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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
COMMISSION FILE NUMBER 0-19056
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NORTHSTAR COMPUTER FORMS, INC.
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(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-0882640
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7130 NORTHLAND CIRCLE NORTH, BROOKLYN PARK, MINNESOTA 55428
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 531-7340
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.05 PER SHARE
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(TITLE OF CLASS)
[Cover page 1 of 2 pages]
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
-----
State issuer's revenues for its most recent fiscal year: $41,809,938
State the aggregate market value of the voting stock held by non-affiliates
of the issuer computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within 60
days. (SEE definition of affiliate in Rule 12b-2 of the Exchange Act.):
$20,316,860.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
2,724,436 Shares of Common Stock as of December 31, 1998
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders for its
fiscal year ended October 31, 1998 are incorporated by reference into Part II of
this Form 10-K.
[Cover page 2 of 2 pages]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Northstar Computer Forms, Inc. (the "Company"), incorporated in 1964,
designs, manufactures and markets printed forms with an emphasis on machine
readable MICR (Magnetic Ink Character Recognition) printing. The Company's two
business concentrations are custom business/negotiable forms and internal bank
forms. Sales are principally through distributors with the remainder to other
printers or on a direct retail basis. A majority of the retail accounts are
serviced by distributor "partners" whereby the distributor acts as a
manufacturer's representative. A sales/service force provides communication
between the customer and the manufacturing facilities.
The corporate headquarters and primary manufacturing facility of the
Company are located at 7130 Northland Circle North, Brooklyn Park, Minnesota.
The Company also maintains manufacturing facilities in Roseville, Minnesota
(Northstar Financial Forms), and Milwaukee, Wisconsin (Wisconsin Business
Forms), which operate as divisions of the Company. The Company also operates,
through its wholly-owned subsidiary, General Financial Supply, Inc. ("GFS"),
manufacturing facilities in the cities of Nevada, Iowa, Bridgewater, Virginia
and Golden, Colorado. As of October 31, 1998, the Company employed approximately
435 persons at its six manufacturing facilities, and the Company anticipates a
moderate increase in personnel for the 1999 fiscal year.
The Company serves most markets where business forms are used, although its
primary targeted customers are banks and other users of MICR forms. During the
past few years, the Company has continued to shift its emphasis towards MICR
form product lines, investing over a million dollars each year in equipment and
technology to produce various kinds of MICR business, negotiable and internal
bank forms.
BUSINESS HIGHLIGHTS - 1998
- - Formed two strategic alliances to enhance sales to the top 200 banks and to
community banks
- - Second best sales and earnings in the Company's history
- - Expanded and implemented The Star System -- Comprehensive Operations
Management Software
- - Moved Denver operation into a new 23,000 sq. ft. building to accommodate
expanded product offerings
- - Invested $2.1 million in capital equipment including Internet-based
pre-press data communications and computer-supported composition and remote
proofing
BUSINESS FORMS
Business forms manufactured by the Company consist of unit-sets, continuous
forms and cut sheet forms.
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Unit-sets, simply defined, are multiple part forms carbon interleaved or
carbonless forms whose parts can be easily separated. Unit-sets are frequently
referred to as snap apart or snap-out forms and are used for a variety of
business applications, such as invoices, purchase orders, checks, vouchers,
sales books and register forms.
Continuous forms are used for the same business applications as unit-sets.
They consist of strips of perforated sets of forms marginally punched to
facilitate high-speed feeding through electronic data processing equipment. They
are manufactured from a continuous web or roll of paper that is not cut into
separate units.
Cut sheet forms are forms produced in individual sheets or placed together
by padding or booking. Examples of cut sheets are internal bank documents
(general ledger debit/credit, cash tickets and process control documents), and
laser cut sheets (checks, statements and gift certificates).
The Company manufactures unit-sets and cut sheet forms in all of its
facilities. The Brooklyn Park, Minnesota and Milwaukee, Wisconsin plants also
produce continuous forms.
COMPANY PRODUCT SPECIALIZATION
Among the business forms which the Company produces, the Company
specializes in internal bank forms, secure and negotiable documents and custom
products. Approximately ninety percent (90%) of the forms produced by the
Company, including virtually all of the internal bank forms, are MICR encoded.
MICR encoded forms require special composition equipment and inks, thus MICR
encoding provides a value-added feature. The Company specializes in such forms,
enabling it to handle large and small volumes and create operating efficiencies.
Internal bank forms produced by the Company are highly specialized forms
such as teller cash tickets, general ledger debit/credit tickets, teller
receipts, batch process control documents and deposit/withdrawal forms. All of
these products are MICR encoded for today's high speed processing needs. The
Company guarantees MICR readability on all forms. Most internal bank forms
products are produced on an extremely short delivery cycle. This enables bank
customers to enjoy lower costs by alleviating the necessity to inventory
products.
In addition to internal bank forms, the Company also focuses on secure and
negotiable documents, which are both MICR encoded and non-MICR encoded. Examples
of secure and negotiable MICR encoded documents are bank official checks,
business checks, gift certificates and money orders. Examples of non-MICR
encoded secure and negotiable documents are vehicle certificates of title, gift
certificates, birth certificates and death certificates. Security features
include security papers (watermark and threads), security inks that react to
ultraviolet light and temperature and security printing features such as void
pantographs and modulus numbering.
MARKETING
All of the Company's operating units service customers nationally through
distributors on a non-exclusive basis, and directly with respect to other
printers and commercial resellers. In
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addition, Northstar Financial Forms sells through distributor "partners"
and, along with one of the Company's other plants, sells directly to certain
bank customers on a retail basis. The Company believes that it has a
competitive advantage over other form manufacturers through the use of its
independent distributor, printer and reseller network, because the network
enables the Company to focus on specialized products and produce them
efficiently. The Company sells to over 1,500 customers in all 50 states, no
one of which is considered a major customer.
The Company's distribution network enables it to save the expense of
supporting a direct sales force, sales offices and certain marketing expenses in
its plants. Because Northstar Financial Forms and one of the Company's other
plants sell to certain bank customers on a retail basis, those facilities incur
higher sales and marketing expenses. All major competitors of the Company
distribute their products through direct sales which typically account for
expenses ranging between 10% and 20% of revenues.
RAW MATERIALS AND ENVIRONMENTAL REGULATIONS
Raw materials utilized by the Company consist principally of a wide variety
of weights, widths, colors, sizes and qualities of paper. Other raw materials
include printing ink, lithographic plate material and chemicals. The Company has
a policy of purchasing its paper supplies from several major paper mills. In
1995, bond paper prices, the principal paper used by the Company, increased
substantially. Since that time, paper prices have leveled off and selected
weights of bond paper prices have decreased. The Company anticipates that paper
prices may begin to increase in 1999. The Company believes that paper and other
raw materials will be sufficiently available for the foreseeable future.
To the best of the Company's knowledge, it complies with all applicable
federal, state and local environmental regulations governing the discharge of
materials into the environment. Compliance with applicable environmental
regulations has not had and, it is anticipated, will not have a material adverse
effect on the Company's capital expenditures, earnings or competitive position.
COMPETITION
The forms industry is highly competitive and fragmented. The Company has a
number of competitors with substantially larger resources. The Company believes
it is the 14th largest United States business forms manufacturer. This position
enables the Company to specialize in a smaller product line. The ability to
specialize allows the Company to focus its capital and create economies of scale
through more efficient production techniques and significantly limit the number
of its direct competitors. The Company believes that the principal competitive
factors in the form industry are specialization, service, quality and price.
The internal bank forms portion of the Company's market is very competitive and
especially price and service sensitive with the top 200 banks in the country.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company operates manufacturing and warehousing facilities in five
states as follows:
<TABLE>
<CAPTION>
Square Feet
of Floor Space
-------------------------
Location Leased Owned
-------- ------ -----
<S> <C> <C>
Brooklyn Park, Minnesota 94,800
Nevada, Iowa 48,500
Roseville, Minnesota 42,500
Shoreview, Minnesota 24,000
Milwaukee, Wisconsin 10,000
Bridgewater, Virginia 25,000
Golden, Colorado 23,000
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TOTAL 124,500 143,300
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------- -------
</TABLE>
The Company's general offices are located in Brooklyn Park, Minnesota. All
of the above properties are used for the production, warehousing and shipping of
forms. Production capacity fluctuates with the ebb and flow of market demands.
Equipment, substantially all of which is owned by the Company, is added as
existing machinery becomes obsolete or irreparable, and as new equipment becomes
necessary to meet market demands. The Company may make material additions to
property, plant and equipment, with the expectation that such additions or
replacements will increase a plant's capacity and efficiency.
All of the above-discussed facilities are deemed to be in good condition.
The lease on the Bridgewater facility will expire on May 31, 2001. The Company's
Milwaukee property lease will expire on June 30, 1999 and the Company is in the
process of determining if that operation should be moved to a larger facility.
The Golden property lease is a new facility which commenced on July 1, 1998 and
will expire September 1, 2005. The lease of the Roseville property expires
August 31, 2007. The Shoreview facility is used as warehousing space for the
Roseville facility and is leased until July 31, 1999. Management of the Company
believes that each of these facilities is adequately covered by insurance. These
property locations are expected to be adequate for operations during the
remaining lease terms. No difficulty is presently foreseen in renewing the
leases or finding replacement facilities.
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The Brooklyn Park, Minnesota and Nevada, Iowa plants are owned outright by
the Company, which is the only company occupying these properties. The Brooklyn
Park facility is financed by Variable Rate Industrial and Development Bonds in
the amount of $2,945,000, of which $2,010,000 was outstanding at October 31,
1998. The bonds are collateralized by a bank letter of credit and are payable in
annual $335,000 installments through fiscal year 2004. The bank letter of credit
is collateralized by a mortgage on the facility. The Nevada plant is also
mortgaged for the Term Loan.
ITEM 3. LEGAL PROCEEDINGS
There are presently no material claims, legal proceedings, or litigation
pending or threatened to which the Company or GFS is a party; and no claims,
litigation or legal proceedings which are expected to have a material adverse
effect on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY-HOLDERS
No matters were submitted during the fourth quarter of the Company's 1998
fiscal year to a vote of security holders, through the solicitation of proxies
or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference
to page 8 of the Company's Annual Report to Shareholders for the fiscal year
ended October 31, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference
to page 8 of the Company's Annual Report to Shareholders for the fiscal year
ended October 31, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The information required by this item is incorporated herein by reference
to (printed) pages 9-11 of the Company's Annual Report to Shareholders for the
fiscal year ended October 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference
to (printed) pages 12-22 of the Company's Annual Report to Shareholders for the
fiscal year ended October 31, 1998.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the Company's directors and executive
officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Roger T. Bredesen 72 Chairman of the Board and
Chief Executive Officer
John Mutschler 70 Director
J.S. Braun 66 Director
Roy W. Terwilliger 61 Director
Dr. Lester A Wanninger 61 Director
Kenneth E. Overstreet 57 President, Director
Mary Ann Morin 51 Treasurer and Chief Financial
Officer
Don E. Dearborn 58 Vice President (GFS)
Stanley J. Klarenbeek 45 Vice President Sales and
Marketing, Internal Bank
Forms
</TABLE>
The following is a list of each of the above person's principal occupations
or employment during the past five years. All directors have been elected to
serve until the next annual election of directors which is expected to occur in
April of 1999 at the annual meeting of the shareholders, or until their earlier
resignation or removal pursuant to the Bylaws of the Company. Officers are
appointed by the Board of Directors to serve until the next annual election by
the Board of Directors, which may be set in accordance with the Bylaws of the
Company at any time after the end of the fiscal year on October 31st of each
year, or until their earlier resignation or removal by the Board of Directors.
ROGER T. BREDESEN. Mr. Bredesen is the founder and has been the Chief
Executive Officer and Chairman of the Board of Directors of the Company since
its incorporation in 1964.
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JOHN MUTSCHLER. Mr. Mutschler has been a Director of the Company since
1972. Mr. Mutschler is an attorney in Minnesota, and since 1958 has been the
President of John G. Mutschler & Associates, Inc., a firm which designs and
administers qualified pension and profit-sharing plans. He has also been the
President of JGM Agency, Inc., a firm engaged in the management of real estate,
since 1980.
J.S. BRAUN. Mr. Braun has been a Director of the Company since 1992. Mr.
Braun is the Chairman of Braun Intertec Corporation, an engineering and
environmental consulting firm that he founded in 1957, Board member of Community
Bank Group and Vice Chairman of a joint venture firm in China, Yucai-Braun
Intertec.
ROY W. TERWILLIGER. Mr. Terwilliger has been a director of the Company
since 1994. Since 1992, Mr. Terwilliger has been a Minnesota Senator in District
42. Since 1989, Mr. Terwilliger has been President of Community Bank Group, Inc.
of Eden Prairie, Minnesota.
DR. LESTER A. WANNINGER. Dr. Wanninger has been a Director of the Company
since 1996. Since 1989, Dr. Wanninger has been a faculty member and coordinator
of extension classes in Information and Decision Sciences at the Carlson School
of Management of the University of Minnesota. Dr. Wanninger has a Ph.D. in
chemical engineering.
KENNETH E. OVERSTREET. Mr. Overstreet has been a director since 1993. Since
December 1994, Mr. Overstreet has been the President of the Company. From 1989
to 1994, he was the Executive Vice President of the Company.
MARY ANN MORIN. Ms. Morin was elected as Chief Financial Officer of the
Company in 1996. She has been Treasurer since 1992 and Assistant Treasurer and
Controller of the Company since 1983. Ms. Morin is a certified public
accountant.
DON E. DEARBORN. Mr. Dearborn has been the general manager of GFS since
1985, and a vice president since 1988.
STANLEY J. KLARENBEEK. Mr. Klarenbeek has been Vice President Sales and
Marketing of GFS since 1990. In December 1997, Mr. Klarenbeek was appointed Vice
President Sales and Marketing for Internal Bank Forms.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table summarizes the cash and non-cash compensation paid to
or earned by the Company's Chief Executive Officer and its three other executive
officers during the past three fiscal years whose annual salary and bonus
exceeded $100,000 during the Company's fiscal year ended October 31, 1998.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
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NAME AND FISCAL ANNUAL COMPENSATION LONG-TERM COMPENSATION ALL OTHER
PRINCIPAL YEAR ENDED -------------------------------------------------- COMPENSATION
POSITION OCTOBER 31, SALARY ($) BONUS ($) AWARDS OF OPTIONS (#) ($)(1)
- -------------------------------------------------------------------------------------------------------------------
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<S> <C> <C> <C> <C> <C>
1998 200,000 25,000 -0- 86,987(2)
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Roger T. Bredesen,
Chairman of 1997 200,000 50,000 -0- 87,799(2)
the Board and Chief
Executive Officer
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1996 180,726 25,000 -0- 5,008
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1998 180,000 38,924 -0- 28,429(3)
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Kenneth E.
Overstreet, 1997 160,000 64,382 -0- 20,573(3)
President and
Director
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1996 122,894 28,198 -0- 19,897
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- -------------------------------------------------------------------------------------------------------------------
1998 90,000 17,060 -0- 13,853
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Mary Ann Morin, 1997 84,929 30,546 -0- 15,353
Treasurer and Chief
Financial Officer
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1996 67,597 11,621 6,000 15,064
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- -------------------------------------------------------------------------------------------------------------------
1998 106,000 11,766 -0- 7,171
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Stanley Klarenbeek, 1997 76,657 27,652 20,000 4,664
Vice President, Sales
and Marketing
Internal Bank Forms
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1996 76,911 16,130 6,000 4,931
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</TABLE>
(1) Other compensation includes contributions under the Company's Profit
Sharing Plan and Trust ($8,641, $8,641, $5,428 and $7,171 in 1998 to each
of Messrs./Ms. Bredesen, Overstreet, Morin and Klarenbeek, respectively)
and the value of deferred compensation benefits under the Company's
Deferred Compensation Plan ($8,938 and $8,425 in 1998 for Mr. Overstreet
and Ms. Morin, respectively).
(2) Also includes amounts paid as deferred compensation pursuant to an annual
deferred compensation benefit established pursuant to Mr. Bredesen's
employment agreement with the Company ($67,496 in 1998 and $65,786 in 1997)
and directors' fees.
(3) Also includes amounts paid as directors' fees.
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STOCK OPTIONS
The following table summarizes the value of the unexercised options held by
the executive officers named in the Summary Compensation table as of October 31,
1998:
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
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- -------------------------------------------------------------------------------------------------------------------
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE(1) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Roger T. Bredesen 10,000 $32,500 0/0 0/0
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Kenneth Overstreet 40,000 162,520 58,998/11,002(3) $152,399/24,250
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Mary Ann Morin N/A N/A 12,600/5,400(4) $30,213/6,507
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Stanley Klarenbeek 2,250 $23,063 3,600/35,400(4) $4,338/6,507
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</TABLE>
(1) Price and number of shares adjusted for May 13, 1998 3 for 2 stock split.
(2) Value of unexercised options is calculated by determining the difference
between the fair market value of the shares underlying the options at
October 31, 1998 and the exercise price of the options.
(3) Consists of options to purchase 10,000 shares for serving on the Board of
Directors, and 60,000 shares under the Company's 1994 Employees Incentive
Stock Option Plan (the "1994 Plan").
(4) Granted pursuant to the 1994 Plan.
DIRECTORS' COMPENSATION
Directors receive annual directors' fees of $3,000 plus $800 per meeting
attended (except for the Chairmen of the Compensation and Audit Committees, who
are paid $1,000 per meeting attended). In addition, directors of the Company
receive options to purchase an aggregate of 10,000 shares of the Company's
Common Stock at a purchase price equal to the closing price of the Common Stock
on the date of grant.
The options are granted on the date a director is elected to the Board and
vest and become exercisable over a five year period at the rate of twenty
percent (20%) per year commencing one year from the date of grant. Mr.
Terwilliger and Dr. Wanninger were granted their options under the Company's
Outside Directors Stock Option Plan (the "Directors Plan") which provides
formula grants of stock options to outside (non-employee) directors ("Outside
Directors"). Options granted under the Directors Plan expire at the earlier of
(i) ten years from the date of grant, or (ii) one year after the Outside
Director ceases to be a member of the Board.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Roger T. Bredesen,
its Chief Executive Officer, effective December 17, 1986, to serve in such
capacity until terminated by one of the parties upon 90 days notice. Mr.
Bredesen's annual base salary under the employment
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agreement is adjusted annually by the Compensation Committee of the Board of
Directors (in 1998, Mr. Bredesen's base salary was $200,000). The employment
agreement also establishes a ten year deferred compensation arrangement under
which Mr. Bredesen began receiving payments in November 1996 and pursuant to
which he received $67,494.00 for 1998.
The Company entered into an employment agreement with Kenneth E.
Overstreet, its President, effective May 10, 1989, to serve originally as its
Executive Vice President until terminated by one of the parties. Mr.
Overstreet's annual base salary under the employment agreement is adjusted
annually by the Compensation Committee of the Board of Directors (in 1998, Mr.
Overstreet's base salary was $180,000). The employment agreement also granted to
Mr. Overstreet an option to purchase 40,000 shares of the Company's Common Stock
at a purchase price of $3.00 per share, which was exercised during the Company's
1998 fiscal year. Mr. Overstreet has agreed not to compete with the Company for
a period of two years after the termination of his employment.
The Company and/or GFS have also entered into employment agreements with
each of Mary Ann Morin, Don Dearborn and Stanley Klarenbeek, effective January
3, 1989, in the case of Ms. Morin and Mr. Dearborn, respectively, and May 1,
1990 in the case of Mr. Klarenbeek, to serve as officers of the Company and GFS
(as appropriate) until terminated by one of the parties. Each officer's annual
base salary under their respective employment agreements is adjusted annually by
the Compensation Committee of the Board of Directors (in 1998, Ms. Morin's, Mr.
Dearborn's and Mr. Klarenbeek's base salary was $90,000, $82,000 and $106,000,
respectively). Under the employment agreements, each has agreed not to compete
with the Company and/or GFS, as appropriate, for a period of two years after the
termination of his or her employment.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW, PHILOSOPHY AND OBJECTIVES
The Compensation Committee of the Board of Directors, composed of three
non-employee directors, is responsible for determining and periodically
evaluating various levels and methods of compensating the Company's employees,
directors and officers. The Committee recommends, on an annual basis, the
compensation to be paid to the Chief Executive Officer and each of the other
executive officers of the Company. Such recommendations are then discussed by
the Board of Directors, which is ultimately responsible for incentive
compensation. The Committee also evaluates and oversees other, more broadly
based benefit programs of the Company. The objective of the Compensation
Committee is to establish a compensation program for executive officers that
will motivate and retain management, recognize and reward individual
performance, and align the financial interests of the executive officers with
the success of the Company.
EXECUTIVE OFFICER COMPENSATION
The Company's executive officer compensation, including that of the Chief
Executive Officer, consists of base salary, annual cash bonuses, long term
incentive compensation in the form of stock options and other long term deferred
compensation. Executive officers are also
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entitled to participate in various benefits offered to all of the Company's
employees such as profit sharing plan contributions.
BASE SALARY. The Compensation Committee meets in December of each year to
recommend executive officer base salaries for the succeeding calendar year. Base
salary decisions are based on what the Committee believes is reasonable in light
of each executive's individual performance, the financial results of the Company
for the preceding fiscal year, compensation paid to executive officers in prior
years and compensation being paid to executive officers of companies similar (in
terms of size, type of business, etc.) to the Company.
ANNUAL CASH BONUS. In addition to base compensation, the Committee reviews
an annual bonus pool pursuant to a formula (previously adopted by the Board)
based on return on shareholders equity. For 1998, the pool consisted of 4.625%
of the Company's fiscal year net income before taxes, profit sharing, bonus and
deferred compensation up to 15% return on shareholders equity plus 8% of its net
income above a 15% return on shareholder's equity. After calculating this
amount, which for fiscal 1998 was an aggregate of $203,805, the Chief Executive
Officer then divides this pool among the executive officers and other employees
over a specified seniority level pursuant to a point system which allocates
points among participants according to their level of responsibility. The Chief
Executive Officer adds up the number of points assigned to all participants in
the bonus pool and divides that total into the amount of the bonus pool yielding
a bonus amount per point. For example, Kenneth E. Overstreet was allocated 2,881
points in fiscal 1998 and the least senior employee in the pool was allocated 82
points. All employees participating in the bonus program were allocated a total
of 15,085 points, yielding a bonus amount per point of $13.51, which, in Mr.
Overstreet's case, translated to a bonus of $38,924. The Committee has the
discretion, which it has exercised in prior years, to adjust the aggregate
amount of the bonus pool upwards or downwards.
STOCK OPTION PLAN. The Company also grants stock options under the
shareholder-approved 1994 Employees' Incentive Stock Option Plan to executive
officers, key personnel and other employees as long term incentive compensation.
Currently, 248,575 shares of common stock are reserved for issuance upon
exercise of options granted under the Stock Option Plan (out of a total of
500,575 shares available under the Plan). Options are granted at prices equal to
the fair market value of the Company's Common Stock on the date of grant. The
Committee encourages the use of stock options as a component of compensation
because it believes that options most closely tie executive officer compensation
to the financial performance of the Company, as evidenced by its stock price. In
fiscal 1998, the Company awarded no options to its executive officers.
CHIEF EXECUTIVE OFFICER COMPENSATION.
Roger Bredesen is the founder of the Company and has been its Chief
Executive Officer since its inception in 1962. Mr. Bredesen's base salary for
fiscal 1998 and 1997 was $200,000. Mr. Bredesen was granted a bonus of $25,000
in fiscal 1998, which bonus was subjectively determined and recommended by the
Committee and not based on the annual bonus formula specified above. Mr.
Bredesen also received an aggregate of $67,496 in deferred compensation pursuant
to his employment agreement with the Company, which provides for payments to be
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paid over 10 years at a rate which is subject to adjustment annually based upon
changes in the Consumer Price Index. Mr. Bredesen began receiving these payments
in November 1996.
The Compensation Committee will continue to evaluate the Company's
executive officer compensation program to ensure that it continues to be
reasonable, performance-based and consistent with the Company's overall
compensation objectives.
SUBMITTED BY THE COMPENSATION COMMITTEE
OF THE COMPANY'S BOARD OF DIRECTORS:
John G. Mutschler, Chairman
J.S. Braun
Roy W. Terwilliger
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION AND COMPENSATION
DECISIONS
As noted above, the Company's Compensation Committee consists of John G.
Mutschler, Chairman, J.S. Braun and Roy W. Terwilliger. No executive officer of
the Company is a member of the Compensation Committee.
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total shareholder return on the
Company's Common Stock for the last five fiscal years with the cumulative total
return of the Dow Jones Publishing Index (consisting of a group of 12 companies)
(the "Industry Index") and the Nasdaq Stock Market (the "Nasdaq Index").
[GRAPH]
<TABLE>
<CAPTION>
10-93 10-94 10-95 10-96 10-97 10-98
<S> <C> <C> <C> <C> <C> <C>
Nasdaq $100 $100 $135 $160 $210 $235
NSCF $100 $109 $123 $133 $280 $170
Dow Jones
Publishing Index $100 $ 99 $117 $141 $187 $209
</TABLE>
14
<PAGE>
Assumes $100 invested in close of trading on the last trading day preceding the
first day of the fifth preceding year in the Company's Common Stock, the
Industry Index, and the Nasdaq Index. The cumulative total return assumes the
reinvestment of dividends.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
To the knowledge of the Company, based solely upon review of Forms 3 and
4 and amendments thereto furnished to the Company during the fiscal year
ended October 31, 1998, pursuant to Rule 16(a)-3(e) of the Rules and
Regulations promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and forms 5 and amendments thereto furnished to the
Company with respect to its fiscal year ended October 31, 1998, no one failed
to file, on a timely basis, such filings for the Company's 1998 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth as of January 1, 1999 the number of
shares of Common Stock beneficially owned by each person known to the Company
to be the beneficial owner of more than five percent (5%) of the outstanding
shares of the Company's capital stock, by each director and by all executive
officers and directors as a group. Except as otherwise indicated, the persons
listed possess all voting and investment power with respect to the shares
listed for them.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------- -------------------- ---------------
<S> <C> <C>
Roger T. Bredesen 211,698 Shares (1) 7.5%
7130 Northland Circle North
Brooklyn Park, MN 55428
Roger T. Bredesen 214,800 Shares 7.6%
Income Trust A dated
June 29, 1990
E. Burke Hinds, Trustee
150 So. 5th Street, Suite 1800
Minneapolis, MN 55402
Roger T. Bredesen 214,800 Shares 7.6%
Income Trust B dated
June 29, 1990
Clarence J. Hynes, Trustee
1433 Utica Avenue So.
Minneapolis, MN 55416
15
<PAGE>
E. Fay Bredesen Income Trust 223,105 Shares 7.9%
dated June 29, 1990
Wendall J. Davidson, Trustee
11931 54th Avenue So.
Minneapolis, MN 55442
E. Fay Bredesen 1996 Annuity 168,997 Shares 6.0%
Trust U/A dated December 20, 1996
E. Fay Bredesen and E. Burke
Hinds, Trustees
150 So. Fifth Street, Suite 1800
Minneapolis, MN 55402
E. Burke Hinds 428,140 Shares (2) 15.2%
150 So. Fifth Street, Suite 1800
Minneapolis, MN 55402
John Mutschler 8,500 Shares (3) *
7130 Northland Circle North
Brooklyn Park, MN 55428
Kenneth E. Overstreet 102,214 Shares (4) 3.6%
7130 Northland Circle North
Brooklyn Park, MN 55428
J.S. Braun 13,999 Shares (5) *
7130 Northland Circle North
Brooklyn Park, MN 55428
Roy W. Terwilliger 6,000 Shares (6) *
7130 Northland Circle North
Brooklyn Park, MN 55428
Dr. Lester A. Wanninger 4,000 Shares (7) *
7130 Northland Circle North
Brooklyn Park, MN 55428
All executive officers (4)
and directors as a group
(9 individuals) 404,284 Shares (1, 3-8) 14.4%
</TABLE>
- --------------------------------
* Represents less than 1%
(1) Includes 44,343 shares held in an annuity trust, 8,156 shares in a
revocable trust and 14,199 shares held in the Company's Profit Sharing Plan
and Trust in a segregated directed account.
(2) Represents 214,800 shares beneficially owned by the Roger T. Bredesen
Income Trust A dated June 29, 1990, 168,997 shares beneficially owned by
the E. Fay Bredesen 1996 Annuity Trust U/A dated December 20, 1996
16
<PAGE>
and 44,343 shares beneficially owned by the Roger T. Bredesen 1996 Annuity
Trust U/A dated December 20, 1996, as to all of which trusts Mr. Hinds
serves as trustee.
(3) Includes 7,000 shares owned by Mr. Mutschler's spouse.
(4) Includes 58,998 shares issuable upon exercise of currently exercisable
options and 3,216 shares held in the Company's Profit Sharing Plan in a
segregated directed account.
(5) Includes 10,000 shares issuable upon exercise of currently exercisable
options.
(6) Consists of 6,000 shares issuable under currently exercisable options.
(7) Consists of 4,000 shares issuable upon exercise of currently exercisable
options.
(8) Includes 19,800 shares issuable to three officers upon exercise of
currently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective August 1997, the Company leased its Roseville, Minnesota facility
from two trusts controlled by Roger T. Bredesen and his spouse, E. Fay Bredesen.
The facility is rented at an annual rate of $191,000 (for the first three Lease
years and then escalates based on various price indices thereafter) plus taxes,
utilities, insurance, certain repair and maintenance obligations and other
operating costs for the property. The initial term of the Lease is 10 years with
the Company having the right to extend the term for two additional periods of
five years each.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
1. Financial Statements:
All financial statements of the Company as set forth under Item 8 of
this Report.
2. Financial Statement Schedules:
The following financial statement schedules and opinion thereon are
filed as a part of this Report:
Financial Statement Schedule II-Valuation and Qualifying Accounts for
the fiscal years ended October 31, 1998, 1997 and 1996, respectively.
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Title Method of Filing
------- ----- ----------------
<S> <C> <C>
3.1 Restated Articles of Incorporation (1)
of the Company, as amended
3.2 Restated and Amended Bylaws (7)
of the Company
4 Instruments defining rights of (1)
security holders
17
<PAGE>
<CAPTION>
Exhibit
Number Title Method of Filing
------- ----- ----------------
<S> <C> <C>
10.1 Employment Agreement of Roger (1)
Bredesen
10.1(a) Employment Agreement, dated May 10,
1989, of Kenneth E. Overstreet (1)
10.3 Northstar Computer Forms, Inc. (1)
Deferred Compensation Plan for
Officers of the Company
10.4 Northstar Computer Forms, Inc. (1)
Amended and Restated Employees'
Profit Sharing Plan and Trust
10.4.1 Amendment to Northstar Computer (2)
Forms, Inc. Amended and Restated
Employees' Profit Sharing Plan
10.4.2 General Financial Supply, Inc. (2)
Amended and Restated Employees'
Profit Sharing Plan and Trust
10.6 Milwaukee, Wisconsin Lease (1)
10.6(a) Fifth and Sixth Addendums dated (4)
March 10, 1994 and December 13,
1994, respectively, to Milwaukee,
Wisconsin Lease
10.7 Bridgewater, Virginia Lease, (7)
dated March 10, 1997
10.12 1994 Employees' Incentive (3)
Stock Option Plan
10.12(a) First Amendment to 1994 Employees' (7)
Incentive Stock Option Plan
10.16 Loan Agreement between Brooklyn (4)
Park Economic Development Authority
and the Company dated August 1, 1994
18
<PAGE>
<CAPTION>
Exhibit
Number Title Method of Filing
------- ----- ----------------
<S> <C> <C>
10.17 Indenture of Trust between Brooklyn (4)
Park Economic Development Authority
and First Trust National Association
dated August 1, 1994
10.18 Reimbursement Agreement between First (4)
Bank National Association and the
Company dated August 1, 1994
10.19 First Bank National Association (4)
Initial Letter of Credit dated
August 25, 1994
10.20 Northstar Computer Forms Outside (5)
Directors Stock Option Plan
10.22 Equipment Lease Agreement effective (7)
as of July 16, 1997 between Northstar
Computer Forms, Inc. and Deluxe
Financial Services, Inc.
10.23 Sublease dated January 31, 1997 between (7)
Northstar Financial Forms, Inc., as sublessee,
and Deluxe Corporation, as sublessor, under
a Master Lease dated September 24, 1993
between St. Paul Properties, Inc., as lessor,
and Deluxe Corporation, as sublessee
10.24 Lease effective August 22, 1997, by and (7)
between Northstar Computer Forms, Inc.,
as tenant, and Roger T. Bredesen and
E. Fay Bredesen as trustees under certain
revocable trusts
10.25 Employment Agreement, dated January (7)
3, 1989 between Northstar Computer Forms,
Inc. and Mary Ann Morin
19
<PAGE>
<CAPTION>
Exhibit
Number Title Method of Filing
------- ----- ----------------
<S> <C> <C>
10.26 Employment Agreement, dated January (7)
3, 1989 between General Financial Supply,
Inc. and Don Dearborn
10.27 Employment Agreement, dated May 1, 1990, (7)
between General Financial Supply, Inc.
and Stan Klarenbeek
10.28 Lease, dated May 1, 1998, by and between Filed herewith
Sun River Properties, Inc., and Northstar
Computer Forms, Inc., relating to the
Company's Golden, Colorado, facility
10.29 Customer Alliance Agreement, dated Filed herewith
November 5, 1998, by and between
Northstar Computer Forms, Inc.,
and NCR Corporation
13 Annual Report to Shareholders Filed herewith
(only those portions specifically
incorporated by reference herein shall be
deemed filed with the Commission)
22 Subsidiaries of the Company (1)
23.1 Consent of PricewaterhouseCoopers L.L.P. Filed herewith
27 1998 Fiscal Year End Financial Data Filed herewith
Schedules
99 Cautionary Statement Relating to Filed herewith
Forward-Looking Information
</TABLE>
- ---------------------------------
(1) Exhibits so marked were filed with the Securities and Exchange Commission
on May 7, 1991, as exhibits to the Form 10 of Northstar Computer Forms,
Inc., and are incorporated herein by reference and made a part hereof.
(2) Exhibits so marked were filed with the Securities and Exchange Commission
on January 27, 1993, as exhibits to the Form 10-KSB of Northstar Computer
Forms, Inc., and are incorporated herein by reference and made a part
hereof.
(3) Exhibits so marked were filed with the Securities and Exchange Commission
on January 25, 1994, as exhibits to the Form 10-KSB of Northstar Computer
Forms, Inc., and are incorporated herein by reference and made a part
hereof.
20
<PAGE>
(4) Exhibits so marked were filed with the Securities and Exchange Commission
on January 27, 1995, as exhibits to the Form 10-KSB of Northstar Computer
Forms, Inc., and are incorporated herein by reference and made a part
hereof.
(5) Exhibits so marked were filed with the Securities and Exchange Commission
on June 14, 1995, as exhibits to the Form 10-QSB of Northstar Computer
Forms, Inc., and are incorporated herein by reference and made a part
hereof.
(6) Exhibits so marked were filed with the Securities and Exchange Commission
on January 29, 1997, as exhibits to the Form 10-KSB of Northstar Computer
Forms, Inc., and are incorporated herein by reference and made a part
hereof.
(7) Exhibits so marked were filed with the Securities and Exchange Commission
on January 29, 1998, as exhibits to the Form 10-KSB of Northstar Computer
Forms, Inc., and are incorporated herein by reference and made a part
hereof.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
(d) FINANCIAL STATEMENT SCHEDULES.
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors
of Northstar Computer Forms, Inc.
Our report on the consolidated financial statements of Northstar Computer
Forms, Inc. and Subsidiary has been incorporated by reference in this Form
10-K from (printed) page 22 of the 1998 Annual Report to Stockholders of
Northstar Computer Forms, Inc. and Subsidiary. In connection with our audits
of such financial statements, we have also audited the related financial
statement schedule included in Item 14(d) of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
December 23, 1998
22
<PAGE>
SCHEDULE II
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column B Column C - Additions Column E
-------- -------------------- --------
Column A Balance at Charged to Charged to Column D Balance at
-------- beginning of costs and other -------- end of
Descriptions period expenses accounts Deductions period
------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1996
Allowance for doubtful accounts ....... $ 109,000 $ 68,260 $ - $ 33,260 $ 144,000
Year ended October 31, 1997
Allowance for doubtful accounts ....... 144,000 172,319 - 22,319 294,000
Year ended October 31, 1998
Allowance for doubtful accounts ....... 284,000 (68,517) - 87,483 138,000
</TABLE>
23
<PAGE>
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.
NORTHSTAR COMPUTER FORMS, INC.
By: /s/ Mary Ann Morin
-------------------------------
Mary Ann Morin, Treasurer
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Roger T. Bredesen 1/23/99
- ----------------------------------------- --------
Roger T. Bredesen, Chairman of the Board, Date
President and Chief Executive Officer
/s/ John Mutschler 1/23/99
- ----------------------------------------- --------
John Mutschler, Director Date
/s/ Kenneth E. Overstreet 1/23/99
- ----------------------------------------- --------
Kenneth E. Overstreet, Director Date
/s/ J.S. Braun 1/23/99
- ----------------------------------------- --------
J. S. Braun, Director Date
/s/ Roy W. Terwilliger 1/23/99
- ----------------------------------------- --------
Roy W. Terwilliger, Director Date
/s/ Dr. Lester A. Wanninger 1/23/99
- ----------------------------------------- --------
Dr. Lester A. Wanninger, Director Date
24
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
The acronym FLA means "First Lease Addendum" when referenced herein.
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, May 1, 1998, is made by and between Sun River Properties, Inc., a
California Corporation ("LESSOR") and Northstar Computer Forms, Inc. a
Minnesota Corporation, ("LESSEE"), (collectively the "PARTIES," or individually
a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, commonly known by the street address of 4403 Table Mountain Drive,
Ste. B, located in the City of Golden, County of Jefferson, State of
Colorado, with zip code 80403, as outlined on Exhibit A attached hereto
("PREMISES"). The "BUILDING" is that certain building containing the Premises
and generally described as (describe briefly the nature of the Building):
23,042 +/- square feet in the Bolder Technologies Building in the Coors
Technology Center In addition to Lessee's rights to use and occupy the
Premises as hereinafter specified, Lessee shall have non-exclusive rights to
the Common Areas (as defined in Paragraph 2.7 below) as hereinafter
specified, but shall not have any rights to the roof, exterior walls or
utility raceways of the Building or to any other buildings in the Industrial
Center. The Premises, the Building, the Common Areas, the land upon which
they are located, along with all other buildings and improvements thereon,
are herein collectively referred to as the "INDUSTRIAL CENTER." (Also see
Paragraph 2.)
1.2(b) PARKING: a minimum of 30 unreserved vehicle parking spaces
("UNRESERVED PARKING SPACES"); and NO reserved vehicle parking spaces
("RESERVED PARKING SPACES"). (Also see Paragraph 2.6.) See FLA Para. 49
1.3 TERM: -7- years and -2- months ("ORIGINAL TERM") commencing
July 1, 1998 subject to FLA Para. 50/5 ("COMMENCEMENT DATE") and ending 86
calendar months thereafter ("EXPIRATION DATE"). (Also see Paragraph 3.)
1.4 EARLY POSSESSION: NONE ("EARLY POSSESSION DATE"). (Also see
Paragraphs 3.2 and 3.3.)
1.5 BASE RENT: $9,178.40 per month ("BASE RENT"), payable on the
first day of each month commencing July 1, 1998 (Also see Paragraph 4.)
Subject to FLA Para. 50 & 55
/X/ If this box is checked, this Lease provides for the Base Rent to be
adjusted per FLA, attached hereto. Para. 51
1.6(a) BASE RENT PAID UPON EXECUTION: $0.00 as Base Rent for the
period N/A.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: 15.38%
("LESSEE'S SHARE") as determined by /X/ prorata square footage
of the Premises as compared to the total square footage of the Building.
1.7 SECURITY DEPOSIT: $ None required ("SECURITY DEPOSIT")
(Also see Paragraph 5.)
1.8 PERMITTED USE: The production of printed business forms, or
any other lawful use permitted under this Lease agreement. ("PERMITTED USE")
(Also see Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY." (Also see
Paragraph 8.)
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
See Exhibit "H" and FLA Para. 56
/X/ CB Commercial Real Estate Group represents Lessor exclusively ("LESSOR'S
BROKER"); James M. Bolt
/X/ Corporate Facility Consulting (CFC) represents Lessee exclusively
("LESSEE'S BROKER"); James A. Cloud
/ / ________________________ represents both Lessor and Lessee
("DUAL AGENCY"). (Also see Paragraph 15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate
shares as they may mutually designate in writing, a fee as set forth in a
separate written agreement between Lessor and said Broker(s) (or in the event
there is no separate written agreement between Lessor and said Broker(s), for
brokerage services rendered by said Broker(s) in connection with this
transaction.
_____________________________________________________________________________
_____________________________________________________________________________
("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or
Addenda consisting of Paragraphs -49- through -78, and Exhibits -A-
through -H-, all of which constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all
of the terms, covenants and conditions set forth in this Lease. Unless
otherwise provided herein, any statement of square footage set forth in this
Lease, or that may have been used in calculating rental and/or Common Area
Operating Expenses, is an approximation which Lessor and Lessee agree is
reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b))
based thereon is not subject to revision whether or not the actual square
footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean
and free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, electrical systems, fire sprinkler system, lighting, air
conditioning and heating systems and loading doors, if any, in the Premises,
other than those constructed by Lessee, shall be in good operating condition
on the Commencement Date. If a non-compliance with said warranty exists as of
the Commencement Date, Lessor shall, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within thirty (30) days after the
Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense. See FLA Para
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants that any improvements (other than those constructed by Lessee
or at Lessee's direction) on or in the Premises which have been constructed
or installed by Lessor or with Lessor's consent or at Lessor's direction
shall comply with all applicable covenants or restrictions of record and
applicable building codes, regulations and ordinances in effect on the
Commencement Date. Lessor further warrants to Lessee that Lessor has no
knowledge of any claim having been made by any governmental agency that a
violation or violations of applicable building codes, regulations, or
ordinances exist with regard to the Premises as of the Commencement Date.
Said warranties shall not apply to any Alterations or Utility Installations
(defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises
do not comply with said warranties, Lessor shall, except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
given within six (6) months following the Commencement Date and setting forth
with specificity the nature and extent of non-compliance, take such action,
at Lessor's expense, as may be reasonable or appropriate to rectify the
non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph
1.8 is permitted for the Premises under Applicable Laws (as defined in
Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and
fire sprinkler systems, security, environmental aspects, seismic and
earthquake requirements, and compliance with the Americans with Disabilities
Act and applicable zoning, municipal, county, state and federal laws,
ordinances and regulations and any covenants or restrictions of record
(collectively, "APPLICABLE LAWS") and the present and future suitability of
the Premises for Lessee's intended use; (b) that Lessee has made such
investigation as it deems necessary with reference to such matters, is
satisfied with reference thereto, and assumes all responsibility therefore as
the same relate to Lessee's occupancy of the Premises and/or the terms of
this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made
any oral or written representations or warranties with respect to said
matters other than as set forth in this Lease.
INITIALS: KEO
-----
SD
MULTI-TENANT--MODIFIED NET -----
- -C- American Industrial Real Estate Association 1993
<PAGE>
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces free of rent, toll or
other charge throughout the Lease term and options specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said
number. Said parking spaces shall be used for parking by vehicles no larger
than full-size passenger automobiles or pick-up trucks, herein called
"PERMITTED SIZE VEHICLES." Vehicles other than Permitted Size Vehicles shall
be parked and loaded or unloaded as directed by Lessor in the Rules and
Regulations (as defined in Paragraph 40) issued by Lessor. (Also see
Paragraph 2.9). See FLA Para. 49
(a) Lessee shall not permit or allow any vehicles that
belong to or are controlled by Lessee or Lessee's employees, suppliers,
shippers, customers, contractors or invitees to be loaded, unloaded, or parked
in areas other than those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may
have, to remove or tow away the vehicle involved and charge the cost to
Lessee, which cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease,
provide the parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined
as all areas and facilities outside the Premises and within the exterior
boundary line of the Industrial Center and interior utility raceways within
the Premises that are provided and designated by the Lessor from time to time
for the general non-exclusive use of Lessor, Lessee and other lessees of the
Industrial Center and their respective employees, suppliers, shippers,
customers, contractors and invitees, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to
Lessee, for the benefit of Lessee and its employees, suppliers, shippers,
contractors, customers and invitees, during the term of this Lease, the
non-exclusive right to use, in common with others entitled to such use, the
Common Areas as they exist from time to time, subject to any rights, powers,
and privileges reserved by Lessor under the terms hereof or under the terms
of any rules and regulations or restrictions governing the use of the
Industrial Center. Under no circumstances shall the right herein granted to
use the Common Areas be deemed to include the right to store any property,
temporarily or permanently, in the Common Areas. Any such storage shall be
permitted only by the prior written consent of Lessor or Lessor's designated
agent, which consent may be revoked at any time. In the event that any
unauthorized storage shall occur then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to time,
to establish, modify, amend and enforce reasonable Rules and Regulations with
respect thereto in accordance with Paragraph 40. Lessee agrees to abide by
and conform to all such Rules and Regulations, and to cause its employees,
suppliers, shippers, customers, contractors and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in
Lessor's sole discretion, from time to time: See Note 1.
(a) To make changes to the Common Areas, including,
without limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and unloading
areas, ingress, egress, direction of traffic, landscaped areas, walkways and
utility raceways;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the
Common Areas;
(e) To use the Common Areas while engaged in making
additional improvements, repairs or alterations to the Industrial Center, or
any portion thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgment, deem to be
appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3.
3.3 DELAY IN POSSESSION. See FLA Para. 55
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or
charges, as the same may be adjusted from time to time, to Lessor in lawful
money of the United States, without offset or deduction, on or before the day
on which it is due under the terms of this Lease. Base Rent and all other
rent and charges for any period during the term hereof which is for less than
one full month shall be prorated based upon the actual number of days of the
month involved. Payment of Base Rent and other charges shall be made to
Lessor at its address stated herein or to such other persons or at such other
addresses as Lessor may from time to time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor
during the term hereof, in addition to the Base Rent, Lessee's Share (as
specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as
hereinafter defined, during each calendar year of the term of this Lease, in
accordance with the following provisions: See FLA Para. 54 and Exhibit "G"
(a) "COMMON AREA OPERATING EXPENSES" are defined, for
purposes of this Lease, as all costs incurred by Lessor relating to the
ownership and operation of the Industrial Center, including, but not limited
to, the following:
(i) The operation, repair and maintenance, in
neat, clean, good order and condition, of the following:
(aa) The Common Areas, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, Common Area lighting facilities, fences and gates,
elevators and roof.
(bb) Exterior signs and any tenant
directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and
telephone to service the Common Areas.
(iii) Trash disposal, property management and
security services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair
of Common Areas.
(v) Real Property Taxes (as defined in Paragraph
10.2) to be paid by Lessor for the Building and the Common Areas under
Paragraph 10 hereof.
(vi) The cost of the premiums for the insurance
policies maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss
concerning the Building or the Common Areas.
(viii) Any other services to be provided by Lessor
that are stated elsewhere in this Lease to be a Common Area Operating
Expense.
(b) Any Common Area Operating Expenses and Real Property
Taxes that are specifically attributable to the Building or to any other
building in the Industrial Center or to the operation, repair and maintenance
thereof, shall be allocated entirely to the Building or to such other
building. However, any Common Area Operating Expenses and Real Property Taxes
that are not specifically attributable to the Building or to any other
building or to the operation, repair and maintenance thereof, shall be
equitably allocated by Lessor to all buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose an
obligation upon Lessor to either have said improvements or facilities or to
provide those services unless the Industrial Center already has the same,
Lessor already provides the services, or Lessor has agreed elsewhere in this
Lease to provide the same or some of them. See FLA Para. 68
(d) Lessee's Share of Common Area Operating Expenses shall
be payable by Lessee within ten (10) days after a reasonably detailed
statement of actual expenses is presented to Lessee by Lessor. At Lessor's
option, however, an amount may be estimated by Lessor from time to time of
Lessee's Share of annual Common Area Operating Expenses and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each 12-month
period of the Lease term, on the same day as the Base Rent is due hereunder.
Lessor shall deliver to Lessee within sixty (60) days after the expiration of
each calendar year a reasonably detailed statement showing Lessee's Share of
the actual Common Area Operating Expenses incurred during the preceding year.
If Lessee's payments under this Paragraph 4.2(d) during said preceding year
exceed Lessee's Share as indicated on said statement, Lessee shall be
credited the amount of such over-
Note 1: Provided Lessee's use of the Premises and Common Areas are not
materially impacted nor are Lessee's costs increased as a result of any such
changes without the prior consent of Lessee, not to be unreasonable withheld.
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payment against Lessee's Share of Common Area Operating Expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during said
preceding year were less than Lessee's Share as indicated on said statement,
Lessee shall pay to Lessor the amount of the deficiency within ten (10) days
after delivery by Lessor to Lessee of said statement.
5. SECURITY DEPOSIT not required under this Lease. Lessee shall deposit
with Lessor upon Lessee's execution hereof the Security Deposit set forth in
Paragraph 1.7 as security for Lessee's faithful performance of Lessee's
obligations under this Lease. If Lessee fails to pay Base Rent or other rent
or charges due hereunder, or otherwise Defaults under this Lease (as defined
in Paragraph 13.1), Lessor may use, apply or retain all or any portion of
said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, cost, expense, loss or
damage (including attorneys' fees) which Lessor may suffer or incur by reason
thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during
the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional monies with Lessor as an addition to the Security Deposit
so that the total amount of the Security Deposit shall at all times bear the
same proportion to the then current Base Rent as the initial Security Deposit
bears to the initial Base Rent set forth in Paragraph 1.5. Lessor shall not
be required to keep all or any part of the Security Deposit separate from its
general accounts. Lessor shall, at the expiration or earlier termination of
the term hereof and after Lessee has vacated the Premises, return to Lessee
(or, at Lessor's option, to the last assignee, if any, of Lessee's interest
herein), that portion of the Security Deposit not used or applied by Lessor.
Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increment for its use, or to be prepayment for any monies to be paid by
Lessee under this Lease.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use
or permit the use of the Premises in a manner that is unlawful, creates waste
or a nuisance, or that disturbs owners and/or occupants of, or causes damage
to the Premises or neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or
delay its consent to any written request by Lessee, Lessee's assignees or
subtenants, and by prospective assignees and subtenants of Lessee, its
assignees and subtenants, for a modification of said Permitted Use, so long
as the same will not impair the structural integrity of the improvements on
the Premises or in the Building or the mechanical or electrical systems
therein, does not conflict with uses by other lessees, is not significantly
more burdensome to the Premises or the Building and the improvements thereon,
and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects
to withhold such consent, Lessor shall within five (5) business days after
such request give a written notification of same, which notice shall include
an explanation of Lessor's reasonable objections to the change in use.
6.2 HAZARDOUS SUBSTANCES. See FLA Para. 61
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or
effect, either by itself or in combination with other materials expected to
be on the Premises, is either: (i) potentially injurious to the public
health, safety or welfare, the environment, or the Premises; (ii) regulated
or monitored by any governmental authority; or (iii) a basis for potential
liability of Lessor to any governmental agency or third party under any
applicable statute or common law theory. Hazardous Substance shall include,
but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any
products or by-products thereof. Lessee shall not engage in any activity in
or about the Premises which constitutes a Reportable Use (as hereinafter
defined) of Hazardous Substances without the express prior written consent of
Lessor and compliance in a timely manner (at Lessee's sole cost and expense)
with all Applicable Requirements (as defined in Paragraph 6.3). "REPORTABLE
USE" shall mean (i) the installation or use of any above or below ground
storage tank, (ii) the generation, possession, storage, use, transportation,
or disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is required
to be filed with, any governmental authority, and (iii) the presence in, on
or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the
foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary
and customary materials reasonably required to be used by Lessee in the
normal course of the Permitted Use, so long as such use is not a Reportable
Use and does not expose the Premises or neighboring properties to any
meaningful risk of contamination or damage or expose Lessor to any liability
therefor. In addition, Lessor may (but without any obligation to do so)
condition its consent to any Reportable Use of any Hazardous Substance by
Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in
its reasonable discretion, deems necessary to protect itself, the public, the
Premises and the environment against damage, contamination or injury and/or
liability therefor, including but not limited to the installation (and, at
Lessor's option, removal on or before Lease expiration or earlier
termination) of reasonably necessary protective modifications to the Premises
(such as concrete encasements) and/or the deposit of an additional Security
Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance has come to be
located in, on, under or about the Premises or the Building, other than as
previously consented to by Lessor, Lessee shall immediately give Lessor
written notice thereof, together with a copy of any statement, report,
notice, registration, application, permit, business plan, license, claim,
action, or proceeding given to, or received from, any governmental authority
or private party concerning the presence, spill, release, discharge of, or
exposure to, such Hazardous Substance including but not limited to all such
documents as may be involved in any Reportable Use involving the Premises.
Lessee shall not cause or permit any Hazardous Substance to be spilled or
released in, on, under or about the Premises (including, without limitation,
through the plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground lessor, if
any, and the Premises, harmless from and against any and all damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, loss of
permits and attorneys' and consultants' fees arising out of or involving any
Hazardous Substance brought onto the Premises by or for Lessee or by anyone
under Lessee's control. Lessee's obligations under this Paragraph 6.2(c)
shall include, but not be limited to, the effects of any contamination or
injury to person, property or the environment created or suffered by Lessee,
and the cost of investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof, or of
any contamination therein involved, and shall survive the expiration or
earlier termination of this Lease. No termination, cancellation or release
agreement entered into by Lessor and Lessee shall release Lessee from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at the time of such agreement.
See FLA Para. 61 & 71 *reasonable & appropriate
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at
Lessee's sole cost and expense, fully, diligently and in a timely manner,
comply with all "APPLICABLE REQUIREMENTS," which term is used in this Lease
to mean all laws, rules, regulations, ordinances, directives, covenants,
easements and restrictions of record, permits, the requirements of any
applicable fire insurance underwriter or rating bureau, and the
*recommendations of Lessor's engineers and/or consultants, relating in any
manner to the Premises (including but not limited to matters pertaining to
(i) industrial hygiene, (ii) environmental conditions on, in, under or about
the Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill, or release of any Hazardous Substance), now
in effect or which may hereafter come into effect. Lessee shall, within five
(5) days after receipt of Lessor's written request, provide Lessor with
copies of all documents and information, including but not limited to
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Requirements specified by
Lessor, and shall immediately upon receipt, notify Lessor in writing (with
copies of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving failure by
Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDERS") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the
condition of the Premises and for verifying compliance by Lessee with this
Lease and all Applicable Requirements (as defined in Paragraph 6.3), and
Lessor shall be entitled to employ experts and/or consultants in connection
therewith to advise Lessor with respect to Lessee's activities, including but
not limited to Lessee's installation, operation, use, monitoring,
maintenance, or removal of any Hazardous Substance on or from the Premises.
The costs and expenses of any such inspections shall be paid by the party
requesting same, unless a Default or Breach of this Lease by Lessee or a
violation of Applicable Requirements or a contamination, caused or materially
contributed to by Lessee, is found to exist or to be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result
of any such existing or imminent violation or contamination. In such case,
Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case
may be, for the costs and expenses of such inspections.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS. See Para. 2.4, 4.2 of Lease & FLA Para. 62
(a) Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation),
Lessee shall, at Lessee's sole cost and expense and at all times, keep the
Premises and every part thereof in good order, condition and repair,
including, without limiting the generality of the foregoing, all equipment or
facilities specifically serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire hose connections if within the Premises,
fixtures, interior walls, interior surfaces of exterior walls, ceilings,
floors, windows, doors, plate glass, and skylights, but excluding any items
which are the responsibility of Lessor pursuant to Paragraph 7.2 below.
Lessee, in keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices. Lessee's obligations shall
include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order,
condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense,
procure and maintain a contract, with copies to Lessor, in customary form and
substance for and with a contractor specializing and experienced in the
inspection, maintenance and service of the heating, air conditioning and
ventilation system for the Premises. However, Lessor reserves the right, upon
notice to Lessee, to procure and maintain the contract for the heating, air
conditioning and ventilating systems, and if Lessor so elects, Lessee shall
reimburse Lessor, upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under
this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days'
prior written notice to Lessee (except in the case of an emergency, in which
case no notice shall be required), perform such obligations on Lessee's
behalf, and put the Premises in good order, condition and repair, in
accordance with Paragraph 13.2 below. See FLA Para. 69
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's
Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor,
subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order,
condition and repair the foundations, exterior walls, structural condition of
interior bearing walls, exterior roof, fire sprinkler and/or standpipe and
hose (if located in the Common Areas) or other automatic fire extinguishing
system including fire alarm and/or smoke
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detection systems and equipment, fire hydrants, parking lots, walkways,
parkways, driveways, landscaping, fences, signs and utility systems serving
the Common Areas and all parts thereof, as well as providing the services for
which there is a Common Area Operating Expense pursuant to Paragraph 4.2.
Lessor shall not be obligated to paint the exterior or interior surfaces of
exterior walls nor shall Lessor be obligated to maintain, repair or replace
windows, doors or plate glass of the Premises.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS. See FLA
Para. 70.1
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning
equipment, plumbing, and fencing in, on or about the Premises. The term
"TRADE FIXTURES" shall mean Lessee's machinery and equipment which can be
removed without doing material damage to the Premises. The term
"ALTERATIONS" shall mean any modification of the improvements on the Premises
which are provided by Lessor under the terms of this Lease, other than
Utility Installations or Trade Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR
UTILITY INSTALLATIONS" are defined as Alterations and/or Utility
Installations made by Lessee that are not yet owned by Lessor pursuant to
Paragraph 7.4(a). Lessee shall not make or cause to be made any Alterations
or Utility Installations in, on, under or about the Premises without Lessor's
prior written consent. Lessee may, however, make non-structural Utility
Installations to the interior of the Premises (excluding the roof) without
Lessor's consent but upon notice to Lessor, so long as they are not visible
from the outside of the Premises, do not involve puncturing, relocating or
removing the roof or any existing walls, or changing or interfering with the
fire sprinkler or fire detection systems and the cumulative cost thereof
during the term of this Lease as extended does not exceed $5,000.00.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent
specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring
all applicable permits required by governmental authorities; (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon; and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any
Alterations or Utility Installations by Lessee during the term of this Lease
shall be done in a good and workmanlike manner, with good and sufficient
materials, and be in compliance with all Applicable Requirements. Lessee
shall promptly upon completion thereof furnish Lessor with as-built plans and
specifications therefor. Lessor may, (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation
that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on, or about the Premises, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense, defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be rendered
thereon before the enforcement thereof against the Lessor or the Premises. If
Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half times the
amount of such contested lien, claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises
free from the effect of such lien or claim. In addition, Lessor may require
Lessee to pay Lessor's attorneys' fees and costs in participating in such
action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter
provided in this Paragraph 7.4, all Alterations and Utility Installations
made to the Premises by Lessee shall be the property of and owned by Lessee,
but considered a part of the Premises. Lessor may, at any time and at its
option, elect in writing to Lessee to be the owner of all or any specified
part of the Lessee-Owned Alterations and Utility Installations. Unless
otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned
Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon the
Premises and be surrendered with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor
may require that any or all Lessee-Owned Alterations or Utility Installations
be removed by the expiration or earlier termination of this Lease,
notwithstanding that their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any
Alterations or Utility Installations made without the required consent of
Lessor. See FLA Para. 70.2
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier
termination date, clean and free of debris and in good operating order,
condition and state of repair, ordinary wear and tear excepted. Ordinary wear
and tear shall not include any damage or deterioration that would have been
prevented by good maintenance practice or by Lessee performing all of its
obligations under this Lease. Except as otherwise agreed or specified herein,
the Premises, as surrendered, shall include the Alterations and Utility
Installations. The obligation of Lessee shall include the repair of any
damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and
Utility Installations, as well as the removal of any storage tank installed
by or for Lessee, and the removal, replacement, or remediation of any soil,
material or ground water contaminated by Lessee, all as may then be required
by Applicable Requirements and/or good practice. Lessee's Trade Fixtures
shall remain the property of Lessee and shall be removed by Lessee subject to
its obligation to repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy
periods commencing prior to, or extending beyond, the term of this Lease
shall be prorated to coincide with the corresponding Commencement Date or
Expiration Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee, Lessor and any Lender(s) whose names have been
provided to Lessee in writing (as additional insureds) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $1,000,000
per occurrence with an "Additional Insured-Managers or Lessors of Premises"
endorsement and contain the "Amendment to the Pollution Exclusion"
*endorsement for damage caused by heat, smoke or fumes from a hostile fire.
The policy shall not contain any intra-insured exclusions as between insured
person or organizations, but shall include coverage for liability assumed
under this Lease as an "INSURED CONTRACT" for the performance of Lessee's
indemnity obligations under this Lease. The limits of said insurance required
by this Lease or as carried by Lessee shall not, however, limit the liability
of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be
carried by Lessee shall be primary to and not contributory with any similar
insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep
in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any Lender(s), insuring against
loss or damage to the Premises. Such insurance shall be for full replacement
cost, as the same shall exist from time to time, or the amount required by
any Lender(s), but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age
of the improvements involved, such latter amount is less than full
replacement cost. Lessee-Owned Alterations and Utility Installations, Trade
Fixtures and Lessee's personal property shall be insured by Lessee pursuant
to Paragraph 8.4. If the coverage is available and commercially appropriate,
Lessor's policy or policies shall insure against all risks of direct physical
loss or damage (except the perils of flood and/or earthquake unless required
by a Lender), including coverage for any additional costs resulting from
debris removal and reasonable amounts of coverage for the enforcement of any
ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Building required to be demolished or removed by
reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered loss, but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in lieu
of any co-insurance clause, waiver of subrogation, and inflation guard
protection causing an increase in the annual property insurance coverage
amount by a factor of not less than the adjusted U.S. Department of Labor
Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and any Lender(s), insuring the loss of the full
rental and other charges payable by all lessees of the Building to Lessor for
one year (including all Real Property Taxes, insurance costs, all Common Area
Operating Expenses and any scheduled rental increases). Said insurance may
provide that in the event the Lease is terminated by reason of an insured
loss, the period of indemnity for such coverage shall be extended beyond the
date of the completion of repairs or replacement of the Premises, to provide
for one full year's loss of rental revenues from the date of any such loss.
Said insurance shall contain an agreed valuation provision in lieu of any
co-insurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, Real Property Taxes, insurance premium
costs and other expenses, if any, otherwise payable, for the next 12-month
period. Common Area Operating Expenses shall include any deductible amount in
the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common
Areas or other buildings in the Industrial Center if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the Insuring
Party, Lessor shall not be required to insure Lessee-Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures and
Lessee-Owned Alterations and Utility Installations in, on, or about the
Premises similar in coverage to that carried by Lessor as the Insuring Party
under Paragraph 8.3(a). Such insurance shall be full replacement cost
coverage with a deductible not to exceed $1,000 per occurrence. The proceeds
from any such insurance shall be used by Lessee for the replacement of
personal property and the restoration of Trade Fixtures and Lessee-Owned
Alterations and Utility Installations. Upon request from Lessor, Lessee shall
provide Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises
are located, and maintaining during the policy term a "General Policyholders
Rating" of at least B+, V, or such other rating as may be required by a
Lender, as set forth in the most current issue of "Best's Insurance Guide."
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies referred to in
* Amendment of the Pollution Exclusion is required only if Lessee has
products or supplies that would, by hostile fire, create a polution
consequence.
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this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven
(7) days after the earlier of the Early Possession Date or the Commencement
Date, certified copies of, or certificates evidencing the existence and amounts
of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall
be cancelable or subject to modification except after thirty (30) days' prior
written notice to Lessor. Lessee shall at least thirty (30) days prior to
the expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. See replacement provision FLA Para. 71
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other lessee of Lessor nor from the failure by Lessor to enforce the
provisions of any other lease in the Industrial Center. Notwithstanding
Lessor's negligence or breach of this Lease, Lessor shall under no circumstances
be liable for injury to Lessee's business or for any loss of income or profit
therefrom.
9. DAMAGE OR DESTRUCTION. See FLA Para. 72
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less than fifty
percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of
the Premises (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises (excluding
Lessee-Owned Alterations and Utility Installations and Trade Fixtures)
immediately prior to such damage or destruction. In addition, damage or
destruction to the Building, other than Lessee-Owned Alterations and Utility
Installations and Trade Fixtures of any lessees of the Building, the cost of
which damage or destruction is fifty percent (50%) or more of the then
Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations
and Trade Fixtures of any lessees of the Building) of the Building shall, at the
option of Lessor, be deemed to be Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on,
or under the Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's
expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. In the event, however,
that there is a shortage of insurance proceeds and such shortage is due to
the fact that, by reason of the unique nature of the improvements in the
Premises, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of written
notice of such shortage and request therefor. If Lessor receives said funds
or adequate assurance thereof within said ten (10) day period, Lessor shall
complete them as soon as reasonably possible and this Lease shall remain in
full force and effect. If Lessor does not receive such funds or assurance
within said period, Lessor may nevertheless elect by written notice to Lessee
within ten (10) days thereafter to make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect. If Lessor does not
receive such funds or assurance within such ten (10) day period, and if
Lessor does not so elect to restore and repair, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any
right to reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood
or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if
made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) needed to make the
repairs on or before the earlier of (i) the date which is ten (10) days after
Lessee's receipt of Lessor's written notice purporting to terminate this Lease,
or (ii) the day prior to the date upon which such option expires. If Lessee
duly exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible,
the Base Rent, Common Area Operating Expenses and other charges, if any,
payable by Lessee hereunder for the period during which such damage or
condition, its repair, remediation or restoration continues, shall be abated
in proportion to the degree to which Lessee's use of the Premises is
impaired, but not in excess of proceeds from insurance required to be carried
under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area
Operation Expenses and other charges, if any, as aforesaid, all other
obligations of Lessee hereunder shall be performed by Lessee, and Lessee
shall have no claim against Lessor for any damage suffered by reason of any
such damage, destruction, repair, remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in
a substantial and meaningful way, the repair of restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
any time prior to the commencement of such repair or restoration, give
written notice to Lessor and to any Lenders of which Lessee has actual notice
of Lessee's election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Lessee gives such notice
to Lessor and such Lenders and such repair or restoration is not commenced
within thirty (30) days after receipt of such notice, this Lease shall
terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after the receipt of such notice, this Lease shall continue in full force and
effect. "COMMENCE" as used in this Paragraph 9.6 shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which case
Lessee shall make the investigation and remediation thereof required by
Applicable Requirements and this Lease shall continue in full force and effect,
but subject
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to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such Hazardous Substance Condition of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the date
of such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the excess costs of (a) investigation and
remediation of such Hazardous Substance Condition to the extent required by
Applicable Requirements, over (b) an amount equal to twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater. Lessee shall provide
Lessor with the funds required of Lessee or satisfactory assurance thereof
within thirty (30) days following said commitment by Lessee. In such event this
Lease shall continue in full force and effect, and Lessor shall proceed to make
such investigation and remediation as soon as reasonably possible after the
required funds are available. If Lessee does not give such notice and provide
the required funds or assurance thereof within the time period specified above,
this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises and the Building with respect to the termination of this Lease and
hereby waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Common Area Operating Expenses in accordance with the provisions
of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Industrial Center by any
authority having the direct or indirect power to tax, including any city, state
or federal government, or any school, agricultural, sanitary, fire, street,
drainage, or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the Industrial Center or any portion thereof,
Lessor's right to rent or other income therefrom, and/or Lessor's business of
leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any
tax, fee, levy, assessment or charge, or any increase therein, imposed by reason
of events occurring, or changes in Applicable Law taking effect, during the term
of this Lease, including but not limited to a change in the ownership of the
Industrial Center or in the improvements thereon, the execution of this Lease,
or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any
calendar year, the Real Property Taxes for any real estate tax year shall be
included in the calculation of Real Property Taxes for such calendar year based
upon the number of days which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall
not include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSESSMENT. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable proportion
of the Real Property Taxes for all of the land and improvements included within
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor's reasonable determination
thereof, in good faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center.
When possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d). Electrical & phone service to be in
Lessee's name and be paid directly by Lessee.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED. Lessor's consent will be
reasonable and timely
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber (collectively,
"assign") or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent given under and subject to the
terms of Paragraph 36.
(d) An assignment or subletting of Lessee's interest in
this Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1, or a
non-curable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unconsented to assignment or subletting as a
non-curable Breach, Lessor shall have the right to either: (i) terminate this
Lease, or (ii) upon thirty (30) days' written notice ("LESSOR'S NOTICE"),
increase the monthly Base Rent for the Premises to the then fair market
rental value of the Premises, as reasonably determined by Lessor, or Pending
determination of the new fair market rental value, if disputed by Lessee,
Lessee shall pay the amount set forth in Lessor's Notice, with any
overpayment credited against the next installment(s) of Base Rent coming due,
and any underpayment for the period retroactively to the effective date of
the adjustment being due and payable immediately upon the determination
thereof. Further, in the event of such Breach and rental adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value as reasonably
determined by Lessor (without the Lease being considered an encumbrance or
any deduction for depreciation or obsolescence, and considering the Premises
at its highest and best use and in good condition) or one hundred ten percent
(110%) of the price previously in effect, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index
applicable to the time of such adjustment, and (iii) any fixed rental
adjustments scheduled during the remainder of the Lease term shall be
increased in the same ratio as the new rental bears to the Base Rent in
effect immediately prior to the adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be pursuant to applicable laws.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not (i) be effective without the express written assumption by
such assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this
Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
assignee or sublessee. However, Lessor may consent to subsequent sublettings
and assignments of the sublease or any amendments or modifications thereto
without notifying Lessee or anyone else liable under this Lease or the sublease
and without obtaining their consent, and such action shall not relieve such
persons from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's
obligation under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of the Lessee's
obligations under this Lease, including any sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or
subletting shall be in writing, accompanied by information relevant to
Lessor's determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the Premises, if
any, together with a non-refundable deposit of $750.00, as reasonable
consideration for Lessor's considering and processing the request for
consent. Lessee agrees to provide Lessor with such other or additional
information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease
shall, by reason of accepting such assignment or entering into such sublease,
be deemed, for the benefit of Lessor, to have assumed and agreed to conform
and comply with each and every term, covenant, condition and obligation
herein to be observed or performed by Lessee during the term of said
assignment or sublease, other than such obligations as are contrary to or
inconsistent with provisions of an assignment or sublease to which Lessor has
specifically consented in writing. See Lease Para. 12.3 "*"
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(g)
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein: *
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all
or a portion of the Premises heretofore or hereafter made by Lessee, and
Lessor may collect such rent and income and apply same toward Lessee's
obligations under this Lease; provided, however, that until a Breach (as
defined in Paragraph 13.1) shall occur in the performance of Lessee's
obligations under this Lease, Lessee may, except as otherwise provided in
this Lease, receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of the foregoing provision or any other
assignment of such sublease to Lessor, nor by reason of the collection of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such
sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessee shall rely upon any such statement and
request from Lessor and shall pay such rents and other charges to Lessor
without any obligation or right to inquire as to whether such Breach exists
and notwithstanding any notice from or claim from Lessee to the contrary.
Lessee shall have no right of claim against such sublessee, or, until the
Breach has been cured, against Lessor, for any such rents and other charges
so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance
of its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior defaults or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall
further assign or sublet all or any part of the Premises without Lessor's
prior written consent.
(e) Lessor shall deliver a copy of any notice of Default
or Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice.
The sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee. *Notwithstanding, Lessee
is permitted to a sublease under these terms which may yield a profit to
Lessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney
is consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), and that Lessor may include the cost of such services
and costs in said notice as rent due and payable to cure said default. A
"DEFAULT" by Lessee is defined as a failure by Lessee to observe, comply with
or perform any of the terms, covenants, conditions or rules applicable to
Lessee under this Lease. A "BREACH" by Lessee is defined as the occurrence of
any one or more of the following Defaults, and, where a grace period for cure
after notice is specified herein, the failure by Lessee to cure such Default
prior to the expiration of the applicable grace period, and shall entitle
Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises. without payment of rent.
(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent, Lessee's Share of
Common Area Operating Expenses, or any other monetary payment required to be
made by Lessee hereunder as and when due, the failure by Lessee to provide
Lessor with reasonable evidence of insurance or surety bond required under
this Lease, or the failure of Lessee to fulfill any obligation under this
Lease which endangers or threatens life or property, where such failure
continues for a period of five (5) days following written notice thereof by
or on behalf of Lessor to Lessee. See FLA Para. 7
(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination
of this Lease per Paragraph 30, (vi) the guaranty of the performance of
Lessee's obligations under this Lease if required under Paragraphs 1.11 and
37, (vii) the execution of any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor
may reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written notice
by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under
Paragraph 40 hereof that are to be observed, complied with or performed by
Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c),
above, where such Default continues for a period of thirty (30) days after
written notice thereof by or on behalf of Lessor to Lessee, provided,
however, that if the nature of Lessee's Default is such that more than thirty
(30) days are reasonably required for its cure, then it shall not be deemed
to be a Breach of this Lease by Lessee if Lessee commences such cure within
said thirty (30) day period and thereafter diligently prosecutes such cure to
completion.
(e) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code
Section 101 or any successor statute thereto (unless, in the case of a
petition filed against Lessee, the same is dismissed within sixty (60) days);
(iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty
(30) days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision shall
be of no force or effect, and shall not affect the validity of the remaining
provisions.
(f) The discovery by Lessor that any financial statement
of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor,
was materially false.
(g)
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its own option, may require all future payments to be made under
this Lease by Lessee to be made only by cashier's check. In the event of a
Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the exercise
of any right or remedy which Lessor may have by reason of such Breach, Lessor
may: See FLA Para. 74
(a) Terminate Lessee's right to possession of the Premises
by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the Premises
to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i)
the worth at the time of the award of the unpaid rent which had been earned
at the time of termination; (ii) the worth at the time of award of the amount
by which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that the Lessee
proves could have been reasonably avoided; (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
the Lessee's failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including
but not limited to the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) of the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco or the Federal Reserve Bank District in which
the Premises are located at the time of award plus one percent (1%). Efforts
by Lessor to mitigate damages caused by Lessee's Default or Breach of this
Lease shall not waive Lessor's right to recover damages under this Paragraph
13.2. If termination of this Lease is obtained through the provisional remedy
of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor
may reserve the right to recover all or any part thereof in a separate suit
for such rent and/or damages. If a notice and grace period required under
Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay
rent or quit, or to perform or quit, as the case may be, given to Lessee
under any statute authorizing the forfeiture of leases for unlawful detainer
shall also constitute the applicable notice for grace period purposes
required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable
grace period under the unlawful detainer statute shall run concurrently after
the one such statutory notice, and the failure of Lessee to cure the Default
within the greater of the two (2) such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in
effect after Lessee's Breach and recover the rent as it becomes due, provided
Lessee has the right to sublet or assign, subject only to reasonable
limitations. Lessor and Lessee agree that the limitations on assignment and
subletting in this Lease are reasonable. Acts of maintenance or preservation,
efforts to relet the Premises, or the appointment of a receiver to protect
the Lessor's interest under this Lease, shall not constitute a termination of
the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
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(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters
occurring or accruing during the term hereof or by reason of Lessee's
occupancy of the Premises.
13.3
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering
the Premises. Accordingly, if any installment of rent or other sum due from
Lessee shall not be received by Lessor or Lessor's designee within ten (10)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to five percent (5%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by any Lender(s) whose name and address shall have been
furnished to Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor's obligation is such that more than thirty (30)
days after such notice are reasonably required for its performance, then
Lessor shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority
takes title or possession, whichever first occurs. If more than ten percent
(10%) of the floor area of the Premises, or more than twenty-five percent
(25%) of the portion of the Common Areas designated for Lessee's parking, is
taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee written
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If
Lessee does not terminate this Lease in accordance with the foregoing, this
Lease shall remain in full force and effect as to the portion of the Premises
remaining, except that the Base Rent shall be reduced in the same proportion
as the rentable floor area of the Premises taken bears to the total rentable
floor area of the Premises. No reduction of Base Rent shall occur if the
condemnation does not apply to any portion of the Premises. Any award for the
taking of all or any part of the Premises under the power of eminent domain
or any payment made under threat of the exercise of such power shall be the
property of Lessor, whether such award shall be made as compensation for
diminution of value of the leasehold or for the taking of the fee, or as
severance damages; provided, however, that Lessee shall be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses
and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal
and other expenses incurred by Lessor in the condemnation matter, repair any
damage to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are
the procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise
agreed in writing, Lessor agrees that: (a) if Lessee exercises any Option (as
defined in Paragraph 39.1) granted under this Lease or any Option
subsequently granted, or (b) if Lessee acquires any rights to the Premises or
other premises in which Lessor has an interest, or (c) if Lessee remains in
possession of the Premises with the consent of Lessor after the expiration of
the term of this Lease after having failed to exercise an Option, or (d) if
said Brokers are the procuring cause of any other lease or sale entered into
between the Parties pertaining to the Premises and/or any adjacent property
in which Lessor has an interest, or (e) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then as to any of said
transactions, Lessor shall pay said Broker(s) a fee in accordance with the
schedule of said Broker(s) in effect at the time of the execution of this
Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation
of law, shall be deemed to have assumed Lessor's obligation under this
Paragraph 15. Each Broker shall be an intended third party beneficiary of the
provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its
interest in any commission arising from this Lease and may enforce that right
directly against Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each
represent and warrant to the other that is has had no dealings with any
person, firm, broker or finder other than as named in Paragraph 1.10(a) in
connection with the negotiation of this Lease and/or the consummation of the
transaction contemplated hereby, and that no broker or other person, firm or
entity other than said named Broker(s) is entitled to any commission or
finder's fee in connection with said transaction. Lessee and Lessor do each
hereby agree to indemnify, protect, defend and hold the other harmless from
and against liability for compensation or charges which may be claimed by any
such unnamed broker, finder or other similar party by reason of any dealings
or actions of the indemnifying Party, including any costs, expenses, and/or
attorneys' fees reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. See FLA Para. 75
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance,
or sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In
the event of a transfer of Lessor's title or interest in the Premises or in
this Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such
transfer or assignment. Except as provided in Paragraph 15.3, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the prior Lessor shall be relieved of all liability with respect to the
obligations and/or covenants under this Lease thereafter to be performed by
the Lessor. Subject to the foregoing, the obligations and/or covenants in
this Lease to be performed by the Lessor shall be binding only upon the
Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10)
days following the date on which it was due, shall bear interest from the
date due at the prime rate charged by the largest state chartered bank in the
state in which the Premises are located plus four percent (4%) per annum, but
not exceeding the maximum rate allowed by law, in addition to the potential
late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties
under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned
herein, and no other prior or contemporaneous agreement or understanding
shall be effective. Lessor and Lessee each represents and warrants to the
Brokers that it has made, and is relying solely upon, its own investigation
as to the nature, quality, character and financial responsibility of the
other Party to this Lease and as to the nature, quality and character of the
Premises. Brokers have no responsibility with respect thereto or with respect
to any default or breach hereof by either Party. Each Broker shall be an
intended third party beneficiary of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
messenger or courier service) or may be sent by regular, certified or
registered mail or U.S. Postal Service Express Mail, with postage prepaid, or
by facsimile transmission during normal business hours, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may
by written notice to the other specify a different address for notice
purposes, except that upon Lessee's taking possession of the Premises, the
Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail, the notice shall be deemed given
forty-eight (48) hours after the same is addressed as required herein and
mailed with postage prepaid. Notices delivered by United States Express Mail
or overnight courier that guarantees next day
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delivery shall be deemed given twenty-four (24) hours after delivery of the
same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone or facsimile confirmation of
receipt of the transmission thereof, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday or a Sunday or a legal
holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of moneys or damages
due Lessor, notwithstanding any qualifying statements or conditions made by
Lessee in connection therewith, which such statements and/or conditions shall
be of no force or effect whatsoever unless specifically agreed to in writing
by Lessor at or before the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of
this Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this
Paragraph 26 then the Base Rent payable from and after the time of the
expiration or earlier termination of this Lease shall be increased to 125% of
the Base Rent applicable during the month immediately preceding such
expiration or earlier termination. Nothing contained herein shall be
construed as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises
are a part, to any and all advances made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor
under this Lease, but that in the event of Lessor's default with respect to
any such obligation, Lessee will give any Lender whose name and address have
been furnished Lessee in writing for such purpose notice of Lessor's default
pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease
and/or any Option granted hereby superior to the lien of its Security Device
and shall give written notice thereof to Lessee, this Lease and such Options
shall be deemed prior to such Security Device, notwithstanding the relative
dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or
(iii) be bound by prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered
into by Lessor after the execution of this lease, Lessee's subordination of
this Lease shall be subject to receiving assurance (a "non-disturbance
agreement") from the Lender that Lessee's possession and this Lease,
including any options to extend the term hereof, will not be disturbed so
long as Lessee is not in Breach hereof and attorns to the record owner of the
Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document
any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding, action, or
appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may
be awarded in the same suit or recovered in a separate suit, whether or not
such action or proceeding is pursued to decision or judgment. The term
"PREVAILING PARTY" shall include, without limitation, a Party or Broker who
substantially obtains or defeats the relief sought, as the case may be,
whether by compromise, settlement, judgment, or the abandonment by the other
Party or Broker of its claim or defense. The attorneys' fee award shall not
be computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. Lessor shall be
entitled to attorneys' fees, costs and expenses incurred in preparation and
service of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection with
such Default or resulting Breach. Broker(s) shall be intended third party
beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of
an emergency, and otherwise at reasonable times for the purpose of showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
Building, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or Building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred eighty (180) days of the
term hereof place on or about the Premises any ordinary "For Lease" signs.
All such activities of Lessor shall be without abatement of rent or liability
to Lessee. See FLA Para. 76
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without
first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the
Premises or the Building, except that Lessee may, with Lessor's prior written
consent, install (but not on the roof) such signs as are reasonably required
to advertise Lessee's own business so long as such signs are in a location
designated by Lessor and comply with Applicable Requirements and the signage
criteria established for the Industrial Center by Lessor. The installation of
any sign on the Premises by or for Lessee shall be subject to the provisions of
Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations). Unless otherwise expressly agreed herein, Lessor reserves all
rights to the use of the roof of the Building, and the right to install
advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor shall be
entitled to all revenues from such advertising signs. See FLA Para. 77
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall in the event of any such
surrender, termination or cancellation, have the option to continue any one
or all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Lessor's election to have such event constitute the termination of such
interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as
otherwise provided herein, wherever in this Lease the consent of a Party is
required to an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable costs and
expenses (including but not limited to architects', attorneys', engineers'
and other consultants' fees) incurred in the consideration of, or response
to, a request by Lessee for any Lessor consent pertaining to this Lease or
the Premises, including but not limited to consents to an assignment a
subletting or the presence or use of a Hazardous Substance, shall be paid by
Lessee to Lessor upon receipt of an invoice and supporting documentation
therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor
may, as a condition to considering any such request by Lessee, require that
Lessee deposit with Lessor an amount of money (in addition to the Security
Deposit held under Paragraph 5) reasonably calculated by Lessor to represent
the cost Lessor will incur in considering and responding to Lessee's request.
Any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting
of the Premises by Lessee shall not constitute an acknowledgement that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such
consent.
(b) All conditions to Lessor's consent authorized by this
Lease are acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude the
impositions by Lessor at the time of consent of such further or other
conditions as are then reasonable with reference to the particular matter for
which consent is being given.
37. GUARANTOR.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the
Premises and the performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
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<PAGE>
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right
of first offer to lease the Premises or the right of first refusal to lease
other property of Lessor or the right of first offer to lease other property
of Lessor; (c) the right to purchase the Premises, or the right of first
refusal to purchase the Premises, or the right of first offer to purchase the
Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.2 OPTION PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph
1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised
by any person or entity other than said original Lessee while the original
Lessee is in full and actual possession of the Premises and without the
intention of thereafter assigning or subletting. The Options, if any, herein
granted to Lessee are not assignable, either as a part of an assignment of
this Lease or separately or apart therefrom, and no Option may be separated
from this Lease in any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised
unless the prior Options to extend or renew this Lease have been validly
exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three (3) or more notices of separate Defaults
under Paragraph 13.1 during the twelve (12) month period immediately
preceding the exercise of the Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability
to exercise an Option because of the provisions of Paragraph 39.4(a)
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force or effect, notwithstanding
Lessee's due and timely exercise of the Option, if, after such exercise and
during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary
obligation of Lessee for a period of thirty (30) days after such obligation
becomes due (without any necessity of Lessor to give notice thereof to
Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate
Defaults under Paragraph 13.1 during any twelve (12) month period, whether or
not the Defaults are cured, or (iii) if Lessee commits a Breach of this
Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep
and observe all reasonable rules and regulations ("Rules and Regulations")
which Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other
occupants or tenants of the Building and the Industrial Center and their
invitees. See FLA Para. 78
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental
payable to Lessor hereunder does not include the cost of guard service or
other security measures, and that Lessor shall have no obligation whatsoever
to provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights of
way, utility raceways, and dedications that Lessor deems necessary, and to
cause the recordation of parcel maps and restrictions, so long as such
easements, rights of way, utility raceways, dedications, maps and
restrictions do not reasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.
44. AUTHORITY. If either Party is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute
and deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or
Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor
shall not be deemed an offer to lease. This Lease is not intended to be
binding until executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by
the parties in interest at the time of the modification. The Parties shall
amend this Lease from time to time to reflect any adjustments that are made
to the Base Rent or other rent payable under this Lease. As long as they do
not materially change Lessee's obligations hereunder, Lessee agrees to make
such reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the
property of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee,
the obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.
First Lease Addendum incorporates Paragraphs 49 through 78 into this Lease
agreement.
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<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN
ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
<TABLE>
<S> <C>
Executed at: Sacramento, California Executed at: Brookland Park, Minnesota
-------------------------------------- -------------------------------------
on: 5-1-98 on: May 1, 1998
---------------------------------------------- ----------------------------------------------
By LESSOR: By LESSEE:
SUN RIVER PROPERTIES, INC. A CALIFORNIA NORTHSTAR COMPUTER FORMS, INC. A
- ------------------------------------------------- -------------------------------------------------
CORPORATION. MINNESOTA CORPORATION
- ------------------------------------------------- -------------------------------------------------
By: /s/ Scott A. Downes By: /s/ Kenneth E. Overstreet
---------------------------------------------- ----------------------------------------------
Name Printed: Scott A. Downes Name Printed: Kenneth E. Overstreet
------------------------------------- -------------------------------------
Title: President Title: President
------------------------------------------- -------------------------------------------
By: By:
---------------------------------------------- ----------------------------------------------
Name Printed: Name Printed:
------------------------------------- -------------------------------------
Title: Title:
------------------------------------------- -------------------------------------------
Address: 730 Howe Avenue, Ste 500 Address: 7130 Northland Circle, North
----------------------------------------- -----------------------------------------
Sacramento, CA 95825 Brookland Park, MN 55428
- ------------------------------------------------- -------------------------------------------------
Telephone: (916) 564-4488 Telephone: (612) 531-7340
--------------------------------- ---------------------------------
Facsimile: (916) 564-4499 Facsimile: (612) 535-5671
--------------------------------- ---------------------------------
ALL NOTICES TO LESSOR SENT TO:
Panattoni & Johnson at Address Below.
BROKER: CB COMMERCIAL REAL ESTATE GROUP BROKER: CORPORATE FACILITY CONSULTING (CFC) CRESA
Executed at: Denver, Colorado Executed at: Englewood, Colorado
-------------------------------------- -------------------------------------
on: on:
---------------------------------------------- ----------------------------------------------
By: By:
---------------------------------------------- ----------------------------------------------
Name Printed: James M. Bolt Name Printed: James A. Cloud, CCIM
------------------------------------- -------------------------------------
Title: Sr. Vice President Title:
------------------------------------------- -------------------------------------------
Address: 1050 Seventeenth St., Ste 800 Address: 7600 East Orchard Rd., Ste 230S
----------------------------------------- -----------------------------------------
Denver, CO 80265 Englewood, CO 80111
- ------------------------------------------------- -------------------------------------------------
Telephone: (303) 628-1710 Telephone: (303) 694-3311
---------------------------------- ---------------------------------
Facsimile: (303) 628-1728 Facsimile: (303) 771-4403
---------------------------------- ---------------------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South
Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777.
NOTCES FOR LESSOR SENT TO:
Panattoni & Johnson Phone: (916) 362-5571
ATTN: Bolder Property Management Facsimile: (916) 362-1061
9806 Old Winery Place, Ste #1
Sacramento, CA 95827
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<PAGE>
FIRST LEASE ADDENDUM
TO STANDARD AIR INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-MODIFIED NET
In the event of a conflict between the terms of this Addendum and the
provisions of the printed form of the AIR Lease, the provisions of the
Addendum shall govern. Therefore, the following provisions shall amend that
certain Lease agreement between Sun River Properties, Inc. as "Lessor" and
Northstar Computer Forms, Inc. as "Lessee", dated for reference purposes
only, May 1, 1998 and affecting that certain Property known as 4403 Table
Mountain Drive, Suite "B", Golden, Colorado, Jefferson County:
49. PARKING
Tenant's allotted thirty (30) non-exclusive parking spaces to include
twenty four (24) non-exclusive spaces located in the surface lot
directly in front of the Premises, and the balance to be located either
within the surface lot directly behind the Building or within the
surface lot directly adjacent to the Building. Lessee shall not be
charged rent in any form, or a toll, for the use of these parking spaces
for the life of the term and options.
50. LEASE TERM COMMENCEMENT
Conditioned upon the Lessee's ratification and execution of the final
Lease agreement by no later than May 1, 1998, the Commencement Date of
the Lease will be July 1, 1998. Lessor shall then be obligated to
deliver the Premises to Lessee in "Substantially Completed" condition on
or before July 1, 1998 under the terms of this Lease. Should Lessee
delay in executing the final Lease agreement beyond May 1, 1998, the
Commencement Date, and the date upon which Lessor will be obligated to
turn over the Premises in Substantially Complete condition, will be the
date which is sixty (60) days after the Effective Date as defined in
Paragraph 66 of this Lease. Should the latter occur, a separate written
agreement will be attached to the Lease in the form of a "SECOND LEASE
ADDENDUM" documenting the revised and true Effective Date and
Commencement Date of the Lease.
Should Lessor anticipate Substantially Completing the Premises prior to
July 1, 1998, Lessor shall notify Lessee ten (10) days in advance of the
date upon which Lessor expects to deliver the Premises to Lessee.
"Substantial Complete" is defined as the completion of the Tenant
Improvements whereby the Lessor's architect, engineer or general
contractor states that the Premises has been completed in accordance
with the plans and specifications except for minor items needing
correction ("punchlist items"), which do not materially affect the
building, and upon the earlier date of a) issuance of a certificate of
occupancy by the jurisdiction with inspection authority or b) issuance
of a temporary certificate of occupancy, either formally or informally
issued, by the jurisdiction having inspection authority. An "informal
certificate of occupancy" is defined as either a written or verbal
authorization by authorized personnel of the inspecting entity which
allows the tenant to occupy the space subject to defined conditions.
Should Lessor fail to deliver the Premises to the Lessee as agreed to
herein, the Lessee will be permitted the rights and actions set forth in
Addendum Paragraph 55.
51. BASE RENT SCHEDULE/RENT INCREASES
The MONTHLY TRIPLE-NET (NNN) base rental schedule shall be as follows.
The corresponding yearly per square foot amounts are stated for
reference purposes. Annual Lease Rent to be paid in twelve (12) equal
monthly installments:
Months 1-2: $ 0.00 (No base rent or NNN Expenses to be Paid)
Months 3-26: $ 9,178.40 monthly ($4.78 psf/yr. + NNN Expenses)
Months 27-38: $ 9,658.44 monthly ($5.03 psf/yr. + NNN Expenses)
Months 39-50: $ 9,946.46 monthly ($5.18 psf/yr. + NNN Expenses)
Months 51-62: $10,234.49 monthly ($5.33 psf/yr. + NNN Expenses)
Months 63-86: $10,522.51 monthly ($5.48 psf/yr. + NNN Expenses)
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<PAGE>
default of its Lease or delinquent in rental payments prior to the time of
Notice or expiration of the primary lease term or first option period.
OPTION RENT: The monthly rental rate of the option period shall be
established at the Fair Market Rent (FMR) for space in comparable class
buildings in the same submarket. In the event Lessor and Lessee are unable
to agree on a FMR rental rate, the Lessor shall hire, at its own expense,
an independent rent appraiser to determine FMR. Should Lessee disagree with
the rent appraisal, Lessee will then hire its own independent rent
appraiser to establish the FMR lease rate. The resulting two appraisals
shall be averaged, yielding the proposed lease rate. Should Lessor and
Lessee disagree as to this Value, the two shall mutually select a third
rent appraiser who shall, at its option, decide between the two values
previously established, or conduct an investigation to establish its own
value. The decision rendered by the third rent appraiser will be the final
base lease rate for the first year of the Option period. A schedule for
annual rent adjustments shall be negotiated to reflect conditions in the
market at the time each option is exercised.
53. RIGHT TO EARLY TERMINATION
Lessee shall have the option to terminate the Lease effective anytime after
the end of the sixtieth (60th) month of the Lease term. Lessee shall give
no less than six (6) months written notice ("Termination Notice") to Lessor
in order to exercise its right to terminate the Lease. In exchange for
invoking its right to terminate, Lessee shall pay, due upon the Termination
Effective Date, the amount of the unamortized cost of both (a) the Tenant
Improvements in excess of $75,000 provided by Lessor as outlined in this
First Addendum and (b) the brokerage commissions paid by Lessor to Lessor's
broker and Lessee's broker. The combined amounts of (a) and (b) shall be
deemed the "Termination Payment". Amortization of the Termination Payment
will be based on a seven (7) year period and shall be computed at an annual
compound interest rate of ten percent (10%). The Calculation of the
Termination Payment has been set forth in the attached EXHIBIT E using the
Estimated TI Amount of $170,000.00 pursuant to Paragraph 57. The
Termination Payment is subject to the cost of any changes that the Lessee
is permitted to make pursuant to Paragraph 58 of this Addendum. Should
Lessee's changes cause the Termination Payment to increase according to
Paragraph 58, then a written Amendment to EXHIBIT E will be prepared and
incorporated into the Lease as EXHIBIT E-2 memorializing the change and
amending the Termination Payment accordingly. "Termination Effective Date"
is hereby defined as the date which is six (6) months following the date
upon which Lessor's receives Lessee's Termination Notice.
54. PAYMENT OF NET CHARGES
Lessee shall be responsible for all net charges based on 15.38% of the
building. Net charges include all costs and expenses incurred by Lessor in
connection with the property, without exception other than as agreed to in
this Lease, including but not limited to all property taxes, utility
charges, common area maintenance fees, assessment bond payments and Coors
Technology Center Owners Association dues.
55. DELAY IN POSSESSION
Should the Lessor fail to turn over the Premises in Substantially Complete
condition by July 1, 1998, the Lessee shall be granted one (1) day of base
rent and Common Area Operating Expense abatement, collectively as "Penalty
Free Rent", for each one (1) day of
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<PAGE>
Lessor's delay beyond July 1, 1998. The Penalty Free Rent will be in
addition to the abated rent already granted the Lessee under this Lease.
Should Lessor's delays exceed September 1, 1998, the Lessee shall have the
right to terminate the Lease without penalty. Should Lessee elect to
terminate the Lease, it shall give the Lessor notice of its intent to do so
by no later than August 25, 1998. Lessee's failure to give notice forfeits
the right to cancel the Lease under this provision and abatement will
continue until the Lessor delivers the Premises as agreed.
Lessor's obligation to deliver the Premises by July 1, 1998, and therefore
the Lessee's ability to enforce the provisions of this Paragraph 55, are
subject to the conditions and terms further defined in Paragraph 50 of this
Addendum. If the Lease is not ratified and executed by May 1, 1998, then
all the dates of this provision will be adjusted accordingly and set forth
in a "SECOND LEASE ADDENDUM".
Lessee will not have the rights set forth in this Paragraph 55 should
delays occur for any of the following reasons: (a) acts of God or "force
majure" which cause delays in the construction or approval process, (b)
delays in the local government approval processes which are not due to the
Lessor's negligence or that of its contractor, (c) Lessee's failure to
deliver to the Lessor in timely manner, and within mutually agreed upon
deadlines set forth in EXHIBIT D-3, it's approved specifications and Tenant
Improvement plans, (d) Lessee failure to respond in a timely manner
throughout the design and construction process to matters which effect
Lessor's ability to deliver the Premises as agreed and within the time
agreed.
56. BROKERAGE COMMISSION
Lessor shall pay brokerage commissions pursuant to EXHIBIT H of this Lease
to the following brokerage firms: to CB Commercial, Denver Office as
Lessor's exclusive agent and to CFC / CRESA as Lessee's exclusive agent.
57. TENANT IMPROVEMENTS
Lessor shall cause to be constructed in the Premises, at its sole cost, the
Tenant Improvements outlined in EXHIBIT C-1, Lessee's Proposed Tenant
Improvement Floor Plan, and as further set forth by Lessee in EXHIBIT D-1,
Lessee's Proposed Schedule of Improvements and EXHIBIT B, Lessee's Proposed
Electrical and Lighting Schedule. The "Estimated TI Amount" of the Tenant
Improvements outlined in Exhibits B, C-1 and D-1 is One Hundred Seventy
Thousand and 00/100 Dollars ($170,000.00). This amount shall be used in the
calculation of the Termination Payment subject to the provisions of
Paragraph 58 of this First Addendum. Lessor and Lessee shall upon
completion and mutual approval of such, add as Exhibit C-2 a reduced legal
size copy of the Lessee's Final Tenant Improvement Floor Plan and as
EXHIBIT D-2 a copy of the Lessor's Scope of Work for Tenant Improvements,
based on the Lessee's Final Floor Plan.
58. SCOPE OF WORK/BUILDING DESIGN/CHANGE ORDERS
To be attached hereto and incorporated as part of this Lease will be
EXHIBIT D-2. EXHIBIT D-2 will provide both parties with a set of
construction specifications, assumptions and exclusions which are based on
the Lessee's Final Tenant Improvement Floor Plan to be attached, and
reduced to legal size form, as EXHIBIT C-2 upon Lease execution, or as soon
as reasonably practical upon Lease execution, or within the time frames set
forth in EXHIBIT D-3. Lessee is permitted to make changes ("Change Orders")
up to an aggregate amount of $5,000.00 ("Change Limit") beyond the
$170,000.00 Estimated TI Amount without effecting the lease rate or the
Termination Payment. Should Lessee elect to make changes, it will put its
request in writing to the Lessor, and the Lessor shall provide Lessee with
the costs, in writing, associated with the change required by Tenant. If
Lessee accepts the Change Order costs and these costs are in excess the
Change Limit, or if these costs when combined when previous Change Orders
exceed the Change Limit, then Lessee shall either; a) pay in cash, or
certified funds, the cost of the Change Order(s) in excess of the $5,000.00
Change Limit, or b) if, and only if, the aggregate costs of all
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<PAGE>
Change Orders exceed the Change Limit by more than $10,000, Lessee may
elect to increase the rental rate based on the cost of the Change Order(s)
which will be fully amortized over the seven year term at ten percent (10%)
per annum. Change Orders executed after the Lease Commencement Date will be
subject to an amortization schedule based on the remaining term of the
Lease. Upon the occurrence of option (b), the amortized amount of the
improvements will be added to the Termination Payment and be incorporated
into the Lease as EXHIBIT E-2.
59. ADHERENCE TO CC&R'S
Lessee agrees to adhere to all requirements of the "Declaration of
Protective Covenants for Coors Technology Center" as recorded with the
County of Jefferson, State of Colorado on March 3, 1990 (document number
90023452).
60. IMPROVEMENTS REQUIRED BY CODE
In accordance with provisions of this lease, in the event the County,
responsible fire department or any other governmental agency or entity with
jurisdictional authority requires additional improvements to the building
due to Lessee's use, such improvements and any and all costs shall be at
the sole cost, coordination and expense of Lessee unless otherwise mutually
agreed.
61. HAZARDOUS MATERIALS
THE FOLLOWING PROVISIONS ARE IN ADDITION TO PARAGRAPHS 6.2 AND 9.7 OF THE
LEASE: LESSEE'S RESPONSIBILITY TO TAKE ACTION IN REMEDYING A HAZARDOUS
MATERIAL PROBLEM AS SET FORTH HEREIN IS LIMITED TO CAUSES ATTRIBUTABLE TO
CONTAMINATION BY THE LESSEE:
SECTION A: REPORTING REQUIREMENTS. Lessee or occupant, sublessee or
assignee (collectively "User") shall be required to report to the federal,
state, city and county division of environmental health or other applicable
governmental division, agency, board or governing governmental authority
all hazardous and extremely hazardous materials handled, stored, generated,
manufactured, or otherwise occurring on all premises as required by
federal, state and local statutes and/or regulations. Any such User shall,
at its sole costs and expense, be required to clean up and abate any
environmental pollutants and/or contamination resulting from the use,
storage, manufacture, handling, spillage or other consequence of the
presence of hazardous and/or extremely hazardous materials upon the
Industrial Center caused by User, its employees, agents, contractors,
invitees, sublessees or assignees. Lessee shall be required to adhere to
all Federal, State and local statutes, laws, rules, regulations, and other
orders regulating the presence, use, storage and disposal of toxic or
hazardous materials.
SECTION B: ENVIRONMENTAL COMPLIANCE. If User breaches the obligations
stated herein, except as modified above, or if the presence of hazardous
material on the Industrial Center caused or permitted by User results in
the contamination of the Industrial Center, or if the contamination of the
Industrial Center by hazardous material otherwise occurs in which the User
is legally liable to Lessor for damage resulting therefrom, then Lessee
shall indemnify, defend and hold Lessor harmless from any and all claims,
judgments, damages, penalties, fines, costs, liabilities or losses
(including, without limitation, diminution in value of the Industrial
Center, damages for the loss or restriction on use of rentable or usable
space or any amenity of the Industrial Center, damages arising from any
adverse impact on marketing of the Industrial Center, and sums paid in
settlement of claims, reasonable attorney, consultant and expert fees)
which arise during and after the lease term as a result of such
contamination.
The indemnification set forth herein shall run to the benefit of any bank
or other lender to which Lessor or Lessor's successors and assigns may
grant a security interest in the Industrial Center. This indemnification of
Lessor by Lessee includes without limitation, costs incurred in connection
with any investigation of site conditions or any clean up, remediation,
removal or restoration work required by any federal, state or local
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<PAGE>
governmental agency or political subdivision due to hazardous material
present in the soil or ground water on or under the Industrial Center
if caused or permitted by Lessee. Without limiting the foregoing, if
the presence of any hazardous material on the Industrial Center
results in the contamination of the Industrial Center, Lessee shall
promptly take all actions at its sole expense as are necessary to
return the Industrial Center to the condition existing prior to the
introduction of hazardous material to the Industrial Center, provided
that Lessor's approval of such actions shall be first obtained, which
approval shall not be unreasonably withheld so long as such actions
would not potentially have any material adverse long-term or
short-term effect on the Industrial Center.
62. USE OF FORKLIFTS
Lessee shall be responsible for the repair of any damage it causes to the
paved areas of the Property including, but not limited to, damage caused
by the use of solid forklift tires on the asphalt paved areas.
63. OUTSIDE STORAGE
Any and all outside storage is strictly prohibited. Outside storage is
defined as stacking or storing items such as pallets, debris, product,
equipment, etc. outside of the building shell without the express written
consent of the Lessor. Lessee shall not construct any outside storage
structures, including fenced yards, without Lessor's express written
approval.
64. ASSIGNMENT OF LEASE
Lessor reserves the right to assign this lease to another party. Lessor
may additionally notify Lessee of additional proposed "assignees" as
required. Lessor will provide Lessee written notice of the assignment a
minimum of ten (10) day in advance.
65. ARBITRATION OF DISPUTES PRIOR TO LEASE COMMENCEMENT
Prior to the lease commencement date, Lessor and Lessee agree to the
following arbitration provision:
Any controversy arising out of or relating to the performance or
interpretation of this Agreement, or the work performed under this
Agreement, is subject to arbitration in accordance with the Construction
Industry Arbitration Rules of the American Arbitration Association.
Arbitrated disputes shall be decided in accordance with Colorado law.
Any award entered in such arbitration proceeding shall be final, and may
be specifically enforced in a court of competent jurisdiction. Lessor
shall continue to prosecute construction of the leasehold improvements
during the pendency of any arbitration proceedings.
"NOTICE: BY SIGNING IN THE SPACE BELOW, YOU ARE AGREEING TO HAVE ANY
DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF
DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION UNDER COLORADO LAW AND
YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE
LITIGATED IN A COURT OR BEFORE A JURY TRIAL. BY SIGNING IN THE SPACE
BELOW, YOU ARE GIVING UP YOUR JUDICIAL RIGHTS OF DISCOVERY AND APPEAL,
UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE 'ARBITRATION OF
DISPUTES' PROVISIONS. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER
AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE COLORADO CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO
THIS ARBITRATION PROVISION IS VOLUNTARY.
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES
ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES'
PROVISION TO NEUTRAL
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ARBITRATION."
ARBITRATION TO THE PROVISIONS OF PARAGRAPH 65.
"ARBITRATION"
/s/ KEO
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LESSOR LESSEE
This arbitration provision shall not apply after the lease commencement
date.
66. EFFECTIVE DATE
The Effective Date of this Lease will be the date upon which both the
Lessor and Lessee have executed the Lease agreement and Addendum(s). If
each of the required signatures fall on different dates, then the latest
date will be utilized as the Effective Date of the Lease.
67. LESSOR'S WARRANT AGAINST LATENT DEFECTS
Regardless of anything contained in the Lease Paragraphs 2.2, 2.3 and
2.4 to the contrary, Lessor warrants the Premises against any latent
defects in construction for a period of 120 days from the Commencement
Date or through October 31, 1998, whichever later occurs. To the best
of Lessor's knowledge, Lessor warrants that the Premises currently
complies, and will at the time Lessee takes occupancy, with all known
and applicable building codes and ordinances. Should a latent defect
occur, Lessor will correct the problem at its expense. Lessor will
not be responsible for damage or repairs cause by Lessee's negligence,
or that of Lessee's agents, employees, suppliers or representatives.
Furthermore, Lessor shall warrant for one (1) year from the Effective
Date of the Lease ("Systems Warranty Term") that the base building
systems, including but not limited to, the HVAC system, electrical
supply and distribution, roof system, security system (if any exists),
and plumbing system are, and will remain, in working order and in good
condition. Should problems occur relative to these systems within the
Systems Warranty Term, then the Lessor shall make any necessary
repairs at its expense, without passing these expenses through to the
Lessee in the Common Area Operating Expenses. Lessor's obligation to
correct problems or make repairs for these systems does not include
the problems or repairs due to the negligence of, or due to damage
caused by, the Lessee, its agents, employees, suppliers or
representatives.
68. ADJUSTMENTS & RECONCILIATION OF OPERATING EXPENSES
Regardless of anything contained in Paragraph 4.2(d) of the Lease to the
contrary, the Lessor shall be permitted to revise its Common Area
Operating Expenses no more than two (2) times per year, and Lessor shall
reconcile the Common Area Operating Expenses by no later than April 15th
of each year. The Lessee shall be permitted to contest the amount of any
Common Area Operating Expense that varies unreasonably from comparable
common area operating expenses for like-kind properties in same
sub-market. However, Lessee shall not be permitted to withhold normal
payment of it's proportionate share of Common Area Operating Expenses, or
deduct any sum from the invoiced amount, nor withhold or deduct in
similar fashion any sums from the Lessee's base rent.
69. LESSEE'S REPAIRS, LESSOR NEGLIGENCE
The Lessee shall not be responsible for performing the repairs or
maintenance set forth in Paragraphs 7.1(a)(b) and (c) if the need for
such repairs or maintenance is due to demonstrable negligence of the
Lessor, its agents or employees.
70. MODIFICATIONS TO PREMISES BY LESSEE
70.1 ALTERATIONS BY LESSEE: Regardless of anything contained in Paragraph
7.3(a) of the Lease to the contrary, the Lessee shall have the right to
make additions and alterations (collectively as a "Change") to the
Premises without the prior written consent of the Lessor subject to the
following criteria: a.) each Change does not exceed more than
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$5,000.00 in cost, b.) a larger single Change in excess of $5,000.00
is not broken up into smaller segments to meet the $5,000.00
threshold, c.) each Change is compliant with the applicable building
codes, zoning restrictions, and other applicable laws, including the
restrictions of the Property CC &Rs, d.) each Change is performed in a
good workman like manner by a competent professional, certified or
licensed in their field, using quality material, e.) each Change does
not involve alteration or penetration of the roof deck and its
components, or the HVAC or its components, g.) each Change which
involves the electrical system does not cause the system as a whole to
exceed its capacity.
70.2 REMOVAL OF ALTERATIONS: Regardless of anything contained in
Paragraph 7.4 (b) of the Lease to the contrary, Lessee shall not be
obligated to remove alterations or installations, or to remodel the
Premises, including the initial work to be completed in the Premises
by the Lessor, when such alterations or installations are approved by
the Lessor, unless however, the Lessor's approval is a condition of
granting its approval for said alterations or installations.
71. INDEMNIFICATION
The following shall replace Lease Paragraph 8.7 in its entirety:
8.7 (a) LESSEE INDEMNIFICATION. Lessee shall indemnify and save
harmless Lessor, and its directors, officers, partners, contractors,
invitees, employees and agents ("Lessor's Affiliates") (except for
loss or damage resulting from the negligence or willful misconduct of
Lessor or Lessor's Affiliates, or the breach of this Lease by Lessor)
from and against any and all claims, actions, damages, liabilities and
expenses, including reasonable attorney's fees, in connection with
loss of life, bodily injury and/or damage to property arising from or
out of any occurrence in or upon THE PREMISES, or any part thereof,
occasioned wholly or in part by any act or omission of Lessee, or its
directors, officers, partners, contractors, invitees, employees or
agents ("Lessee's Affiliates") thereon.
With respect to any occurrence in or upon THE PREMISES, or any actions
based in whole or in part upon acts or omissions of Lessee, or
Lessee's Affiliates on or off THE PREMISES, Lessee shall defend Lessor
with counsel selected by Lessee and reasonably satisfactory to Lessor
(and shall indemnify and hold Lessor harmless from and against all
defense costs, including without limitation, reasonable attorney's
fees, court costs, discovery costs, expert witness fees, and related
expenses incurred in such defense) against any such claim or action.
Lessee shall pay such defense costs and fees as they accrue. Lessor
shall have the right to reject or to augment defense counsel appointed
by Lessee or its agents and to appoint replacement or additional
counsel at Lessor's sole cost and expense, and Lessee and its counsel
shall fully cooperate with Lessor's replacement or additional counsel.
In the event that Lessor is determined to be solely or jointly liable
with Lessee in any such claim or action, Lessor shall reimburse to
Lessee amounts expended or required to be expended by Lessee
hereunder, with such reimbursement to be based upon the relative
percentages of liability of Lessor and Lessee which are determined to
exist in any such claim or action.
(b) LESSOR INDEMNIFICATION. Lessor shall indemnify and save harmless
Lessee and Lessee's Affiliates (except for loss or damage resulting
from the negligence or willful misconduct of Lessee or Lessee's
Affiliates, or the breach of this Lease by Lessee) from and against
any and all claims, actions, damages, liability and expenses,
including reasonable attorney's fees, in connection with loss of life,
bodily injury and/or damage to property arising from or out of any
occurrence in or upon THE PROPERTY, or any part thereof, occasioned
wholly or in part by any act or omission of Lessor or Lessor's
Affiliates thereon.
With respect to any occurrence in or upon THE PROPERTY (other than THE
PREMISES), except for actions based in whole or in part upon the acts
or omissions of Lessee or Lessee's Affiliates (for which Lessee shall
defend Lessor pursuant to PARAGRAPH 8.7(a)), Lessor shall defend
Lessee with counsel selected by Lessor and reasonably satisfactory to
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<PAGE>
Lessee (and shall indemnify and hold Lessee harmless from and against
all defense costs, including without limitation, reasonable attorney's
fees, court costs, discovery costs, expert witness fees, and related
expenses incurred in such defense) against any such claim or action.
Lessor shall pay such defense costs and fees as they accrue. Lessee
shall have the right to reject or to augment defense counsel appointed
by Lessor or its agents and to appoint replacement or additional
counsel at Lessee's sole cost and expense, and Lessor and its counsel
shall fully cooperate with Lessee's replacement or additional counsel.
In the event that Lessee is determined to be solely or jointly liable
with Lessor in any such claim or action, Lessee shall reimburse to
Lessor amounts expended or required to be expended by Lessor
hereunder, with such reimbursement to be based upon the relative
percentages of liability of Lessee and Lessor which are determined to
exist in any such claim or action.
72. DAMAGE AND DESTRUCTION TO PREMISES
Lessee shall have the right to terminate the Lease if the Lessor,
under election or requirement as set forth under the provisions of
Paragraph 9 of the Lease, estimates by way of its licensed general
contractor, architect, or engineer that it will take longer than two
hundred forty (240) calendar days from the date a casualty occurs to
restore the Premises. Lessor shall give Lessee notice ("Restoration
Notice") of the estimated time that it will take Lessor's general
contractor to restore the Premises as soon as reasonably practical
after the date the casualty occurs, not to exceed thirty (30) days
from the date of the casualty. The time from the date of the casualty
to the Lessor's projected date of the restoration of the Premises
shall be considered the "Restoration Period". Lessor's estimate of the
time and cost to restore the Premises ("Restoration Estimate") will be
derived from Lessor's general contractor, architect or engineer or a
combination of all the foregoing. Upon Lessee's receipt of the
Restoration Notice, if the Restoration Period is greater than 240
days, then Lessee shall give Lessor notice of its intent to terminate
the Lease within fifteen (15) days of receiving the Restoration Notice
and Lessee's Lease shall terminate as of the date of the casualty. If
Lessor demonstrates good faith in obtaining its Restoration Estimate,
Lessee, at its option and in good faith, shall allow Lessor additional
time as may be necessary to complete its Restoration Estimate. This
additional time is to be agreed to by Lessee and Lessor in writing.
73. AMENDMENT TO PARAGRAPH 13.1(b) - GRACE PERIOD FOR BREACH
Lessee shall be permitted to be late beyond the ten (10) day grace
period set forth in Paragraph 13.4 not more than one (1) time per year
without Lessor considering Lessee in breach of its Lease so long as
the reason for Lessee's delay is not intentional in nature.
74. AMENDMENT TO PARAGRAPH 13.2 - CHECKS NOT HONORED
If any check given to Lessor by Lessee not be honored by the bank upon
which it is drawn more than two (2) times during any one calendar
year, Lessor, at its own option, may require all future payments to be
made under this Lease by Lessee to be made only by cashier's check.
75. AMENDMENT TO PARAGRAPH 16 - TENANT ESTOPPEL CERTIFICATE
Lessee, upon written notice of request by Lessor, will cooperate in
providing Lessor, Lessor's lender or appraiser an executed Tenant
Estoppel Certificate ("Estoppel"), or equivalent document, in a form
acceptable to Lessor, Lessor's lender or appraiser. Upon delivery by
Lessor of such written notice of request, Lessee will commence
efforts so as to provide delivery to Lessor of the Estoppel within
fifteen (15) calendars days thereafter.
76. AMENDMENT TO PARAGRAPH 32 - ENTRY BY LESSOR
Except in the instance of emergency, inspections of the Premises by
the Lessor shall be made with an employee of Lessee and will require
24 hour notice, either written or verbal.
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77. AMENDMENT TO PARAGRAPH 34 - SIGNS ON BUILDING
Lessee shall be permitted to install its sign on the building,
however, any sign Lessee desires to place on the building must meet
all applicable codes, be approved by Lessor, and conform with the
Declaration of Protective Covenants for Coors Technology Center
attached as EXHIBIT F. Lessor's approval will not be unreasonably
withheld.
78. AMENDMENT TO PARAGRAPH 40 - RULES & REGULATIONS
As of the Effective Date of this Lease, the only written "Rules and
Regulations" of the Property are the terms and conditions set forth in
the "Declaration of Protective Covenants for Coors Technology Center"
attached as EXHIBIT F to this Lease. The Lessee will be bound to abide
the terms and conditions of this document. Currently, there are no
further Rules and Regulations of the Property.
By signing below, Lessor and Lessee acknowledge and agree to the additional
provisions of this First Addendum as such provisions amend or supplement the
terms and conditions of the Lease.
LESSOR: LESSEE:
Sun River Properties, Inc., Northstar Computer Forms, Inc.,
a California Corporation a Minnesota Corporation
730 Howe Avenue, Ste. 500 7130 Northland Circle, North
Sacramento, CA 95825 Brookland Park, MN 55428
BY: Scott A. Downes BY: Kenneth E. Overstreet
/s/ Scott A. Downes 5-1-98 /s/ Kenneth E. Overstreet May 1, 1998
- -------------------------------------- --------------------------------------
President DATE President DATE
NOTICE TO LESSOR TO BE SENT TO:
Panattoni & Johnson
ATTN: Bolder Property Management
9806 Old Winery Place, Suite 1
Sacramento, CA 95827
Telephone: (916) 362-5571
Facsimile: (916) 362-0161
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First Lease Addendum - May 1, 1998
<PAGE>
CUSTOMER ALLIANCE AGREEMENT
THIS AGREEMENT is entered into this 5th day of November, 1998, by NCR
Corporation, a Maryland (USA) corporation, whose principal place of business
is Dayton, Ohio (hereinafter, "NCR") and Northstar Computer Forms, Inc., a
Minnesota corporation, whose principal place of business is 7130 Northland
Circle North, Brooklyn Park, Minnesota 55428, (hereinafter, "NSCF").
Recitals
A. NCR would like to compliment its product line and marketing and sales
resources by utilizing NSCF's manufacturing resources to provide a
private label product line of financial forms and negotiable documents
described in Exhibit "A" attached hereto ("Products").
B. NCR appoints NSCF as its exclusive supplier of the Products for the
Territory defined below.
C. Both Parties plan to work together to cultivate NCR's current customer
base by developing new accounts and market requirements in the banking
and financial industries.
D. NSCF would like to expand sales coverage to the Top 200 U.S. banks.
E. NCR would like to offer the Products to all its banking customers.
NOW THEREFORE, in consideration of the mutual promises set forth herein, the
Parties hereby agree as follows:
1.0 Definitions
1.1 Territory shall mean both a geographic and vertical Territory
consisting of the entire United States, including its territories and
possessions. Although NCR will primarily focus its sales and marketing
activities on the 200 largest banks, saving institutions, and credit
unions, NCR may provide Products to other financial institutions within
the Territory. Any sales outside the Territory will be by mutual
agreement of both parties.
1.2 Products shall mean financial products and negotiable documents as
listed in Exhibit A, and as modifies from time to time in writing per
the mutual agreement of the parties.
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<PAGE>
1.3 Purchase Order or Order shall mean any purchase order issued by NCR for
the purpose of ordering Products from NSCF pursuant to this Agreement.
1.4 NCR Technology shall mean certain NCR trademarks and tradenames and
technical expertise provided to NSCF (which NSCF does not already have
and which is not generally known or in the public domain) that is
associated with financial products, negotiable documents, NCR
Systemedia's business processes and NCR's financial equipment operating
specifications.
1.5 Private Label shall mean the Products, with an NCR trademark, tradename,
or logo printed thereon, that is offered exclusively to NCR's customers
by NSCF.
1.6 Product Specifications will be defined by Purchase Orders or referenced
to in published Product catalogs.
2.0 Sales Terms and Conditions
2.1 NCR hereby appoints NSCF as its exclusive supplier of the Products in
the Territory during the term of this Agreement. NSCF will provide NCR
pricing of Products on a wholesale basis.
2.2 NSCF agrees to sell Products to NCR in accordance with the terms and
conditions of this Agreement. Specific quantities of Products shall be
ordered by NCR for purchase by the placement of Purchase Orders or via
EDI. This agreement is not a Purchase Order. NCR shall have no
obligation to purchase any Products hereunder until NCR has placed a
Purchase Order, and then only to the extent of the products covered
under such Purchase Order. It is acknowledged that neither party can
project to what extent NCR may achieve market penetration in the
Territory or in what quantities NCR may place Orders for the Products.
In the event that NSCF can not meet NCR capacity requirements, NSCF will
be responsible to outsource production. NSCF shall assure outsourced
Products meet both NCR and NSCF specifications. In the event that NCR
sells a large block of new business which exceeds NSCF's internal
capacity and outsourcing resources, both parties will work together to
establish a time frame when the capacity will be available to accept the
business. This "ramp up" time should not exceed four months.
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<PAGE>
2.3 NSCF will continue to sell the products it currently manufactures to
its existing customer base. NSCF will not sell, deliver or provide
Products marked with NCR "Private Label" directly or indirectly to any
third party, but will only provide these products to NCR. NCR will
assist in this effort with known requirements and publication of a NCR
catalog of product information and pricing. NSCF may sell similar
Products to others without the NCR "Private Label."
2.4 NSCF and NCR will work together to develop new accounts and market
segments. The Parties will meet quarterly to review NSCF and NCR
performance and establish action plans to expand the relationship and
develop opportunities.
2.5 If a customer has already entered into a contract either directly with
NSCF or one of its distributors to purchase products which could be used
as Product replacements, then during the term of the contract NSCF shall
not be obligated to accept Orders for Products for that customer from
NCR. Similarly, if NCR enters into a contract for purchase of Products
with one of its customers, which is not already subject to a contract to
purchase products which could be used as Product replacements from NSCF
or one of its distributors, then during the term of this Agreement, NSCF
will only accept Orders for that customer from NCR.
3.0 Pricing and Payment
3.1 With the exception of existing bank contracts, NSCF will provide NCR
with NSCF's most competitive price. Existing bank contracts may contain
certain custom products specifically designed for a function that
prohibits comparison with NCR's "Private Label" products.
3.2 It is understood that some of NCR's customers may enter into contractual
commitments with NCR to provide Products for a specified period of time
during the term hereof and any Orders issued hereunder pursuant to a
contract are hereinafter referred to as a "Contract Order." Prior to
entering into any Contract Order with a customer, NCR will consult with
NSCF regarding the pricing terms of that order. This pricing will then
remain in effect for the agreed upon terms of the contract order.
3.3 The parties will establish pricing annually for standard Orders. Subject
to 45 days written notice, NSCF reserves the right to increase its
pricing if the increase is attributable to variances of greater than
five percent in the cost of raw materials. In addition, NSCF agrees to
pass cost savings attributable to decreases greater than five percent in
the cost of raw
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<PAGE>
materials. Any modifications to the pricing terms such as cost decreases
as the result of manufacturing process improvements will be subject to
the mutual agreement of the parties.
3.4 NSCF will invoice within 24 hours of shipment. The invoice will be sent
via fax to the corresponding location which issued the purchase order.
As purchased volumes increase, both parties will work together to
implement an automated invoicing system, such as EDI. Invoice terms will
be 2% 10 net 30. Any outstanding billing issues will be finalized, paid
or credited within two business days after the quarterly review meetings.
4.0 Customer Service and Delivery
4.1 NSCF will establish NCR service contracts within its operation to
provide NCR timely feedback on requests for quotes, order data,
scheduling changes and shipping requirements.
4.2 NSCF will respond to all customer service requests concerning stock
items within 24 hours and 48 hours for non stock items.
4.3 NSCF will send order acknowledgements within 24 hours of receipt. If
NSCF cannot accommodate an Order due to limits in production capacity as
provided in Section 2.2 above, it shall notify NCR within 24 hours and
shall indicate when the Order can be produced. NCR shall then have 24
hours in which to approve the delayed production date or withdraw the
Order. If the order is withdrawn due to insufficient production
capacity, and the inability of NSCF to outsource, NCR may purchase the
products elsewhere.
4.4 Packaging will consist of a generic box and include a NCR logo carton
label.
4.5 NSCF will maintain competitive delivery schedules for NCR orders based
on marketplace requirements. NSCF will provide a delivery schedule for
stock and custom items. NSCF and NCR will agree on schedules to meet
NCR's customer's requirements. Delivery may be either to the end user
customer or to the NCR warehouse. Modifications to the delivery schedule
shall be subject to NSCF and NCR approval.
5.0 Specifications, Inspections and Testing
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<PAGE>
5.1 All data submitted to NSCF in connection with the Product is hereby
incorporated by reference. All Products ordered to NCR's specifications
will comply with then-current Specifications, unless otherwise
authorized by NCR. All Products will adhere to both ABA and ANSI print
standards. The Products shall be subject to inspection and test by NCR
at all times and places. If any inspection or test is made on NSCF's
premises, NSCF shall, without additional charge, provide reasonable
assistance for the safety and convenience of NCR's inspectors. NCR
reserves the right to reject Products which do not comply with the
warranty hereinafter stated. If rejected after delivery, rejected
Products will be returned to NSCF at NSCF's expense period Payment for
any Products shall not be deemed acceptance of those Products, and if such
Products are rejected after payment NCR shall be entitled to return the
same for replacement or refund. Consumption of the Product by NCR's
customers will constitute acceptance unless prior arrangements have been
agreed to by both NSCF and NCR.
6.0 Warranty
6.1 NSCF warrants for a period of one year after date of receipt that the
Products furnished hereunder will be in full conformity with all
Specifications and/or other descriptions and will be merchantable and of
good quality material and workmanship, and free from defects. NSCF does
not recommend storage of carbonized or carbonless products for longer
than one year. This warranty shall survive inspection, test, acceptance,
and payment, and shall run to NCR, its successors, assigns, and
customers. NCR may, at its option, either return for replacement or
credit, or require prompt correction of defective or nonconforming
Products. Return to NSCF of any defective or nonconforming Products
shall be made at NSCF's expense and no replacements of defective or
nonconforming Products shall be made unless specified by NCR.
Replacement or reworked Products shall be subject to this warranty to
the same extent as Products originally delivered under this Agreement.
7.0 NCR Technology
7.1 NCR hereby grants NSCF a license to use NCR Technology to manufacture,
market and distribute the Products exclusively to NCR. NSCF agrees that
NCR technology will not be used by NSCF to manufacture products on
behalf of any third Party without the prior written consent of NCR.
Page 5 of 11
<PAGE>
7.2 In the case of jointly developed new technology, both parties shall have
equal rights of use and access to same.
7.3 NCR and NSCF may enter into joint development agreements to develop new
technology associated with financial forms.
7.4 NSCF agrees it use of NCR trademarks and tradenames will comply with
NCR's applicable policies and that NCR will be given the opportunity to
approve any such use prior to publication or product distributed by NSCF.
8.0 Confidentiality
8.1 Except as otherwise specifically agreed, all information disclosed by
NCR and NSCF to each other shall be in confidence and is not, in any
way, intended to be for public disclosure, provided such information is
marked "Confidential" or the like. NSCF and NCR shall take all
reasonable precautions to prevent any such information from being
divulged to any person for any purpose other than to perform this
Agreement, including having recipients acknowledge the confidential
status of such information and agreeing to like restrictions on
divulging such information. This obligation of confidence shall survive
termination of this Agreement and will continue for three (3) years
thereafter. Information in the public domain, or which is rightfully
received by NSCF or NCR from a third party, or information which both
NCR and NSCF agree in writing may be disclosed, shall not be considered
confidential. As to publicity, NSCF and NCR shall not, without first
obtaining each other's consent in writing, advertise or otherwise
disclose the fact that NSCF has furnished Products and services to NCR
under this Agreement; provided, however, both parties acknowledge that
NSCF and NCR are publicly owned companies and that this Agreement may
have to be disclosed as a material contract as part of any securities
offerings or filings with the Securities and Exchange Commission.
9.0 Indemnification
9.1 NCR will defend at its expense any claim or suit brought against NSCF
that NCR Technology infringes a patent, copyright, trade secret, or
other intellectual property rights of another and will pay all costs and
damages finally awarded, if NSCF promptly notifies NCR of the claim and
gives NCR (a) the information and cooperation that NCR reasonable asks
for, and (b) sole authority to defend or settle the claim. THIS SECTION
STATES NCR'S ENTIRE LIABILITY FOR INFRINGEMENT OF
Page 6 of 11
<PAGE>
PATENTS, COPYRIGHTS, TRADE SECRETS, AND OTHER INTELLECTUAL PROPERTY
RIGHTS.
9.2 NSCF will defend at its expense any claim or suit brought against NCR
alleging that any Product infringes a patent, copyright, trade secret or
other intellectual property rights and will pay all costs and damages
finally awarded, if NCR promptly notifies NSCF of the claim and gives
NSCF (a) the information and cooperation that NSCF reasonably asks for,
and (b) sole authority to defend or settle the claim. In handling the
claim, NSCF may obtain for NCR the right to continue using the Product
or replace or modify the Product so that it becomes non-infringing. If
NSCF is unable to reasonably secure those remedies, as a last resort
NSCF will refund the purchase price for infringing Products. NSCF is not
obligated to indemnify NCR under this Section if the alleged
infringement is based on the use specifications or instructions provided
by NCR. THIS SECTION STATES NSCF'S ENTIRE LIABILITY FOR INFRINGEMENT OF
PATENTS, COPYRIGHTS, TRADE SECRETS, AND OTHER INTELLECTUAL PROPERTY
RIGHTS.
10.0 Limitation of Liability
10.1 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL,
INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES UNDER THIS AGREEMENT
REGARDLESS OF WHETHER THE PARTY HAS BEEN NOTIFIED OF THE POSSIBILITY OF
ANY SUCH DAMAGES.
11.0 Compliance with Laws
NSCF and NCR shall at all times comply with all applicable federal,
state, and local laws, regulations, rules, and orders. Any provision
which is required to be a part of this Agreement by virtue of any such
law, regulation, rule, or order is incorporated by reference.
12.0 Reservation of Rights
No failure by either party to insist upon strict compliance by the
other party with any of the terms, provisions, or conditions of this
Agreement, in any instance, shall be construed as a waiver or
relinquishment by either party of the other party's rights to insist
upon strict compliance therewith in the future.
Page 7 of 11
<PAGE>
13.0 Term and Termination
13.1 This Agreement shall continue for an initial term of three years from
the date first set forth above and shall be automatically renewed for
successive one year terms thereafter, unless notice of termination is
given by one party to the other at least one hundred and eighty (180)
days prior to the termination date of the initial term or of any yearly
renewal term, or unless earlier terminated under any other provision of
this Agreement.
13.2 Either party may terminate this Agreement upon sixty (60) days written
notice to the other party for failure of such other party to fulfill
any of its material obligations hereunder, provided, however, if during
the period of such notice the other party shall have remedied such
failure, this Agreement shall continue in full force and effect as it
would have had such failure not occurred. Nothing contained herein shall
be deemed to bar or prohibit NSCF from suspending its performance at any
time that NCR is in default in payment in accordance with Section 3.3
hereof or otherwise in default hereunder. In the event of termination
under this paragraph, each party shall be entitled to return of any
amounts paid in anticipation of performance not rendered by the other
party.
13.3 This Agreement shall terminate forthwith, at the option of either party
by notice in writing to the other party, upon the other party ceasing to
carry on its business or in the event the other party becomes the subject
of any proceedings under the law of any jurisdiction for the relief of
debtors or otherwise becomes insolvent, bankrupt, or makes an assignment
for the benefit of creditors, or upon the appointment of a receiver for
the other party, or its reorganization for the benefit of creditors. The
sale or change in control of a party shall not be deemed cessation of
that party's business under the terms of this Section 13.3 or considered
grounds for termination.
13.4 Upon termination of this Agreement, the terms of Section 6.1, 8.1, 9.0,
10.0, 11.0 and 17.0, shall survive termination. Upon termination of this
Agreement, NCR shall remain liable and pay for all Orders shipped during
the Term hereof.
Page 8 of 11
<PAGE>
14.0 Assignment
Neither this Agreement nor any right or obligations at governs may be
assigned or delegated by either party without the prior written consent
of the other party, which consent shall not unreasonably be withheld.
15.0 Notices and Communications
Except as otherwise specifically provided herein, notices and other
communications by a party under this Agreement shall be provided in
writing to:
To NCR: Tracy Drew
Manager Product Service and Alliance
9095 Washington Church Road
Miamisburg, OH 45342
To NSCF: John Christenson
National Sales Manager
7130 Northland Circle North
Brooklyn Park, MN 55428
16.0 Applicable Law
This Agreement shall be construed in accordance with the internal
substantive laws of the state of Minnesota.
17.0 Dispute Resolution
17.1 Except as otherwise specifically provided herein, any controversy or
claim, whether based on a contract, statute, fraud, misrepresentation or
other tort legal theory, arising out of or related to this Agreement
shall be resolved by arbitration in accordance with this paragraph.
17.2 The arbitration shall be conducted before a single arbitrator who is
knowledgeable in the field of financial and business forms. The
arbitrator shall be selected from a panel proposed by the American
Arbitration Association ("AAA"), and both the arbitrator's selection and
the arbitration proceedings shall be administered by the AAA. The U.S.
Federal Arbitration Act, 9 U.S.C. Sections 1-15, shall govern any and
all issues concerning the arbitrability of claims. The arbitrator's
award shall be final and binding, and may be entered for enforcement in
any court of
Page 9 of 11
<PAGE>
competent jurisdiction. The arbitrator shall not have the power to award
lost profits or other consequential, special, punitive, exemplary, or
other non-compensatory damages to either party. The arbitration shall be
held in a location that is mutually agreeable to the parties and each
party shall be responsible for paying its own expenses. The costs of
the arbitration itself, including facilities and fees, shall be borne
equally by the parties.
17.3 If either party pursues a claim arbitrable under this paragraph through
means other than arbitration, then the other party shall be entitled to
recover any costs it incurs in compelling arbitration, including
reasonable attorney's fees.
17.4 Nothing in this paragraph shall be construed as limiting NCR's and
NSCF's right to seek injunctive or other special or equitable relief
through any judicial forum for potential or actual violations of this
Agreement's provisions on Confidentiality.
IN WITNESS WHEREOF, NCR AND NSCF have caused this instrument to be
executed by their duly authorized representatives.
Northstar Computer Forms, Inc. NCR Corporation
By: /s/ Kenneth E. Overstreet By: /s/ Daniel J. Enneking
------------------------------- -------------------------------
Name: Kenneth E. Overstreet Name: Daniel J. Enneking
----------------------------- -----------------------------
Title: President Title: Sr. Vice President
---------------------------- ----------------------------
Date: Nov 6, 1998 Date: Nov 6, 1998
----------------------------- -----------------------------
Page 10 of 11
<PAGE>
EXHIBIT A
PRODUCT LIST
I. NEGOTIABLE DOCUMENTS (Security Documents)
- Money Orders
- Official Checks (Cashier's, Expense, Dividend, Accounts Payable)
- Gift Certificates
- Letter Checks (MICR Variable Image Printing)
II. INTERNAL BANK FORMS (Non-Negotiable)
- Cash Tickets
- General Ledger Tickets
- Teller Receipts
- Process Control Documents
- Drive Up Envelopes
III. OTHER FORMS
- Currency Envelopes
- Holiday Bank Items (Letter Checks, Statements, Receipts, Envelopes)
- Document Carriers
- Counter Forms (Savings Deposits/Withdrawals, Deposit Tickets)
- Forms Management/Distribution
- Imprint Programs (Commercial Deposit Ticket Books)
- Business Checks
- Test Documents (NCR, IBM, and Lundy Sorters)
Page 11 of 11
<PAGE>
COMPANY OVERVIEW
- - Northstar Computer Forms, Inc. designs, manufactures, and markets internal
bank forms, negotiable documents, and custom business forms and services.
- - The Company's primary emphasis is MICR (Magnetic Ink Character Recognition)
printing. Customers include financial institutions and processors of MICR
encoded documents.
- - Northstar's three business segments sell their products nationally through
distributors, with direct marketing to the nation's 200 largest banks.
- - The Company works through strategic business alliances and
distributor/business partners to provide full support to customers and
coverage of market opportunities throughout the country.
- - Corporate headquarters are in Brooklyn Park, Minnesota.
BUSINESS PROGRESS - 1998
- - Formed two strategic alliances to enhance sales to the top 200 banks and to
community banks.
- - Second best sales and earnings in the Company's history.
- - Expanded and implemented The Star Computer System--comprehensive operations
management software--in two additional plants.
- - Moved Denver operation into a new 23,000 square foot building to
accommodate expanded product offerings.
- - Invested $2.1 million in capital equipment including Internet-based,
pre-press data communications and computer-supported composition and remote
proofing.
<PAGE>
<TABLE>
<CAPTION>
Year Ended October 31 1998 1997 %Change
<S> <C> <C> <C>
Results of Operations (In thousands)
Net Sales $41,810 $46,277 (10)
Operating Income 3,479 7,298 (52)
Net Earnings 1,783 4,136 (57)
Financial Condition (In thousands)
Total Assets $29,452 $33,325 (12)
Stockholders' Equity 18,611 16,766 11
Working Capital 7,658 7,214 6
Weighted Average Shares 2,655 2,598 2
Per Share Data
Net Earnings $ .67 $ 1.59 (58)
Dividends Declared .14 .12 2
Stockholder's Equity 7.00 6.45 9
Key Ratios and Other Data
Current Ratio 2.7 2.0
Long-Term Debt-to-Cap 17.5% 30.4%
Gross Profit on Sales 27.2% 33.3%
Return on Average Equity 10.1% 28.1%
Return on Net Sales, Pretax 7.2% 14.3%
Number of Employees 435 535
</TABLE>
<PAGE>
Dear Fellow Stockholders,
After the exceptional year in 1997, Northstar had both a reduction in sales
and in earnings in fiscal 1998. However, the year was still the second best
in company history. We were challenged in 1998 by the need for new business
to replace four large contracts that ended during the year. Replacement
business is now in hand, and the management team has negotiated staggered
terms so that revenue exposure is stabilized. We are now well positioned for
fiscal 1999 performance to significantly surpass fiscal 1998.
Sales for the fiscal year ended October 31, 1998, were $41,809,938, a 9.7
percent decrease from the previous year of $46,277,461. Net earnings
decreased 56.9 percent from $4,135,922 to $1,782,941. Basic earnings per
share were $ .67 in fiscal 1998 compared to $1.59 in the previous year.
The company's primary focus in fiscal 1998 was to form strategic alliances
with other companies in our industry in order to strengthen sales and
marketing coverage of the end user market. We have entered into two such
alliances, and our new partners have large sales groups that concentrate on
sales and services to large banks and community banks respectively. Northstar
is well known as a premier manufacturing organization, and the two alliances
will strengthen the sales and marketing reach of our company.
During the year we made great strides in doing electronic commerce with key
customers. As you review this report, our employees will tell you of several
exciting applications of this new technology. We have strived to continue our
practice of being easy to do business with, of staying on the leading edge of
several technologies, and of being the low cost producer. We believe this
strategy continues to serve the best interest of our customers, employees and
shareholders.
We appreciate your support as we move into an exciting year in 1999.
/s/ Roger T. Bredesen /s/ Kenneth E. Overstreet
- ----------------------------- -----------------------------
Roger T. Bredesen Kenneth E. Overstreet
Chief Executive Officer President
<PAGE>
Strengthening market coverage through partnering
Consolidation and mega-mergers have transformed the financial services industry.
The new, very large financial services companies need "power suppliers," for
one-stop shopping, full national support and cutting-edge technology. To address
this challenge, Northstar has expanded its operations, invested heavily in
technology and increased its market coverage.
In a new strategy to stay on top, Northstar has formed strategic alliances with
other companies--with complementary strengths--addressing the same target
markets. These partnerships expand the effective size and strength of the sales
organization, providing full support to national banks and other very large
customers and full coverage of opportunities. Some partnerships provide
immediate access to previously unavailable categories of customers.
In one new partnering relationship, Northstar manufactures financial forms for a
major supplier of bank processing equipment serving 23 of the top 25 banks in
the country. Custom printed on a private label basis, the forms comply to the
rigid specifications of the partner's equipment. Northstar's quality control and
competitive pricing enable the partner to treat the forms as its own. The large
banks served by the business partner's national sales force order the forms with
confidence that they will perform perfectly with their processing systems.
Working with a major provider of documents and supplies for community banks,
Northstar has significantly increased its potential business with that segment
of the bank market. This business partner's sales force of approximately 400
representatives provides nationwide coverage of community banks, which can now
order a full spectrum of forms and supplies through a single source. Using a
toll-free number to order internal bank forms, the sales force representatives
access Northstar's customer service representatives answering directly on behalf
of the business partner. Orders are entered into Northstar's
<PAGE>
Star Computer System, which ensures that the forms are manufactured and
shipped by the operating unit that can do it most efficiently. The Star
System also transfers the information to the business partner's computer
system on a daily basis for tracking and billing, allowing both companies to
improve efficiencies.
Yet another partnership--with a financial printing company specializing in
on-demand typesetting, printing and document distribution services--enables
Northstar to provide specialty numbered forms to a major customer in the
insurance industry. The key to this relationship is that the insurance company
needs big-company manufacturing capability, but wants the personal attention and
responsiveness of dealing with a more agile and responsive team like Northstar
and its partner.
Northstar continues to serve the needs of the many large bank customers that
came on stream through the acquisition of the Deluxe Financial Forms Division in
1996. Working through expanded distributor/business partners around the country,
Northstar has reinforced these relationships through effective two-way
communications, in many cases achieving preferred vendor status.
Northstar also continues to serve the needs of medium-sized and smaller banks
through its national network of distributors. This business remains strong and
continues to expand.
Expanding Product and Service Offering
Northstar expanded its product offering in 1998 through the addition of
envelopes, individualized gift certificates and over 400 new internal bank
forms. This broad product offering supports the "one-stop shopping" concept for
customers. As electronic commerce grows in popularity, more and more customers
of Northstar and its business partners are ordering their financial forms,
business forms and negotiable documents on-line, through point-and-click
transactions. Electronic Data Interchange (EDI) at Northstar ensures accurate
order entry and efficient invoicing. The billing system now links electronically
to
<PAGE>
business partners and distributors for electronic or conventional billing to
meet customer needs.
Northstar continues to expand support and services for customers:
- - Two new, highly automated warehouses near its manufacturing plants
integrate production and distribution in support of the forms management
programs required by large financial institutions. These customers using
Northstar forms management rest assured that their every branch and
operating unit will have a constant supply of all forms and materials.
- - Summary billing creates a comprehensive statement, electronically or on
paper as desired, breaking out ordering by organizational components in any
way the customer requests.
- - Using Pick and Pack, a customer orders to take advantage of quantity
discounts, but has its forms shipped in smaller quantities whenever it
requests them.
- - The SecureStar program allows customers to select from over 30 high-tech
security options for customized protection against fraud.
Fast-forward to flexibility
Bringing the new Star Computer System on stream in its operating locations is
taking Northstar to a significantly higher level of operating efficiency and
flexibility than ever possible before. With software created specifically for
the financial forms business, The Star System allows the Company to operate on a
fully coordinated, seamless basis to ensure rapid and efficient production of
all forms and documents.
When an order comes in from a customer directly, or by a business partner or
distributor, the information is efficiently entered on the system once and for
all. Programmed to balance the workload among the various Northstar operations
for optimal productivity, the system can also readily reassign work in the event
of a power outage or other contingency in any individual production plant.
Work-in-process information is instantly
<PAGE>
available to those authorized throughout the Company. The system also
provides the necessary data to the computer systems of business partners and
distributors for tracking and invoicing as required.
Moving ahead through technology
Annual investments of over $2 million in technology have moved Northstar into
the forefront of automation in its industry. A premier producer of bank forms,
business forms and negotiable documents ON PAPER, Northstar has become virtually
PAPERLESS in its composition, pre-press, tracking and invoicing systems.
- - Designers create documents on Macintosh, PC and Unix-based systems quickly
and efficiently, taking advantage of the latest upgrades in publishing
software.
- - Proofing has moved from "snail mail" to e-mail. Instead of sending paper
proofs overnight to customers and awaiting their response, designers
transmit their layouts electronically in seconds, often getting the
response back in minutes rather than days.
- - Advanced file servers allow document files to be transmitted between
departments or between plants on the Internet.
- - The creation of printing plates, which used to involve the developing,
cutting and taping of photographic film, now happens electronically,
through an on-screen, point-and-click computer program, with much greater
flexibility and efficiency.
- - On-press, computerized electronic sequencing of numbers eliminates waste
when paper rolls are changed--without stopping the printing of sequentially
numbered documents.
- - Northstar has also continued to upgrade its state-of-the art capabilities
in image processing for banking customers, enabling them to reduce encoding
activities.
- - Linking its variable image printing system to an Internet server, Northstar
has increased by ten-fold its ability to produce gift certificates,
redemption checks and other individualized documents for retail and
direct-mail customers.
<PAGE>
<TABLE>
<CAPTION>
Year Ended, October 31:
1998 1997 1996 1995 1994 1993
Results of Operations
<S> <C> <C> <C> <C> <C> <C>
Net Sales $41,809,938 $46,277,461 $28,903,158 $24,215,962 $22,633,951 $20,019,575
Gross Profit 11,356,506 15,417,187 6,748,180 4,975,894 5,177,970 4,652,286
Operating Income 3,478,686 7,298,492 2,375,086 1,902,976 2,135,223 1,697,710
Net Earnings 1,782,941 4,135,922 1,263,056 1,363,410 1,285,835 1,374,657
Cash Flow/Ops 5,183,231 5,833,641 2,872,187 1,376,858 2,322,240 2,076,189
Financial Condition
Total Assets $29,451,672 $33,324,874 $29,401,432 $17,523,364 $16,499,238 $12,042,847
Working Capital 7,658,171 7,214,439 5,381,223 $ 4,545,734 3,357,561 3,935,416
Current Ratio 2.7 2.0 2.2 3.3 2.6 3.4
Long Term Debt 3,945,550 7,330,550 $10,565,175 $ 2,535,000 2,795,000 -
Stockholders' Equity 18,611,095 16,765,854 $12,638,535 $11,587,122 $10,399,485 $ 9,303,208
Key Ratios Analysis
Gross Profit 27.2% 33.3% 23.3% 20.6% 22.9% 23.2%
Operating Income 8.3% 15.8 8.2 7.9 9.4 8.4
Net Earnings 4.3% 8.9 4.4 5.6 5.7 6.9
Return on Equity 10.1% 28.1 10.4 12.4 13.0 15.7
L-T Debt to Capitalization 17.5% 30.4 45.5 18.0 21.2
Per Share Data
Book Value $ 7.00 $ 6.45 $ 4.91 $ 4.41 $ 3.93 $ 3.55
Net Earnings .67 1.59 .49 .52 .49 .53
Dividends .14 .12 .09 .08 .08 .07
Weighted Average
Outstanding Shares 2,655,096 2,598,093 2,572,658 2,626,094 2,642,549 2,617,227
</TABLE>
Stock Information/Register
The Company's common stock is traded under the symbol NSCF on the Nasdaq
National Market. As of January 18, 1999, the approximate number of
stockholders was 900 and holders of record 245. The following table sets
forth the range of high and low quotations per share for 1998 and 1997. In
1998 and 1996 the Company declared dividends of $.14 per share and $.12 per
share, respectively. Future dividends are restricted to a maximum of 20
percent of consolidated net income under the Company's term loan agreement.
(See Note 7 to Consolidated Financial Statements.)
<TABLE>
<CAPTION>
1998 Quarter High Low Close
<S> <C> <C> <C>
1st 10.88 7.61 9.72
2nd 10.16 7.78 9.67
3rd 10.00 7.75 8.00
4th 9.50 6.25 6.88
Present-1-18-1999 8.63 8.63 8.63
<CAPTION>
1997 Quarter High Low Close
<S> <C> <C> <C>
1st 13.67 5.50 7.67
2nd 9.24 6.67 7.32
3rd 11.67 7.67 11.33
4th 12.17 9.50 11.50
</TABLE>
<PAGE>
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
- -------------------------------------------------------------------------------
INTRODUCTION
The following discussion and analysis provides information that the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the financial statements and footnotes which appear
elsewhere in this Annual Report.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers that statements
contained herein, other than historical data, may be forward-looking and subject
to risks and uncertainties. The following important factors could cause the
Company's actual results to differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company:
- - Loss of one or more major customers due to bank consolidations or other
reasons,
- - Rise in paper prices which outpaces the Company's ability to pass the
increase onto its customers,
- - Inability to extend existing contracts or successfully negotiate new
contracts,
- - Technological obsolescence of the Company's products or manufacturing
equipment,
- - Contracting market for traditional business forms products,
- - Competition from large national manufacturers of internal bank forms and
custom business forms.
These factors are discussed in more detail in Exhibit 99 to the Company's form
10K.
The following table sets forth, for the years indicated, certain items in the
Company's consolidated statement of earnings as a percentage of net sales and
the percentage changes of the dollar amounts of such items as compared with the
prior year.
<TABLE>
<CAPTION>
1998 Compared 1997 Compared to
1998 1997 1996 to 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% (9.7%) 60.1%
- ------------------------------------------------------------------------------------------------------------
Cost of Goods Sold 72.8 66.7 76.7 (1.3) 39.3
- ------------------------------------------------------------------------------------------------------------
Gross Profit 27.2 33.3 23.3 (26.3) 128.5
- ------------------------------------------------------------------------------------------------------------
Selling General and
Administrative Expenses 18.8 17.5 15.1 (3.0) 85.7
- ------------------------------------------------------------------------------------------------------------
Operating Income 8.3 15.8 8.2 (52.3) 207.3
- ------------------------------------------------------------------------------------------------------------
Net Earnings 4.3 8.9 4.4 (56.9) 227.5
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
2
RESULTS OF OPERATIONS
NET SALES. Net sales in 1998 decreased $4,467,523 from $46,277,461 in 1997 to
$41,809,938 in 1998. The 1997 net sales increased $17,374,303 from 1996 sales of
$28,903,158. Internal bank forms contributed 69.7 percent of sales in 1998
compared to 72.4 percent in 1997 and 63.5 percent in 1996. The balance of sales
were custom business forms products, principally secure and negotiable
documents.
Sales of internal bank forms decreased $4,555,289 from $33,680,702 in 1997 to
$29,125,413 in 1998, a decrease of 13.5 percent. The 1997 internal bank forms
sales increased $15,321,643, an 83.5 percent increase from the 1996 sales of
$18,359,059. Approximately 96 percent of the decrease for 1998 and 79 percent of
the increase for 1997 can be attributed to the financial forms division of
Deluxe Corporation that the Company acquired in July 1996, now called Northstar
Financial Forms. During 1998, competition in the internal bank forms industry
became more intense, particularly in contract negotiations with larger banks.
This increased competition resulted in non-renewal of three sales contracts for
Northstar Financial Forms. In addition, as part of the 1996 acquisition, the
Northstar Financial Forms division had a two year contract to manufacture a
special product line for Deluxe Corporation (Deluxe). Deluxe elected not to
renew the contract in 1998. The non-renewal of these four sales contracts
accounted for approximately $3.0 million of the sales reduction in internal bank
forms for 1998. The remaining sales of internal bank forms remained relatively
flat for 1998 with no significant change in product mix, sales prices or
customer base compared to 1997.
Sales of custom business forms include standard business forms as well as
various secure and negotiable documents such as gift certificates, money orders,
certificates of title and bank official checks. Custom business forms sales were
relatively flat with $12,684,525 in sales in 1998 compared to $12,596,758 in
1997 and $10,544,099 in 1996. During 1998, there was no significant change in
the sales mix between standard business forms and secure and negotiable
documents or in the customer base compared to 1997. Approximately 92 percent of
the increase in 1997 was from increased sales in one negotiable document product
line.
GROSS PROFIT. Gross profit was $11,356,506 (27.2 percent of net sales) in 1998
compared to $15,417,187 (33.3 percent of net sales) in 1997 and $6,748,180 (23.3
percent of net sales) in 1996. In 1998, strong competition in the internal bank
forms market resulted in renewal of certain contracts at reduced profit margins.
In addition, retail sales to financial institutions accounted for 34 percent of
Company sales in 1998 compared to 37 percent in 1997 and 23 percent in 1996.
Retail sales generally have a higher gross profit which is then offset by higher
selling and administrative expenses, which consist primarily of personnel costs
to administer these sales. The increased number of contracts with lower margin
levels, the decrease in retail sales and the overall decrease in sales reduced
the absorption of fixed and semi-fixed costs thereby decreasing the gross
profit. For example, although variable components of manufacturing costs,
particularly materials and direct labor, remained relatively stable as a
percentage of sales, other fixed and semi-fixed costs had a negative impact on
gross margin. In 1998, due to the reduced cost absorption from the overall
reduction in sales, fixed costs such as depreciation and building occupancy
costs and semi-fixed costs such as indirect labor accounted for a 4.0 percent
decrease in gross profit. In
<PAGE>
3
1997, material costs decreased approximately 7 percent. This decrease in
material costs was due to paper price declines in certain types of paper and
changes in product mix to more labor intensive products. In addition, the
increased sales improved the absorption of costs. These factors increased the
gross profit from the 1996 level of 23.3 percent to 33.3 percent in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $240,875 in 1998 compared to 1997 and
increased $3,745,601 in 1997 compared to 1996. In 1998, sales commissions to
distributor/partners were restructured to provide additional incentive to
increase new business. These restructured commission cost increases were offset
by decreases in costs related to employee profit sharing and bonuses and reduced
computer service costs. The 1997 increase of $3,745,601 included approximately
$3,350,000 in expenses for the financial forms division acquired in the last
fiscal quarter of 1996. The balance of the increase in 1997 is principally due
to increased contributions to employee benefit plans.
OTHER INCOME AND EXPENSE. Other income and expense consists principally of
interest expense which decreased $250,347 in 1998 due to debt repayments and
increased $526,077 in 1997 due to the debt incurred with the Northstar Financial
Forms Division acquisition.
PROVISION FOR INCOME TAXES. The provision for incomes taxes increased to 40.5
percent in 1998 compared to 37.4 percent in 1997 and 39.9 percent in 1996.
NET EARNINGS. Net earnings were $1,782,941 ($ 0.67 per basic share) in 1998
compared to $4,135,922 ($1.59 per basic share) in 1997 and $1,263,056 ($ 0.49
per basic share) in 1996. Return on average assets was 5.7 percent in 1998
compared to 13.2 percent in 1997 and 5.4 percent in 1996. Return on average
stockholders' equity was 10.1 percent in 1998 compared to 28.1 percent in 1997
and 10.4 percent in 1996.
FINANCIAL CONDITION
ACQUISITION: In July 1996 the Company acquired certain assets of the financial
forms division of Deluxe Corporation for $9.3 million. The Company financed the
acquisition with a $9.0 million term loan. This acquisition consisted
principally of manufacturing equipment at an appraised value of $7.3 million.
The Company continues to expand its manufacturing capacity through the
acquisition of other equipment. Capital expenditures for 1998 were $1.8 million
compared to $2.0 million in 1997 and $1.0 million for 1996.
LONG TERM DEBT. The Company's long term debt consists of the term loan
related to the 1996 acquisition and Industrial Development Revenue Bonds
which were used to finance construction. The term loan and the bonds are
collateralized by the Company's property, plant and equipment, inventories
and accounts receivable. In addition to the required payments on the debt,
the Company prepaid $2,000,000 on its term loan in 1998 resulting in total
debt repayment of $5,235,000 for the year. This repayment in 1998 reduced
long term debt from $10,565,550 on October 31, 1997 to $5,330,550 on October
31, 1998. Both the term loan and the bonds specify limits on capital
expenditures and dividends as well as
<PAGE>
4
specify working capital, net worth and certain financial ratios that the
Company must maintain.
LIQUIDITY. Cash provided by operations remained relatively constant at $5.2
million in 1998 compared to $5.8 million in 1997. Cash provided by operations
was $2.9 million in 1996. Although 1998 net earnings decreased $2.4 million from
1997, the change in operating assets and liabilities to effectively offset each
other during 1998 resulting in no significant change in cash compared to the
$1.2 million decrease in cash during 1997 from the change in these assets and
liabilities. The Company's working capital was $7.7 million as of October 31,
1998 compared to $7.2 million as of October 31, 1997. Depreciation and
amortization expense was $2,861,826 and $2,729,918 for 1998 and 1997
respectively.
If necessary to finance operations, the Company has a $1.5 million line of
credit at an interest rate equal to the bank's reference rate. The Company did
not have to utilize this line of credit during 1998 or 1997. The Company
believes its existing financial resources are adequate to fund its 1999
operations, including projected capital expenditures of $2.1 million and
dividend payments, and foresees no events or uncertainties that are likely to
have a material impact on its liquidity.
OUTLOOK. Merger and acquisition activity in the banking industry is extremely
strong at this time. Banks generally consolidate their purchasing of internal
bank forms with one supplier. Therefore, the Company could obtain or lose a
significant customer or numerous smaller customers as this consolidation
activity continues. The Company continues to work to stabilize and increase its
customer base. During the third quarter of 1998, the Company was able to obtain
three new large-volume internal bank form customers which are expected to
positively impact sales in 1999. In addition, to increase and improve market
penetration in the internal bank forms market, the Company has developed
additional distribution channels by forming two new strategic alliances with
other companies in the financial forms industry. Sales with one of these
partners has already begun. Sales with the second alliance depends on the
partner's ability to sell internal bank forms as ancillary products used in the
equipment it sells to the banking industry. In the custom business forms market,
the Company has verbally agreed to an extension and expansion of its contracts
to manufacture negotiable documents for its largest customer. The proposed new
contract would be for a four- year term with sales from a new product line
estimated at $3 million annually. The Company also has a proposal pending for
one other new negotiable document contract.
Paper price changes, sales volume changes and sales mix changes are three
factors with a significant effect on the Company's gross profit. The Company
expects the paper industry to increase prices in 1999, but at this time
expects to be able to pass these paper price increases onto its customers. In
1999 sales volumes are expected to increase in both custom business forms and
internal bank forms with no significant change in the sales mix. Based upon
these expectations, the Company expects the 1999 gross profit to exceed the
1998 gross profit both in total and as a percentage of sales.
The Company does not anticipate significant changes in selling, general and
administrative costs for 1999. Based on the projected increase in sales volume,
these costs are expected to decrease as a percentage of sales in 1999.
<PAGE>
5
The outlook for the Company has been positively affected by the internal bank
forms computer system which the Company developed and installed in the first
location in the last quarter of 1997. This system has been continually
enhanced and is now installed in three of the Company's four internal bank
forms production facilities. The fourth installation is scheduled for the
second quarter of fiscal 1999. The integrated computer system is already
increasing operating efficiencies within the three plants by streamlining
order processing, enhancing equipment utilization and improving billing and
reporting capabilities.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," a new standard requiring the reporting and
display of "Comprehensive Income" (defined as the change in equity of a business
enterprise during a period from sources other than those resulting from
investment by owners and distributions to owners) and its components in a
full-set of general-purpose financial statements. The new standard will be
effective for the Company's annual financial statements in fiscal year 1999. In
fiscal years 1998, 1997 and 1996, the Company did not have any changes in
stockholders' equity from nonowner sources.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," a new standard for reporting
information about business segments in financial statements. The new standard
will be effective for the Company's annual financial statements in fiscal
year 1999. The Company has not determined what impact, if any, this new
standard will have on its reporting of segment information.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The SOP provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. The Company is reviewing the requirements of the SOP and does
not expect it to significantly change its current accounting for software
costs. SOP 98-1 is required to be adopted by the Company for its fiscal year
2000.
<PAGE>
6
YEAR 2000 READINESS
STATE OF READINESS. As part of the Company's Y2K Plan, management is in the
process of evaluating its information technology ("IT") and non-information
("non-IT") technology systems, including manufacturing equipment, telephone and
mechanical systems and other equipment and systems with embedded date sensitive
technology for Year 2000 compliance. The Company's Y2K Plan is focused on
assessing and ensuring compliance in the following areas: IT and non-IT
hardware, operating systems, software applications and custom applications.
Additionally, the Company is reviewing the Year 2000 compliance status of its
customers, vendors and other service providers.
HARDWARE. The Company is in the process of completing its assessment of its IT
and non-IT hardware for Y2K compliance. The Company estimates that 70% of its IT
and non-IT hardware has either been upgraded for Y2K compliance or has been
certified internally or through the appropriate vendor to be compliant. The
Company expects that the remaining IT and non-IT hardware will be upgraded or
certified as Y2K compliant by August 31, 1999.
OPERATING SYSTEMS. The Company's operating systems are SCO Unix 5.0 or higher,
Microsoft NT4X and Microsoft Windows 95 or 98. SCO Unix has certified versions
5.0 to be Y2K compliant. Microsoft has certified Windows 98 to be compliant and
95 to be compliant with minor issues. Microsoft has certified NT4X software as
compliant now that the upgrade released in December 1998 has been installed.
SOFTWARE APPLICATIONS. The Company's primary information systems application
consist of licensed product purchased from Plantrol Systems, Ltd. (Plantrol).
Plantrol has certified that all installations since January 1, 1997 are Y2K
compliant. All systems in our internal bank forms manufacturing plants were
installed subsequent to January 1, 1997. For the custom business forms
application which was installed prior to 1997, Plantrol has installed Y2K
service patches and the Company has tested the compliance on a computer server
operating system running the Year 2000. The minor application errors noted have
been patched. The Company's software systems also consist of Mecca computer
composition systems and one Solimar System, Inc. (Solimar) Print Management
System. At some of the Company's locations, the Mecca systems require service
patches which will be installed in early 1999. Solimar has certified its system
to be Y2K compatible. The Company believes that date/time issues related to some
limited custom applications are either non-essential to the functioning of the
application, or can be worked around, or the function can be accomplished
manually if required.
OTHER TECHNOLOGY. The Company has started to replace other technology that is
known to be non Y2K compatible or to upgrade hardware and software as needed.
The security systems at all locations have either been certified as Y2K
compatible or the required upgrades have been ordered. Other items such as
telephone systems that are not Y2K compatible are being upgraded or replaced as
deemed appropriate. In the first quarter of 1999, the phone system of the one
location deemed not to be upgradeable was replaced with a new Y2K compliant
system. Such expenditures are included in the 1999 proposed capital expenditure
budget of $2.1 million.
<PAGE>
7
THIRD PARTY RELATIONSHIPS. Because Y2K issues also impact the Company by
affecting the business and operations of the Company's vendors, customers and
other business partners, the Company is in the process of communicating with
these parties in order to determine their Y2K compliance status. This
communication is in the early stage, and accordingly, the Company has not been
able to determine if the failure of a third-party to be Y2K compliant will have
a materially adverse effect on the Company. The Company anticipates that this
part of its Y2K plan will be complete by July 1999.
COST TO ADDRESS YEAR 2000 ISSUES. Although the ultimate cost of attaining Year
2000 compliance is not fully known at this time, managements best estimate is
that the external costs will not be material. These costs will be funded from
operations. The Company does not track internal personnel time spent on IT
projects, including the Y2K project. To date, no information technology projects
have been delayed as a result of the Company's Y2K project. In the event the
Company's Y2K Plan is not successful or implemented timely, the Company may need
to devote more resources to the process and additional costs may be incurred.
Such a situation could have a materially adverse effect on the Company's
financial condition and results of operations.
WORST CASE SCENARIO. The Company believes that the worst scenario that could
reasonably result from the Year 2000 problem would be the failure of one or
more significant vendors, customers or business partners to become Year 2000
compliant and the inability of the Company to determine and react on a timely
basis to mitigate the effects. Even though the Company is undertaking its Y2K
Plan in an effort to minimize its risks, there can be no assurance that this
scenario or any other impact of the Y2K problem will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTINGENCY PLANS. To date, the Company has not yet developed any detailed
contingency plans to address Year 2000 compliance deficiencies, as it is
still in the process of gathering data from its customers, vendors and other
business partners regarding their Year 2000 compliance and otherwise
implementing its Y2K Plan. To the extent that the Company identifies Year
2000 compliance issues that cannot be addressed on a timely basis, it will
seek to develop appropriate contingency plans in order to mitigate its risk.
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,162,845 $ 5,317,881
Accounts receivable, net 4,936,112 6,614,209
Inventories 2,245,338 1,912,646
Deferred income taxes 255,656 318,656
Other current assets 687,769 267,737
------------ ------------
Total current assets 12,287,720 14,431,129
------------ ------------
Property, plant and equipment, net 14,153,269 15,211,143
Notes receivable, less current portion 161,573 829,108
Goodwill, net 1,556,293 1,757,799
Other assets, net 1,292,817 1,095,695
------------ ------------
Total assets $ 29,451,672 $ 33,324,874
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 1,385,000 3,235,000
Accounts payable 1,316,878 1,373,805
Accrued liabilities 1,927,671 2,607,885
------------ ------------
Total current liabilities 4,629,549 7,216,690
Long-term debt, less current portion 3,945,550 7,330,550
Deferred compensation 738,845 827,147
Deferred income taxes 1,526,633 1,184,633
Commitments (Notes 7 and 8)
Stockholders' equity:
Common shares; $.05 par value, authorized
5,000,000 shares; issued and outstanding,
1998: 2,714,436; 1997: 2,642,207 135,722 132,110
Additional paid-in capital 2,671,492 2,245,730
Retained earnings 15,803,881 14,388,014
------------ ------------
Total stockholders' equity 18,611,095 16,765,854
------------ ------------
Total liabilities and stockholders' equity $ 29,451,672 $ 33,324,874
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net sales $ 41,809,938 $ 46,277,461 $ 28,903,158
Cost of goods sold 30,453,432 30,860,274 22,154,978
------------- ------------- -------------
Gross profit 11,356,506 15,417,187 6,748,180
Selling, general and administrative expenses 7,877,820 8,118,695 4,373,094
------------- ------------- -------------
Operating income 3,478,686 7,298,492 2,375,086
------------- ------------- -------------
Other income (expense):
Interest expense (642,169) (892,516) (366,439)
Other, net, principally interest income 158,424 196,946 94,409
------------- ------------- -------------
(483,745) (695,570) (272,030)
------------- ------------- -------------
Earnings before provision for income taxes 2,994,941 6,602,922 2,103,056
Provision for income taxes 1,212,000 2,467,000 840,000
------------- ------------- -------------
Net earnings $ 1,782,941 $ 4,135,922 $ 1,263,056
------------- ------------- -------------
------------- ------------- -------------
Net earnings per common share:
Basic $ 0.67 $ 1.59 $ 0.49
------------- ------------- -------------
------------- ------------- -------------
Diluted $ 0.62 $ 1.48 $ 0.48
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ADDITIONAL
STATED PAID-IN RETAINED
SHARES CAPITAL CAPITAL EARNINGS
<S> <C> <C> <C> <C>
Balances at October 31, 1995 1,713,896 $ 85,695 $ 1,983,865 $ 9,517,562
Purchase and retirement of stock (389) (20) (2,704)
Stock options exercised 3,064 153 14,016
Cash dividends, $.130 per share (223,088)
Net earnings 1,263,056
---------- --------- ------------ ------------
Balances at October 31, 1996 1,716,571 85,828 1,995,177 10,557,530
Stock options exercised 44,900 2,245 294,590
Cash dividends, $.175 per share (305,438)
Net earnings 4,135,922
---------- --------- ------------ ------------
Balances at October 31, 1997 1,761,471 88,073 2,289,767 14,388,014
Stock split 880,690 44,035 (46,269)
Stock options exercised 72,275 3,614 257,994
Cash dividends, $.137 per share (367,074)
Tax benefit from stock options exercised 170,000
Net earnings 1,782,941
---------- --------- ------------ ------------
Balances at October 31, 1998 2,714,436 $ 135,722 $ 2,671,492 $ 15,803,881
---------- --------- ------------ ------------
---------- --------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,782,941 $ 4,135,922 $ 1,263,056
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 2,517,552 2,458,399 1,736,839
Amortization 344,274 271,519 79,118
Provision for losses on (recovery of) receivables (70,586) 167,437 63,857
Deferred income taxes 405,000 (25,000) 348,000
Loss (gain) on sale of land and equipment 50,286 (5,576) (3,687)
Changes in certain operating assets and
liabilities 153,764 (1,169,060) (614,996)
------------ ------------ ------------
Net cash provided by operating activities 5,183,231 5,833,641 2,872,187
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures and equipment deposits (1,577,203) (1,465,679) (1,021,415)
Capitalized computer software costs (236,405) (584,321)
Purchase of certain assets of a division of
Deluxe Corporation (9,324,754)
Proceeds from sale of land and equipment 67,239 12,400 5,550
Notes receivable granted (65,919)
Notes receivable repayments 736,932 117,219 83,137
------------ ------------ ------------
Net cash used in investing activities (1,009,437) (1,920,381) (10,323,401)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt (5,235,000) (1,029,450) (140,000)
Borrowing on long-term debt 9,000,000
Dividends paid (353,204) (240,869) (222,914)
Stock options exercised 261,608 296,835 14,169
Other, net (2,234) (2,724)
------------ ------------ ------------
Net cash (used in) provided by financing
activities (5,328,830) (973,484) 8,648,531
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents (1,155,036) 2,939,776 1,197,317
Cash and cash equivalents at beginning of year 5,317,881 2,378,105 1,180,788
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,162,845 $ 5,317,881 $ 2,378,105
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF THE BUSINESS:
Northstar Computer Forms, Inc. and Subsidiary (the Company) designs,
manufactures and markets printed forms with an emphasis on MICR
(Magnetic Ink Character Recognition) printing. The Company's two
business concentrations are custom business forms which are marketed in
the North Central United States and negotiable documents and internal
bank forms which are marketed nationally. Sales are principally made
through distributors, with the remainder directly to end-user customers.
Approximately 34%, 37% and 23% of the Company's net sales were to
financial institutions in fiscal years 1998, 1997 and 1996,
respectively. The Company's corporate headquarters is in Brooklyn Park,
Minnesota.
REVENUE RECOGNITION:
The Company recognizes sales principally upon shipment of the product to
the customer.
CONSOLIDATION:
The consolidated financial statements include the accounts of Northstar
Computer Forms (Northstar) and General Financial Supply, Inc. (General
Financial), its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
CASH EQUIVALENTS:
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
INVENTORIES:
Inventories are stated at the lower of cost or market using the last-in,
first-out (LIFO) method. As of October 31, 1998 and 1997, consolidated
inventories, stated at LIFO, approximated the cost of consolidated
inventories using the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method. The estimated useful lives are 15 - 40
years for buildings, 5 - 10 years for machinery and equipment, and 3 - 8
years for furniture and fixtures and automobiles. Leasehold
improvements are amortized on a straight-line basis generally over the
term of the respective leases. Gains or losses on dispositions are
included in current earnings. Major renewals or betterments are
capitalized while maintenance and repairs are charged to current
operations when incurred.
6
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
COMPUTER SOFTWARE COSTS:
The Company capitalizes costs incurred for developing and obtaining
computer software, primarily relating to modifying and installing new
information technology systems for internal use. These costs are
amortized on a straight-line basis over five years, the estimated useful
lives of the underlying assets.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides
guidance on accounting for the costs of computer software developed or
obtained for internal use. The Company is reviewing the requirements of
the SOP and does not expect it to significantly change its current
accounting for software costs. SOP 98-1 is required to be adopted by
the Company for its fiscal year 2000.
GOODWILL:
During fiscal year 1996, the Company recorded goodwill in connection
with its purchase of substantially all the assets of the Financial Forms
Division of Deluxe Corporation (see Note 2). Goodwill represents the
excess of the purchase price over the estimated fair value of the
identifiable assets acquired and is being amortized on a straight-line
basis over 10 years.
LONG-LIVED ASSETS:
The recoverability of long-lived assets, including goodwill, is assessed
annually or whenever adverse events or changes in circumstances or
business climate indicate that the expected cash flows previously
anticipated warrant reassessment. When such reassessments indicate the
potential of impairment, all business factors are considered and, if the
carrying values of long-lived assets are not likely to be recovered from
future net operating cash flows, they will be written down for financial
reporting purposes.
INCOME TAXES:
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense
or benefit is the tax refundable or payable for the period and the
change during the period in deferred tax assets and liabilities.
7
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share," a new standard for computing and presenting earnings per
share. As required, the Company adopted this new standard in the first
quarter of fiscal year 1998. Net earnings per share (EPS) for all
periods presented have been computed by dividing net earnings by the
weighted average number of common shares outstanding (basic EPS) and by
the weighted average number of common and common equivalent shares
outstanding (diluted EPS). The Company's common equivalent shares
consist of stock options when their effect is not antidilutive.
The computations of basic and diluted weighted average common shares
outstanding are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Weighted average common shares outstanding 2,655,096 2,598,093 2,572,658
Common equivalent shares outstanding:
Option equivalents 199,387 187,860 72,378
--------- --------- ---------
Weighted average common and common
equivalent shares outstanding 2,854,483 2,785,953 2,645,036
--------- --------- ---------
--------- --------- ---------
</TABLE>
At October 31, 1998, 1997 and 1996, 9,000, 30,000 and 72,000 outstanding
options were excluded from the computation of diluted earnings per share
for the year then ended because the options' exercise price was greater
than the average market price of the Company's common shares during the
respective year.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," a new standard requiring the reporting and display of
"Comprehensive Income" (defined as the change in equity of a business
enterprise during a period from sources other than those resulting from
investment by owners and distributions to owners) and its components in
a full-set of general-purpose financial statements. The new standard
will be effective for the Company's annual financial statements in
fiscal year 1999. In fiscal years 1998, 1997 and 1996, the Company did
not have any changes in stockholders' equity from nonowner sources.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," a new standard for reporting
information about business segments in financial statements. The new
standard will be effective for the Company's annual financial statements
in fiscal year 1999. The Company has not determined what impact, if
any, this new standard will have on its reporting of segment information.
8
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The most significant areas which require the use of
management's estimates relates to the determination of the allowances
for uncollectible accounts receivable and obsolete inventory and
components of the calculation of the deferred compensation accrual.
2. ACQUISITION:
In July 1996, the Company purchased substantially all of the assets of
the Financial Forms Division of Deluxe Corporation (the Acquisition) for
$9,200,000 in cash and incurred $124,754 of direct acquisition costs.
The assets acquired consisted principally of equipment which was used by
Deluxe Corporation to manufacture internal bank forms. The Company has
continued to use the assets to manufacture internal bank forms, which is
the same product manufactured by the Company's subsidiary, General
Financial. The Company recorded goodwill of $2,015,065 in connection
with the Acquisition.
In the year of acquisition, the financial results attributable to the
Acquisition were included in the Consolidated Statement of Earnings for
the period from the acquisition date through October 31, 1996. The
unaudited financial results of operations for the fiscal year ended
October 31, 1996, on a pro forma basis as though the Acquisition
occurred as of November 1, 1995, are as follows:
<TABLE>
<S> <C>
Net sales $ 43,650,175
Net earnings 1,773,502
Diluted net earnings per common share $0.67
</TABLE>
9
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SELECTED BALANCE SHEET INFORMATION:
The following provides additional information concerning selected balance
sheet accounts at October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 5,074,112 $ 6,908,209
Allowance for doubtful accounts (138,000) (294,000)
------------ ------------
$ 4,936,112 $ 6,614,209
------------ ------------
------------ ------------
Inventories:
Raw material 1,394,156 1,492,927
Work in process 598,846 329,175
Finished goods 252,336 90,544
------------ ------------
$ 2,245,338 $ 1,912,646
------------ ------------
------------ ------------
Property, plant and equipment, net:
Land 109,626 109,626
Buildings 3,993,073 3,927,785
Machinery and equipment 24,124,637 23,346,491
Furniture and fixtures 1,804,043 1,733,622
Automobiles 335,322 295,068
Leasehold improvements 66,313 66,313
------------ ------------
30,433,014 29,478,905
Accumulated depreciation (16,213,432) (14,201,449)
Accumulated amortization (66,313) (66,313)
------------ ------------
$ 14,153,269 $ 15,211,143
------------ ------------
------------ ------------
Goodwill, net:
Goodwill 2,015,065 2,015,065
Accumulated amortization (458,772) (257,266)
------------ ------------
$ 1,556,293 $ 1,757,799
------------ ------------
------------ ------------
Other assets, net:
Computer software costs, net of
accumulated amortization of
$171,683 and $48,429 at
October 31, 1998 and
1997, respectively 649,043 535,892
Cash value of life insurance, net
of outstanding loans
of $166,857 at October 31,
1998 and 1997 359,918 308,646
Other 283,856 251,157
------------ ------------
$ 1,292,817 $ 1,095,695
------------ ------------
------------ ------------
</TABLE>
10
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SELECTED BALANCE SHEET INFORMATION, CONTINUED:
<TABLE>
1998 1997
<S> <C> <C>
Accrued liabilities:
Payroll and bonuses $ 504,888 $ 676,811
Vacation 345,471 341,050
Profit sharing 301,125 540,000
Real estate taxes 195,454 214,192
Dividends 190,017 176,147
Other 390,716 659,685
------------ ------------
$ 1,927,671 $ 2,607,885
------------ ------------
------------ ------------
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION:
Changes in certain operating assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Accounts receivable $ 1,748,683 $ (2,052,911) $ (1,146,436)
Inventories (332,692) 379,411 (974,143)
Other assets (592,914) (111,704) (96,583)
Accounts payable (56,927) (729,732) 1,283,976
Accrued liabilities (612,825) 1,293,928 269,662
Deferred compensation 439 51,948 48,528
------------ ------------- -------------
$ 153,764 $ (1,169,060) $ (614,996)
------------ ------------- -------------
------------ ------------- -------------
Cash paid during the year for:
Interest $ 699,308 $ 834,348 $ 357,948
Income taxes 1,456,894 2,222,243 384,105
</TABLE>
11
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. NOTES RECEIVABLE:
Notes receivable consisted of the following at October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Brooklyn Park Economic Development Authority Tax Increment
Financing Note, interest at 9.5%, payable in semi-annual
installments of $48,889, with remaining principal and
interest due August 2001. $ 204,250 $ 258,008
Note receivable, interest at 8%. During fiscal year 1998, this
note receivable was paid in full to the Company. - 614,666
Other, mainly customers, with various terms 33,095 101,603
---------- ----------
237,345 974,277
Less current portion, included in "other current assets" (75,772) (145,169)
---------- ----------
$ 161,573 $ 829,108
---------- ----------
---------- ----------
</TABLE>
Management believes that the carrying values of its notes receivable as
of October 31, 1998, approximate their fair value.
6. BANK LINE OF CREDIT:
In July 1996, the Company entered into a Revolving Credit agreement
(Agreement) with a bank in connection with a term loan (see Note 7) and
the Acquisition (see Note 2). Under this Agreement, the Company may
borrow up to $1,500,000 with interest accruing at the prime interest
rate. The Company would have the option to convert the variable
interest rate on all or a portion of these borrowings to a fixed rate
determinable at the date of conversion upon notification to the bank.
Collateral for borrowings under this Agreement, as well as the related
covenants, are the same as the term loan the Company entered into during
July 1996 (see Note 7). There were no borrowings under this Agreement
during fiscal years 1998, 1997 or 1996.
12
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT:
Long-term debt consisted of the following at October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenue Bonds $ 2,010,000 $ 2,345,000
Term Loan 3,320,550 8,220,550
------------ ------------
5,330,550 10,565,550
Less current portion (1,385,000) (3,235,000)
------------ ------------
$ 3,945,550 $ 7,330,550
------------ ------------
------------ ------------
</TABLE>
REVENUE BONDS:
In August 1994, the Company received proceeds of $2,945,000 from the
issuance of Variable Rate Demand Industrial Development Revenue Bonds
(Revenue Bonds) in connection with the construction of the Company's
corporate headquarters and manufacturing facility. The Revenue Bonds
require annual principal payments of $335,000 through fiscal year 2004
and bear interest at an interest rate which varies based upon comparable
tax-exempt issues, but not to exceed 12%. The interest rate at October
31, 1998, was 3.5%. The Company has an option to convert the variable
interest rate on these bonds to a fixed interest rate determinable at
the date of conversion upon notification to the bond trustee. The
Revenue Bonds are collateralized by an outstanding irrevocable
direct-pay letter of credit with a financial institution equal to the
outstanding principal amount of the Revenue Bonds.
The letter of credit is renewable upon mutual agreement of the Company
and the financial institution. If the letter of credit is not renewed
and the Company is unable to obtain a similar letter of credit with
another financial institution, the Revenue Bonds may be callable at the
option of the bond trustee.
The Company's outstanding letter of credit expires in August 2000 and is
collateralized by its corporate headquarters and manufacturing facility,
inventories and accounts receivable. The letter of credit agreement,
among other things, requires the Company to not exceed annual capital
expenditures ranging from $1,200,000 to $1,400,000 until the Revenue
Bonds have been fully paid, maintain certain minimum net worth
requirements, meet certain leverage and cash flow ratios, as well as
limits cash dividends. The letter of credit agreement also allows for
the lender to call the debt upon any "material change in the nature of
the business." For fiscal years 1997, 1998 and 1999 only, the letter of
credit agreement was amended to increase the allowable maximum annual
capital expenditure amount to $2,100,000 for fiscal year 1997 and
$2,500,000 for fiscal years 1998 and 1999.
13
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT, CONTINUED:
TERM LOAN:
In July 1996, the Company entered into a term loan (Term Loan) with a
bank for $9,000,000 in connection with the Acquisition (see Note 2).
The Term Loan is collateralized by substantially all the Company's
assets and requires remaining quarterly principal payments of $262,500
through October 2001, with the remaining principal amount to be paid in
January 2002. The Company has an option, upon written notice to the
bank, to accrue interest on its outstanding Term Loan balance based on
the prime interest rate or the Eurodollar rate. At October 31, 1998,
the interest rate used to accrue interest on the Term Loan was 7.27%.
Also, the Term Loan agreement requires excess cash flow, as defined in
the agreement, as well as the net proceeds on any sale of stock be used
to make principal payments on the Term Loan. Accordingly, due to the
excess cash flow provision, the Company classified $2,000,000 as of
October 31, 1997, as a component of the current portion of long-term
debt (current liability) in addition to its scheduled principal payments
due in the succeeding fiscal year under the Term Loan agreement. During
fiscal year 1998, the Company made additional principal payments of
$2,000,000 in excess of its scheduled principal payments due under the
Term Loan. In exchange for the $2,000,000 prepayment, the bank waived
the requirement for the Company to make any "excess cash flow" debt
repayment related to fiscal year 1998. The Company has an option to
convert the variable interest rate on all or a portion of the Term Loan
to a fixed interest rate determinable at the date of conversion upon
notification to the bank.
The Term Loan agreement, among other things, requires the Company to not
exceed annual capital expenditures ranging from $1,200,000 to $1,400,000
from fiscal year 1998 until the Term Loan and related revolving line of
credit (see Note 6) have been fully paid, maintain certain minimum net
worth requirements, meet certain current and cash flow ratios, as well
as limits cash dividends and lease payments. The Term Loan agreement
also allows for the lender to call the debt upon any "material change in
the nature of the business." For fiscal years 1997, 1998 and 1999 only,
the Term Loan agreement was amended to increase the allowable maximum
annual capital expenditure amount to $2,100,000 for fiscal year 1997 and
$2,500,000 for fiscal years 1998 and 1999.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
<S> <C>
1999 $ 1,385,000
2000 1,385,000
2001 1,385,000
2002 505,550
2003 335,000
2004 335,000
------------
$ 5,330,550
------------
------------
</TABLE>
Management believes that the carrying value of its long-term debt as of
October 31, 1998, approximates its fair value.
14
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. OPERATING LEASES, INCLUDING RELATED PARTY LEASE:
The Company leases certain buildings and equipment under six separate
operating lease agreements expiring through 2007 and requiring monthly
payments in addition to real estate taxes, insurance and maintenance
costs. The Company has the option to extend the lease term upon
expiration of one of the leases.
In August 1997, the Company began leasing the Company's Financial Forms
Division manufacturing facility from the Company's Chairman and Chief
Executive Officer under an operating lease agreement expiring in fiscal
year 2007, with two additional five-year extensions available at the
option of the Company. This operating lease agreement requires monthly
payments, subject to increase every three years based on that period's
average price index, as defined in the lease agreement, in addition to
real estate taxes, utilities, assessments, insurance and maintenance
costs.
Future minimum payments, excluding real estate taxes, utilities,
assessments, insurance and maintenance costs, under operating lease
agreements with noncancellable terms are as follows:
<TABLE>
<CAPTION>
NON-
RELATED RELATED
FISCAL YEAR PARTY PARTY TOTAL
<S> <C> <C> <C>
1999 $ 418,571 $ 191,000 $ 609,571
2000 235,691 191,000 426,691
2001 110,141 191,000 301,141
2002 110,141 191,000 301,141
2003 110,141 191,000 301,141
Thereafter 211,104 732,167 943,271
---------- ---------- ----------
$1,195,789 $1,687,167 $2,882,956
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Total rent expense was $695,062, $774,372 and $221,328 in fiscal
years 1998, 1997 and 1996, respectively, exclusive of real estate taxes,
insurance and maintenance costs. Rent expense related to the related
party lease, exclusive of real estate taxes, insurance and maintenance
costs, was $191,000 and $31,384 in fiscal years 1998 and 1997,
respectively.
15
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES:
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Currently payable:
Federal $ 684,000 $ 2,153,000 $ 414,000
State 123,000 339,000 78,000
----------- ------------ -----------
807,000 2,492,000 492,000
----------- ------------ -----------
Deferred provision (benefit):
Federal 343,000 (21,000) 298,000
State 62,000 (4,000) 50,000
----------- ------------ -----------
405,000 (25,000) 348,000
----------- ------------ -----------
$ 1,212,000 $ 2,467,000 $ 840,000
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
The actual provision for income taxes differed from the "expected"
amounts computed by applying the U.S. federal corporate tax rate of 34%
to earnings before provision for income taxes for the fiscal years ended
October 31, 1998, 1997 and 1996, respectively, as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Computed expected provision for income taxes $ 1,018,000 $ 2,245,000 $ 715,000
State income taxes, net of federal tax effect 148,000 221,000 51,500
Other, net 46,000 1,000 73,500
------------ ------------ -----------
Actual provision for income taxes $ 1,212,000 $ 2,467,000 $ 840,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
16
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INCOME TAXES, CONTINUED:
The approximate effects of temporary differences that gave rise to
deferred tax balances at October 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance for doubtful accounts $ 55,200 $ 117,600
Inventories 40,851 35,505
Accrued liabilities 124,188 130,420
Deferred compensation 331,034 321,153
Goodwill 58,124 31,258
------------- ------------
Total deferred tax assets 609,397 635,936
------------- ------------
Deferred tax liabilities:
Property, plant and equipment (1,669,331) (1,289,063)
Investment in limited partnership (211,043) (212,850)
------------- ------------
Total deferred tax liabilities (1,880,374) (1,501,913)
------------- ------------
Net deferred tax liabilities $ (1,270,977) $ (865,977)
------------- ------------
------------- ------------
</TABLE>
The Company has not recorded a valuation allowance as of October 31,
1998 and 1997, related to its deferred tax assets as management believes
no such allowance is necessary.
10. PROFIT-SHARING AND BONUS PLANS:
The Company has a profit-sharing and 401(k) plan (the Plan) covering
substantially all full-time employees of the Company. The Plan was amended
during fiscal year 1997 to include the Company's employees who became
employed with the Company in connection with the Acquisition (see Note 2)
and who were previously ineligible to participate in the Plan. Company
contributions are determined based upon a profitability formula approved by
the Company's Board of Directors, but are not to exceed 15% of the salary
and wages paid to the participants for the year. Vesting of benefits
occurs at a rate of 20% for each year of service, commencing after the
second full year of service. Vested benefits allocated to the employees'
accounts are payable upon retirement, death or earlier termination in a
lump sum or installments. The Company recognized expense under the Plan of
$301,125, $540,000 and $192,856 in fiscal years 1998, 1997 and 1996,
respectively.
17
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. PROFIT-SHARING AND BONUS PLANS, CONTINUED:
The Company also has a bonus plan for certain key salaried employees.
Bonuses are determined, in part, based on a profitability formula
approved by the Company's Board of Directors and, in part, at the Board
of Directors' discretion. Company expense under the bonus plan was
$203,805, $408,440 and $149,027 in fiscal years 1998, 1997 and 1996,
respectively.
11. DEFERRED COMPENSATION:
The Company has deferred compensation plans covering four current
officers and one former officer of the Company. The plans for one
current and the former officer call for periodic payments ranging from
ten to fifteen years at retirement or death of such employees. The
plans for the remaining three current officers call for contributions to
a "rabbi trust" to maintain benefits to be paid upon retirement or
termination. Deferred compensation expense was $78,882, $51,397 and
$65,114 in fiscal years 1998, 1997 and 1996, respectively.
12. STOCK OPTIONS:
The Company has an incentive stock option plan for option grants to
employees (ISO Plan) and a nonqualified stock option plan for option
grants to the Company's Outside Board of Directors (BOD Plan). As of
October 31, 1998, the Company has reserved 500,000 and 50,000 shares of
its common stock for grant under the ISO Plan and BOD Plan,
respectively. During fiscal year 1998, the Company amended its ISO Plan
to increase the maximum number of shares reserved for issuance under
that plan to 500,000. Options granted under the ISO Plan and BOD Plan
have exercise prices not less than the fair market value of the
Company's common stock at the date of grant and become exercisable
generally over a five-year period or based on the discretion of the
Company's Board of Directors. Options granted under the ISO Plan expire
in August 2003, regardless of the original grant date, and options
granted under the BOD Plan expire 10 years from the date of grant.
In addition, the Company has a nonqualified stock option plan for option
grants to the Company's Board of Directors (Non-Active Plan), under
which no more options may be granted. At October 31, 1998, 30,000 of
these options are outstanding and have a weighted average exercise price
of $3.62. Of these options, 26,000 are exercisable at October 31, 1998.
These options expire through 2005.
18
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK OPTIONS, CONTINUED:
The following is a summary of the stock option activity with respect to
the ISO, BOD and Non-Active Plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE OPTIONS
EXERCISE PRICE AVAILABLE
PER SHARE OPTIONS FOR GRANT
<S> <C> <C> <C>
Balance at October 31, 1995 $4.01 286,900 154,002
Exercised 3.25 (14,000)
Cancelled 4.83 (3,600) 3,600
Granted 5.55 82,000 (82,000)
Expired 3.75 (2,000)
-------- --------
Balance at October 31, 1996 4.39 349,300 75,602
Exercised 4.41 (67,350)
Cancelled 5.58 (8,550) 8,550
Granted 7.17 96,000 (96,000)
Expired 3.87 (14,000)
-------- --------
Balance at October 31, 1997 5.13 355,400 (11,848)
Authorization of additional stock options 300,000
Exercised 3.62 (72,275)
Cancelled 4.28 (3,300) 3,300
Granted 12.67 9,000 (9,000)
Expired 4.42 (250)
-------- --------
Balance at October 31, 1998 $5.75 288,575 282,452
-------- --------
-------- --------
</TABLE>
The Company may grant nonqualified stock options outside of the ISO and
BOD Plans to other parties at the discretion of the Company's Board of
Directors. The terms of these options, including the exercise price,
vesting provision and expiration of the options, are determined by the
Company's Board of Directors prior to the granting of the options.
During fiscal year 1995, the Company granted 30,000 of these options to
a vendor. At October 31, 1998, all of these options are outstanding and
have a weighted average exercise price of $5.09. These options expire
in November 2003.
19
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK OPTIONS, CONTINUED:
The following table summarizes information about all stock options
outstanding and exercisable at October 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$3.25 - $6.17 279,575 4.6 years $ 4.93 189,525 $ 4.71
$10.58 - $12.67 39,000 4.9 years 11.06
------- --------- ------- ------- -------
318,575 4.7 years $ 5.69 189,525 $ 4.71
------- --------- ------- ------- -------
------- --------- ------- ------- -------
</TABLE>
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, compensation
cost for stock options granted to employees is measured as the excess,
if any, of the fair value of the Company's common stock at the date of
the grant over the amount an employee must pay to acquire the stock.
The Company accounts for stock-based compensation to nonemployees using
the fair value method prescribed by SFAS No. 123. Such compensation
costs are amortized on a straight-line basis over the underlying option
vesting terms.
If the Company had elected to recognize compensation expense for options
granted in fiscal years 1998, 1997 and 1996 based on the fair value of
the options granted at the date of grant as prescribed by SFAS No. 123,
the Company's net earnings and diluted net earnings per share for fiscal
years 1998, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net earnings:
As reported $ 1,782,941 $ 4,135,922 $ 1,263,056
Pro forma 1,708,430 4,021,562 1,250,964
Diluted net earnings per share:
As reported $ 0.62 $ 1.48 $ 0.48
Pro forma $ 0.60 $ 1.44 $ 0.47
</TABLE>
20
<PAGE>
NORTHSTAR COMPUTER FORMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK OPTIONS, CONTINUED:
The weighted average fair value of options at the date of grant was
$5.45, $3.26 and $2.38 per option during fiscal years 1998, 1997 and
1996, respectively.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model and the following key
assumptions:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Risk-free interest rates 5.5% 6.3%
Expected life 5 years 5 years
Expected volatility 46.20% 47.24%
Expected dividend yield 1.26% 1.79%
</TABLE>
13. STOCK SPLIT:
On May 31, 1998, the common stock of the Company was split 3 for 2. All
per share and number of share data have been retroactively restated to
reflect the stock split, except for those presented in the Consolidated
Statements of Changes in Stockholders' Equity.
14. PREFERRED STOCK:
The Company has 200,000 shares of authorized, nonvoting preferred stock
that to date have not been issued. The terms of the preferred stock
will be finalized and approved by the Board of Directors prior to
issuance.
15. CONCENTRATIONS OF CREDIT RISK:
At October 31, 1998 and 1997, cash and cash equivalents totaling
approximately $3,400,000 and $4,844,000, respectively, were concentrated
in one financial institution. At October 31, 1997, 14.2% of the
Company's accounts receivable were from one customer. The Company
generally requires no collateral from its customers to support their
accounts receivable.
16. FOURTH QUARTER ADJUSTMENTS:
In the fourth quarter of fiscal year 1997, the Company recorded certain
adjustments to reflect changes in accounting estimates to amounts
reported in previous interim periods of the fiscal year. The
adjustments were related to the estimation of gross profit on net sales
from the Company's financial forms division and the interim income tax
rate used in previous interim periods of fiscal year 1997. These
adjustments increased fourth quarter net earnings by approximately
$207,000 and diluted net earnings per common share by $0.07.
21
<PAGE>
The accompanying consolidated financial statements and related information
are the responsibility of management. They have been prepared in conformity
with generally accepted accounting principles and include amounts that are
based on our best estimates and judgements under the existing circumstances.
The financial information contained elsewhere in this Annual Report is
consistent with that in the consolidated financial statements.
The Company maintains internal accounting control systems that are adequate
to provide reasonable assurance that the assets are safeguarded from loss or
unauthorized use. The systems produce records adequate for preparation of
financial information. We believe the Company's systems are effective, and
the cost of the systems does not exceed the benefits obtained.
The role of independent accountants is to render an independent, professional
opinion of management's consolidated financial statements to the extent
required by generally accepted auditing standards.
/s/ ROGER T. BREDESEN /s/ MARY ANN MORIN
ROGER T. BREDESEN MARY ANN MORIN
CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Northstar Computer Forms, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, changes in stockholders' equity, and
cash flows present fairly, in all material respects, the financial position
of Northstar Computer Forms, Inc. and Subsidiary as of October 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended October 31, 1998, in conformity with
generally accepted accounting principle. These financial statements are the
responsibility of Northstar Computer Forms, Inc.'s management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principals used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
December 23, 1998
<PAGE>
Annual Meeting
The annual meeting of the shareholders of Northstar Computer Forms, Inc. will be
held Thursday, April 8, 1999 at 3:30 p.m. at the Radisson Plaza Hotel, 35 South
7th Street, Minneapolis, Minnesota 55402.
Form 10-K
A copy of the Form 10-K Report filed with the Securities and Exchange
Commission by the Company may be obtained without charge by written request to:
Mary Ann Morin, Northstar Computer Forms, Inc., 7130 Northland Circle North,
Brooklyn Park, MN 55428-1530.
Independent Accountants
PricewaterhouseCoopers L.L.P.
650 Third Avenue South
Minneapolis, MN 55402
Corporate Offices
7130 Northland Circle North
Brooklyn Park, MN 55428-1530
612-531-7340
Transfer Agent
Norwest Bank Minnesota
Stock Transfer
P.O. Box 64854
St. Paul, MN 55164-0854
1-800-468-9716
Legal Counsel
Parsinen Kaplan Levy Rosberg & Gotlieb P.A.
100 South Fifth Street
Suite 1100
Minneapolis, MN 55402
Quarterly Financial Information (Unaudited and not reviewed)
<TABLE>
<CAPTION>
Fiscal Year 1998 First Quarter Second Quarter Third Quarter Fourth Quarter
Jan. '98 Apr. '98 July '98 Oct. '98
<S> <C> <C> <C> <C>
Net Sales $10,608,027 $10,753,943 $10,358,271 $10,089,697
Earnings before taxes 791,575 719,173 589,912 894,281
Provision for income taxes 297,000 277,000 225,000 412,000
Net earnings 494,575 442,173 364,912 481,281
Earnings per share .18 .15 .12 .22
Depreciation and amortization 715,290 726,930 678,818 740,788
<CAPTION>
Fiscal Year 1997 First Quarter Second Quarter Third Quarter Fourth Quarter
Jan. '97 Apr. '97 July '97 Oct. '97
<S> <C> <C> <C> <C>
Net Sales $11,608,757 $11,740,931 $11,330,222 $11,579,551
Earnings before taxes 952,693 1,326,609 1,261,296 4,478,824
Provision for income taxes 382,000 531,000 503,500 1,050,500
Net earnings 570,693 795,609 757,796 2,011,824
<PAGE>
Earnings per share .21 .29 .27 .82
Depreciation and amortization 623,731 590,659 638,267 877,261
</TABLE>
<PAGE>
Company Management
- - Northstar Computer Forms, Brooklyn Park, MN
Mike O'Neil, VP Operations
Jim Staricha, National Sales Manager
John Christenson, National Sales Manager
- - Northstar Financial Forms, Roseville, MN
Stan Klarenbeek, VP Sales/Marketing
Henry Schultz, Operations Manager
- - Wisconsin Business Forms, Milwaukee, WI
Steve Otto, General Manager
- - General Financial Supply, Nevada, IA
Don Dearborn, VP & General Manager
- - General Financial Supply, Bridgewater, VA
Tony Scarselletta, General Manager
- - General Financial Supply, Denver, CO
Terry Kennedy, General Manager
Company Operating Locations
- - Northstar Computer Forms, Inc.
7130 Northland Circle North
Brooklyn Park, MN 55428
800-765-6787
FAX: 612-535-5671
www.nscf.com
- - General Financial Supply
321 11th Street
P.O. Box 179
Nevada, IA 50201
800-759-4374
FAX: 515-382-2414
www.genfinsup.com
- - Northstar Financial Forms
2341 St. Croix Street
Roseville, MN 55113
800-328-9600
FAX: 651-638-5237
www.nff.com
- - General Financial Supply
213 B Dry River Road
P.O. Box 105
Bridgewater, VA 22812
800-333-6167
FAX: 540-828-6176
- - Wisconsin Business Forms
6580 North Industrial Road
Milwaukee, WI 53223
800-333-9472
FAX: 414-358-1894
- - General Financial Supply
4403 Table Mountain Parkway
Golden, CA 80403
<PAGE>
800-288-1223
FAX: 303-277-0701
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 of Northstar Computer Forms, Inc. and Subsidiary (File Nos. 33-83846,
333-60357 and 333-69417) of our reports dated December 23, 1998 on our audits of
the consolidated financial statements and the related financial statement
schedule of Northstar Computer Forms, Inc. and Subsidiary as of October 31, 1998
and 1997, and for the years ended October 31, 1998, 1997 and 1996, which reports
are included or incorporated by reference in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
January 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD INDICATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 4,162,845
<SECURITIES> 0
<RECEIVABLES> 5,074,112
<ALLOWANCES> 138,000
<INVENTORY> 2,245,338
<CURRENT-ASSETS> 12,287,720
<PP&E> 30,433,014
<DEPRECIATION> 16,279,745
<TOTAL-ASSETS> 29,451,672
<CURRENT-LIABILITIES> 4,629,549
<BONDS> 3,945,550
0
0
<COMMON> 135,722
<OTHER-SE> 18,475,373
<TOTAL-LIABILITY-AND-EQUITY> 29,451,672
<SALES> 41,809,938
<TOTAL-REVENUES> 41,809,938
<CGS> 30,453,432
<TOTAL-COSTS> 30,453,432
<OTHER-EXPENSES> 158,424
<LOSS-PROVISION> (68,517)
<INTEREST-EXPENSE> 642,169
<INCOME-PRETAX> 2,994,941
<INCOME-TAX> 1,212,000
<INCOME-CONTINUING> 1,782,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,782,941
<EPS-PRIMARY> .67
<EPS-DILUTED> .62
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENT RELATING
TO FORWARD-LOOKING INFORMATION
The Company and its representatives may, from time to time, make written or
verbal forward-looking statements. Those statements relate to developments,
results, conditions or other events the Company expects or anticipates will
occur in the future. Such statements are based on management's then current
views and assumptions and, as a result, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Such statements must therefore be evaluated in the context of a
number of factors that may materially affect the Company's business. Disclosure
of these factors is intended to permit the Company to take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Although the Company has attempted to list the factors that it is currently
aware may have an impact on its business and operations, other factors may in
the future prove to be important and the following list should not necessarily
be considered comprehensive.
RISKS RELATING TO BANK CONSOLIDATIONS. For the past few years, the banking
industry has undergone considerable consolidation. As a result of such
transactions, banks generally consolidate their purchasing of forms with one
supplier, so bank mergers could cause the Company to lose (or gain) significant
customers. The loss of one or more significant bank customers could have a
material adverse effect on the Company's business and operations.
RISKS RELATING TO COST AND AVAILABILITY OF PAPER. The cost of paper represents
a significant portion of the Company's cost of materials. Increases in paper
costs could have a material adverse effect on the Company's results of
operations and financial condition. The Company attempts to maintain gross
profit margins when paper prices increase by passing such increases on to its
customers. There can be no assurance, however, that it will be able to pass on
increases in the cost of paper in the future or be able to do so at the same
rate at which prices are increasing. In addition, when paper prices decrease
materially, market forces could require that such lower costs be passed on to
customers in the form of lower prices which, in turn, could decrease the
Company's gross profit margins from paper inventory purchased when prices were
higher. The failure to pass on paper price increases, or to offset paper price
reductions passed on to customers, could have a material adverse effect on the
Company's operating results.
Due to the significance of paper in the manufacture of the Company's products,
it is dependent upon the availability of paper. During periods of tight paper
supply, many paper producers allocate shipments of paper based on the historical
purchase levels of customers. As a result of the Company's large volume paper
purchases from several paper producers, it generally has not experienced
difficulty in obtaining adequate quantities of paper, although occasionally it
has experienced minor delays in delivery. Although the Company believes
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that its large volume paper purchases and strong relationships with vendors
will continue to enable it to receive adequate supplies of paper in the
future, there can be no assurance in this regard.
RISKS RELATING TO INABILITY TO EXTEND EXISTING CONTRACTS OR SUCCESSFULLY
NEGOTIATE NEW CONTRACTS. The Company has contracts with many of its major
customers to provide some or all of their business and/or internal bank forms
needs. Typically, these contracts are competitively bid and the Company has
been successful in winning these contracts on the basis of price, quality and/or
service. There can be no assurance that the Company will be able to
successfully extend existing contracts or successfully negotiate new ones.
RISKS RELATING TO TECHNOLOGICAL OBSOLESCENCE. The Company budgets approximately
$2 Million per year for capital expenditures. Significant changes or
improvements in printing technology could require the Company to accelerate its
capital spending in order to remain competitive. Unanticipated capital expenses
can have a significant impact on the Company's results of operations and
financial condition, and could make it difficult to continue to compete
effectively with companies with substantially greater resources.
Another factor related to advancement in technology, though deemed remote at
this time, is the continuing trend toward paperless commerce. Advancements in
automated banking and other services provided by customers of the Company could
significantly decrease the use of business forms in niche markets served by the
Company. A significant decrease in the use of business forms in markets
serviced by the Company could require a major shift in the Company's business
direction.
RISKS RELATING TO COMPETITION. The markets for the Company's products are
highly competitive and relatively fragmented, with a large number of
competitors. Many of the Company's competitors are larger and have greater
financial, marketing and technical resources. Although the Company has invested
significant resources in computer technology, capital equipment and project
specialization in an attempt to differentiate itself from certain of its
competitors, there can be no assurance that competitors will not take actions,
including developing new technologies, products and services, which could
adversely affect the Company's sales and operating results.
RISKS RELATED TO ACQUISITIONS. A component of the Company's business strategy
includes growth through the acquisition of businesses complimentary to its
current business. The Company has been successful in integrating recent
acquisitions into its operations. There can be no assurance, however, that the
Company will be able to locate or successfully integrate future acquisitions.
RISKS RELATED TO DISRUPTIONS IN OPERATING SYSTEMS. The Company has become
increasingly dependent upon its manufacturing, administrative and computer
processing infrastructure and operations to process its orders on an efficient,
cost competitive
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and profitable basis. The Company has implemented commercially reasonable
safeguards to reduce the likelihood of property loss or service disruptions
and has secured property and business interruption insurance to minimize the
adverse financial consequences arising from a select group of risks.
However, the Company can make no assurances that its infrastructure and
operations are not susceptible to loss or disruption, whether caused by
intentional or unintentional acts of Company personnel or third party service
providers or natural disasters such as earthquakes, fires or severe storms.
In addition, the Company can make no assurance that its insurance coverage
will adequately respond to all potential causes of property loss or service
disruption. In the event that any such acts or disasters lead to property
loss or operating system disruption for which property and business
interruption insurance coverage is unavailable or insufficient, the Company's
financial performance and long term prospects could be materially adversely
affected.
RISKS RELATING TO YEAR 2000. A description of the relative risks in the
Company's readiness for the Year 2000 is set forth in Management's Discussion
and Analysis of Results of Operations and Financial Condition in its Annual
Report.
RISKS RELATING TO KEY PERSONNEL. The Company's success is highly dependent on
the efforts of its senior management, including Roger T. Bredesen, its Chief
Executive Officer, Kenneth E. Overstreet, its President, Mary Ann Morin, its
Chief Financial Officer and Don Dearborn and Stan Klarenbeek, both Vice
Presidents. The loss of the services of one or more of these individuals could
adversely affect the Company.
