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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, 1998 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: (612) 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 March
25, 1999 was 8,651,496.
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 March 25, 1999 was approximately $17,302,992 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 20, 1999 are incorporated by reference into Part
III of this Form 10-K.
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Business...........................................................1
Item 2. Properties.........................................................7
Item 3. Legal Proceedings..................................................8
Item 4. Submission of Matters to a Vote of Security Holders................8
Item 4A. Executive Officers of the Registrant..............................8
PART II........................................................................9
Item 5. Market for the Registrant's Common Equity..........................9
Item 6. Selected Financial Data...........................................10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................10
Item 8. Financial Statements and Supplementary Data.......................15
Item 9. Disagreements with Accountants on Accounting and Financial
Disclosures.......................................................16
PART III......................................................................16
Item 10. Directors and Executive Officers of the Registrant...............16
Item 11. Executive Compensation...........................................16
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................................16
Item 13. Certain Relationships and Related Transactions...................16
PART IV.......................................................................17
Item 14. Exhibits, Schedule and Reports on Form 8-K.......................17
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
ultimately developing fully featured ODBC (open data-based connectivity)
compliant software applications, trade-named Stylus(R). The Company has evolved
to market 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 support the supply and
service needs of domestic clients of these in-store printing systems and
actively markets these products internationally through independent
distributors.
In May of 1998, the Company formally launched the Insignia
Point-Of-Purchase-Services (POPS(TM)) program. Insignia POPS is an account and
product-specific, in-store promotion program. Funded by consumer goods
manufacturers, Insignia POPS combines product selling information and graphics
supplied by the manufacturer with the retailer's logo and current store price on
a sign designed to fit each participating retailer's decor and merchandising
theme.
For participating retailers, Insignia POPS is a source of new revenue and is the
first in-store promotion program that delivers a complete call-to-action, on an
account and store-specific basis, with all participating retail stores updated
weekly. For consumer goods manufacturers, the POPS program provides access to
the optimum retail promotion site for their products - the retail shelf edge. In
addition, the POPS program offers manufacturers lead-times of less than 30 days,
no production costs and micro-marketing capabilities such as store-specific
messaging and multiple language options.
Company management has been investing the Company's primary resources and
energies in the development of the Insignia POPS program for the last three
years. During this time, management has also been restructuring the organization
and redirecting the Company's activities to leverage the Company's in-store
experience, acquire the promotion industry expertise and develop the necessary
operational and systems foundation to successfully compete in the in-store
promotion industry.
In November, 1996 the Company replaced the Impulse Retail System with the
SIGNright system, which performed essentially the same functions as the Impulse.
The Company's business strategy with the Impulse system and the SIGNright system
was to obtain both initial revenue from the sale of electronic sign production
equipment and software, and recurring revenue from the sale of the sign cards,
label supplies, and accessories used with them. In 1998, the Company eliminated
the direct sale of the SIGNright system in the United States, but will continue
to market the SIGNright system through its international sales representatives.
The Company's second product, a PC-based software product tradenamed Stylus, is
used by retail chains to produce signs, labels, and posters. The Company's third
product, Insignia POPS, combines the Company's expertise in signage and in-store
merchandising with its Stylus software products to provide for a unique sign to
be ordered by a
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brand manufacturer and placed in a participating retail store. The Company
markets its Stylus software and the Insignia POPS through a direct marketing
process. The sign systems are marketed through independent distributors in
foreign markets and its accessories and supplies principally through
telemarketers.
INDUSTRY AND MARKET BACKGROUND
Product manufacturers are constantly seeking in-store ways to motivate
consumers to buy that particular manufacturer's product. Industry studies have
proven that the shelf edge sign represents the final and best opportunity for
the manufacturer to convince the consumer to buy. The Company estimates that
manufacturers now spend approximately $1 billion annually on in-store efforts.
The Company's market studies indicate that in-store signs are the most effective
means of inducing a purchase, second only to personal demonstrations and
sampling. The Company's marketing studies also indicate that the most effective
sign contains information that can be best supplied by the product manufacturer
in combination with the retailer's price and design look.
COMPANY PRODUCTS
INSIGNIA POPS (POINT OF PURCHASE SERVICES)
The Insignia POPS program is an in-store point-of-purchase promotional
program which enables manufacturers to deliver account-specific promotional
messages quickly and accurately - in designs and formats that have been
pre-approved and supported by participating retailers. By utilizing proprietary
technology, Insignia combines product-specific information including product
features, product benefits, a graphic image and an advertising tag line supplied
by consumer goods manufacturers, together with the retailer's logo, colors and
the current store price on a sign that is displayed directly in front of the
manufacturer's product in participating retail stores. Insignia POPS signs are
responsive to each participating retailers' look, quality, content and
consistency of promotion materials displayed in-store, while ensuring retailer
pricing authority.
Insignia POPS signs, including the retailer's logo, design, color and
price in combination with the manufacturer's selling messages and images, are
created and printed by the Company and placed at the shelf by store personnel
for two-week display cycles. The Company collects and organizes data from both
manufacturers and retailers, then formats, prints and delivers the signs to
retailers for distribution and display. The Company will charge the
manufacturer, on average, $4.75 per sign/per week/per store. Retailers are paid
a flat fee per/sign 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 its second major product,
tradenamed Stylus, which is a PC-based software product used by retailers to
produce signs, labels, and posters. The Company believes that the primary market
for the Stylus software is large independent retailers and retail chains. The
Company estimates that there are approximately 350,000 such retail locations in
the U.S.
The Stylus software allows retailers to create signs, labels, and
posters by manually entering the information for the sign or by importing
information from a computer database. Retailers can
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import barcode and price information from their point-of-sale system and can add
a graphic image of the product from a CD-ROM containing branded clip-art. They
can also create a database of selling information such as product features and
benefits, nutritional information, or lifestyle-type uses for the product which
can be added to create a more informative sign or label.
A significant portion of the retail marketplace is made up of chain
retailers who require that signs be consistent and controlled from headquarters.
Most chain retailers continue to create their signs at their headquarters,
duplicate them and deliver them to their stores. The headquarters version of the
Company's Stylus software allows chains to create signs and labels centrally to
maintain consistency in appearance, and then transmit to store-level printers.
The Company believes the Stylus software product has significant benefits for
chain retailers.
The current retail price of the Stylus software is $2,495 for the
single store version and $4,990 for the headquarters version. The Company also
sells the sign cards and labels used with the Stylus software in a variety of
sizes, colors, and styles. The Company sells these supplies at competitive
prices, but is not in a proprietary position.
THE SIGNRIGHT SYSTEM
The Impulse Retail System was developed by an independent product
design and development firm (the "Developer"). In November 1996, the Company
replaced the Impulse Retail System with the SIGNright system. In 1998, the
Company eliminated the domestic sale of the SIGNright system.
The Company's business strategy with the Impulse system and the
SIGNright system was to obtain both initial revenue from the sale of electronic
sign production equipment and software, and recurring revenue from the sale of
the sign cards, label supplies, and accessories used with them.
Sign cards for the SIGNright system and Impulse Retail System are sold
by the Company in a variety of sizes, colors and combinations and can be
customized to include pre-printed custom artwork (such as the retailer's logo)
as required by the customer. Approximately 53% of 1998 revenues came from the
sale of sign cards and the Company expects that this percentage will be slightly
lower in the future as the Company expects the Insignia POPS revenue to increase
in the future.
MARKETING AND SALES
The Company's marketing strategy is to focus on food manufacturers and
food retailers. By utilizing the Insignia POPS program, food manufacturers and
food 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, POPS media allows for more information to be
provided to consumers to aid in purchasing decisions, and because the POPS media
is consistent in format and design, consumer messages are clearer. The Company
believes Insignia POPS is the most complete in-store media 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.
Page 3
Through April 1998, the Company marketed the SIGNright system through
telemarketing by in-house sales personnel and independent sales representatives.
In May 1998, the Company discontinued the sale of the SIGNright system to U.S.
customers, but continues to market the SIGNright system through its
international sales representatives covering 20 countries.
During 1996, 1997 and 1998 foreign sales accounted for approximately
16%, 14% and 16% of total sales, respectively. The Company expects that sales to
foreign distributors will be approximately 14% of total sales in 1999.
PATENTS AND TRADEMARKS
The Developer has entered into a joint venture agreement with a
Japanese firm (the "Supplier") to manufacture and supply the SIGNright system.
The Supplier has entered into an exclusive supplier agreement whereby the
Company would have the exclusive distribution rights of the SIGNright system.
The manufacturing agreement required the Company to purchase 24,000 units by
October 31, 1998. However, the Company was unable to sell this number of units
by October 31, 1998. Therefore, the Developer could grant the same manufacturing
rights for the SIGNright system to another party. However, the Developer has
stated it does not presently intend to grant similar manufacturing rights to any
other party.
The Company is not presently aware of any patents of third parties
which the SIGNright system would infringe. There can be no assurance, however,
that such conflicting rights do not exist, in which event the Company would be
unable to sell its product without obtaining a license from others. There is no
assurance the Company would be able to obtain any such license on satisfactory
terms, or at all.
The barcode which the Company uses on the sign cards for the Impulse
and SIGNright 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 sign card or other supply item that bears the barcode and
used by the Impulse Retail 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 sign cards 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 "Impulse" for use on sign production machines. The Company is not
obligated to pay any royalty related to this trademark.
Page 4
The Company has obtained trademark registration in the United States of
the trademark "SIGNright" for use on sign production machines. 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
The Company's product development activities for the Insignia POPS
program have been conducted internally and include the proprietary data
management and operations system as well as the current offering of
point-of-purchase display 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 as
appropriate.
The Company's product development activities on the SIGNright system
were primarily conducted by the Developer on a contract basis. The Company
continues to introduce various additional complementary products such as new
sign card formats, new colors and new types of sign cards.
The Stylus software product was initially developed on a contract basis
beginning in 1992 and continuing through 1997. Beginning in 1993, the Company
hired in-house employees to develop and modify portions of the Stylus software
product. The Company plans no further development to its existing Stylus
software products. Product development costs of $498,160 in 1996, $493,686 in
1997 and $407,409 in 1998 were primarily related to development of the Stylus
software product.
SUPPLIERS
The Company has no plans to develop an in-house manufacturing
capability for the SIGNright machine and is obligated to purchase the SIGNright
machine from the Supplier. Prices under the supply agreement are fixed in
Japanese yen. The Company owns certain tooling for the SIGNright machine which
is used by the Supplier. The Company believes there are other manufacturers
capable of manufacturing and providing the SIGNright machine on comparable
terms. However, the time required to locate and qualify another supplier could
cause a delay in the manufacturing process that might have a serious adverse
effect on the Company.
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.
Page 5
COMPETITION
INSIGNIA POPS (POINT-OF-PURCHASE-SERVICES)
Insignia POPS has three major competitors in its market: News America
Marketing In-Store (News America), Catalina Marketing Corporation (Catalina) and
FLOORgraphics(TM), Inc. (FLOORgraphics). News America offers a network of
in-store advertising, promotion and sales merchandising services. News America
has branded all of their in-store products with their FSI coupon business as
SmartSource(TM). Catalina offers more than 20 strategic marketing solutions that
provide targeted communications and incentives at the checkout based on
consumer's actual purchase behavior. These marketing solutions include a
scanner-based network and in-store electronic marketing programs. FLOORgraphics
is an in-store media company that projects national advertising campaigns at
retail point-of-sale through large format, full color "floor billboards." Placed
on a category exclusive basis, FLOORgraphics activate recall of national ad
campaigns at point-of-sale.
The Insignia POPS main strengths, in relation to its competition are:
- the linking of manufacturers to retailers at a central coordination
point
- providing a complete call to action
- supplying account-specific and store-specific messages at the retail
shelf
THE SIGNRIGHT SYSTEM
The Company's patent covers the SIGNright system and the use of sign
card encoded with a complementary barcode. The Company could face competition
from suppliers of sign cards who duplicate the barcode used by the Company.
Management believes that the number, relatively small size, and geographic
dispersal of its customers, their relationship with the Company, and the
Company's retention of its customer list as a trade secret will discourage such
competition. However, there is no assurance that such competition will not
develop.
STYLUS SOFTWARE
Stylus software has three major competitors in its market: Access, Inc.
(Access), Electronic Label Technology, Inc. (ELT), and Retail Technologies, Inc.
(RTI). Access offers a product called dSIGN, which by its very nature of
requiring individual customization is focused more toward large retail chains.
ELT sells numerous versions of LabelMaster. RTI markets Design-R-Labels. The
Company believes that its complete line of Stylus products compares favorably on
features, benefits, cost, performance, and ease of use and implementation to
that of its main competitors. The Company has several products and can provide
solutions to operate in the following environments: UNIX/AIX, AS/400, MD-DOS,
Windows 3.1/95/NT, OBDC, or with stand-alone printers. The Company's main
strengths, in relation to its competition are: merchandising, large format
printing, high speed printing, image handling, ease of use, and rapid
implementation for their products, services and offerings.
Unlike the SIGNright system, the Stylus product does not offer the
Company the benefit of proprietary sign card stock. While this leaves customers
free to buy stock from alternate suppliers, the Company believes that it will
capture a significant portion of sign card and label sales due to the wide array
of pre-printed and perforated sign and label stock offered by the Company at
competitive prices.
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RESTRUCTURING PROGRAM
During January 1998, the Company implemented a restructuring program
(Program) to achieve a more focused marketing strategy regarding the selling of
SIGNright machines. This marketing strategy eliminated the marketing and selling
of SIGNright machines through direct channels. This resulted in the Company
streamlining and downsizing its operations by reducing its workforce and
consolidating certain employee groups. As a result of this Program, the Company
reduced its workforce from 130 full time employees to 93 full time employees.
The Company took a charge to earnings in December 1997 due to this restructuring
in the amount of $315,000. During April 1998, the Company initiated a further
restructuring program to redirect the Company's marketing strategy toward the
Insignia POPS program. This marketing strategy eliminated the marketing and
selling of 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. This $546,000 charge is comprised of a
$196,000 write-down 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 March 12, 1999, the Company had 66 full-time employees. The
full-time employees included 2 in telemarketing, 16 in other sales and marketing
positions, 38 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.
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 December 2004. The Company believes that this facility is more than
adequate to meet the Company's current and foreseeable needs.
Page 7
Item 3. Legal Proceedings
In December 1997, Meta-4, Inc., the developer of the DOS version of the
Company's Stylus software product, brought suit against the Company in U.S.
District Court in the District 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.
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 1998.
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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G. L. Hoffman 49 Chairman and Secretary
Scott F. Drill 46 President and Chief Executive Officer
Gary L. Vars 58 Executive Vice President, General Manager, POPS Division
John R. Whisnant 53 Vice President, Finance and Chief Financial Officer
G. L. Hoffman, a co-founder of the Company, has been the Chairman and
Secretary of the Company since it was incorporated in January 1990 and was
President and Chief Executive Officer from January 1990 until February 1998.
Prior to that time he was a co-founder of Varitronic Systems, Inc., which
develops, manufactures and markets business graphic products. Mr. Hoffman was
employed as Chairman, Executive Vice President and Secretary of Varitronics from
1983 until January 1990. Mr. Hoffman also had primary responsibility for
developing Varitronics' international marketing and private label distribution
systems.
Scott F. Drill, has been President and Chief Executive Officer of the
Company since February 24, 1998. Since May 1996 Mr. Drill was 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 Executive Vice President and General Manager of
the POPS Division since September 15, 1998. Prior to joining Insignia Systems
Mr. Vars spent 22 years as a marketing and business development consultant to
Fortune 500 companies. From 1966 to 1976 Mr. Vars held
Page 8
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 market-ups, mark-downs or commission.
1998 High Low
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First Quarter 1-15/16 1
Second Quarter 2-15/16 1-5/32
Third Quarter 3 1-1/2
Fourth Quarter 2-3/8 1
1997 High Low
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First Quarter 4-5/8 1-13/16
Second Quarter 4 2-5/16
Third Quarter 3-3/8 2-1/2
Fourth Quarter 2-5/8 1-1/32
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of March 17, 1999, the Company had 147 shareholders of record and
approximately 855 beneficial owners.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
Page 9
Item 6. Selected Financial Data
(In thousands, except per share amounts.)
For the Years Ended
December 31 1998 1997 1996 1995 1994
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Net sales $ 8,704 $ 13,321 $ 14,667 $ 15,547 $ 16,304
Operating income (loss) (3,396) (3,393) (999) (1,470) (947)
Net income (loss) (3,416) (3,380) (999) (1,451) (909)
Net income (loss) per share:
Basic and diluted $ (.44) $ (.50) $ (.18) $ (.27) $ (.17)
Shares used in calculation of
Net loss per share:
Basic and diluted 7,714 6,790 5,404 5,360 5,203
Working capital $ 2,232 $ 3,462 $ 3,512 $ 4,351 $ 4,952
Total assets 4,069 5,855 6,426 6,832 8,107
Long-term debt and lease obligation 72 186 289 383 --
Total stockholders' equity 2,430 3,795 4,174 5,118 6,413
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.
Year Ended December 31 1998 1997 1996
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Net Sales 100.0% 100.0% 100.0%
Cost of Sales 53.7 51.3 48.2
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Gross Profit 46.3 48.7 51.8
Operating Expenses:
Sales and Marketing 51.3 53.0 42.5
Product Development 4.7 3.7 3.3
General and Administrative 23.1 15.1 12.8
Restructuring Charge 6.3 2.4 --
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Total Operating Expenses 85.4 74.2 58.6
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Operating Loss (39.0) (25.5) (6.8)
Other Income (0.2) 0.1 --
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Net Loss (39.2)% (25.4)% (6.8)%
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Page 10
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES: Net sales for the year ended December 31, 1998 decreased 35% to
$8,704,000 compared to sales of $13,321,000 in 1997.
The decrease in sales in 1998 resulted primarily from discontinuing domestic
sales of the SIGNright machine in 1998 and significantly lower Stylus software
revenue. Machine and machine related revenue was $997,000 in 1998 compared to
$3,500,000 in 1997. Stylus software revenue was $532,000 in 1998 compared to
software revenue of $1,597,000 in 1997.
GROSS PROFIT: The Company's gross profit decreased 38% in 1998 to $4,033,000 as
compared to 1997. Gross profit as a percentage of net sales decreased to 46.3%
for 1998 compared to 48.7% for 1997. The decrease in 1998 was due primarily to
the overall decrease in net sales and change in product mix. Also, the Company's
fixed costs did not decrease in the same proportion as net sales decreased in
1998. The Company's foreign sales were 16% in 1998, 14% in 1997 and 16% in 1996.
The Company expects that sales to foreign distributors will be approximately 14%
in 1999.
OPERATING EXPENSES: Operating expenses decreased 25% in 1998. In 1998 the
Company recorded a restructuring charge of $546,000, offset by a $2,620,000
decrease to sales expenses as a result of the restructuring which accounted for
the 25% overall decrease in operating expenses in 1998. Sales expenses decreased
58% in 1998. The decrease in 1998 was due primarily to the restructuring of the
Company and elimination of SIGNright sales personnel. Marketing expenses also
decreased 53% in 1998 as a result of an expense reduction effort and the
restructuring of the Company. Product development expenses decreased 17% in 1998
as the Company eliminated any further independent product development of its
Stylus software. The Company expects that its operating expenses will increase
in 1999 as the Company continues to invest in the POPS program.
Operating expenses as a percentage of net sales were 85.4% in 1998. The increase
as a percentage of net sales in 1998 was due primarily to the lower sales volume
of the SIGNright machine and Stylus software. The Company expects its operating
expenses as a percentage of net sales to decrease and its net sales to increase
at a faster rate than operating expenses as the Company is able to leverage its
fixed expenses and increase its POPS program revenues.
NET LOSS: The Company had a net loss of $3,416,000 in 1998 compared to a net
loss of $3,380,000 in 1997. The net loss in 1998 resulted primarily from a
substantial decrease in net sales and a decrease in margins due to a higher
proportion of fixed expense allocated to lower sales, along with a restructuring
charge of $546,000 and the increased costs of investing in the Insignia POPS
program.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES: Net sales for 1997 decreased 9% compared to sales of $14,667,000 in
1996. The decrease in sales in 1997 compared to 1996 resulted primarily from a
decreased demand for the SIGNright machine compared to the demand for the
Impulse machine in 1996 and a lower sales price for the SIGNright machines.
Page 11
GROSS PROFIT: The Company's gross profit decreased 15% in 1997 as compared to
1996. Gross profit as a percentage of net sales decreased to 48.7% for 1997
compared to 51.8% for 1996. The decrease in 1997 was due primarily to the
overall decrease in net sales in 1997. Also, the Company's fixed costs did not
decrease in the same proportion as net sales decreased in 1997.
OPERATING EXPENSES: Operating expenses increased 15% in 1997 compared to 1996.
In 1997 the Company recorded a restructuring charge of $315,000 and also
introduced its Insignia POPS program and incurred $1,007,000 of sales expenses
which accounted for the 15% increase in 1997. Sales expenses increased 27% in
1997. The increase in 1997 was due to the introduction of the Insignia POPS
program. Marketing expenses decreased 19% in 1997. This decrease was a result of
an expense reduction effort. General and administrative expenses increased 7% in
1997. The increase in 1997 was due primarily to an increase in rent and bad debt
expense. Product development expenses decreased 1% in 1997.
Operating expenses as a percentage of net sales were 74.2% in 1997 compared to
58.6% in 1996. The increase as a percentage of net sales in 1997 was due
primarily to the lower sales volume of the SIGNright machine.
NET LOSS: The Company had a net loss of $3,380,000 in 1997 compared to a net
loss of $999,000 in 1996. The net loss in 1997 resulted primarily from a
substantial decrease in net sales and a decrease in margins due to a higher
proportion of fixed expense allocated to lower sales, along with a restructuring
charge of $315,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations with proceeds from public and private
equity placements. At December 31, 1998, working capital was $2,232,000 compared
to $3,462,000 at December 31, 1997. During the same period total cash and cash
equivalents increased $655,000 to $1,120,000.
Net cash used in operating activities during 1998 was $830,000, primarily due to
the net loss and the increase in accrued expenses, offset by the decrease in
accounts receivable, inventory, prepaids and other liabilities. Accounts
receivable decreased $1,360,000 in 1998 as extended term payment plans were paid
down during 1998. Inventory decreased $407,000 primarily due to the Company's
decision to reduce its inventory levels of SIGNright machines. Prepaid expenses
decreased $352,000 primarily due to the write-off of SIGNright machine deposits.
The Company expects accounts receivable to remain relatively flat during 1999.
The Company also expects inventory levels to remain flat during 1999.
Net cash of $740,000 was used in investing activities in 1998. The net cash
decrease was due to the purchase of marketable securities in the amount of
$1,701,000 offset by the maturity of marketable securities in the amount of
$1,046,000 and the purchase of property and equipment of $116,000.
Net cash of $1,569,000 was provided by financing activities, primarily from the
proceeds from the issuance of common stock of $2,038,000 offset by principal
payments on long term debt of $103,000 and payments to the line of credit in the
amount of $365,000.
The Company anticipates that its working capital needs will remain consistent
with prior years. In December of 1997, the Company entered into a loan agreement
with a commercial financing
Page 12
division of a U.S. Bank. The bank issued the Company a line of credit in the
amount of $3,000,000. As of December 31, 1998 there was no outstanding balance
on the line of credit and the borrowing availability was approximately
$1,200,000. 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.
2. COMPETITION.
Insignia POPS will be competing for the marketing expenditures of branded
product manufacturers, who use various forms of point-of-purchase marketing
methods, such as displays, coupons, in-store samples, etc. There is no
assurance that Insignia POPS will compete successfully with these
traditional marketing methods.
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 significant 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 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 and
marketing personnel.
Page 13
YEAR 2000 COMPLIANCE
GENERAL DESCRIPTION: The year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs or hardware that have date sensitive
software or imbedded chips may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
YEAR 2000 COMPLIANCE: The Company has modified or upgraded portions of its
software and certain hardware so that those systems will properly utilize dates
beyond December 31, 1999. This modification and upgrade was completed in March
1999. The Company believes that with these modifications and upgrades, the year
2000 issue has been mitigated.
THIRD PARTY: The Company does not have any direct interfacing with significant
third party vendors. The Company has queried significant suppliers and
subcontractors who do not share information systems with company (external
agents). To date, the Company is not aware of any external agent with a year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of insuring
that external agents will be year 2000 ready. The inability of external agents
to complete their year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
COST: The Company utilized both internal and external resources to reprogram and
modify the software and operating equipment for year 2000 modifications. The
total cost of the year 2000 project was approximately $20,000 and is being
funded through operating cash flows.
PRODUCT: The Company has made modifications to any of its products which require
remediation to be year 2000 compliant. Accordingly, the Company does not believe
that the year 2000 presents a material exposure as it relates to the Company's
products.
------------------------------- ------------------- ------------------ ------------------ ------------------
RESOLUTION PHASES ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
------------------------------- ------------------- ------------------ ------------------ ------------------
E Information Technology 100% Complete 100% Complete 100% Complete 100% Complete
X ------------------------------- ------------------- ------------------ ------------------ ------------------
P Operating Equipment with 100% Complete 100% Complete 100% Complete 100% Complete
O Embedded Chips or Software
S ------------------------------- ------------------- ------------------ ------------------ ------------------
U Products 100% Complete 100% Complete 100% Complete 100% Complete
R ------------------------------- ------------------- ------------------ ------------------ ------------------
E
3rd Party - System Interface N/A N/A N/A N/A
T ------------------------------- ------------------- ------------------ ------------------ ------------------
Y 3rd Party - Surveying 100% Complete Implement
P contingency plans
E or other
alternatives as
necessary.
------------------------------- ------------------- ------------------ ------------------ ------------------
Page 14
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, 1998 and 1997..............................F-2
Statements of Operations for the years ended December 31, 1998,
1997, and 1996.............................................................F-3
Statement of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996..........................................F-4
Statement of Cash Flows for the years ended December 31, 1998,
1997, and 1996.............................................................F-5
Notes to Financial Statements................................................F-6
Page 15
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Insignia Systems, Inc.
We have audited the accompanying balance sheets of Insignia Systems, Inc. as of
December 31, 1998 and 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. Our audits also included the financial statement
schedule listed in the index at Item 14(a).These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Insignia Systems, Inc. at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/Ernst & Young LLP
Minneapolis, Minnesota
February 5, 1999
Page F-1
INSIGNIA SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31 1998 1997
- ------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 0 $ 0
Marketable securities 1,120,100 464,837
Accounts receivable - net of $96,000 allowance in 1998
and $204,000 in 1997 1,280,021 2,712,505
Inventories 1,210,500 1,617,578
Prepaid expenses 187,784 540,028
- ------------------------------------------------------------------------------------------------
Total Current Assets 3,798,405 5,334,948
PROPERTY AND EQUIPMENT:
Production tooling, machinery and equipment 1,894,577 1,902,704
Office furniture and fixtures 358,602 356,099
Computer equipment 954,096 978,952
Leasehold improvements 35,134 312,420
- ------------------------------------------------------------------------------------------------
3,242,409 3,550,175
Accumulated depreciation and amortization (2,972,303) (3,030,500)
- ------------------------------------------------------------------------------------------------
Total Property and Equipment 270,106 519,675
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 4,068,511 $ 5,854,623
- ------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 518,529 $ 424,361
Accrued compensation and benefits 176,746 234,291
Accrued expenses 85,138 245,028
Deferred revenue 404,729 361,976
Warranty reserve 25,840 98,430
Other 241,515 40,523
Line of credit 0 365,447
Current portion of long-term debt 114,087 103,221
- ------------------------------------------------------------------------------------------------
Total Current Liabilities 1,566,584 1,873,277
LONG-TERM DEBT 72,018 186,104
COMMITMENTS (SEE NOTES 5 AND 9)
STOCKHOLDERS' EQUITY:
Common stock, par value $.01:
Authorized shares - 20,000,000
Issued and outstanding shares - 8,498,800 in 1998 and
6,857,721 in 1997 84,998 68,578
Additional paid-in capital 15,163,071 13,083,563
Unearned compensation (47,932) (2,250)
Accumulated deficit (12,770,228) (9,354,649)
- ------------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,429,909 3,795,242
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,068,511 $ 5,854,623
- ------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
Page F-2
INSIGNIA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
NET SALES $ 8,703,604 $ 13,321,124 $ 14,667,382
Cost of Sales 4,670,419 6,832,609 7,063,836
- ------------------------------------------------------------------------------------------------------
Gross Profit 4,033,185 6,488,515 7,603,546
OPERATING EXPENSES:
Sales 3,672,173 5,557,557 4,381,247
Marketing 790,981 1,501,242 1,845,730
Product development 407,409 493,686 498,160
General and administrative 2,012,899 2,014,322 1,877,411
Restructuring Charge 545,992 314,568 --
- ------------------------------------------------------------------------------------------------------
Total Operating Expenses 7,429,454 9,881,375 8,602,548
- ------------------------------------------------------------------------------------------------------
Operating Loss (3,396,269) (3,392,860) (999,002)
OTHER INCOME (EXPENSE):
Interest income 56,936 84,667 46,751
Interest expense (113,672) (56,717) (64,911)
Other income (expense) 37,426 (14,602) 17,936
- ------------------------------------------------------------------------------------------------------
NET LOSS $ (3,415,579) $ (3,379,512) $ (999,226)
- ------------------------------------------------------------------------------------------------------
Net loss per share:
Basic and diluted $ (.44) $ (.50) $ (.18)
- ------------------------------------------------------------------------------------------------------
Shares used in calculation of net loss per share:
Basic and diluted 7,714,522 6,790,484 5,403,741
- ------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
Page F-3
INSIGNIA SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional
------------ Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
-----------------------------------------------------------------------------------------------------------------------
BALANCE AT JAN. 1, 1996 5,361,006 $ 53,610 $ 10,056,117 $ (16,125) $ (4,975,911) $ 5,117,691
Employee stock purchase plan 42,852 429 46,280 -- -- 46,709
Amortization of stock grant -- -- -- 8,812 -- 8,812
Net loss -- -- -- -- (999,226) (999,226)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1996 5,403,858 54,039 10,102,397 (7,313) (5,975,137) 4,173,986
Sale of common stock 1,373,660 13,737 2,890,471 -- -- 2,904,208
Exercise of stock options 13,768 138 13,630 -- -- 13,768
Employee stock purchase plan 66,435 664 77,065 -- -- 77,729
Amortization of stock grant -- -- -- 5,063 -- 5,063
Net loss -- -- -- -- (3,379,512) (3,379,512)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 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 DEC. 31, 1998 8,499,800 $ 84,998 $ 15,163,071 $ (47,932) $(12,770,228) $ 2,429,909
- ------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
Page F-4
INSIGNIA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $(3,415,579) $(3,379,512) $ (999,226)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization 336,613 662,279 540,192
Provision for bad debt expense 72,000 185,000 70,000
Provision for obsolete inventory 69,500 71,500 47,500
Amortization of unearned compensation 2,250 5,063 8,812
Gain on sale of equipment (2,444) -- --
Issuance of stock warrants in lieu of services 10,168 -- --
Changes in operating assets and liabilities:
Accounts receivable 1,360,484 (252,654) (479,477)
Inventories 337,578 326,885 (35,897)
Prepaid expenses 352,244 (324,466) 116,056
Accounts payable 94,168 (257,800) (101,890)
Accrued compensation and benefits (57,545) 5,272 6,317
Deferred revenue 42,753 268,052 73,047
Warranty reserve (72,590) 55,590 (31,160)
Accrued expenses and other 41,102 137,705 2,789
- ---------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (829,298) (2,497,086) (782,937)
INVESTING ACTIVITIES:
Purchases of property and equipment (116,279) (230,651) (341,980)
Proceeds from sale of equipment 31,680 -- --
Purchase of marketable securities (1,700,967) (1,812,307) (1,114,271)
Maturity/sale of marketable securities 1,045,704 1,496,897 1,468,750
- ---------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Investing Activities (739,862) (546,061) 12,499
FINANCING ACTIVITIES:
Net change in line of credit (365,447) (307,834) 673,281
Proceeds from issuance of Common Stock 2,037,827 2,995,704 46,709
Principal payments on long-term debt (103,220) (93,391) (84,497)
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 1,569,160 2,594,479 635,493
- ---------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 0 (448,668) (134,945)
Cash and Cash Equivalents at Beginning of Year 0 448,668 583,613
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 0 $ 0 $ 448,668
- ---------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
Page F-5
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") markets
in-store promotional programs, products and services to retailers and
manufacturers. These products include thermal sign card supplies for the
Company's SIGNright and Impulse systems, Stylus software, and Insignia
POPS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
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 are
recognized over the life of the contract. Revenue associated with Insignia
POPS is recognized at the completion 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 cards, 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 and amortization is provided on a straight line basis over
three to five 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.
Page F-6
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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 COMMON SHARE. Loss per share is calculated under FASB
Statement 128. Basic loss per share is based on the weighted average shares
outstanding and exclude any dilutive effects of options and warrants.
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.
ADVERTISING COSTS. Advertising costs are charged to operations as incurred.
Advertising expenses were approximately $361,500, $677,195 and $758,786 in
1998, 1997 and 1996, respectively.
RESEARCH AND DEVELOPMENT. Research and development expenditures are charges
to operations as incurred. Statement of Financial Accounting Standards No.
86, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED, requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs
incurred by the Company between completion of the working model and the
point at which the product is ready for general release have been
insignificant. All research and development costs have been expensed.
3. RESTRUCTURING PROGRAM. During January 1998, the Company implemented a
restructuring program (Program) to achieve a more focused marketing
strategy regarding the selling of SIGNright machines. This marketing
strategy eliminated the marketing and selling of SIGNright machines through
direct channels. This resulted in the Company streamlining and downsizing
its operations by reducing its workforce and consolidating certain employee
groups. As a result of this Program, the Company reduced its workforce from
130 full time employees to 93 full time employees. The Company took a
charge to earnings in December 1997 due to this restructuring in the amount
of $315,000. Accruals established as part of this restructuring were fully
utilized in 1998. During April 1998, the Company initiated a further
restructuring program to redirect the Company's marketing strategy toward
the Insignia POPS program. This marketing strategy eliminated the marketing
and selling of 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. This $546,000 charge is
comprised of a $196,000 write-down 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
Page F-7
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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.
4. MARKETABLE SECURITIES. Marketable securities consist of U.S. Treasury Debt
Securities which mature in April 1999 and certificates of deposit.
Approximately $170,000 of these certificates are pledged as collateral for
the loan agreement (see Note 8) and approximately $243,000 of these
certificates are pledged as collateral for the building lease agreement
(see Note 9). 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, 1998 and
1997.
5. COMMITMENTS.
PRODUCT DESIGN AGREEMENTS. The Company has an exclusive licensing 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.
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, 1998, the Company had paid $175,000 of this commitment. In addition,
before beginning production, the Company paid for tooling, equipment and
development expenditures of approximately $248,000. The purchase price for
the SIGNright machine is payable in Japanese yen and therefore the dollar
value of such payments may fluctuate with exchange rates.
6. INCOME TAXES. At December 31, 1998, the Company had net operating loss
carryforwards of approximately $11,848,000 which are available to offset
future taxable income through 2018. 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 significant ownership changes have occurred for federal
tax purposes. Significant components of the deferred tax assets are as
follows:
As of December 31 1998 1997
----------------------------------------------------------------------
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 4,383,600 $ 2,897,600
Depreciation and amortization 144,000 106,900
Accounts receivable allowance 35,600 75,600
Allowance for machine returns 9,500 36,400
Inventory reserve 87,400 134,400
Restructuring reserve 57,400 110,500
Other 20,500 50,000
----------------------------------------------------------------------
Total deferred tax asset 4,738,000 3,411,400
Valuation allowance (4,738,000) (3,411,400)
----------------------------------------------------------------------
Net deferred tax assets $ -- $ --
Page F-8
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
7. STOCK OPTIONS, WARRANTS AND AWARDS.
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 years
after the date of grant and typically vest in one-third increments on the
first, second and third anniversaries of the grant date.
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, 1995 46,843 335,100 $ 2.16
Shares reserved 300,000 -- --
Granted (223,400) 223,400 1.92
Cancelled 99,300 (99,300) 2.25
Exercised -- -- --
--------------------------------------------------------------------------------
Balance at December 31, 1996 222,743 459,200 1.79
Granted (199,000) 199,000 2.84
Cancelled 5,632 (5,632) 2.86
Exercised -- (13,768) 2.59
--------------------------------------------------------------------------------
Balance at December 31, 1997 29,375 638,800 1.98
Reserved 600,000 -- --
Granted (749,000) 749,000 1.25
Cancelled 236,734 (236,734) 2.21
Exercised -- (40,066) 1.41
--------------------------------------------------------------------------------
Balance at December 31, 1998 117,109 1,111,000 1.54
The number of options exercisable under the plan were:
December 31, 1996 267,262
December 31, 1997 342,523
December 31, 1998 541,623
Page F-9
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
The following tables summarizes information about the stock options
outstanding at December 31, 1998.
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, 1998 Per share
-----------------------------------------------------------------------------------------------------------
$1.06 -$2.75 701,334 5 Years $1.34 203,126 $1.17
1.81 - 3.38 91,000 4 Years 3.10 48,166 3.48
1.25 - 1.38 95,000 3 Years 1.36 66,665 1.36
1.00 - 1.88 29,500 2 Years 1.44 29,500 1.44
1.38 - 3.38 194,166 1 Year 1.56 194,166 1.56
-----------------------------------------------------------------------------------------------------------
1.06 - 3.38 1,111,000 3 Years 1.54 541,623 1.52
Options outstanding under the plan expire at various dates during the
period January 1999 through December 2003.
The weighted average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996 was $.75, $1.62 and $.80, 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, 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 loss and loss 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 1996; risk-free interest rate of 6.0%; volatility factor of
the expected market price of the Company's common stock of .532, and a
weighted-average life of the option of three years; and for 1997: risk-free
interest rate of 6.0%; volatility factor of the expected market price of
the Company's common stock of .882, and a weighted-average life of the
option of three years; and for 1998: risk-free interest rate of 6.0%;
volatility factor of the expected market price of the Company's common
stock of .978, and a weighted-average 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
Page F-10
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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:
1998 1997 1996
---------------------------------------------------------------------------------------
Pro forma net loss $(3,715,870) $(3,508,528) $(1,111,522)
Pro forma net loss per common share $ (.48) $ (.52) $ (.21)
The pro forma effect on the net loss for 1996, 1997 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.
Prior to 1995, the Company issued five year warrants to consultants to
purchase a total of 17,500 shares of Common Stock exercisable at various
prices between $2.56 per share and $4.00 per share. The warrants expire on
various dates through November 1999.
During 1990, two non-employee board members provided strategic planning,
financial and general advisory assistance to the Company. In exchange for
their services, the Company granted to each individual a warrant to
purchase 75,000 shares of Common Stock at $2.00 per share for a five year
period. During 1994, these warrants were extended to September 9, 1999.
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 will expire in five
years.
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 will recognize consulting expense
associated with these warrants over the vesting period. The Company
recognized an expense of $10,168 in 1998 associated with these warrants.
STOCK AWARD. In December 1993, the Company granted 25,000 shares of
restricted stock at no cost to an officer of the Company. The restriction
on the shares were removed as the individual completed employment periods
with the Company through various dates from 1995 through 1998.
8. FINANCING AGREEMENTS AND LONG-TERM DEBT. The Company entered into a $3
million line of credit agreement with a finance corporation against which
$0 was outstanding at December 31, 1998. 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 $7,500. The outstanding balance
under the line of credit accrues interest at a rate of 2 percent over the
bank's reference rate per annum. This credit agreement was amended in
September 1998 to
Page F-11
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
provide for the temporary suspension of this line of credit, until such
time that the Company elects to reinstate the credit agreement and the
availability of advances under the credit agreement. As a result of this
suspension, the agreement shall remain effective for one year upon
reinstatement of the credit line. No minimum amount of interest will be due
and payable during the suspension period. 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.
The Company also has a long-term loan agreement with a finance corporation
which accrues interest at a rate of 10.05 percent per annum and expires on
August 1, 2000. In 1995 the Company borrowed $500,000 and pledged certain
printing press assets and U.S. Treasury Debt Securities as collateral
against this facility.
Long-term debt as of December 31, 1998 is as follows:
Obligations under long-term debt $186,105
Less current portion 114,087
-----------------------------------------------------
$ 72,018
-----------------------------------------------------
Maturities of long-term debt as of December 1998 are as follows:
1999 $114,087
2000 72,018
-----------------------------------------------------
$186,105
-----------------------------------------------------
Cash paid during the year for interest was $113,672, $56,166 and $51,285 in
1998, 1997, and 1996, respectively.
9. LEASES. In December 1998, the Company relocated its office space to a
26,000 square foot office and warehouse space. The Company leases its
office space under a five year operating lease. The term of the operating
lease is January 1, 1999 through December 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,
1998 are as follows:
1999 $ 209,484
2000 $ 209,484
2001 $ 209,484
2002 $ 209,484
2003 $ 209,484
---------------------------------------------------
$1,047,420
---------------------------------------------------
The Company incurred approximately $312,567, $506,000, and $429,000 in rent
expense in 1998, 1997, and 1996, respectively. As a result of this
relocation, the Company expensed $55,000 of moving expenses in 1998.
Page F-12
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
10. CUSTOMER SALES. No single customer represented a significant portion of
total sales. Export sales accounted for 16%, 14%, and 16% of total sales in
1998, 1997, and 1996, respectively.
11. 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 1998, 1997, and 1996, the Company
made no matching contributions.
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 1998, 1997, and 1996, 0, 66,435 and 42,852 shares,
respectively, were purchased by employees under the plan. At December 31,
1998, 150,941 shares are reserved for future employee purchases of Common
Stock under the plan.
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. STOCKHOLDERS' EQUITY. In June 1998, the Company issued 1,600,000 units
consisting of 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, which is available for general
corporate purposes. The warrants are exercisable at $1.625 per share and
expire in June 2001.
14. SUBSEQUENT EVENT (UNAUDITED). In December 1997, Meta-4, Inc., the developer
of the DOS version of the Company's Stylus software product, brought suit
against the Company in U.S. District Court in the District 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.
Page F-13
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 1999
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 1999 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 1999 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 1999 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.
Page 16
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 Exhibit 3.1 of the Registrant's Registration
Registrant, as amended to date Statement of Form S-18, Reg. No. 33-40765C
3.2 Bylaws, 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 of Exhibit 4.1 of the Registrant's Registration
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 Statement of Form S-18, Reg. No. 33-40765C
dated 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 dated January 23, 1990
10.3 The Company's 1990 Stock Plan, as Exhibit 10.3 of the Registrant's Annual
amended Report on Form 10-K for the year ended December
31, 1995
10.4 Sign Printer Sales Agreement between Exhibit 10.4 of the Registrant's Registration
the Company and Creative Machineries Statement of Form S-18, Reg. No. 33-40765C
International, Inc. dated January 29,
1990, as amended
10.6 Lease Agreement between Plymouth 21
Partners II, and the Company, dated
October 5, 1998
10.7 Common Stock Warrant dated September Exhibit 10.7 of the Registrant's Registration
28, 1990 issued to Erwin Kelen Statement of Form S-18, Reg. No. 33-40765C
10.8 Non competition and Consulting Exhibit 10.12 of the Registrant's Registration
Agreement between Varitronics and G. Statement of Form S-18, Reg. No. 33-40765C
L. Hoffman dated January 12, 1990
Page 17
10.9 Employee Stock Purchase Plan Exhibit 10.14 of the Registrant's Annual Report
on Form 10-K for the year ended December 31,
1994
10.10 Loan and Security Agreement between Exhibit 10.15 of the Registrant's Annual Report
FBS Business Finance Corporation and on Form 10-K for the year ended December 31,
the Company dated July 31, 1995 1995
10.11 Loan Agreement between Republic Exhibit 10.16 of the Registrant's Annual Report
Acceptance Corporation and the Company on Form 10-K for the year ended December 31,
dated December 20, 1997 1997
10.12 Amendment to the Loan Agreement 59
between Republic Acceptance
Corporation and the Company dated
December 30, 1998
23 Consent of Ernst & Young LLP 63
25 Power of Attorney (See signature page 20
of this Form 10-K)
27 Financial Data Schedule 64
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during 1998.
Page in
This Form 10-K
--------------
Schedule II: Valuation and Qualifying Accounts..............................19
Page 18
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E
- -------------------------------------- ------------ --------------------------- ------------ -----------
Additions
---------------------------
(1) (2)
Charged
Balance at Charged to To Other Balance
Beginning Costs and Accounts Deductions at End of
Description of Period Expenses Describe Describe Period
- -------------------------------------- ------------ ------------ ---------- ------------ -----------
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 (5) 25,842
Provision for obsolete inventory 127,949 69,500 107,943 (4) 89,506
Year ended December 31, 1997
Allowance for doubtful accounts 135,475 185,000 -- 116,093 (1) 204,382
Provision for normal returns
and rebates 54,485 $65,556 (2) 17,116 (3) 102,925
Provision for obsolete inventory 120,162 71,500 63,713 (4) 127,949
Year ended December 31, 1996
Allowance for doubtful accounts 88,587 70,000 -- 23,112 (1) 135,475
Provision for normal returns
and rebates 99,166 5,069 (2) 49,750 (3) 54,485
Provision for obsolete inventory 108,000 47,500 35,338 (4) 120,162
- ----------------------------------------------------------
(1) Uncollectable accounts written off, net of recoveries.
(2) Charged against sales.
(3) Rebates paid to customer buying groups.
(4) Inventory scrapped and disposed of.
(5) Includes $14,112 for rebates paid to customer buying groups and $72,600
credited to income.
Page 19
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By: /s/ Scott Drill
---------------
Scott Drill
President and CEO
Dated: March 29, 1999
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/ G. L. Hoffman Chairman and Secretary March 29, 1999
- --------------------------
G. L. Hoffman
/s/ Scott F. Drill President and Chief Executive Officer March 29, 1999
- -------------------------- (principal executive officer)
Scott F. Drill
/s/ John R. Whisnant Vice President of Finance and Chief March 29, 1999
- -------------------------- Financial Officer (principal financial officer)
John R. Whisnant
/s/ Erwin A. Kelen Director March 29, 1999
- --------------------------
Erwin A. Kelen
/s/ Don E. Schultz Director March 29, 1999
- --------------------------
Don E. Schultz
/s/ Gordon F. Stofer Director March 29, 1999
- --------------------------
Gordon F. Stofer
/s/ Frank D. Trestman Director March 29, 1999
- --------------------------
Frank D. Trestman
Page 20