UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO _________________
Commission File Number: 0-19380
INSIGNIA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1656308
--------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5025 Cheshire Lane North, Plymouth, Minnesota 55446
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(Address of principal executive offices)
(763) 392-6200
---------------------------------
(Registrant's telephone number, including area code)
Not applicable.
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(Former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common Stock, $.01 Par Value - 10,933,335 shares as of October 29, 2002
1
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets - September 30, 2002 and December 31, 2001
Statements of Operations - Three months ended September 30,
2002 and 2001; Nine months ended September 30, 2002 and 2001
Statements of Cash Flows - Nine months ended September 30, 2002 and
2001
Notes to Financial Statements - September 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4 CONTROLS AND PROCEDURES.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
CERTIFICATIONS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INSIGNIA SYSTEMS, INC.
BALANCE SHEETS
September 30, December 31,
ASSETS 2002 2001
============================================================== ------------ ------------
(UNAUDITED) (NOTE)
CURRENT ASSETS:
Cash and cash equivalents $ 2,640,777 $ 2,209,448
Marketable securities -- 80,000
Accounts receivable - net of allowance of $218,511
and $174,000 respectively 3,420,395 2,995,527
Inventories 803,743 843,965
Prepaid expenses and other 275,109 146,002
------------ ------------
TOTAL CURRENT ASSETS 7,140,024 6,274,942
PROPERTY AND EQUIPMENT:
Production tooling, machinery and equipment 2,007,410 1,740,462
Office furniture and fixtures 243,051 243,051
Computer equipment 606,974 517,510
Leasehold improvements 275,292 266,836
------------ ------------
3,132,727 2,767,859
Accumulated depreciation and amortization (2,531,901) (2,411,900)
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 600,826 355,959
------------ ------------
TOTAL ASSETS $ 7,740,850 $ 6,630,901
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
==============================================================
CURRENT LIABILITIES:
Accounts payable $ 1,611,165 $ 2,140,452
Accrued compensation and benefits 556,687 509,636
Accrued expenses 622,251 25,028
Deferred revenue 507,998 151,214
Line of credit 322,458 511,619
Other 113,184 53,618
------------ ------------
TOTAL CURRENT LIABILITIES 3,733,743 3,391,567
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized--20,000,000
shares; issued and outstanding September 30, 2002--
10,927,367 shares; December 31, 2001--10,614,098 shares 109,274 106,141
Additional paid-in capital 18,759,854 18,017,617
Accumulated deficit (14,862,021) (14,884,424)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,007,107 3,239,334
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 7,740,850 $ 6,630,901
============ ============
Note: The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date. See Notes to Financial
Statements.
3
INSIGNIA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES $ 5,075,908 $ 3,997,460 $ 16,913,907 $ 13,770,183
Cost of Sales 2,116,181 1,750,282 6,726,743 5,934,153
------------ ------------ ------------ ------------
GROSS PROFIT 2,959,727 2,247,178 10,187,164 7,836,030
OPERATING EXPENSES:
POPS Program 1,859,407 1,473,565 5,460,173 4,260,771
Sales 320,778 277,554 947,668 911,346
Marketing 680,288 459,553 1,780,376 1,404,288
General & Administrative 598,731 529,109 1,876,021 1,557,721
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,459,204 2,739,781 10,064,238 8,134,126
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (499,477) (492,603) 122,926 (298,096)
OTHER INCOME (EXPENSE):
Interest Income 14,808 15,892 37,895 52,417
Interest Expense (15,778) (16,381) (44,476) (54,633)
Other Income (Expense) 1,231 569 (94,550) 25,393
------------ ------------ ------------ ------------
PRE-TAX INCOME (LOSS) (499,216) (492,523) 21,795 (274,919)
Provision for Income Tax 0 0 (607) 15,650
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (499,216) $ (492,523) $ 22,402 $ (290,569)
============ ============ ============ ============
Basic Earnings (Loss) Per Share $ (0.05) $ (0.05) $ 0.00 $ (0.03)
Diluted Earnings (Loss) Per Share $ (0.05) $ (0.05) $ 0.00 $ (0.03)
Shares used in calculation of net
income (loss) per share:
Basic 10,915,056 10,464,820 10,802,774 10,409,591
Diluted 10,915,056 10,464,820 11,679,294 10,409,591
4
INSIGNIA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
---------------------------
2002 2001
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OPERATING ACTIVITIES:
Net income (loss) $ 22,402 $ (290,569)
Non-cash expenses included in income (loss):
Depreciation and amortization 120,001 127,411
Provision for bad debt expense (76,000) (8,971)
Amortization of unearned compensation 0 8,630
Changes in operating assets & liabilities:
Accounts receivable (348,868) (241,868)
Inventories 40,222 279,275
Prepaids and other (129,107) 52,629
Accounts payable (223,538) 502,174
Accrued compensation and benefits 47,051 (40,297)
Deferred revenue 356,784 198,185
Accrued expenses & Other 351,041 (180,180)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES 159,988 406,419
INVESTING ACTIVITIES:
(Purchase) of property and equipment (364,868) (158,091)
Sales of marketable securities 80,000 80,000
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (284,868) (78,091)
FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 745,370 390,796
Proceeds (to) from credit line (189,161) 1,483
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 556,209 392,279
INCREASE IN CASH & CASH EQUIVALENTS 431,329 720,607
Cash and cash equivalents at beginning of period 2,209,448 1,106,160
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,640,777 $ 1,826,767
=========== ===========
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Third Quarter Ended September 30, 2002
--------------------------------------
RESULTS OF OPERATIONS
NET SALES. The Company's net sales for the third quarter ended September 30,
2002 were $5,076,000, an increase of 27%, compared to net sales of $3,997,000
for the third quarter of 2001. For the nine months ended September 30, 2002, net
sales were $16,914,000, an increase of 23%, compared to net sales of $13,770,000
for the first nine months of 2001. POPS program sales increased 39% from
$9,534,000 in the first nine months of 2001 to $13,218,000 for the first nine
months of 2002. Thermal sign card sales decreased 12% from $2,139,000 during the
first nine months of 2001 to $1,875,000 in the first nine months of 2002.
Printing sales decreased 13% from $1,247,000 in the first nine months of 2001 to
$1,088,000 in the first nine months of 2002.
GROSS PROFIT. The Company's gross profit for the third quarter of 2002 increased
32% to $2,960,000, compared to $2,247,000 for the third quarter of 2001. Gross
profit for the first nine months of 2002 increased 30% to $10,187,000, compared
to $7,836,000 for the first nine months of 2001. The increase in gross profit
for the third quarter and the first nine months of 2002 is primarily due to the
increase in the POPS program sales which have higher margins. Gross profit as a
percentage of net sales was $58.3% for the third quarter of 2002, compared to
56.2% for the third quarter of 2001, and was 60.2% for the first nine months of
2002, compared to 56.9% for the first nine months of 2001.
OPERATING EXPENSES. Operating expenses increased 26% in the third quarter of
2002 compared to the third quarter of 2001, and increased 24% for the first nine
months of 2002, compared to the first nine months of 2001. POPS expenses
increased 26% for the third quarter of 2002, compared to the third quarter of
2001 and reflects the continuing commitment to the POPS program. Sales expenses
increased 16% for the third quarter of 2002, compared to the third quarter of
2001. Marketing expenses increased 48% for the third quarter of 2002, compared
to the third quarter of 2001. This increase was due primarily to additional sign
promotional expenses incurred during the third quarter of 2002. General and
administrative expenses increased 13% for the third quarter of 2002, compared to
the third quarter of 2001. This increase was due primarily to increased legal
fees, investor relations fees and rent.
This increase in POPS operating expenses for the first nine months of 2002
reflects the continuing commitment to the POPS program. Sales expenses increased
4% for the first nine months of 2002, compared to the first nine months of 2001.
Marketing expenses increased 27% for the first nine months of 2002, compared to
the first nine months of 2001 and is due primarily to additional sign
promotional expenses during the first nine months of 2002. General and
administrative expenses increased 20% for the first nine months of 2002,
compared to the first nine months of 2001. POPS operating expenses increased 28%
for the first nine months of 2002, compared to the first nine months of 2001.
Operating expenses as a percentage of net sales were 69% in the third quarter of
2002 and 60% for the first nine months of 2002, compared to 69% in the third
quarter of 2001 and 59% for the first nine months of 2001.
NET INCOME (LOSS). The Company had a net loss of $(499,000), or $(.05) per share
for the third quarter of 2002, compared to a net loss of $(493,000), or $(.05)
per share for the third quarter of 2001. For the first nine months of 2002, the
net income was $22,000, or $.00 per share, compared to a net loss of $(291,000),
or $(.03) per share for the first nine months of 2001.
LIQUIDITY AND CAPITAL RESOURCES
6
At September 30, 2002, working capital was $3,407,000, compared to $2,883,000 at
December 31, 2001. Cash, cash equivalents and marketable securities increased
$432,000 from $2,209,000 at December 31, 2001 to $2,641,000 on September 30,
2002. The change in the Company's cash position is due to proceeds received from
the issuance of common stock of $745,000, plus an increase in deferred revenue
of $357,000 and an increase in accrued expense of $351,000, offset by a decrease
in accounts payable of $224,000, an increase in prepaids of $129,000, an
increase in accounts receivable of $349,000, the purchase of capital equipment
of $365,000, and payments to the credit line of $189,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 4: CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer, Scott Drill, and Chief Financial
Officer, John Whisnant, have reviewed the Company's disclosure controls and
procedures within 90 days prior to the filing of this report. Based upon this
review, these officers believe that the Company's disclosure controls and
procedures are effective in ensuring that material information related to the
Company is made known to them by others within the Company.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
quarter covered by this report or from the end of the reporting period to the
date of this Form 10-Q.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously disclosed, the Company was sued in August 2000 in U.S. District
Court in New York, New York by News America Marketing In-Store, Inc. The
complaint alleges that News America has exclusive promotional agreements with
certain grocery store retailers, and that the promotional agreements prevented
those retailers from contracting for the Company's POPS program. The complaint
also accuses the Company of unfair competition, false advertising and
interfering with business relationships. The Company has denied any wrongful or
improper action and has brought counterclaims alleging that News America has
engaged in anti-competitive practices and is attempting to stifle competition,
and that News America's use of exclusive dealing clauses and other
anti-competitive behavior violate the anti-trust laws.
The District Court has established a deadline for completion of discovery of
January 10, 2003, except for discovery involving experts, which is to be
completed by March 1, 2003. All papers regarding motions to the Court that would
terminate the case are to be filed with the Court by April 25, 2003. These dates
are subject to change by the District Court. The Court has not set a trial date.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS.
None.
7
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are included herein:
99.1 Certificate pursuant to 18 U.S.C. ss.1350.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements 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.
Insignia Systems, Inc.
(Registrant)
Date: October 31, 2002 /s/ Scott Drill
-----------------------
President and
Chief Executive Officer
Date: October 31, 2002 /s/ John Whisnant
-----------------------
Chief Financial Officer
8
CERTIFICATIONS
--------------
I, Scott Drill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Insignia Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 31, 2002 /s/ Scott Drill
-----------------------
President and
Chief Executive Officer
9
I, John Whisnant, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Insignia Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 31, 2002 /s/ John Whisnant
-----------------------
Chief Financial Officer
10