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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2000 Commission File Number 0-19380
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INSIGNIA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1656308
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5025 Cheshire Lane North
Plymouth, MN 55446-3715
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(Address of principal executive offices)
Registrant's telephone number, including area code: (763) 392-6200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X___ No _______
Number of shares of outstanding Common Stock, $.01 par value, as of February
28, 2001 was 10,365,356.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K.
Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2001 was approximately $88,105,526 based upon the
last sale price of the registrant's Common Stock on such date.
Documents Incorporated By Reference:
Portions of the registrant's proxy statement for the Annual Meeting of
Shareholders scheduled for May 17, 2001 are incorporated by reference into Part
III of this Form 10-K.
1
BUSINESS REVIEW PART I
PART I
ITEM 1 BUSINESS
GENERAL
Insignia Systems, Inc. (the "Company") markets in-store promotional programs
and services to retailers and manufacturers. Since its inception in 1990, the
Company has marketed point-of-purchase merchandising systems and resources to
merchants in over 30 classes of retail trade. The Company started with simple
standalone printers, trade-named Impulse(R) and SIGNright!(R), and later
developed a fully featured ODBC (Open Database Connectivity) compliant software
application, trade-named Stylus(R). This PC-based software is used by retail
chains to produce signs, labels and posters, and is currently directly marketed.
The Company executed a business strategy to obtain both initial revenue from the
sale of these products and recurring revenue from the sale of the sign cards,
label supplies and accessories used with them. The Company developed the
products into turn-key solutions that allow retailers to quickly and easily
produce high quality point-of-purchase signs, labels and large format
promotional materials in their stores. The Company continues to make these
products available and supports the supply and service needs of domestic
clients. The Company actively markets these products internationally through
independent distributors.
In 1998, Insignia formally launched Insignia Point-Of-Purchase-Services (POPS),
an in-store, shelf-edge sign promotion program that was developed by combining
the Company's expertise in signage and in-store merchandising with its Stylus
software products. Funded by consumer goods manufacturers, the account- and
product-specific program combines product selling information and graphics from
manufacturers with the retailer's logo and current store price on a sign
designed to fit each participating retailer's decor and merchandising theme.
For retailers, Insignia POPS(R) is a source of incremental revenue and is the
first in-store promotion signing program that delivers a complete
call-to-action, on a product- and store-specific basis, with all participating
retail stores updated weekly. For consumer goods manufacturers, Insignia POPS
provides access to the optimum retail promotion site for their products - the
retail shelf edge. In addition, manufacturers are offered lead-times of less
than 30 days, no production costs and micro-marketing capabilities such as
store-specific messaging and multiple language options. The POPS program is
directly marketed.
Company management has been investing the Company's primary resources and
energies in the development of the Insignia POPS program for the last five
years. During this time, management also restructured the organization and
redirected the Company's activities to leverage the Company's in-store
experience, acquire promotion industry expertise and develop the necessary
operational and systems foundation to successfully compete in the in-store
promotion industry.
INDUSTRY & MARKET BACKGROUND
With 70% of buying decisions being made in store, product manufacturers are
constantly seeking in-store vehicles to motivate consumers to buy their branded
products. Industry studies estimate that manufacturers spend approximately $1
billion annually on in-store promotion efforts. The Company's market studies
indicate that the shelf-edge sign represents the final and best opportunity for
manufacturers to convince the consumer to buy. In fact, a 1996 study concluded
the shelf is second only to end-aisle displays for in-store effectiveness.
Many consumers seek product information beyond price in order to make educated
buying decisions. The Company's marketing studies indicate the most effective
sign contains information supplied by the product manufacturer in combination
with the retailer's price and design look.
2
BUSINESS REVIEW PART I
COMPANY PRODUCTS
INSIGNIA POPS
Insignia POPS is an in-store, shelf-edge point-of-purchase promotional
signing program that enables manufacturers to deliver account-specific messages
quickly and accurately - in designs and formats that have been pre-approved and
supported by participating retailers. Utilizing proprietary technology, Insignia
combines vital product information, such as product features and benefits,
nutritional information, product uses, advertising tag lines and product images
from the manufacturer with the retailer's logo, colors and current store price
on a sign that is displayed directly in front of the manufacturer's product in
the participating retailer's stores. Insignia POPS signs are responsive to each
retailer's merchandising look and store decor, while ensuring retailer pricing
authority.
The Company collects and organizes the data from both manufacturers and
retailers, then formats, prints and delivers the signs to retailers for
distribution and display. The signs are placed at the shelf by store personnel
for two-week display cycles. The Company charges manufacturers, on average,
$5.25 per sign/per week/per store. Retailers are paid a flat fee per sign/per
store/per display cycle by the Company based upon third-party compliance audits
and retailer-supplied product movement data provided to Insignia.
STYLUS SOFTWARE
In late 1993, the Company introduced Stylus, a PC-based software application
used by retailers to produce signs, labels and posters. The Company believes the
primary market for the Stylus software is large independent retailers and retail
chains, of which the Company estimates there being approximately 350,000
locations in the United States.
The Stylus software allows retailers to create store signs, labels and posters
by manually entering the information or by importing information from a
database. Retailers can create more informative signage by importing barcode and
price information from their point-of-sale system, adding graphic images and
other selling information such as product features and benefits, nutritional
information or lifestyle-type uses for the product.
The retail marketplace has a significant portion of chain retailers creating and
duplicating signs at their headquarters and then delivering them to their stores
in an effort to maintain consistency. The headquarters version of the Stylus
software provides significant benefits by allowing chains to create
consistent-looking signs and labels centrally and then transmit them to
store-level printers.
The current retail price of the Stylus software is $3,595 for the single store
version and $4,995 for the headquarters version. The Company not only sells the
Stylus software, but also sells a variety of sizes, colors and styles of
cardstock and labels used with the software. The Company sells these supplies at
competitive prices, but is not in a proprietary position. Approximately 6% of
2000 revenues came from the sale of Stylus products and maintenance. The Company
expects this percentage to be lower in the future as POPS revenue increases.
THE SIGNRIGHT! SIGN SYSTEM
In 1996, the Company replaced the Impulse Retail System, a system developed
by an independent product design and development firm (the "Developer") with the
SIGNright! Sign System. In 1998, the Company ceased the active domestic sales of
the SIGNright! Sign System.
The Company's business strategy with the Impulse and the SIGNright! was to
obtain both initial revenue from their sale, and recurring revenue from the sale
of the proprietary cardstock, label supplies and accessories used with them.
Cardstock for the two systems are sold by the Company in a variety of sizes and
colors that can be customized to include pre-printed custom artwork, such as a
retailer's logo. Approximately 26% of 2000 revenues came from the sale of
cardstock. The Company expects this percentage to be lower in the future as
Insignia POPS revenue increases.
3
BUSINESS REVIEW PART I
MARKETING & SALES
The Company's marketing strategy is to focus on food manufacturers and food
retailers. By utilizing the Insignia POPS program, these manufacturers and
retailers can easily accomplish what had previously been either impossible or
extremely difficult: tailoring national promotional programs to regional and
local needs with minimal effort. In addition to the benefits provided to
manufacturers and retailers, Insignia POPS signs provide consumers more
information and clearer messages to aid in purchasing decisions. The Company
believes Insignia POPS is the most complete in-store sign promotion program
available, benefiting consumer, retailer and manufacturer.
The Company markets its Stylus software in the United States and internationally
primarily through resellers that integrate Stylus as an ODBC design and
publishing component into their retail data and information management software
applications.
Through April 1998, the Company marketed the SIGNright! Sign System through
telemarketing by in-house sales personnel and independent sales representatives.
In May 1998, the Company discontinued the active sale of the SIGNright! Sign
System to U.S. customers, but continues to market it through the Company's
international distributors covering 20 countries.
During 1998, 1999 and 2000, foreign sales accounted for approximately 16%, 16%
and 8% of total sales, respectively. The Company expects sales to foreign
distributors will be approximately 5% of total sales in 2001.
PATENTS AND TRADEMARKS
The barcode which the Company uses on the sign cards for the Impulse and
SIGNright! Sign Systems was also developed by the Developer, which has granted
the Company an exclusive worldwide license of its rights to the barcode. The
license requires the Company to pay a royalty of 1% of the net sales price
received by the Company on each cardstock or other supply item that bears the
barcode and used by the Impulse Sign Systems. Although a patent has been issued
to the Developer which covers the use of the barcode, there is no assurance that
the Company will be able to prevent other suppliers of cardstock from copying
the barcode used by the Company. However, the Company believes that the number,
relatively small size and geographic dispersal of Impulse and SIGNright! users,
their relationship with the Company and the Company's retention of its customer
list as a trade secret will discourage other sign card suppliers from offering
barcoded sign cards for use on the Impulse and SIGNright! machines.
The Company has obtained trademark registration in the United States of the
trademark "Insignia POPS" for use on in-store point-of-purchase media. The
Company is not obligated to pay any royalty related to this trademark.
The Company has obtained trademark registration in the United States of the
trademark "Stylus" for use on sign and label software. The developer of the DOS
version of the Stylus software has granted to the Company an exclusive worldwide
license to market and sell the DOS version of the Stylus software. The Company
no longer sells and markets the DOS version of the Stylus software and has
terminated this license agreement. The Company has developed the Windows version
of the Stylus software which it is now marketing and selling.
PRODUCT DEVELOPMENT
Product development for Insignia POPS has been conducted internally and
includes the proprietary data management and operations system, as well as the
current offering of point-of-purchase and other promotion products. Ongoing
internal systems enhancements, as well as the development of point-of-purchase
and other promotion products, will be conducted utilizing both internal and
external resources where appropriate.
Product development on the SIGNright! Sign System was primarily conducted by the
Developer on a contract basis. The Company continues to introduce complementary
products such as new cardstock formats, types and colors.
4
BUSINESS REVIEW PART I
From 1992 to 1997, the Stylus software was developed on a contract basis. In
1993, the Company hired in-house employees to develop and modify portions of the
product. In 1998, 1999 and 2000, Stylus software product development costs were
$407,409, $0 and $0, respectively. The Company plans no further development to
the product.
SUPPLIERS
The thermal paper used by the Company in its SIGNright! and Impulse thermal
sign cards is purchased exclusively from one supplier. While the Company
believes that an alternative supplier would be available if necessary, any
disruption in the relationship with or deliveries by the current supplier could
have a serious adverse effect on the Company.
COMPETITION
INSIGNIA POPS
Insignia POPS is competing for the marketing expenditures of branded product
manufacturers for at-shelf advertising or promotion-related signage.
Insignia POPS has two major competitors in its market: News America Marketing
In-Store(R)(News America) and FLOORgraphics(TM), Inc. (FLOORgraphics).
NEWS AMERICA offers a network for in-store advertising, promotion and sales
merchandising services. News America has branded their in-store shelf signage
products as SmartSource Shelftalk(TM) and SmartSource Shelfvision(TM).
FLOORGRAPHICS offers a network for in-store advertising and promotion programs.
FLOORgraphics has branded their advertising shelf signage product
IN-STOREplus!(TM).
The main strengths of Insignia POPS in relation to its competitors are:
- the linking of manufacturers to retailers at a central coordination point
- providing a complete call-to-action
- supplying account-specific, product-specific and store-specific messages
at the retail shelf
RESTRUCTURING PROGRAM
During April 1998, the Company initiated a restructuring program to redirect
the Company's marketing and selling of the SIGNright! machines domestically. As
a result of this program, the Company reduced its workforce from 93 full-time
employees to 65 full-time employees. The Company took a charge to earnings in
1998 due to this restructuring in the amount of $546,000. The $546,000 charge
was comprised of a $196,000 writedown of a prepayment made to its Japanese
vendor for SIGNright! machines, a $106,000 charge for the write-off of
SIGNright! machines, a $15,000 charge for moving expenses, a $47,000 charge for
accrued rental costs associated with a portion of the lease of the facility
which in 1998 was permanently idle and separate from the remaining utilized
lease space, and severance costs in the amount of $182,000 as a result of the
workforce reduction.
EMPLOYEES
As of February 28, 2001, the Company had 89 full-time employees. The
full-time employees included 2 in telemarketing, 21 in other sales and marketing
positions, 56 in operations and customer service, 7 in administration and
accounting functions and 3 in senior management positions. None of the Company's
employees are represented by unions.
5
BUSINESS REVIEW PART I
ITEM 2 PROPERTIES
The Company is located in approximately 26,000 square feet of office and
warehouse space in suburban Minneapolis, Minnesota, which has been leased until
March 31, 2004. The Company believes that this facility will meet the Company's
current and foreseeable needs.
ITEM 3 LEGAL PROCEEDINGS
On August 7, 2000, News America Marketing In-Store, Inc., (News America) a
major provider of in-store, shelf mounted signs for retail stores, filed a suit
against the Company in federal district court in New York, New York. The
complaint alleges that News America has exclusive promotional agreements with
various major retail chains, and that those agreements prevented retailers from
contracting for the Company's POPS program. The complaint accuses the Company of
interfering with business relationships, unfair competition and false
advertising and seeks an injunction against the Company and actual and punitive
damages in an unspecified amount.
In response to News America's suit, the Company brought suit against News
America in federal district court in Minneapolis, Minnesota. The federal court
in New York has recently ruled that the litigation should proceed in New York,
not Minnesota. Thus the Company has brought a counter-claim in the New York case
alleging that News America is engaged in anti-competitive practices and is
attempting to use its dominant position in the market to stifle competition. In
particular, the Company alleges that News America is violating the anti-trust
laws by attempting to use unenforceable exclusive dealing clauses to dissuade
customers from using the Company's POPS program. The Company's counter-claim
seeks declaratory and injunctive relief, actual damages in an unspecified
amount, treble damages and attorney fees under federal anti-trust law, and an
order under Section 7 of the Clayton Act that News America divest its 1997
acquisition of Actmedia. News America has made a motion to dismiss the Company's
counter-claim, and the Company expects that the motion will be briefed and heard
by the court in the next several months.
The Company believes that News America's suit is without merit, and the Company
intends to vigorously defend that suit and pursue its counter-claim.
In December 1997, Meta-4, Inc. the developer of the DOSversion of the Company's
Stylus software product, brought suit against the Company in U.S. District Court
in the State of Minnesota. The complaint alleged copyright infringement and
breach of contract in connection with the Company's distribution of the
Company's Stylus software product. This lawsuit was settled in March 1999. Under
the settlement, Meta-4 assigned all its rights to the Stylus software to the
Company in consideration of $15,000 in cash and 75,000 shares of the Company's
Common Stock. In 1999, the Company recognized $136,875 as expense associated
with this settlement.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
6
BUSINESS REVIEW PART II
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Company's executive officers are as
follows:
Name Age Position
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Scott F. Drill 48 President and Chief
Executive Officer
Gary L. Vars 60 Chairman, Executive Vice
President and General
Manager, POPS Division
John R. Whisnant 55 Vice President of Finance,
Chief Financial Officer and
Acting Secretary
SCOTT F. DRILL, has been President and Chief Executive Officer of the Company
since February 1998. In May 1996 Mr. Drill became a partner in Minnesota
Management Partners (MMP), a venture capital firm located in Minneapolis,
Minnesota. He remains a partner in MMP, which completed investment of its
capital in January 1998. From 1983 through March 1996 Mr. Drill was President
and Chief Executive Officer of Varitronic Systems, Inc. and Chairman since 1990.
Prior to starting Varitronics, Mr. Drill held senior management positions in
sales and marketing at Conklin Company and Kroy, Inc.
GARY L. VARS has been Chairman since March 2001 and Executive Vice President and
General Manager of the POPS Division since September 1998. Prior to joining the
Company, Mr. Vars spent 22 years as a marketing and business development
consultant to Fortune 500 companies. From 1966 to 1976 Mr. Vars held various
management positions at the Pillsbury Co., including Director of Marketing and
New Product Development, Grocery Products Division.
JOHN R. WHISNANT joined the Company as Vice President of Finance and Chief
Financial Officer of the Company in October 1995. From June 1994 to September
1995 he was self employed as a franchise consultant. From June 1992 to June 1994
he served as President of AmericInn, Inc. a motel franchising company.
PART II
ITEM 5 MARKET FOR THE REGISTRANT'S
COMMON EQUITY
MARKET INFORMATION
The Company's common stock trades on the Nasdaq Small-Cap Market System under
the symbol ISIG. The following table sets forth the range of high and low bid
prices reported on the Nasdaq System. These quotations represent prices between
dealers and do not reflect retail mark-ups, mark-downs or commissions.
2000 HIGH LOW
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First Quarter 4 5/8 2 5/8
Second Quarter 7 7/8 3
Third Quarter 8 1/4 4 17/32
Fourth Quarter 8 4 1/2
1999 HIGH LOW
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First Quarter 2 1/2 1 1/8
Second Quarter 1 7/8 1 1/4
Third Quarter 1 1/2 3/4
Fourth Quarter 4 7/8
APPROXIMATE NUMBER OF
HOLDERS OF COMMON STOCK
As of February 28, 2001, the Company had one class of Common Stock
beneficially held by 1,530 persons.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
7
BUSINESS REVIEW PART II
ITEM 6 SELECTED FINANCIAL DATA
(In thousands, except per share amounts.)
FOR THE YEARS ENDED
DECEMBER 31 2000 1999 1998 1997 1996
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Net sales $ 12,830 $ 9,287 $ 8,704 $ 13,321 $ 14,667
Operating loss (809) (1,394) (3,396) (3,393) (999)
Net loss (824) (1,411) (3,416) (3,380) (999)
Net loss per share:
Basic and diluted $ (.08) $ (.16) $ (.44) $ (.50) $ (.18)
Shares used in calculation of
net loss per share:
Basic and diluted 9,880 8,828 7,714 6,790 5,404
Working capital $ 2,362 $ 1,798 $ 2,232 $ 3,462 $ 3,512
Total assets 5,065 4,043 4,069 5,855 6,426
Long-term debt and lease obligation -- -- 72 186 289
Total stockholders' equity 2,612 2,017 2,430 3,795 4,174
ITEM 7 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
the Company's statements of operations as a percentage of net sales.
FOR THE YEARS ENDED
DECEMBER 31 2000 1999 1998
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Net sales 100.0% 100.0% 100.0%
Cost of sales 42.8 44.7 53.7
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Gross profit 57.2 55.3 46.3
Operating expenses:
Sales and marketing 49.8 52.8 51.3
Product development -- -- 4.7
General and administrative 13.6 17.5 23.1
Restructuring charge -- -- 6.3
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Total Operating Expenses 63.5 70.3 85.4
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Operating loss (6.3) (15.0) (39.0)
Other income (0.1) (0.2) (0.2)
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Net Loss (6.4)% (15.2)% (39.2)%
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8
BUSINESS REVIEW PART II
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES: Net sales for the year ended December 31, 2000 increased 38% to
$12,830,000 compared to sales of $9,287,000 in 1999.
The increase in sales in 2000 resulted primarily from increased POPS program
sales. POPS program revenue was $6,481,000 in 2000 compared to $2,211,000 in
1999. Machine and machine related revenue was $691,000 in 2000 compared to
$923,000 in 1999. Stylus software revenue and maintenance was $772,000 in 2000
compared to $751,000 in 1999. Thermal sign card revenue was $3,366,000 in 2000
compared to $4,069,000 in 1999.
GROSS PROFIT: The Company's gross profit increased 43% in 2000 to $7,334,000 as
compared to $5,131,000 in 1999. Gross profit as a percentage of net sales
increased to 57.2% for 2000 compared to 55.3% for 1999. The increase in 2000 was
due primarily to the overall increase in net sales and change in product mix.
The Company's foreign sales were 8% in 2000, 16% in 1999 and 16% in 1998. The
Company expects that sales to foreign distributors will be approximately 5% in
2001.
OPERATING EXPENSES: Operating expenses increased 25% in 2000. Sales expenses
increased 36% in 2000. The increase in 2000 was due primarily to the continued
investment in the POPS program. Marketing expenses increased 12% in 2000 as a
result of increased promotional expenses for the POPS program. The Company
expects that its operating expenses will increase in 2001 as the Company
continues to invest in the POPS program.
Operating expenses as a percentage of net sales were 63.5% in 2000. The decrease
as a percentage of net sales in 2000 was due primarily to an increase in sales
of 38% while operating expenses only increased 25% in 2000. The Company expects
its operating expenses as a percentage of net sales to decrease as its net sales
increase at a faster rate than operating expenses.
NET LOSS: The Company had a net loss of $824,000 in 2000 compared to a net loss
of $1,411,000 in 1999. The net loss in 2000 resulted primarily from the costs of
investing in the POPS program.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES: Net sales for the year ended December 31, 1999 increased 7% to
$9,287,000 compared to sales of $8,704,000 in 1998.
The increase in sales in 1999 resulted primarily from increased POPS program
sales. POPS program revenue was $2,211,000 in 1999 compared to $359,000 in 1998.
Machine and machine related revenue was $923,000 in 1999 compared to $997,000 in
1998. Stylus software and maintenance revenue was $751,000 in 1999 compared to
$712,000 in 1998. Thermal sign card revenue was $4,069,000 in 1999 compared to
$4,583,000 in 1998.
GROSS PROFIT: The Company's gross profit increased 27% in 1999 to $5,131,000 as
compared to $4,033,000 in 1998. Gross profit as a percentage of net sales
increased to 55.3% for 1999 compared to 46.3% for 1998. The increase in 1999 was
due primarily to the overall increase in net sales and change in product mix.
The Company's foreign sales were 16% in 1999, 16% in 1998 and 14% in 1997.
OPERATING EXPENSES: Operating expenses decreased 12% in 1999. In 1998, the
Company recorded a restructuring charge of $546,000. Sales expenses increased 3%
in 1999. Marketing expenses increased 44% in 1999 as a result of increased
promotion expenses for the POPS program. Product development expenses decreased
100% in 1999 as the Company eliminated any further independent product
development of its Stylus software.
Operating expenses as a percentage of net sales were 70.3% in 1999. The decrease
as a percentage of net sales in 1999 was due primarily to higher sales volume in
1999 along with no product development expenses in 1999.
9
BUSINESS REVIEW PART II
NET LOSS: The Company had a net loss of $1,411,000 in 1999 compared to a net
loss of $3,416,000 in 1998. The net loss in 1999 resulted primarily from the
costs of investing in the sales and marketing of the Insignia POPS program.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations with proceeds from public and private
equity placements. At December 31, 2000, working capital was $2,362,000 compared
to $1,798,000 at December 31, 1999. During the same period total cash and cash
equivalents increased $117,000.
Net cash used in operating activities during 2000 was $826,000, primarily due to
the net loss and the increase in accounts receivable, offset by an increase in
accounts payable, accrued compensation and deferred revenue. Accounts receivable
increased $822,000 due to increasing POPS program sales during the last few
months of 2000. Accounts payable increased $601,000 as a result of payments due
to participating retail stores in the POPS program. Accrued compensation
increased $231,000 as a result of commissions and bonuses due to POPS sales
representatives. Pre-paid expenses increased $142,000 primarily due to advances
made to customers. The Company expects accounts receivable to increase during
2001 as the POPS program continues to grow. The Company also expects inventory
levels to remain flat during 2001.
Net cash of $105,000 was used in investing activities in 2000. The net cash
decrease was due to the purchase of marketable securities in the amount of
$160,000 and the purchase of property and equipment of $185,000, offset by the
maturity of marketable securities in the amount of $240,000.
Net cash of $1,048,000 was provided by financing activities, primarily from the
proceeds from the issuance of common stock of $1,334,000, offset by payments to
the line of credit in the amount of $204,000 and payments on long term debt of
$82,000.
The Company anticipates that its working capital needs will remain consistent
with prior years. During 1999, the Company amended its line of credit agreement
with a commercial financing division of a U.S. bank reducing the overall line of
credit to $2.35 million. During 2000, the Company amended its line of credit
agreement reducing the overall line of credit to $2 million. As of December 31,
2000 there was an outstanding balance on the line of credit of $603,000 and the
borrowing availability was approximately $1,400,000. The Company believes that
with this line of credit it will have sufficient capital resources to fund its
current business operations and anticipated growth for the foreseeable future.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained herein and in the following section and like
statements elsewhere in this report are forward looking statements. Actual
results could differ materially from those anticipated as a result of various
factors. Set forth below are the principal factors and risks considered most
likely to cause actual results to differ materially from management's
expectations.
SIGNIFICANT RISK FACTORS, WHILE NOT ALL INCLUSIVE, ARE:
1. RESULTS OF INSIGNIA POPS PROGRAM.
It will be necessary to achieve lift results from the Insignia POPS
program that are comparable to the results to date from the Insignia POPS
program in order to obtain additional participating manufacturers and
retailers at the rate anticipated by the Company.
10
BUSINESS REVIEW PART II
2. COMPETITION.
Insignia POPS is competing for the marketing expenditures of branded
product manufacturers for at-shelf advertising or promotion related
signage. There is no assurance that Insignia POPS will compete
successfully for these expenditures.
In addition, the budget levels allocated by branded product manufacturers
for these types of marketing expenditures can fluctuate as economic
conditions and overall advertising and promotion strategies change.
3. SIGN PRODUCTION.
The Company's ability to produce the planned number of signs will depend
on a number of factors, including receipt of data and information from
both the retailers and manufacturers and conducting the necessary
training.
4. BUSINESS CONDITIONS OF THE GENERAL ECONOMY.
5. COST OF THE RAW MATERIAL.
The Company's printing gross margin percentage is a sensitive function of
the cost of the raw paper materials.
6. SIGN CARD REVENUE.
The Company derives a portion of its revenue from the sale of the
bar-coded sign cards required by the Impulse and SIGNright! systems, which
are no longer being actively marketed domestically by the Company. If a
substantial number of existing customers discontinue the use of the sign
card there could be a serious adverse effect on the Company's revenue.
7. DEPENDENCE ON KEY EMPLOYEES.
The Company is highly dependent upon the services of its present officers,
and the loss of any of them could have a material adverse effect on the
Company. None of the Company's officers are bound by employment or
non-competition agreements with the Company. The success of the Company
will also depend on its ability to attract and retain capable sales,
marketing and operational personnel.
7. A. QUANTITIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
Not applicable.
11
BUSINESS REVIEW PART II
ITEM 8 FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
The following Independent Auditors' Report and Financial Statements thereon are
included on the pages indicated:
Report of Independent Auditors .......................................... F-1
Balance Sheets as of December 31, 2000 and 1999 ......................... F-2
Statements of Operations for the years ended December 31, 2000,
1999 and 1998 ........................................................... F-3
Statement of Shareholders' Equity for the years ended December 31,
2000, 1999 and 1998 ..................................................... F-4
Statements of Cash Flows for the years ended December 31, 2000, 1999
and 1998 ................................................................ F-5
Notes to Financial Statements ........................................... F-6
12
REPORT OF INDEPENDENT AUDITORS PART II
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
INSIGNIA SYSTEMS, INC.
We have audited the accompanying balance sheets of Insignia Systems, Inc. as
of December 31, 2000 and 1999, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. Our audits also include the financial statement
schedule listed in the index at Item 14. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Insignia Systems, Inc. at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth herein.
Ernst & Young LLP
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 2, 2001
F-1
BALANCE SHEETS PART II
AS OF DECEMBER 31 2000 1999
- ----------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,106,160 $ 989,091
Marketable securities 160,000 240,000
Accounts receivable - net of $106,000 allowance in 2000
and $71,000 in 1999 2,089,786 1,303,087
Inventories 1,242,402 1,217,784
Prepaid expenses 216,792 74,138
- ----------------------------------------------------------------------------------------------
Total Current Assets 4,815,140 3,824,100
PROPERTY AND EQUIPMENT:
Production tooling, machinery and equipment 1,713,240 1,743,020
Office furniture and fixtures 201,457 262,767
Computer equipment 399,447 833,440
Leasehold improvements 178,796 105,151
- ----------------------------------------------------------------------------------------------
2,492,940 2,944,378
Accumulated depreciation and amortization (2,242,887) (2,725,077)
- ----------------------------------------------------------------------------------------------
Total Property and Equipment 250,053 219,301
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,065,193 $ 4,043,401
- ----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 602,852 $ 807,020
Accounts payable 988,707 387,396
Accrued compensation and benefits 439,795 209,016
Accrued expenses 160,199 149,800
Deferred revenue 187,367 321,617
Warranty reserve 15,840 15,840
Other 58,201 53,913
Current portion of long-term debt -- 81,967
- ----------------------------------------------------------------------------------------------
Total Current Liabilities $ 2,452,961 $ 2,026,569
STOCKHOLDERS' EQUITY:
Common stock, par value $.01:
Authorized shares - 20,000,000 issued and outstanding
shares - 10,287,371 in 2000 and 9,327,946 in 1999 102,874 93,279
Additional paid-in capital 17,524,200 16,134,002
Unearned compensation (9,588) (28,764)
Accumulated deficit (15,005,254) (14,181,685)
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,612,232 2,016,832
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,065,193 $ 4,043,401
- ----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-2
STATEMENTS OF OPERATIONS PART II
YEAR ENDED DECEMBER 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
NET SALES $ 12,830,172 $ 9,286,888 $ 8,703,604
Cost of sales 5,496,131 4,155,391 4,670,419
- ----------------------------------------------------------------------------------------------------
Gross Profit 7,334,041 5,131,497 4,033,185
OPERATING EXPENSES:
Sales 5,115,558 3,764,502 3,672,173
Marketing 1,276,440 1,139,229 790,981
Product development -- -- 407,409
General and administrative 1,751,019 1,621,418 2,012,899
Restructuring charge -- -- 545,992
- ----------------------------------------------------------------------------------------------------
Total Operating Expenses 8,143,017 6,525,149 7,429,454
- ----------------------------------------------------------------------------------------------------
Operating Loss (808,976) (1,393,652) (3,396,269)
OTHER INCOME (EXPENSE):
Interest income 85,607 52,472 56,936
Interest expense (122,053) (89,042) (113,672)
Other income (expense) 21,853 18,765 37,426
- ----------------------------------------------------------------------------------------------------
NET LOSS $ (823,569) $ (1,411,457) $ (3,415,579)
- ----------------------------------------------------------------------------------------------------
Net loss per share:
Basic and diluted $ (.08) $ (.16) $ (.44)
- ----------------------------------------------------------------------------------------------------
Shares used in calculation of net loss per share:
- ----------------------------------------------------------------------------------------------------
Basic and diluted 9,879,546 8,827,549 7,714,522
- ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-3
STATEMENT OF SHAREHOLDERS' EQUITY PART II
ADDITIONAL
COMMON STOCK PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,857,721 $ 68,578 $ 13,083,563 $ (2,250) $ (9,354,649) $ 3,795,242
Sale of common stock 1,600,000 16,000 1,961,252 -- -- 1,977,252
Exercise of stock options 40,066 400 55,898 -- -- 56,298
Exercise of stock warrants 2,013 20 4,258 -- -- 4,278
Issuance of stock warrants
in lieu of services -- -- 58,100 (47,932) -- 10,168
Amortization of stock grant -- -- -- 2,250 -- 2,250
Net loss -- -- -- -- (3,415,579) (3,415,579)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 8,499,800 84,998 15,163,071 (47,932) (12,770,228) 2,429,909
Employee stock purchase plan 20,030 200 22,234 -- -- 22,434
Exercise of stock options 181,666 1,817 250,474 -- -- 252,291
Exercise of stock warrants 551,450 5,514 577,098 -- -- 582,612
Issuance of common stock
under META-4 settlement 75,000 750 121,125 -- -- 121,875
Amortization of unearned
compensation -- -- -- 19,168 -- 19,168
Net loss -- -- -- -- (1,411,457) (1,411,457)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 9,327,946 93,279 16,134,002 (28,764) (14,181,685) 2,016,832
Employee stock purchase plan 56,537 566 62,755 -- -- 63,321
Exercise of stock options 135,000 1,350 192,448 -- -- 193,798
Exercise of stock warrants 767,888 7,679 1,068,896 -- -- 1,076,575
Stock option repricing -- -- 66,099 -- -- 66,099
Amortization of unearned
compensation -- -- -- 19,176 -- 19,176
Net loss -- -- -- -- (823,569) (823,569)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 10,287,371 $ 102,874 $ 17,524,200 $ (9,588) $(15,005,254) $ 2,612,232
- ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-4
STATEMENTS OF CASH FLOWS PART II
YEAR ENDED DECEMBER 31 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (823,569) $ (1,411,457) $ (3,415,579)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 150,150 220,071 336,613
Provision for bad debt expense 35,000 -- 72,000
Provision for obsolete inventory (11,401) 96,000 69,500
Amortization of unearned compensation 19,176 19,168 2,250
Stock option repricing 66,099 -- --
Loss (gain) on sale of equipment 3,791 -- (2,444)
Issuance of stock warrants in lieu of services -- -- 10,168
Issuance of stock for litigation settlement -- 121,875 --
Changes in operating assets and liabilities:
Accounts receivable (821,699) (1,133) 1,360,484
Inventories (13,217) (103,284) 337,578
Prepaid expenses (142,654) 113,646 352,244
Accounts payable 601,311 (131,133) 94,168
Accrued compensation and benefits 230,779 32,270 (57,545)
Deferred revenue (134,250) (83,112) 42,753
Warranty reserve -- (10,000) (72,590)
Accrued expenses and other 14,687 (122,940) 41,102
- ----------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (825,797) (1,260,029) (829,298)
INVESTING ACTIVITIES
Purchases of property and equipment (184,693) (169,266) (116,279)
Proceeds from sale of equipment -- -- 31,680
Purchase of marketable securities (160,000) -- (1,700,967)
Maturities of marketable securities 240,000 858,167 1,045,704
- ----------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (104,693) (688,901) (739,862)
FINANCING ACTIVITIES
Net change in line of credit (204,168) 807,020 (365,447)
Proceeds from issuance of Common Stock 1,333,694 857,337 2,037,827
Principal payments on long-term debt (81,967) (104,138) (103,220)
- ----------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,047,559 1,560,219 1,569,160
- ----------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents 117,069 989,091 --
Cash and Cash Equivalents at Beginning of Year 989,091 -- --
- ----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 1,106,160 $ 989,091 $ --
- ----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES
F-5
NOTES TO FINANCIAL STATEMENTS PART II
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS.
Insignia Systems, Inc. (the "Company") markets in-store shelf-edge
promotional programs and services to retailers and consumer goods manufacturers.
The Company's products include the Insignia Point-Of-Purchase Services (POPS)
in-store promotion program, thermal sign card supplies for the Company's
SIGNright! and Impulse systems, Stylus software and laser printable cardstock
and label supplies.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash equivalents. Cash
equivalents are carried at cost which approximates market value.
REVENUE RECOGNITION. The Company recognizes revenue associated with equipment,
software and sign card sales at the time the products are shipped to customers.
Revenue associated with maintenance agreements is recognized over the life of
the contract. Revenue associated with Insignia POPS is recognized over the
period of service.
MARKETABLE SECURITIES. Marketable securities are composed of debt securities and
are classified as available-for-sale. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses, net of tax, reported as a
separate component of stockholders' equity. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in other income.
INVENTORIES. Inventories are primarily comprised of Impulse machines, SIGNright!
machines, sign card and accessories. Inventory is valued at lower of cost or
market using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost. Depreciation
is provided using the straightline method over the estimated useful lives of the
assets as follows:
Machinery and equipment 5 years
Office furniture and fixtures 3 years
Computer equipment 3 years
Leasehold improvements are amortized over the shorter of the term of the lease
or life of the asset.
PRODUCTION TOOLING COSTS. Expenditures relating to the purchase and installation
of production tooling are capitalized and amortized over the anticipated useful
life of the product.
INCOME TAXES. Income taxes are accounted for under the liability method.
Deferred income taxes are provided for temporary differences between financial
reporting and tax bases of assets and liabilities.
STOCK-BASED COMPENSATION. The Company has adopted the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, but applies Accounting Principles Board Opinion No. 25
(APB 25) and related interpretations in accounting for its plans. Under APB 25,
when the exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company will record impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount.
USE OF ESTIMATES. The preparation of financial statements in conformity with
general accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
NET LOSS PER SHARE. Basic loss per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted loss per share for the
Company is the same as basic earnings per share because the effect of options
and warrants is anti-dilutive.
F-6
NOTES TO FINANCIAL STATEMENTS PART II
ADVERTISING COSTS. Advertising costs are charged to operations as incurred.
Advertising expenses were approximately $762,757, $259,018 and $361,500 in 2000,
1999 and 1998, respectively.
RESEARCH AND DEVELOPMENT. Research and development expenditures are charged to
operations as incurred.
2. MARKETABLE SECURITIES
Marketable securities consist of a certificate of deposit, which is pledged
as collateral for the building lease agreement (see Note 8). Investments are
classified as available-for-sale and are stated at amortized cost which
approximates fair market value. As a result no unrealized gains or losses were
recognized at December 31, 2000 and 1999.
3. FINANCING AGREEMENTS AND LONG-TERM DEBT
During the year, the Company amended its line of credit agreement with a
finance corporation against which $602,852 was outstanding at December 31, 2000.
The amendment reduced the overall line of credit from $2.35 million to $2
million. The credit agreement provides that the minimum amount of interest due
and payable in any month under the line of credit agreement will be not less
than $5,000. The line of credit agreement accrues interest at a rate of 2% over
the bank's reference rate (the reference rate was 9.5% at December 31, 2000) per
annum and expires on December 31, 2001. The Company pledged as security all
inventory, accounts receivable, equipment and general intangibles. The carrying
amount of the Company's debt instruments approximates fair value.
In 1995, the Company borrowed $500,000 and pledged certain printing press assets
and U.S. Treasury Debt Securities as collateral against this facility. During
1999, the securities were released under terms of the agreement. The loan which
accrues interest at a rate of 10.05% per annum expired and was repaid in its
entirety in August 2000.
Cash paid during the year for interest was $122,053, $89,042 and $113,672 in
2000, 1999 and 1998, respectively.
4. SHAREHOLDERS' EQUITY
During 2000, various warrant holders exercised 767,888 warrants to purchase
shares of the Company's common stock at prices ranging from $1.25 to $2.125. The
Company received proceeds of $1,076,575 as a result of these warrant exercises.
In 2000, the Company repriced certain stock options resulting in a compensation
expense of $66,099 due to variable plan account.
During 1999, various warrant holders exercised 551,450 warrants to purchase
shares of the Company's Common Stock at prices ranging from $1.00 to $2.125. The
Company received proceeds of $582,612 as a result of these warrant exercises.
In June 1998, the Company issued 1,600,000 shares of its Common Stock and
warrants to purchase an additional 800,000 shares of Common Stock. The Company
received net proceeds of approximately $2,000,000. At December 31, 2000, 166,000
of these warrants remain exercisable at $1.625 per share and expire in June
2001.
5. STOCK OPTIONS AND WARRANTS
STOCK OPTION PLAN.
The Company has a stock option plan for its employees and directors. Under
the terms of the plan, the Company grants incentive stock options to employees
at an exercise price at or above 100% of fair market value on the date of grant.
The plan also allows the Company to grant non-qualified options at an exercise
price of less than 100% of fair market value at the date of grant. The stock
options expire five or ten years after the date of grant and typically vest in
one-third increments on the first, second and third anniversaries of the grant
date.
F-7
NOTES TO FINANCIAL STATEMENTS PART II
The following tables summarizes activity under the plan:
Plan Plan Weighted
Shares Options Average Exercise
Available for Grant Outstanding Price Per Share
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 29,375 638,800 $ 1.98
Reserved 600,000 -- --
Granted (749,000) 749,000 1.25
Exercised -- (40,066) 1.41
Canceled 236,734 (236,734) 2.21
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 117,109 1,111,000 1.54
Reserved 250,000 -- --
Granted (455,500) 455,500 1.31
Exercised -- (181,666) 1.39
Canceled 100,834 (100,834) 2.61
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 12,443 1,284,000 1.38
Reserved 200,000 -- --
Granted (261,600) 261,600 4.84
Exercised -- (135,000) 1.44
Canceled 54,350 (54,350) 1.50
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 5,193 1,356,250 $ 2.04
- ---------------------------------------------------------------------------------------------------------------------
The number of options exercisable under the Plan were:
December 31, 1998 541,623
December 31, 1999 610,503
December 31, 2000 849,994
The following table summarizes information about the stock options outstanding
at December 31, 2000.
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------------
Weighted Weighted Weighted
Ranges of Average Average Number Average
Exercise Number Remaining Exercise Price Exercisable at Exercise Price
Prices Outstanding Contractual Life Per Share December 31, 2000 Per Share
- ---------------------------------------------------------------------------------------------------------
$1.38 - $1.88 35,000 Less than 1 year $1.38 35,000 $1.38
1.50 - 3.63 51,000 1 to 2 years 2.82 48,500 2.87
1.06 - 2.38 669,250 2 to 3 years 1.32 523,166 1.23
0.75 - 1.50 340,000 3 to 4 years 1.25 168,328 1.23
4.00 - 8.00 261,000 4 to 9.9 years 4.84 75,000 5.10
- ---------------------------------------------------------------------------------------------------------
$0.75 - $8.00 1,356,250 3 years $2.04 849,994 $1.68
- ---------------------------------------------------------------------------------------------------------
Options outstanding under the Plan expire at various dates during the period
January 2000 through November 2010.
The weighted average fair value of options granted during the years ended
December 31, 2000, 1999 and 1998 was $2.58, $0.76 and $0.75, respectively.
The Company follows Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES (APB 25) and related interpretations in accounting for
its employee stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123,
F-8
NOTES TO FINANCIAL STATEMENTS PART II
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123"), requires use of
option valuation models that were not developed for use valuing employee stock
options.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of Statement 123. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999, and 1998: risk-free interest rate of 6.0%; dividend
yield of 0%; volatility factor of the expected market price of the Company's
common stock of .766, .917 and .978, respectively, and a weighted average
expected life of the option of three years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Pro forma
net loss $(1,323,099) $(1,726,999) $(3,715,870)
Pro forma
net loss per
common
share $ (.13) $ (.20) $ (.48)
The pro forma effect on the net loss for 2000, 1999 and 1998 is not
representative of the pro forma effect on net loss in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
WARRANTS. During 1995, the Company issued five year warrants to an outside
consultant to purchase 1,000 shares of Common Stock at $1.50 per share. The
warrants were exercised in 2000.
In 1998, the Company issued three year warrants to outside consultants to
purchase 70,000 shares of Common Stock at $1.625 per share. The Company valued
these warrants at $58,100 and is recognizing consulting expense associated with
these warrants over the vesting period. The Company recognized expenses of
$19,176 and $19,168 in 2000 and 1999, respectively, associated with these
warrants. The warrants expire on June 22, 2001.
During 1997, a non-employee Board member providing strategic planning and
advisory assistance to the Company was granted a warrant to purchase 25,000
shares of Common Stock at $2.31 per share. The warrant expires on September 26,
2002.
During 1994, the Company issued five year warrants to a consultant to purchase a
total of 15,000 shares of Common Stock exercisable at a price of $1.50 per
share. During 1999, these warrants were extended to November 22, 2004.
In May 1999, the Company issued warrants to non-employee Board members to
purchase a total of 15,000 shares of Common Stock in recognition for
services performed as Board members of the Company. The warrants are exercisable
at $2.00 per share and expire on September 28, 2004.
F-9
NOTES TO FINANCIAL STATEMENTS PART II
6. EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan effective January 1,
1993. The plan enables employees to contribute up to 10% of their compensation
toward the purchase of the Company's Common Stock at 85% of market value. In
2000, 1999 and 1998, employees purchased 56,537, 20,030 and 0 shares,
respectively, under the plan. At December 31, 2000, 274,374 shares are reserved
for future employee purchases of Common Stock under the plan.
7. INCOME TAXES
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $14,500,000 which are available to offset future taxable income.
These carryforwards are subject to the limitations of Internal Revenue Code
Section 382. This section provides limitations on the availability of net
operating losses to offset current taxable income if an ownership change has
occurred as defined by Internal Revenue Code Section 382. These carryforwards
will begin expiring in 2005.
The Company has established a valuation allowance equal to the net deferred tax
asset due to uncertainties regarding the realization of deferred tax assets
based on the Company's lack of earnings and expected lack of near-term future
taxable earnings on which to recover those deferred tax assets.
8. LEASES
The Company leases its office space under a five year operating lease. The
term of the operating lease is January 1, 1999 through March 31, 2004. The
future noncancelable lease payments, exclusive of costs associated with the
landlord operating costs, due on the operating lease as of December 31, 2000 are
as follows:
2001 $ 209,484
2002 209,484
2003 209,484
2004 52,371
- --------------------------------------------------------------------------------
$ 680,823
- --------------------------------------------------------------------------------
The Company incurred approximately $308,869, $253,000 and $312,567 in rent
expense in 2000, 1999 and 1998, respectively.
Significant components of the deferred tax assets are as follows:
AS OF DECEMBER 31 2000 1999
- -----------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Net operating loss carryforwards $ 5,360,600 $ 4,930,700
Depreciation 83,800 256,200
Accounts receivable allowance 39,300 26,200
Allowance for machine returns -- 5,900
Inventory reserve 41,500 45,800
Other 21,000 --
- -----------------------------------------------------------------------------------
Total deferred tax assets 5,546,200 5,264,800
DEFERRED TAX LIABILITIES
Other -- (9,200)
- -----------------------------------------------------------------------------------
Net deferred tax assets before valuation allowance 5,546,200 5,255,600
Less valuation allowance (5,546,200) (5,255,600)
- -----------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
- -----------------------------------------------------------------------------------
F-10
NOTES TO FINANCIAL STATEMENTS PART II
9. COMMITMENTS
PRODUCT DESIGN AGREEMENT. The Company has an exclusive agreement for a
bar-code used with the Impulse Retail System and SIGNright! system. The Company
has agreed to pay royalties totaling 1% of net sales on all paper and supplies
using the bar-code technology of the Impulse Retail System.
The Company has the rights to use and distribute certain fontware technology
developed for its Impulse Retail System. The agreement required a one time
payment of $25,000 for source code rights and $1,500 for each fontware outline
licensed. In addition, the Company has agreed to pay royalties of $3.75 per
fontware outline sold.
HARDWARE PURCHASE AGREEMENT. The Company has a purchase agreement with a
Japanese company that holds the rights to supply its SIGNright! machine. As of
December 31, 1998, the Company had a purchase commitment for 1,000 SIGNright!
machines in the approximate amount of $350,000. As of December 31, 2000, the
Company had paid this commitment in full. In addition, before beginning
production, the Company paid for tooling, equipment and development expenditures
of approximately $248,000.
10. EMPLOYEE BENEFIT PLANS
The Company has a Retirement Profit Sharing and Savings Plan under Section
401(k) of the Internal Revenue Code. The Plan allows employees to defer up to
15% of their income on a pre-tax basis through contributions to the plan. The
Company may make matching contributions with respect to salary deferral at a
percentage to be determined by the Company each year. In 2000, 1999 and 1998,
the Company made no matching contributions.
11. CUSTOMER SALES
No single customer represented a significant portion of total sales. Export
sales accounted for 8%, 16% and 16% of total sales in 2000, 1999 and 1998,
respectively.
12. SOURCE OF SUPPLY
The Company currently buys the components of its products from sole
suppliers. Although there are a limited number of manufacturers capable of
manufacturing its products, management believes that other manufacturers could
adapt to provide the products on comparable terms. The time required to locate
and qualify other manufacturers, however, could cause a delay in manufacturing
that may be financially disruptive to the Company.
13. RESTRUCTURING PROGRAM
During April 1998, the Company initiated a restructuring program to redirect
the Company's marketing and selling of the SIGNright! machines domestically. As
a result of this program, the Company reduced its workforce from 93 full-time
employees to 65 full-time employees. The Company took a charge to earnings in
1998 due to this restructuring in the amount of $546,000. The $546,000 charge
was comprised of a $196,000 writedown of a prepayment made to its Japanese
vendor for SIGNright! machines, a $106,000 charge for the write-off of
SIGNright! machines, a $15,000 charge for moving expenses, a $47,000 charge for
accrued rental costs associated with a portion of the lease of the facility
which in 1998 was permanently idle and separate from the remaining utilized
lease space, and severance costs in the amount of $182,000 as a result of the
workforce reduction.
F-11
NOTES TO FINANCIAL STATEMENTS PART II
14. LITIGATION
On August 7, 2000, News America Marketing In-Store, Inc., (News America) a
major provider of in-store, shelf mounted signs for retail stores, filed a suit
against the Company in federal district court in New York, New York. The
complaint alleges that News America has exclusive promotional agreements with
various major retail chains, and that those agreements prevented retailers from
contracting for the Company's POPS program. The complaint accuses the Company of
interfering with business relationships, unfair competition and false
advertising and seeks an injunction against the Company and actual and punitive
damages in an unspecified amount.
In response to News America's suit, the Company brought suit against News
America in federal district court in Minneapolis, Minnesota. The federal court
in New York has recently ruled that the litigation should proceed in New York,
not Minnesota. Thus the Company has brought a counter-claim in the New York case
alleging that News America is engaged in anti-competitive practices and is
attempting to use its dominant position in the market to stifle competition. In
particular, the Company alleges that News America is violating the anti-trust
laws by attempting to use unenforceable exclusive dealing clauses to dissuade
customers from using the Company's POPS program. The Company's counter-claim
seeks declaratory and injunctive relief, actual damages in an unspecified
amount, treble damages and attorney fees under federal anti-trust law, and an
order under Section 7 of the Clayton Act that News America divest its 1997
acquisition of Actmedia. News America has made a motion to dismiss the Company's
counter-claim, and the Company expects that the motion will be briefed and heard
by the court in the next several months.
The Company believes that News America's suit is without merit, and the Company
intends to vigorously defend that suit and pursue its counter-claim.
In December 1997, Meta-4, Inc. the developer of the DOSversion of the Company's
Stylus software product, brought suit against the Company in U.S. District Court
in the State of Minnesota. The complaint alleged copyright infringement and
breach of contract in connection with the Company's distribution of the
Company's Stylus software product. This lawsuit was settled in March 1999. Under
the settlement, Meta-4 assigned all its rights to the Stylus software to the
Company in consideration of $15,000 in cash and 75,000 shares of the Company's
Common Stock. In 1999, the Company recognized $136,875 as expense associated
with this settlement.
F-12
ITEMS 10 THROUGH 13 PART III
15. QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly data for 2000 and 1999 was as follows:
YEAR ENDED DECEMBER 31, 2000 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- -----------------------------------------------------------------------------------------------------------
Net sales $ 2,878,226 $ 3,047,996 $ 2,863,480 $ 4,040,470
Gross profit 1,573,249 1,634,535 1,691,342 2,434,915
Net loss (253,806) (248,896) (295,331) (25,536)
Earnings per share:
Basic $ (.03) $ (.03) $ (.03) $ (.00)
Diluted $ (.03) $ (.03) $ (.03) $ (.00)
YEAR ENDED DECEMBER 31, 1999 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- -----------------------------------------------------------------------------------------------------------
Net sales $ 2,290,852 $ 2,300,111 $ 2,364,464 $ 2,331,461
Gross profit 1,143,811 1,154,759 1,187,183 1,645,744
Net loss (259,721) (399,164) (389,994) (362,568)
Earnings per share:
Basic $ (.03) $ (.05) $ (.04) $ (.04)
Diluted $ (.03) $ (.05) $ (.04) $ (.04)
ITEM 9 DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
Information concerning Executive Officers of the Company is included in this
Annual Report in Item 4A under the caption "Executive Officers of the
Registrant."
The information required by Item 10 concerning the directors of the Company is
incorporated herein by reference to the Company's proxy statement for its 2001
Annual Meeting of Shareholders which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the close
of the fiscal year for which this report is filed.
ITEM 11 EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the Company's proxy statement for its 2001 Annual Meeting of Shareholders which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after the close of the fiscal year for which this report is
filed.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Company's proxy statement for its 2001 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the fiscal year for which this report is
filed.
ITEM 13 CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Company's proxy statement for its 2001 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the fiscal year for which this report is
filed.
13
EXHIBITS PART IV
PART IV
ITEM 14 EXHIBITS, SCHEDULE AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT PAGE NUMBER OR INCORPORATION
NUMBER DESCRIPTION BY REFERENCE TO
- ----------------------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation of Registrant, Exhibit 3.1 of the Registrant's Registration
as amended to date Statement of Form S-18, Reg. No. 33-40765C
3.2 By laws, as amended to date Exhibit 3.2 of the Registrant's Registration
Statement of Form S-18, Reg. No. 33-40765C
4.1 Specimen Common Stock Certificate Exhibit 4.1 of the Registrant's Registration
of Registrant Statement of Form S-18, Reg. No. 33-40765C
10.1 License Agreement between Thomas and Exhibit 10.1 of the Registrant's Registration
Lawrence McGourty and the Company dated Statement of Form S-18, Reg. No. 33-40765C
January 23, 1990, as amended
10.2 Barcode License and Support Agreement Exhibit 10.2 of the Registrant's Registration
between Thomas and Lawrence McGourty Statement of Form S-18, Reg. No. 33-40765C
and the Company dates January 23, 1990
10.3 The Company's 1990 Stock Plan, as amended 17
10.6 Lease Agreement between Plymouth Partners II, Exhibit 10.6 of the Registrant's Annual
and the Company, dated October 5, 1998 Report on Form 10-K for the year ended
December 31, 1998.
10.9 Employee Stock Purchase Plan, as amended 18
10.11 Loan Agreement between Republic Acceptance Exhibit 10.16 of the Registrant's Annual
Corporation and the Company dated Report on Form 10-K for the year ended
December 20, 1997 December 31, 1997
10.12 First Amendment to the Loan Agreement Exhibit 10.12 on the Registrant's Annual
between U.S. Bancorp Republic Commercial Report on Form 10-K for the year ended
Finance, Inc. and the Company dated December 31, 1998
December 31, 1998
10.13 Second Amendment to the Loan Agreement Exhibit 10.12 on the Registrant's Annual
between U.S. Bancorp Republic Commercial Report on Form 10-K for the year ended
Finance, Inc. and the Company dated December 31, 1999
June 30, 1999
10.14 Third Amendment to the Loan Agreement
between U.S. Bank National Association 19
and the Company dated October 31, 2000
23 Consent of Ernst & Young 25
25 Power of Attorney (See signature page of this Form 10-K) 16
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during 2000
14
VALUATION AND QUALIFYING ACCOUNTS PART IV
SCHEDULE II VALUATION AND QUALIFYING ACCOUNT
Balance at Charged to Balance
Beginning Costs and Deductions at End of
Description of Period Expenses Describe Period
- ---------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Allowance for doubtful accounts $ 70,917 $ 45,000 $ (9,675)(1) 106,242
Provision for normal returns and rebates 15,840 15,840
Provision for obsolete inventory 61,960 91,000 85,751 (4) 67,209
- ---------------------------------------------------------------------------------------------------
Year ended December 31, 1999
Allowance for doubtful accounts 96,350 25,433 (1) 70,917
Provision for normal returns and rebates 25,842 10,002 (3) 15,840
Provision for obsolete inventory 89,506 96,000 123,546 (4) 61,960
- ---------------------------------------------------------------------------------------------------
Year ended December 31, 1998
Allowance for doubtful accounts 204,382 72,000 180,032 (1) 96,350
Provision for normal returns and rebates 102,925 9,629 86,712 (2) 25,842
Provision for obsolete inventory 127,949 69,500 107,943 89,506
- ---------------------------------------------------------------------------------------------------
(1) Uncollectable accounts written off, net of recoveries.
(2) Includes $14,112 for rebates paid to customer buying groups and $72,600
credited to income.
(3) Credited to income.
(4) Inventory scrapped and disposed of.
15
SIGNATURES PART IV
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Scott Drill
---------------------------------
Scott Drill
PRESIDENT AND CEO
Dated: March 23, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints John R.
Whisnant his true and lawful attorney-in-fact and agent, acting alone, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
/s/ Gary L. Vars Chairman, Executive Vice President March 23, 2001
- ----------------------- and General Manager, POPS Division
GARY L. VARS
/s/ Scott Drill President and Chief Executive Officer March 23, 2001
- ----------------------- (PRINCIPAL EXECUTIVE OFFICER)
SCOTT DRILL
/s/ John R. Whisnant Vice President of Finance, Chief March 23, 2001
- ----------------------- Financial Officer and Acting
JOHN R. WHISNANT Secretary (PRINCIPAL FINANCIAL OFFICER)
/s/ G. L. Hoffman Director March 23, 2001
- -----------------------
G. L. HOFFMAN
/s/ Erwin A. Kelen Director March 23, 2001
- -----------------------
ERWIN A. KELEN
/s/ W. Robert Ramsdell Director March 23, 2001
- -----------------------
W. ROBERT RAMSDELL
/s/ Don E. Schultz Director March 23, 2001
- -----------------------
DON E. SCHULTZ
/s/ Gordon F. Stofer Director March 23, 2001
- -----------------------
GORDON F. STOFER
/s/ Frank D. Trestman Director March 23, 2001
- -----------------------
FRANK D. TRESTMAN
16