ratio that the number of days from the commencement of the calendar year to and Including such termination date bears to 365. Tenant agrees to pay any additional rent due under this Section within ten (10) days following receipt of the invoice or accounting showing additional rent due. Tenant's pro rata share set forth in Section 1.8 shall be equal to a percentage based upon a fraction the numerator of which is the total area of the Premises as set forth in Article 1, subject to adjustment as provided in this Lease, and the denominator of which shall be the net rentable area of the Building. Upon termination of the Lease, Landlord and Tenant agree to reconcile within sixty (60) days any amounts due from either party for the over payment or underpayment of operating expenses by Tenant. 2.3 DEFINITION OF OPERATING EXPENSES. The term "operating expenses" includes all expenses incurred by Landlord with respect to the maintenance and operation of the Building of which the Premises are a part, including, but not limited to, the following: maintenance, repair and replacement costs; electricity, fuel, water, sewer, gas and other common Building utility charges; signage; equipment used for maintenance and operation of the Building; security charges; security, window washing and janitorial services; trash and snow removal; landscaping and pest control; management fees, wages and benefits payable to employees of Landlord whose duties are directly connected with the operation and maintenance of the Building; all services, supplies, repairs, replacements or other expenses for maintaining and operating the Building or project including parking and common areas; improvements made to the Building which are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed; installation of any device or other equipment which improves the operating efficiency of any system within 3 the Premises and thereby reduces operating expenses; all other expenses which would generally be regarded as operating, repair, replacement and maintenance expenses; all real property taxes and installments of special assessments, including dues and assessments by means of deed restrictions and/or owners' associations which accrue against the Building during the term of this Lease and legal fees incurred in connection with actions to reduce the same; except that Tenant shall have the right to approve legal fees associated with reducing taxes; and all insurance premiums Landlord is required to pay or deems necessary to pay, including fire and extended coverage, rent loss and public liability insurance, with respect to the Building. Notwithstanding the foregoing, operating expenses shall not include the following: a) The cost of decorating, redecorating, special cleaning, or other services not provided on a regular basis to all tenants of the Building. b) Any costs associated with the initial interior or exterior landscaping and the purchase, rental or maintenance of sculpture, paintings, or other objects purporting to be art for the Building and Common Areas. c) Landlord's general overhead except to the extent it is expended in direct connection with the management and operation of the Building. d) Wages, salaries, fees, and fringe benefits paid to administrative or executive personnel or officers or partners of Landlord. e) Any charge for depreciation or amortization (except as specifically noted herein) of the Building or equipment. f) All costs relating to activities for the solicitation and execution of leases for space in the Building. g) All costs for which Tenant or any other tenant in the Building is being charged other than pursuant to similar "operating costs" clauses. h) Except as provided in section i., the costs of structural repairs and/or replacements including the cost of correcting defects in the construction of the Building or other structures which are a part of the project and the related equipment and any other costs that are considered to be of a capital nature under generally accepted accounting principles consistently applied, including, but not limited to, capital improvements, capital repairs, capital equipment, capital tools, and other capital items. i) Any such capital improvements made to reduce operation expenses may be amortized over the longest useful life of improvement on a straight line basis. The amount amortized in any year shall be an amount not to exceed the amount of the net reduction or operating cost savings resulting in such year from the improvements. 4 j) Costs of initial cleaning of, and rubbish removal from, the building to be performed prior to final completion of construction of the Building or Common Areas. k) The cost of any repair made by Landlord because of the total or partial destruction of the Building or the condemnation of a portion of the Building. l) Repairs, alterations, additions, improvements or replacements made to rectify or correct any defect m) Repairs or replacements covered by warranties or guaranties to the extent of service or payment thereunder. n) Any insurance premium to the extent that Landlord is entitled to be reimbursed for it by Tenant pursuant to Tenant's Lease or by any tenant of the Building pursuant to a similar lease other than pursuant to causes comparable to this "operating costs" clause and any insurance premium increase caused by rerating of the Building caused by other tenants' uses. o) The costs of any items for which Landlord is reimbursed by insurance or otherwise compensated by a tenant or another party other than by tenant of the Building pursuant to clauses similar to this "operating costs" clause. p) Any operating cost representing an amount paid to Landlord or a related corporation, entity or person which is in excess of the amount which would be paid in the absence of such a relationship. q) The cost of any work or services performed for or facilities furnished to any tenant of the Building to a greater extent or in a manner more favorable to such tenant than performed or furnished to tenant. r) Costs, including costs of plans, construction, permit, license and inspection costs, incurred with respect to the installation of tenant improvements made for tenants in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenant or other occupants of the Building. s) The cost of regular and overtime wages and salaries or any other expenses to Landlord in curing its defaults or performing work expressly provided in this Lease to be borne at Landlord's expense. t) Any costs, fines, or penalties incurred due to violation by the Landlord of any laws or other governmental rule or authority. u) Damage and repairs necessitated by the negligence or willful misconduct of Landlord or Landlord's employees, contractors or agents. 5 v) Promotional and advertising expense. w) Attorney's, accountants and other professionals fees and expenses incurred in connection with: negotiations or disputes with tenants, other occupants, or prospective tenants or other occupants; accounting, legal or other professional fees relating to the ownership, construction, sale or any litigation relating to the Building or the Project except as specifically provided in this Lease. x) Finance charges, interest and other payments on any mortgages and/or other debt encumbering the Building or Common Areas, or obligation in the nature of a mortgage or other project financing and rental payments on any ground lease or other underlying lease. y) Rental payments incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature, except operating/maintenance equipment not affixed to the Building or Common Areas which is used in providing janitorial or similar services. z) The costs resulting from Landlord's default or from the default of any other tenant. aa) The costs for any activity (including but not limited to legal fees) associated. with the removal, correction or clean up of toxic or hazardous waste in the Building, Premises or future expansion areas or the project. bb) Costs relating to compliance with laws regarding CCFC's and HCFC's. cc) Any costs associated with modifications made to the Building in order to comply with the requirements of laws including without limitation the Americans with Disabilities Act. dd) Any property management fee (or similar operating agreement fee) shall be as charged as an operating expense to all other Building tenants, but in no event shall be in excess of 5% of all Base Rent and Additional Rent payable by Tenant to Landlord hereunder and shall include all costs associated with the delivery of such service including, but not limited to, the property management office and all other building personnel except building engineer(s) and janitorial services. ee) Any charge for Landlord's income tax. excess profit tax, franchise tax, gross receipts, or like tax on Landlord's business or resulting from Tenant's lease with Landlord. ff) Except on a temporary basis (not to exceed one (1) month) in cases of emergency or except for items as to which Tenant shall specifically agree in advance in writing, the costs of renting or leasing capital items, the cost of which could not be amortized 6 as an operating expense under (i) above but such costs may be included in amortization of capital improvements made to reduce operating expenses to the extent permitted in section i. gg) Auditing fees. hh) The cost of subscriptions, political donations, professional fees (except as specifically provided in the Lease), travel costs, automobile allowance, entertainment and all other dues and donations. ii) Insurance expense and costs incurred for other than Building Operations (including without limitation rent insurance, Directors and Officers insurance and personal general liability insurance for any employee of Landlord). jj) Insurance any charges that would result in Landlord collecting in excess of one hundred percent (100%) of all Operating Expenses. kk) No profit or administrative charges shall be included in Operating Expenses. 2.4 LATE PAYMENT CHARGE. If the monthly rental payment or any other payment due from Tenant to Landlord is not received by Landlord on or before the due date thereof, Landlord shall be entitled to exercise any remedy for nonpayment provided in this Lease and, in addition, if such payment is not received on or before five (5) days after the due date, a late payment charge of five percent (5%) of such past due amount shall become due and payable by Tenant in addition to such amounts owed under this Lease. 2.5 INCREASE IN INSURANCE PREMIUMS. If an increase in any insurance premiums paid by Landlord for the Building is caused by Tenant's use of the Premises or if Tenant vacates the Premises and causes an increase in such premiums, then Tenant shall pay as additional rent the amount of such increase to Landlord. 2.6 HOLDING OVER. In the event that Tenant does not vacate the Premises upon the expiration or termination of this Lease, Tenant shall be a tenant at will for the holdover period and all of the terms and provisions of this Lease shall be applicable during that period, except that Tenant shall pay Landlord as base rental for the period of such holdover an amount equal to one and one-half (1-1/2) times the base rent which would have been payable by Tenant had the holdover period been a part of the original term of this Lease, together with all additional rent as provided in this Lease. Tenant agrees to vacate and deliver the Premises to Landlord upon Tenant's receipt of notice from Landlord to vacate. The rental payable during the holdover period shall be payable to Landlord on demand. No holding over by Tenant, whether with or without the consent of Landlord, shall operate to extend the term of this Lease. 7 ARTICLE 3. OCCUPANCY AND USE 3.1 USE. Tenant warrants and represents to Landlord that the Premises shall be used and occupied only for the purpose as set forth in Section 1.6. Tenant shall occupy the Premises, conduct its business and control its agents, employees, invitees and visitors in such a manner as is lawful, reputable and will not create a nuisance. Tenant shall not permit any operation which emits any odor or matter which intrudes into other portions of the Building, use any apparatus or machine which makes undue noise or causes vibration in any portion of the Building or otherwise interfere with, annoy or disturb any other lessee in its normal business operations or Landlord in its management of the Building. Tenant shall neither permit any waste on the Premises nor allow the Premises to be used in any way which would in the opinion of Landlord, be extra hazardous on account of fire or which would in any way increase or render void the fire insurance on the Building. 3.2 SIGNS. No sign of any type or description shall be erected, placed or painted in or about the Premises or project except those signs submitted to Landlord in writing and approved by Landlord in writing, and which signs are in conformance with Landlord's sign criteria established for the project, attached hereto as Exhibit E. 3.3 COMPLIANCE WITH LAWS, RULES AND REGULATIONS. Tenant, at Tenant's sole cost and expense, shall comply with all laws, ordinances, orders, rules and regulations of state, federal, municipal or other agencies or bodies having jurisdiction over the use, condition or occupancy of the Premises. Tenant will comply with the rules and regulations of the Building adopted by Landlord, including those attached hereto as Exhibit F. Landlord shall have the right at all times to change and amend the rules and regulations in any reasonable manner as may be deemed advisable for the safety, care, cleanliness, preservation of good order and operation or use of the Building or the Premises. All changes and amendments to the rules and regulations of the Building will be sent by Landlord to Tenant in writing and shall thereafter be carried out and observed by Tenant. Landlord agrees to enforce any such rules and regulations in a non-discriminatory manner. 3.4 WARRANTY OF POSSESSION. Landlord warrants that it has the right and authority to execute this Lease, and Tenant, upon payment of the required rents and subject to the terms, conditions, covenants and agreements contained in this Lease, shall have possession of the Premises during the full term of this Lease as well as any extension or renewal thereof. Landlord shall not be responsible for the acts or omissions of any other lessee or third party that may interfere with Tenant's use and enjoyment of the Premises. 3.5 RIGHT OF ACCESS. Landlord or its authorized agents shall at any and all reasonable times upon reasonable verbal notice have the right to enter the Premises to inspect the same, to show the Premises to prospective purchasers or lessees, and to alter, improve or repair the Premises or any other portion of the Building, however Landlord agrees to not show the Premises to prospective Lessee's prior to six (6) months before lease expiration unless otherwise permitted. Landlord shall have the right to use any and all means which Landlord may deem proper to open any door in an emergency without liability therefore. 8 Tenant shall permit Landlord to erect, use, maintain and repair pipes, cables, conduits, plumbing, vents and wires in, to and through the Premises as often and to the extent that Landlord may nor or hereafter deem to be necessary or appropriate for the proper use, operation and maintenance of the Building. 3.6 ACCEPTANCE. Upon substantial completion of Landlord's work, Landlord and Tenant shall schedule a walkthrough inspection of the Premises and shall mutually agree upon a list of punchlist items. Landlord shall diligently proceed to complete such punchlist items. Subject to completion of such punchlist, the commencement by Tenant of any business in the Premises shall constitute an acknowledgment that the Premises are in the condition called for in this Lease and that Landlord has performed all of Landlord's work. ARTICLE 4. UTILITIES AND SERVICE 4.1 BUILDING SERVICES. Tenant shall pay when due, all charges for utilities furnished to or for the use or benefit of Tenant or the Premises. Tenant shall have no claim for rebate of rent on account of any interruption in service unless caused by Landlord or Landlord's agent negligence or misconduct. 4.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to Tenant's property or personal injury caused by criminal acts or entry by unauthorized persons into the Premises or the Building. ART1CLE 5. REPAIRS AND MAINTENANCE 5.1 LANDLORD REPAIR. Landlord shall not be required to make any improvements, replacements or repairs of any kind or character to the Premises or the Building during the term of this Lease except as are set forth in this Section. Landlord shall maintain only the roof, foundation, parking and common areas, the structural soundness of the exterior walls, doors, corridors, and other structures serving the Premises, provided, that Landlord's cost of maintaining, replacing and repairing the items set forth in this Section are operating expenses subject to the additional rent provisions in Section 2.2 and 2.3. Landlord shall not be liable to Tenant, except as expressly provided in this Lease, for any damage or inconvenience, and Tenant shall not be entitled to any abatement or reduction of rent by reason of any repairs, alterations or additions made by Landlord under this Lease. 5.2 TENANT REPAIRS. Tenant shall, at all times throughout the term of this Lease, including renewals and extensions, and at its sole expense, keep and maintain the Premises in a clean, safe, sanitary and first class condition and in compliance with all applicable laws, codes, ordinances, rules and regulations. Tenant's obligations hereunder 9 shall include, but not be limited to, the maintenance, repair and replacement, if necessary, of all heating, ventilation, air conditioning, lighting and plumbing fixtures and equipment, fixtures, motors and machinery, all interior walls, partitions, doors and windows, including the regular painting thereof, all exterior entrances, windows, doors and docks and the replacement of all broken glass. When used in this provision, the term "repairs" shall include replacements or renewals when necessary and all such repairs made by the Tenant shall be equal in quality and class to the original work. The Tenant shall keep and maintain all portions of the Premises and the sidewalk and areas adjoining the same in a clean and orderly condition, free of accumulation of dirt, rubbish, snow and ice. If Tenant fails, refuses or neglects to maintain or repair the Premises as required in this Lease after notice shall have been given Tenant, in accordance with this Lease, Landlord may make such repairs without liability to Tenant for any loss or damage that may accrue to Tenant's merchandise, fixtures or other property or to Tenant's business by reason thereof, and upon completion thereof, Tenant shall pay to Landlord all costs plus ten percent (10%) for overhead incurred by Landlord in making such repairs upon presentation to Tenant of bill therefor. 5.3 TENANT DAMAGES. Tenant shall not allow any damage to be committed on any portion of the Premises or Building or common areas, and at the termination of this Lease, by lapse of time or otherwise, Tenant shall deliver the Premises to Landlord in as good condition as existed at the Commencement Date of this Lease, ordinary wear and tear excepted. The cost and expense of any repairs necessary to restore the condition of the Premises shall be borne by Tenant. ARTICLE 6. ALTERATIONS AND IMPROVEMENTS 6.1 LANDLORD IMPROVEMENTS. If construction to the Premises is to be performed by Landlord prior to or during Tenant's occupancy, Landlord will complete the construction of the improvements to the Premises in accordance with plans and specifications agreed to by Landlord and Tenant, which plans and specifications are made a part of this Lease by reference on Exhibit C & D. Within seven (7) days of receipt of plans and specifications, Tenant shall execute a copy of the plans and specifications and, if applicable, change orders setting forth the amount of any costs to be borne by Tenant. In the event Tenant fails to execute the plans and specifications and change order within the seven (7) day period, Landlord may, at its sole option, declare this Lease canceled or notify Tenant that the base rent shall commence on the completion date even though the improvements to be constructed by Landlord may not be complete. Any changes or modifications to the approved plans and specifications shall be made and accepted by written change order or agreement signed by Landlord and Tenant and shall constitute an amendment to this Lease. Landlord warrants that the Premises and any such improvements completed by the Landlord shall comply with all applicable laws, rules and regulations including ADA at the time of occupancy by Tenant. 10 6.2 TENANT IMPROVEMENTS. Tenant shall not make or allow to be made any alterations or physical additions in or to the Premises without first obtaining the written consent of Landlord, which consent may in the sole and absolute discretion of Landlord be denied. Any alterations, physical additions or improvements to the Premises made by Tenant shall at once become the property of Landlord and shall be surrendered to Landlord upon the termination of this Lease; provided, however, Landlord, at its option, may require Tenant to remove any physical additions and/or repair any alterations in order to restore the Premises to the condition existing at the time Tenant took possession, all costs of removal and/or alterations to be borne by Tenant. This clause shall not apply to moveable equipment or furniture owned by Tenant, which may be removed by Tenant at the end of the term of this Lease if Tenant is not then in default and if such equipment and furniture are not then subject to any other rights, liens and interests of Landlord. Tenant shall have the right to make non-structural alterations to the Premises under $10,000.00 without obtaining Landlord's written approval. However, Tenant may elect to submit any such plans to Landlord and request Landlord's approval at that time to not be responsible to remove such alteration upon Lease Expiration. Tenant shall be permitted to install security systems and phone systems and remove same at the termination of the Lease. ARTICLE 7. CASUALTY AND INSURANCE 7.1 SUBSTANTIAL DESTRUCTION. If all or a substantial portion of the Premises or the Building should be totally destroyed by fire or other casualty, or if the Premises or the Building should be damaged so that rebuilding cannot reasonably be completed within one hundred eighty (180) working days after the date of written notification by Tenant to Landlord of the destruction, or if insurance proceeds are not made available to Landlord, or are inadequate, for restoration, this Lease shall terminate at the option of Landlord by written notice to Tenant within sixty (60) days following the occurrence, and the rent shall be abated for the unexpired portion of the Lease, effective as of the date of the written notification. 7.2 PARTIAL DESTRUCTION. If the Premises should be partially damaged by fire or other casualty, and rebuilding or repairs can reasonably be completed within one hundred eighty (180) working days from the date of written notification by Tenant to Landlord of the destruction, and insurance proceeds are adequate and available to Landlord for restoration, this Lease shall not terminate, and Landlord shall at its sole risk and expense proceed with reasonable diligence to rebuild or repair the Building or other improvements to substantially the same condition in which they existed prior to the damage. If the Premises are to be rebuilt or repaired and are untenaniable in whole or in part following the damage, and the damage or destruction was not caused or contributed to by act or negligence of Tenant, its agents, employees, invitees or those for whom Tenant is responsible, the rent payable under this Lease during the period for which the Premises are untenantable shall be adjusted to such an extent as may be fair and reasonable under the circumstances. In the event that Landlord fails to complete the necessary repairs or rebuilding within one hundred eighty (180) working days from the date of written notification by Tenant to Landlord of the destruction, Tenant may at its 11 option terminate this Lease by delivering written notice of termination to Landlord, whereupon all rights and obligations under this Lease shall cease to exist. 7.3 PROPERTY INSURANCE. Landlord shall not be obligated in any way or manner to insure any personal property (including, but not limited to, any furniture, machinery, goods or supplies) of Tenant upon or within the Premises, any fixtures installed or paid for by Tenant upon or within the Premises, or any improvements which Tenant may construct on the Premises. Tenant shall maintain property insurance on its personal property and shall also maintain plate glass insurance. Tenant shall have no right in or claim to the proceeds of any policy of insurance maintained by Landlord even if the cost of such insurance is borne by Tenant as set forth in Article 2. 7.4 WAIVER OF SUBROGATION. Anything in this Lease to the contrary notwithstanding, Landlord and Tenant hereby waive and release each other of and from any and all right of recovery, claim, action or cause of action, against each other, their agents, officers and employees, for any loss or damage that may occur to the Premises, the improvements of the Building or personal property within the Building, by reason of fire or the elements, regardless of cause or origin, including negligence of Landlord or Tenant and their agents, officers and employees. Landlord and Tenant agree immediately to give their respective insurance companies which have issued policies of insurance covering all risk of direct physical loss, written notice of the terms of the mutual waivers contained in this Section. 7.5 HOLD HARMLESS. Neither party shall be liable to the other's employees, agents, invitees, licensees or visitors, or to any other person, for an injury to person or damage to property on or about the Premises caused by any act or omission of either party, its agents, servants or employees, or of any other person entering upon the Premises under express or implied invitation by either party, or caused by the improvements located on the Premises becoming out of repair, the failure or cessation of any service provided by Landlord (including security service and devices), or caused by leakage of gas, oil, water or steam or by electricity emanating from the Premises. Both parties agree to indemnify and hold harmless the other party of and from any loss, attorney's fees, expenses or claims arising out of any such damage or injury. 7.6 PUBLIC LIABILITY INSURANCE. Tenant shall during the term hereof keep in full force and effect at its expense a policy or policies of public liability insurance with respect to the Premises and the business of Tenant, on terms and with companies approved in writing by Landlord, in which both Tenant and Landlord shall be covered by being named as insured parties under reasonable limits of liability not less than $1,000,000, or such greater coverage as Landlord may reasonably require, combined single limit coverage for injury or death. Such policy or policies shall provide that thirty (30) days written notice must be given to Landlord prior to cancellation thereof. Tenant shall furnish evidence satisfactory to Landlord at the time this Lease is executed that such coverage is in full force and effect. 12 ARTICLE 8. CONDEMNATION 8.1 SUBSTANTIAL TAKING. If all or a substantial part of the Premises are taken for any public or quasi-pubic use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and the taking would prevent or materially interfere with the use of the Premises for the purpose for which it is then being used, this Lease shall terminate and the rent shall be abated during the unexpired portion of this Lease effective on the date physical possession is taken by the condemning authority. Tenant shall have no claim to the condemnation award or proceeds in lieu thereof, except that Tenant shall be entitled to a separate award for the cost of removing and moving its personal property. 8.2 PARTIAL TAKING. If a portion of the Premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain or by purchase in lieu thereof, and this Lease is not terminated as provided in Section 8.1 above, the rent payable under this Lease during the unexpired portion of the term shall be adjusted to such an extent as may be fair and reasonable under the circumstances. Tenant shall have no claim to the condemnation award or proceeds in lieu thereof, except that Tenant shall be entitled to a separate award for the cost of removing and moving its personal property. ARTICLE 9. ASSIGNMENT OR SUBLEASE 9.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or assign, in whole or in part, its rights and obligations under this Lease and in the Building. Any such sale, transfer or assignment shall operate to release Landlord from any and all liabilities under this Lease arising after the date of such sale, assignment or transfer. 9.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this Lease, or allow it to be assigned, in whole or in part, by operation of law or otherwise (including without limitation by transfer of a majority interest of stock, merger, or dissolution, which transfer of majority interest of stock, merger or dissolution shall be deemed an assignment) or mortgage or pledge the same, or sublet the Premises, in whole or in part, without the prior written consent of Landlord, and in no event shall say such assignment or sublease ever release Tenant or any guarantor from any obligation or liability hereunder. Notwithstanding anything in this Lease to the contrary, in the event of any assignment or sublease, any option or right of first refusal granted to Tenant shall not be assignable by Tenant to any assignee or sublessee. No assignee or sublessee of the Premises or any portion thereof may assign or sublet the Premises or any portion thereof. 9.3 CONDITIONS OF ASSIGNMENT. If Tenant desires to assign or sublet all or any part of the Premises, it shall so notify Landlord at least thirty (30) days in advance of the 13 date on which Tenant desires to make such assignment or sublease. Tenant shall provide Landlord with a copy of the proposed assignment or sublease and such information as Landlord might request concerning the proposed sublessee or assignee to allow Landlord to make informed judgments as to the financial condition, reputation, operations and general desirability of the proposed sublessee or assignee. Within fifteen (15) days after Landlord's receipt of Tenant's proposed assignment or sublease and all required information concerning the proposed sublessee or assignee, Landlord shall have the following options: (1) cancel this Lease as to the Premises or portion thereof proposed to be assign or sublet; (2) consent to the proposed assignment or sublease, and, if the rent due and payable by any assignee or sublessee under any such permitted assignment or sublease (or a combination of the rent payable under such assignment or sublease plus any bonus or any other consideration or any payment incident thereto) exceeds the rent payable under this Lease for such space, Tenant shall pay to Landlord all such excess rent and other excess consideration within ten (10) days following receipt thereof by Tenant; or (3) refuse, in its sole and absolute discretion and judgment, to consent to the proposed assignment or sublease, which refusal shall be deemed to have been exercised unless Landlord gives Tenant written notice providing otherwise. Upon the occurrence of an event of default, if all or any part of the Premises are then assig nod or sublet, Landlord, in addition to any other remedy's provided by this Lease or provided by law, may, at its option, collect directly from the assignee or sublessee all rents becoming due to Tenant by reason of the assignment or sublease, and Landlord shall have a security interest in all properties on the Premises to secure payment of such sums. Any collection directly by Landlord from the assignee or sublessee shall not be construed to constitute a novation or a release of Tenant or any guarantor from the further performance of its obligations under this Lease. 9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to any recorded mortgage presently existing or hereafter created upon the Building and to all existing recorded restrictions, covenants, easements and agreements with respect to the Building. Landlord is hereby irrevocably vested with full power and authority to subordinate Tenant's interest under this Lease to any first mortgage lien hereafter placed on the Premises, and Tenant agrees upon demand to execute additional instruments subordinating this Lease as Landlord may require. If the interests of Landlord under this Lease shall be transferred by reason of foreclosure or other proceedings for enforcement of any first mortgage or deed of trust on the Premises, Tenant shall be bound to the transferee (sometimes called the "Purchaser") at the option of the Purchaser, under the terms, covenants and conditions of this Lease for the balance of the term remaining, including any extensions or renewals, with the same force and effect as if the Purchaser were Landlord under this Lease, and, if requested by the Purchaser, Tenant agrees to attorn to the Purchaser, including the first mortgagee under any such mortgage if it be the Purchaser, as its Landlord. Notwithstanding the foregoing, Tenant shall not be disturbed in its possession of the Premises so long as Tenant is not in default hereunder. 9.5 TENANT'S STATEMENTS. Tenant agrees to furnish, from time to time, within ten (10) days after receipt of a request from Landlord or Landlord's mortgagee, a statement certifying, if applicable, the following: Tenant is in possession of the Premises; the Premises 14 are acceptable; the Lease is in full force and effect; the Lease is unmodified; Tenant claims no present charge, lien, or claim of offset against rent; the rent is paid for the current month, but is not prepaid for more than one month and will not be prepaid for more than one month in advance; there is no existing default by reason of some act or omission by Landlord; and such other matters as may be reasonably required by Landlord or Landlord's mortgagee. Tenant's failure to deliver such statement, in addition to being a default under this Lease, shall be deemed to establish conclusively that this Lease is in full force and effect except as declared by Landlord, that Landlord is not in default of any of its obligations under this Lease, and that Landlord has not received more than one month's rent in advance. Tenant agrees to furnish, from time to time, within ten (10) days after receipt of a request from Landlord, a current financial statement of Tenant, certified as true and correct by Tenant. ARTICLE 10. LIENS 10.1 LANDLORD'S LIEN. AS security for payment of rent, damages and all other payments required to be made by this Lease, Tenant hereby grants to Landlord a lien upon all property of Tenant now or subsequently located upon the Premises. Landlord may enter upon the Premises, by picking or changing locks if necessary, and take possession of all or any part of the personal property, and may sell all or any part of the personal property at a public or private sale, in one or successive sales, with or without notice, to the highest bidder for cash, and, on behalf of Tenant, sell and convey all or part of the personal property to the highest bidder, delivering to the highest bidder all of Tenant's title and interest in the personal property sold. The proceeds of the sale of the personal property shall be applied by Landlord toward the reasonable costs and expenses of the sale, including attorney's fees, and then toward the payment of all sums then due by Tenant to Landlord under the terms of this Lease. Any excess remaining shall be paid to Tenant or any other person entitled thereto by law. ARTICLE 11. DEFAULT AND REMEDIES 11.1 DEFAULT BY TENANT. The following shall be deemed to be events of default ("Default") by Tenant under this Lease: (1) Tenant shall fail to pay when due any installment of rent or any other payment required pursuant to this Lease; (2) Tenant shall abandon any substantial portion of the Premises; (3) Tenant shall fail to comply with any term, provision or covenant of this Lease, other than the payment of rent, and the failure is not cured within ten (10) days after written notice to Tenant; (4) Tenant shall file a petition or if an involuntary petition is filed against Tenant, or becomes insolvent, under any applicable federal or state bankruptcy or insolvency law or admit that it cannot meet its financial obligations as they become due; or a receiver or trustee shall be appointed for all or substantially all of the assets of Tenant; or Tenant shall make a transfer in fraud of creditors or shall make an assignment for the benefit of creditors; or (5) Tenant shall do or permit to be done any act 15 which results in a lien being filed against the Premises or the Building and/or project of which the Premises are a part. In the event that an order for relief is entered in any case under Title 11, U.S.C. (the "Bankruptcy Code") in which Tenant is the debtor and: (A) Tenant as debtor-in-possession, or any trustee who may be appointed in the case (the "Trustee") seeks to assume the Lease, then Tenant, or Trustee if applicable, in addition to providing adequate assurance described in applicable provisions of the Bankruptcy Code, shall provide adequate assurance to Landlord of Tenant's future performance under the Lease by depositing with Landlord a sum equal to the lesser of twenty-five percent (25%) of the rental and other charges due for the balance of the Lease term of six (6) months' rent ("Security"), to be held (without any allowance for interest thereon) to secure Tenant's obligations under the Lease, and (B) Tenant, or Trustee if applicable, seeks to assign the Lease after assumption of the same, then Tenant, in addition to providing adequate assurance described in applicable provisions of the Bankruptcy Code, shall provide adequate assurance to Landlord of the proposed assignee's future performance under the Lease by depositing with Landlord a sum equal to the Security to be held (without any allowance or interest thereon) to secure performance under the Lease. Nothing contained herein expresses or implies, or shall be construed to express or imply, that Landlord is consenting to assumption and/or assignment of the Lease by Tenant, and Landlord expressly reserves all of its rights to object to any assumption and/or assignment of the Lease. Neither Tenant nor any Trustee shall conduct or permit the conduct of any "fire", "bankruptcy", "going out of business" or auction sale in or from the Premises. 11.2 REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of a Default as defined above Landlord may elect either (i)to cancel and terminate this Lease and this Lease shall not be treated as an asset of Tenant's bankruptcy estate, or (ii) to terminate Tenant's right to possession only without canceling and terminating Tenant's continued liability under this Lease. Notwithstanding the fact that initially Landlord elects under (iii) to terminate Tenant's right to possession only, Landlord shall have the continuing right to cancel and terminate this Lease by giving three (3) days' written notice to Tenant of such further election, and shall have the right to pursue any remedy at law or in equity that may be available to Landlord. In the event of election under (ii) to terminate Tenant's right to possession only, Landlord may, at Landlord's option, enter into the Premises and take and hold possession thereof, without such entry into possession terminating this Lease or releasing Tenant in whole or in part from Tenant's obligation to pay all amounts hereunder for the full stated term. Upon such reentry, Landlord may remove all persons and property from the Premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant, without becoming liable for any loss or damage which may be occasioned thereby. Such reentry shall be conducted in the following manner: without resort to judicial process or notice of any kind if Tenant has abandoned or voluntarily surrendered possession of the Premises; and, otherwise, by resort to judicial process. Upon and after entry into possession without termination of the Lease, Landlord may, but is not obligated to, relet the Premises, or any part thereof, to any one other than the Tenant, for such time and upon 16 such terms as Landlord, in Landlord's sole discretion, shall determine. Landlord may make alterations and repairs to the Premises to the extent deemed by Landlord necessary or desirable. Upon such reentry, Tenant shall be liable to Landlord as follows: A. For all attorneys' fees incurred by Landlord in connection with exercising any remedy hereunder; B. For the unpaid installments of base rent, additional rent or other unpaid sums which were due prior to such reentry, including interest and late payment fees, which sums shall be payable immediately. C. For the installments of base rent, additional rent, and other sums falling due pursuant to the provisions of this Lease for the period after reentry during which the Premises remain vacant, including late payment charges and interest, which sums shall be payable as they become due hereunder. D. For all expenses incurred in releasing the Premises, including leasing commissions, attorneys fees, and costs of alteration and repairs, which shall be payable by Tenant as they are incurred by Landlord; and E. While the Premises are subject to any new lease or leases made pursuant to this Section, for the amount by which the monthly installments payable under such new lease or leases is less than the monthly installment for all charges payable pursuant to this Lease, which deficiencies shall be payable monthly. Notwithstanding Landlord's election to terminate Tenant's right to possession only, and notwithstanding any relefting without termination, Landlord, at any time thereafter, may elect to terminate this Lease, and to recover (in lieu of the amounts which would thereafter be payable pursuant to the foregoing, but not in diminution of the amounts payable as provided above before termination), as damages for loss of bargain and not as a penalty, an aggregate sum equal to the amount by which the rental value of the portion of the term unexpired at the time of such election is less than an amount equal to the unpaid base rent, percentage rent, and additional rent and all other charges which would have been payable by Tenant for the unexpired portion of the term of this Lease, which deficiency and all expenses incident thereto, including commissions, attorneys' fees, expenses of alterations and repairs, shall be due to Landlord as of the time Landlord exercises said election, notwithstanding that the term had not expired. If Landlord, after such reentry, leases the Premises, then the rent payable under such new lease shall be conclusive evidence of the rental value of the unexpired portion of the term of this Lease. 17 If this Lease shall be terminated by reason of the bankruptcy or insolvency of Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate, as liquidated damages for loss of bargain and not as a penalty, the amount determined by the immediately preceding paragraph. 11.3 LANDLORD'S RIGHT TO PERFORM FOR ACCOUNT OF TENANT. If Tenant shall be in Default under this Lease, Landlord may cure the Default at any time for the account and at the expense of Tenant. If Landlord cures a Default on the part of Tenant, Tenant shall reimburse Landlord upon demand for any amount expended by Landlord in connection with the cure, including, without limitation, attorney's fees and interest. 11.4 INTEREST AND ATTORNEY'S FEES. In the event of a Default by Tenant: (1) if a monetary default, interest shall accrue on any sum due and unpaid at the rate of the lesser of eighteen percent (18%) per annum or the highest rate permitted by law and, if Landlord places in the hands of an attorney the enforcement of all or any part of this Lease, the collection of any rent due or to become due or recovery of the possession of the Premises, Tenant agrees to pay Landlord's costs of collection, including reasonable attorney's fees for the services of the attorney, whether suit is actually filed or not. 11.5 ADDITIONAL REMEDIES, WAIVERS, ETC. A. The rights and remedies of Landlord set forth herein shall be in addition to any other right and remedy now and hereafter provided by law. All rights and remedies shall be cumulative and not exclusive of each other. Landlord may exercise its rights and remedies at any times, in any order, to any extent, and as often as Landlord deems advisable without regard to whether the exercise of one right or remedy precedes, concurs with or succeeds the exercise of another. B. A single or partial exercise of a right or remedy shall not preclude a further exercise thereof, or the exercise of another right or remedy from time to time. C. No delay or omission by Landlord in exercising a right or remedy shall exhaust or impair the same or constitute a waiver of, or acquiesce to, a Default. D. No waiver of a Default shall extend to or affect any other Default or impair any right or remedy with respect thereto. E. No action or inaction by Landlord shall constitute a waiver of a Default. F. No waiver of a Default shall be effective unless it is in writing and signed by Landlord. 18 ARTICLE 12. RELOCATION - DELETED ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES 13.1 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL CONSIDERATION FOR THE Execution OF THIS LEASE, THAT THIS LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN Extrinsic DOCUMENTS, IS THE ENTIRE AGREEMENT OF THE PARTIES: THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAIN1NG TO THIS LEASE OR TO THE EXPRESSLY MENTIONED WRITTEN Extrinsic DOCUMENTS NOT INCORPORATED IN WRITING IN THIS LEASE. 13.2 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WANED, AMENDED OR EXTENDED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT. 13.3 LIMITATION OF WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OR MERCHANTABILITY, HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND THERE ARE NO WARRANTIES WH1CH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS LEASE. ARTICLE 14. MISCELLANEOUS 14.1 ACT OF GOD. Landlord shall not be required to perform any covenant or obligation in this Lease, or be liable in damages to Tenant, so long as the performance or 19 non-performance of the covenant or obligation is delayed. caused or prevented by an act of God, force majeure or by Tenant. 14.2 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors and assigns. It is hereby covenanted and agreed that should Landlord's interest in the Premises cease to exist for any reason during the term of this Lease, then notwithstanding the happening of such event this Lease nevertheless shall remain unimpaired and in full force and effect, and Tenant hereunder agrees to attorn to the then owner of the Premises. 14.3 RENT TAX. If applicable in the jurisdiction where the Premises are issued, Tenant shall pay and be liable for all rental, sales and use taxes or other similar taxes. If any, levied or imposed by any city, state, county or other governmental body having authority, such payments to be in addition to all other payments required to be paid to Landlord under the terms of this Lease. Any such payment shall be paid concurrently with the payment of the rent, additional rent, operating expenses or other charge upon which the tax is based as set forth above. 14.4 CAPTIONS. The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of any Section. 14.5 NOTICE. All rent and other payments required to be made by Tenant shall be payable to Landlord at the address set forth in Section 1.5. All payments required to be made by Landlord to Tenant shall be payable to Tenant at the address set forth in Section 1.5, or at any other address within the United States as Tenant may specify from time to time by written notice. Any notice or document required or permitted to be delivered by the terms of this Lease shall be deemed to be delivered (whether or not actually received) when deposited in the United States Mail, postage prepaid, certified mail, return receipt requested, addressed to the parties at the respective addresses set forth in Section 1.5. 14.6 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature does not constitute a reservation of space or an option to lease. This Lease is not effective until execution by and delivery to both Landlord and Tenant. 14.7 CORPORATE AUTHORITY. If Tenant executes this Lease as a corporation, each of the persons executing this Lease on behalf of Tenant does hereby personally represent and warrant that Tenant is a duly authorized and existing corporation, that Tenant is qualified to do business in the state in which the Premises are located, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation Is authorized to do so. In the event any representation or warranty is false, all persons who execute this Lease shall be liable, individually, as Tenant. 20 14.8 HAZARDOUS SUBSTANCES. Tenant shall not bring or permit to remain on the Premises or the Building any asbestos, petroleum or petroleum products, explosives, toxic materials, or substances defined as hazardous wastes, hazardous materials, or hazardous substances under any federal, state, or local law or regulation ("Hazardous Materials"). Tenant's violation of the foregoing prohibition shall constitute a material breach and default hereunder and Tenant shall indemnify, hold harmless and defend Landlord from and against any claims, damages, penalties, liabilities, and costs (including reasonable attorney fees and court costs) caused by or arising out of (i) a violation of the foregoing prohibition or (ii) the presence or any release of any Hazardous Materials on, under, or about the Premises or the Building during the term of the Lease. Tenant shall clean up, remove, remediate and repair any soil or ground water contamination and damage caused by the presence and any release of any Hazardous Materials in, on, under, or about the Premises or the Building during the term of the Lease in conformance with the requirements of applicable law. Tenant shall immediately give Landlord written notice of any suspected breach of this paragraph; upon learning of the presence of any release of any Hazardous Materials, and upon receiving any notices from governmental agencies pertaining to Hazardous Materials which may affect the Premises or the Building. The obligations of Tenant hereunder shall survive the expiration or earlier termination, for any reason, of this Lease. To the best of Landlord's knowledge, the Premises does not contain any hazardous substances as of the Lease Commencement Date. 14.9 SEVERABILITY. If any provision of this Lease or the application thereof to any person or circumstances shall be invalid or unenforceable to any extent, the remainder of this Lease and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 14.10 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease and, if as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the right, title and interest of Landlord in the Building as the same may then be encumbered and neither Landlord nor any person or entity comprising Landlord shall be liable for any deficiency. In no event shall Tenant have the right to levy execution against any property of Landlord nor any person or entity comprising Landlord other than its interest in the Building as herein expressly provided. 14.11 BROKERAGE. Landlord and Tenant each represents and warrants to the other that there is no obligation to pay any brokerage fee, commission, finder's fee or other similar charge in connection with this Lease, other than fees due to Roberts Properties which are the responsibility of Hoyt Properties, lnc. Each party covenants that it will defend, indemnify and hold harmless the other party from and against any loss or liability by reason of brokerage or similar services alleged to have been rendered to, at the instance of, or agreed upon by said indemnifying party. Notwithstanding anything herein to the contrary, Landlord and Tenant agree that there shall be no brokerage fee or commission due on expansions; options or renewals by Tenant. 21 Tenant agree that there shall be no brokerage fee or commission due on expansions, options or renewals by Tenant. 14.12 NOTIFICATION TO TENANT. Landlord hereby notifies Tenant that the person auThorized to execute this Lease and manage the Premises is Hoyt Properties, Inc., which has been appointed to act as the agent in leasing management and operation of the Building for owner and is authorized to accept service of process and receive or give receipts for notices and demands on behalf of Landlord. Landlord reserves the right to change the identity and status of its duly authorized agent upon written notice to Tenant. 14.13 PLYMOUTH TECHNOLOGY PARK LEASE TERMINATION. Upon complete execution of this Lease, Leases dated April 12, 2001 for 5,033 square feet of space at Plymouth Technology Park I and Leases date October 5th, 1998 for 26,186 square feet of space at Plymouth Technology Park II shall become null and void. 14.14 EXHIBITS. Reference is made to the following Exhibits which are attached hereto and made a part hereof: Exhibit A Plan of Demised Premises Exhibit B Legal Description Exhibit C DELETED Exhibit D Tenant Improvements Exhibit D1 ProForm Bid Exhibit E Sign Restrictions Exhibit F Rules and Regulations Exhibit G Contingency ARTICLE 15. SIGNATURES SIGNED effective the day and year first above written: LANDLORD TENANT 321 CORPORATION INSIGNIA SYSTEMS INC. By: /s/ Steven B. Hoyt By: /s/ John Whisnant - ----------------------------- ------------------------------------ Steven B. Hoyt CEO John Whisnant VP Finance - ----------------------------- ------------------------------------ (Type Name and Title) (Type Name and Title) EXHIBIT "A" PLAN OF DEMISED PREMISES [GRAPHIC OMITTED] EXHIBIT "B" LEGAL DESCRIPTION ----------------- LOT 1, BLOCK 1, NORTHGATE PLAZA PARK, ACCORDING TO THE RECORDED PLAT THEREOF, HENNEPIN COUNTY, MINNESOTA. 2 EXHIBIT "D" LANDLORD SHALL AT LANDLORD'S SOLE COST PROVIDE $705,800.40 IN TENANT IMPROVEMENTS AS OUTLINED ON THE ATTACHED EXHIBIT D1. ANY ADDITIONAL TENANT IMPROVEMENTS OVER THE $705,800.40 ALLOWANCE WILL BE THE TENANT'S RESPONSIBILITY. EXHIBIT "D1" October 22, 2002 Quotation #23207 BOB ATKINSON 6417 Bay Cliffe Drive Excelsior, MN 55331 RE: Insignia Systems, Inc. Dear Mr. Atkinson, We are pleased to present this quotation to furnish labor, materials, equipment and supervision as required to perform work as listed below. This budget is based on drawings, notes & specs dated 7/12/02 and also a walk with the Owner's/Insignia's representative on Wednesday, July 17, 2002. FRAMING AND DRYWALL o Frame, hang, tape and finish per plan. o Warehouse walls to be 3 5/8" 20-gauge studs. o Set metal doorifames. o Exclusions: Work on existing walls. PLUMBING o Sawcut, remove & patch concrete floor (based on 100' of trench). o Demo & patch floor to cap 8 floor drains. o Hook-up 2 each air compressors & install 3/4" air piping. o Hang 2 each vacuum exhaust machines & approximately 200' of tubing. o Hook-up Owners DI system & install new schedule 80 PVC piping. o Furnish and install 2 each Toto handicapped tank type toilets. o Furnish and install 3 each Toto regular toilets. o Furnish and install 1 each American Standard urinal with Sloan flush valve. o Furnish and install 4 each wall-hung lays with ADA Delta faucets. o Furnish and install toilet partitions & accessories, grab bars, mirrors, toilet paper holders, paper towel holders, etc. o Furnish and install PVC waste & vent piping. o Furnish and install Type L copper water piping & fittings with fiberglass pipe insulation. o Furnish and install 6 each 2" floor drains & waste piping. o Permits, testing & inspections. ELECTRICAL o Demo as required for front offices and new east offices. o Demo ceiling in Press area (store existing lights at jobsite). o Re-work lighting as needed. o Furnish and install 1 each reception desk receptacle. o Furnish and install 7 each total receptacles for breakroom, 6 each dedicated receptacles for equipment per plan. Wire 1 each 50-amp oven. o Wire 1 each phone panel per spec. Including 4 each isolated 4-plex receptacles. o Furnish and install 46 new switches for new offices. o Relocate and re-wire up to 120 existing 2 x 4 fixtures. o Furnish and install up to 9 each new exist lights (to be approved by Fire Marshall). o Allowance for up to 18 new recessed -- fluorescent can lights. o Allowance for 80 duplex -- general purpose receptacles. o 5 each column feeds for furniture connections. o 5 each power pole feed points for furniture connections. o Circuits to include 1 each circuit per 2 cubicles. o Additional panel for cube circuits. o Wire 2 small PRV units. o 50 data stub conduits. o Print Press area to include: disconnect existing machines at existing building, reuse transformers at new location, 2 each new panels per existing space, 4 each cord drop receptacles, wire 2 each mark Andy machines with exhaust machines, and 54 each 8' strip fixtures with industrial cover to reflect downward (432'). o Wire the following machines in the print pres area: 1 each bailer and fan, 1 each humidifier, 2 each air compressors, 1 each dryer, 2 each shrink-wrap machines, 1 each press dryer, 1 each cortel, 1 each receptacle for mechanical hoist, and an allowance to wire new 25-HIP compressor. o Re-work up to 60 lights to accommodate for new room lay-out, re-use existing transformer, wire existing Heidelburg machine, water softener receptacle, panel for up to 15 copiers in adjacent room, up to 20 general purpose receptacles, and wire other machine in the same area. o Permit fees. FLOORING o Furnish and install carpet and standard VCT. o Furnish, install and bind 4" carpet base. o Patch plumbing drain. o Remove VCT/Wax/Grind. o Patch/ramp VCT down. o Transitions. o Furnish and install ceramic at bathroom. MECHANICAL o Revamp existing ductwork, ceiling diffusers and add necessary ductwork and ceiling diffusers for new wall lay out and new ceiling height. o Necessary vents through roof from existing machinery. o Disconnect round ductwork from 2 existing presses and reconnect in the print room. o Exhaust for existing compactor and the new pressroom. o Graphic room to have separate rooftop unit and control. o Boardroom, President's office and Vice President's office to have thermostat for rooftop units. o Permits. FINISHES o Painting of all walls to 10'. o Finish new doors and frames to match existing doors, frames and windows. o Buy and hang wall covering in boardroom with an allowance of $10.00 per yard - for material. o No work to be done on existing doors, frames, and windows. FIRE PROTECTION o Add/relocate sprinklers as required for the new office build out. Sprinklers will be aligned but not necessarily centered in the tile-- chrome semi-recessed type. o Provide sprinklers along new demising walls as required by NFPA #13. o Wet pipe system modifications only. No special system (i.e. pre-action, FM 200, etc.) modifications included. o No raising or relocation of existing main or branchline piping is included in this proposal other than raising the existing drops in the 9' ceiling area being converted to 10' ceiling. o Pipe shall be black schedule 7, 10 or threadable lightwall with black screwed or mechanical fittings. o Permits and engineering included. o Excludes: paint, electrical, bonds, fire extinguishers, hose station/racks, and monitoring. Subtotal: $690,800.40 ADD for Owner IT allowance: $ 15,000.00 ----------- TOTAL: $705,800.40 Thank you for the opportunity to present this budget quotation. If you have any further questions, feel free to call. Sincerely, Ryan Tollander President of Operations - ------------------------------- ---------------------------- Ryan Tollander -- President Date Proform Construction, Inc. - ------------------------------- ---------------------------- Hoyt Properties Representative Date LEASE EXHIBIT E TENANT SIGN CRITERIA (NORTHGATE I/INSIGNIA SYSTEMS INC.) NORTHGATE ONE - ------------- 1. FRONT OF BUTLDING - EXTERIOR SIGN A) Main Tenant Identification Signs -- Exterior 1) All front exterior signs to be limited to area above the glass line. With individual entrances, sign letters shall be centered vertically and horizontally over tenant entry doorway/sidelight, or centered above the tenant's space if the door if off center. Where tenants share an entrance the letters are to be installed on the appropriate side of entrance. 2) Building standard sign letters are 2" deep reverse channel aluminum letters. Face and channels to have paint finish and are to be Burgundy. 3) Letter height may not exceed 18" tall. Overall height for two lines of text may not exceed 30". All sign leter layouts must be approved by the Landlord. The total width of the letter area may not exceed 50% of the front facade of that portion of the building occupied by the tenant. 4) The building standard letter style is Helvetica Medium. Tenant may select from other type styles only with approval of the Landlord. Individual letters may be upper or lower case. Logos are acceptable in the same letter color and finish. 5) Method of attaching sign letters to building to be standard non-corrosive studs spaced to correspond with horizontal grout lines space 4" on center. Silicone adhesive to be used to secure studs and fill holes. B) Front doors -- Exterior/Interior 1) Exterior Front Doors a) Suite numbers are required on the main glass entrance door. Text to be 4" tall premium adhesive vinyl film, white Helvetica medium style, applied first surface. b) For individual entranced, numbers shall be centered on the door glass. For shared entrance doors, numbers shall be centered on the appropriate half and 4" below the top of the glass. c) Suite numbers are assigned by the Owner. film, white, Helvetica Medium style, applied first surface. The first tenant shall place its name and numbers at top of door. A maximum of two tenants per door. B) Interior vestibule service door, if applicable: Graphics identical with front interior door. 3. PROHIBITED SIGNS A) Signs on glass visible from exterior except as identified in this criteria. B) Rooftop signs. C) Freestanding signs other than the project identification sign and appropriately authorized real estate sign(s). D) The use of electrical components that flash, illuminate, revolve, rotate, or make noise. E) Auxiliary signage, including banners. F) Parking space signs without approval of the owner 3 sq. ft. maximum. G) Signs on vehicles when parked other than in a parking stall. 4. APPROVAL PROCESS A) Three copies of a sign layout drawing must be submitted by the tenant to the building owner. Approval must be granted in writing by the building owner prior to sign installation. B) Tenant is responsible for all sign permits required by the City. 5. MISCELLANEOUS A) Tenant is responsible for cost of sign removal upon vacating space. EXHIBIT "F" BUILDING RULES AND REGULATIONS ------------------------------ 1. Any sign, lettering, picture, notice or advertisement installed on or in any part of the Premises and visible from the exterior or interior common area of the Complex, or visible from the exterior of the Premises, shall be installed at Lessee's sole cost and expense, and in such manner, character and style as Lessor may approve in writing. Anything herein to the contrary not withstanding, approval as to signs shall be subject to Lessor's approval which may be withheld in Lessor's sole discretion. In the event of a violation of the foregoing by Lessee, Lessor may remove the same without any liability and may charge the expense incurred by such removal to Lessee. 2. No awning or other projection shall be attached to the outside walls of the Complex. No curtains, blinds, shades or screens visible from the exterior Premises, shall be attached to or hung in, or used in connection with any such curtains, blinds, shades, screens or other fixtures must be of a quality, type, design and color, and attached in the manner approved by Lessor. 3. Lessee, its employees, customers, invitees and guests shall not obstruct sidewalks, entrances, passages, corridors, vestibules, halls or stairways in and about the Complex which are used in common with other tenants and their employees, customers, guests and invitees, and which are not a part of the Premises of Lessee. Lessee shall not place objects against glass partitions or doors or windows which would be unsightly from the Complex corridors or from the exterior of the Complex and will promptly remove any such objects upon notice from Lessor. 4. Lessee shall not make excessive noises, cause disturbances or vibrations or use or operate any electrical or mechanical devices that emit excessive sound or other waves or disturbances or create obnoxious odors, any of which may be offensive to the other tenants and operation of any device equipment, radio, television broadcasting or reception from or within the Complex aerials or similar devices inside or outside of the Premises or on the Complex. 5. Lessee shall not waste electricity, water or air conditioning furnished by Lessor, if any, and shall cooperate fully with Lessor to ensure the most effective operation of the Complex's heating and air conditioning systems. 6. Lessee assumes full responsibility for protecting its space from theft, robbery, and pilferage, which includes keeping doors locked and other means of entry to the Premises closed and secured after normal business hours. 7. In no event shall Lessee bring into the Complex flammables, such as gasoline, kerosene, naphtha and benzine, or explosives or any other article of intrinsically dangerous nature. If, by reason of the failure of Lessee to comply with the provisions of this subparagraph, any insurance premium for all or any part of the Complex shall at any time be increased, Lessee shall make immediate payment of the whole of the increased insurance premium, without waiver of any of Lessor's other rights at law or in equity for Lessee's breach of this Lease. 8. Lessee shall comply with all applicable federal, state and municipal laws, ordinances and regulations, and building rules and shall not directly of indirectly make any use of the Premises which may be prohibited by any of the foregoing or which may be dangerous to persons or property or may increase the cost of insurance or require additional insurance coverage. 9. Lessor shall have the right to prohibit any advertising by Lessee which in Lessor's reasonable opinion tends to impair the reputation of the Complex or its desirability as a building complex for office/warehouse use, and upon written notice from Lessor, Lessee shall refrain from or discontinue such advertising. 10. The Premises shall not be used for cooking (as opposed to heating of food), lodging, sleeping or for any immoral or illegal purpose. 11. Lessee and Lessee's employees, agents, visitors and licensees shall observe faithfully and comply strictly with the foregoing Rules and Regulations and such other and further appropriate rules and regulations as Lessor or Lessor's agent may from time to time adopt. Reasonable notice of any additional rules and regulations shall be given in such manner as Lessor may reasonable elect. 12. Unless expressly permitted by the Lessor, no additional locks or similar devices shall be attached to any door or window and no keys other than those provided by the lessor shall be made for any door. If more than two keys for one lock are desired by the Lessee, the Lessor may provide the same upon payment by the Lessee. Upon termination of this Lease or of the Lessee's possession, the Lessee shall surrender all keys of the Premises and shall explain to the Lessor all combination locks on safes, cabinets and vaults. 13. Any carpeting cemented down shall be installed with a releasable adhesive. In the event of a violation of the foregoing by Lessee, Lessor may charge the expense incurred by such removal to Lessee. 14. The restrooms, drinking fountains and other plumbing fixtures shall not be used for any purpose other than those for which they are constructed, and no sweepings, rubbish, rags, coffee grounds or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the Lessee who, or whose employees, agents, visitors or licensees have caused the same. No person shall waste water by interfering or tampering with the faucets or otherwise. 15. No electric or other wires for any purpose shall be brought into leased Premises without Lessor's written permission specifying the manner in which same may be done. Lessee shall not overload any utilities serving the Premises. 16. No dog or other animal shall be allowed in the Complex. 17. All loading, unloading, receiving or delivery of goods, supplies or disposal of garbage or refuse shall be made only though entryways provided for such purposes. Lessee shall be responsible for any damage to the Complex or the property of its employees or others and injuries sustained by any person whomsoever resulting from the use or moving of such articles in or out of the Premises, and shall make all repairs and improvements required by Lessor or governmental authorities in connection with the use or moving of such articles. 18. All safes, equipment or other heavy article shall be carried in or out of the Premises only in such manner as shall be prescribed in writing by Lessor, and Lessor shall in all cases have the right to specify the proper position of any such safe, equipment or other heavy article, which shall only be used by Lessee in a manner which will not interfere with or cause damage to the Premises or Complex in which they are located, or to the other tenants or occupants of said Complex. Lessee shall be responsible for any damage to the building or the property of its employees or others and injuries sustained by any person whomsoever resulting from the use or moving of such articles in or out of the Premises, and shall make all repairs and improvements required by Lessor or governmental authorities in connection with the use or moving of such articles. 19. Canvassing, soliciting and peddling in or about the Complex is prohibited and each Lessee shall cooperate to prevent the same . 20. Wherever in these Building Rules and Regulations the word "Lessee" occurs, it is understood and agreed that it shall mean Lessee's associates, employees, agents, clerks, invitees and visitors. Wherever the word "Lessor" occurs, it is understood and agreed that it shall mean Lessor's assignees, agents, clerks and visitors. 21. Lessor shall have the right to enter the Premises at hours convenient to the Lessee for the purpose of exhibiting the same to prospective tenants within the one hundred twenty (120) day period prior to the expiration of this Lease, and may place signs advertising the leased Premises for rent on the exterior of said Premises at any time within said period. 22. Lessee, its employees, customers, invitees and guests shall, when using the parking facilities in and around the Complex, observe and obey all signs regarding fire lanes and no parking zones, and when parking always park between the designated lines. Lessor reserves the right to tow away, at the expense of the owner, any vehicle which is improperly parked or parked in a no parking zone. All vehicles shall be parked at the sole risk of the owner, and Lessor assumes no responsibility for any damage to or loss of vehicles. No vehicles shall be parked overnight. 23. In case of invasion, mob, riot, public excitement, or other commotion, Lessor reserves the right to prevent access to the Complex during the continuance of the same by closing the doors or otherwise, for the safety of the tenant or the protection of the Complex and the property therein. Lessor shall in no case be liable for damages for any error or other action taken with regard to the admission to or exclusion for the Complex of any person. 24. All entrance doors to the Premises shall be locked when the Premises are not in use. All common corridor doors, if any, shall also be closed during times when the air conditioning equipment in the Complex is operating so as not to dissipate the effectiveness of the system or place an overload thereon. 25. Lessee shall be responsible for all repair, maintenance and replacement of mechanical systems and devices directly associated with Lessee's Demised Premises, including, but no limited to, heating and air conditioning equipment, water heaters, exhaust fans, plumbing and electrical. Lessor must be advised of any such repair, etc. and must approve of any such repairs. 26. Alterations to the Demised Premises by the Lessee of any nature shall require the written approval of the Lessor. Such approval shall be at the sole discretion of the Lessor. In the event of a violation of the foregoing by Lessee, Lessor may remove the same without any liability and may charge the expense incurred by such removal to Lessee. 27. Lessor reserves the right at any time and from time to time to rescind, alter or waive, in whole or in part, any of these Rules and Regulations when it is deemed necessary, desirable, or proper, in Lessor's judgment, for its best interest or for the best interest of the tenants of the Complex. EXHIBIT "G" CONTINGENCY This lease is contingent upon the successful purchase/closing of Northgate 1, 6464 Sycamore Court by 321 Corporation from First Industrial Realty Trust by January 15, 2003. EX-23 5 isig031093_ex23.txt CONSENTS OF EXPERTS AND COUNSEL EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 333-82626, 33-60243 and 333-79915) and Registration Statements (Form S-8 Nos. 33-47003, 33-92376, 333-43781, 333-59709, 333-80261, 333-41242 and 333-65172) pertaining to the 1990 Stock Plan and in Registration Statements (Form S-8 Nos. 33-75372 and 33-92374) pertaining to the Employee Stock Purchase Plan of Insignia Systems, Inc. of our report dated January 31, 2003, with respect to the financial statements and schedule of Insignia Systems, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ Ernst & Young LLP Minneapolis, Minnesota March 7, 2003 EX-99.1 6 isig031093_ex99-1.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION The undersigned certifies pursuant to 18 U.S.C.ss.1350, that: (1) The accompanying Annual Report on Form 10-K for the period ended December 31, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the accompanying Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 10, 2003 /s/ Scott F. Drill -------------------------- Scott F. Drill President and Chief Executive Officer EX-99.2 7 isig031093_ex99-2.txt CERTIFICATION EXHIBIT 99.2 CERTIFICATION The undersigned certifies pursuant to 18 U.S.C.ss.1350, that: (1) The accompanying Annual Report on Form 10-K for the period ended December 31, 2002, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the accompanying Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 10, 2003 /s/ Denni J. Lester -------------------------- Denni J. Lester Vice President, Finance and Chief Financial Officer c
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