-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V7PqOCYIVc/WgD7sHeHFbr62pS8gmWYVuXIIekBO1g17QZvl7GCagd3AOYxMoa5r vTVwj+5eOlbcTFlXC+8PwQ== 0000897101-00-000279.txt : 20000328 0000897101-00-000279.hdr.sgml : 20000328 ACCESSION NUMBER: 0000897101-00-000279 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGNIA SYSTEMS INC/MN CENTRAL INDEX KEY: 0000875355 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 411656308 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13471 FILM NUMBER: 579568 BUSINESS ADDRESS: STREET 1: 10801 RED CIRCLE DR CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129308200 MAIL ADDRESS: STREET 1: 10801 RED CIRCLE DRIVE STREET 2: 10801 RED CIRCLE DRIVE CITY: MINNETONKA STATE: MN ZIP: 55343 10-K 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1999 Commission File Number 0-19380 - -------------------------------------------------------------------------------- INSIGNIA SYSTEMS, INC. ------------------------------------------------------------ (Exact name of registrant as specified in its charter) Minnesota 41-1656308 ---------------------------------- ----------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 5025 Cheshire Lane North Plymouth, MN 55446-3715 ---------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (612) 392-6200 - -------------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No _______ Number of shares of outstanding Common Stock, $.01 par value, as of March 15, 2000 was 9,521,371. 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 15, 2000 was approximately $40,465,826 based upon the last sale price of the registrant's Common Stock on such date. Documents Incorporated By Reference: Portions of the registrant's proxy statement for the Annual Meeting of Shareholders scheduled for May 17, 2000 are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS - -------------------------------------------------------------------------------- PART I Business .................................................................. 3 Properties ................................................................ 8 Legal Proceedings ......................................................... 8 Submission of Matters to a Vote of Security Holders ....................... 8 Executive Officers of the Registrant ...................................... 8 PART II Market for the Registrant's Common Equity ................................. 9 Selected Financial Data ...................................................10 Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................................10 Index To Financial Statements .............................................14 Financial Statements .............................................F-1 to F-12 PART III Directors and Executive Officers of the Registrant ........................15 Executive Compensation ....................................................15 Security Ownership of Certain Beneficial Owners and Management ............15 Certain Relationships and Related Transactions ............................15 PART IV Exhibits, Schedule and Reports on Form 8-K ................................16 2 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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 developed fully featured ODBC (open data-based connectivity) compliant software applications, trade-named Stylus(R). The Company developed these products into turn-key solutions that allow retailers to quickly and easily produce high quality point-of-purchase signs, labels and large format promotional materials in their stores. The Company continues to 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(R)) 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 four years. During this time, management also restructured the organization and redirected the Company's activities to leverage the Company's in-store experience, acquire promotion industry expertise and develop the necessary operational and systems foundation to successfully compete in the in-store promotion industry. In November, 1996 the Company replaced the Impulse Sign System with the SIGNright Sign System, which performed essentially the same functions as the Impulse. The Company's business strategy with the Impulse system and the SIGNright Sign 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 Sign System in the United States, but continues to market the SIGNright system through its international distributors. 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 brand manufacturer and placed in a participating retail store. The Company markets its Stylus(R) 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. 3 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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 are supported by participating retailers. By utilizing proprietary technology, Insignia combines product-specific information including product features, product benefits, graphic images 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 application 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 United States. 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 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. 4 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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. Approximately 8% of 1999 revenues came from the sale of Stylus products and maintenance and the Company expects that this percentage will be lower in the future as the Company expects the Insignia POPS revenue to increase in the future. 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 Sign System. In 1998, the Company ceased the domestic sale of the SIGNright Sign System. The Company's business strategy with the Impulse system and the SIGNright Sign 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 proprietary cardstock, label supplies, and accessories used with them. Cardstock for the SIGNright Sign 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 44% of 1999 revenues came from the sale of cardstock 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. Through April 1998, the Company marketed the SIGNright Sign System through telemarketing by in-house sales personnel and independent sales representatives. In May 1998, the Company discontinued the sale of the SIGNright system to U.S. customers, but continues to market the SIGNright Sign System through its international distributors covering 20 countries. During 1997, 1998 and 1999 foreign sales accounted for approximately 14%, 16% and 16% of total sales, respectively. The Company expects that sales to foreign distributors will be approximately 10% of total sales in 2000. PATENTS AND TRADEMARKS The barcode which the Company uses on the sign cards for the Impulse and SIGNright Sign Systems was also developed by the Developer, which has granted the Company an exclusive worldwide license of its rights to the barcode. The license requires the Company to pay a royalty of 1% of the net sales price received by the Company on each cardstock or other supply item that bears the barcode and used by the Impulse Sign Systems. Although a patent has been issued to the Developer which covers the use of the barcode, there is no assurance that the Company will be able to prevent other suppliers of cardstock from copying the barcode used by 5 BUSINESS REVIEW - -------------------------------------------------------------------------------- the Company. However, the Company believes that the number, relatively small size and geographic dispersal of Impulse and SIGNright users, their relationship with the Company, and the Company's retention of its customer list as a trade secret will discourage other sign card suppliers from offering barcoded sign cards for use on the Impulse and SIGNright machines. The Company has obtained trademark registration in the United States of the trademark "Insignia POPS" for use on in-store point-of-purchase media. The Company is not obligated to pay any royalty related to this trademark. The Company has obtained trademark registration in the United States of the trademark "Stylus" for use on sign and label software. The developer of the DOS version of the Stylus software has granted to the Company an exclusive worldwide license to market and sell the DOS version of the Stylus software. The Company no longer sells and markets the DOS version of the Stylus software and has terminated this license agreement. The Company has developed the Windows version of the Stylus 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 Sign System were primarily conducted by the Developer on a contract basis. The Company continues to introduce various additional complementary products such as new cardstock formats, new colors and new types of cardstock. 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 $493,686 in 1997, $407,409 in 1998 and $0 in 1999 were primarily related to development of the Stylus software product. SUPPLIERS The thermal paper used by the Company in its SIGNright and Impulse thermal sign cards is purchased exclusively from one supplier. While the Company believes that an alternative supplier would be available if necessary, any disruption in the relationship with or deliveries by the current supplier could have a serious adverse effect on the Company. COMPETITION INSIGNIA POPS (POINT-OF-PURCHASE SERVICES) Insignia POPS has three major competitors in its market: News America Marketing In-Store(R)(News America), Catalina Marketing Corporation(R)(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. 6 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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 SIGN SYSTEM The Company's patent covers the SIGNright system and the use of cardstock encoded with a complementary barcode. The Company could face competition from suppliers of cardstock 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 itsvery 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, MS-DOS, Windows 3.1/98/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 Sign System, the Stylus product does not offer the Company the benefit of proprietary cardstock. While this leaves customers free to buy cardstock from alternate suppliers, the Company believes that it will obtain a portion of cardstock and label sales due to the wide array of pre-printed and perforated sign and label stock offered by the Company at competitive prices. 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 was 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 7 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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 7, 2000, the Company had 72 full-time employees. The full-time employees included 2 in telemarketing, 13 in other sales and marketing positions, 48 in operations and customer service, 5 in administration and accounting functions and 4 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 March 31, 2004. The Company believes that this facility will meet the Company's current and foreseeable needs. 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 State of Minnesota. The complaint alleged copyright infringement and breach of contract in connection with the Company's distribution of the Company's Stylus software product. This lawsuit was settled in March 1999. Under the settlement Meta-4 assigned all its rights to the Stylus software to the Company in consideration of $15,000 in cash and 75,000 shares of the Company's common stock. 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 1999. Item 4A EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of the Company's executive officers are as follows: Name Age Position ---- --- -------- G. L. Hoffman 50 Chairman and Secretary Scott F. Drill 47 President and Chief Executive Officer Gary L. Vars 59 Executive Vice President, General Manager, POPS Division John R. Whisnant 54 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 developed, manufactured and marketed 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 1998. In May 1996 Mr. Drill became a partner in Minnesota Management Partners (MMP), a venture capital firm located in Minneapolis, Minnesota. He remains a partner 8 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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 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 various management positions at the Pillsbury Co., including Director of Marketing and New Product Development, Grocery Products Division. JOHN R. WHISNANT joined the Company as Vice President of Finance and Chief Financial Officer of the Company in October 1995. From June 1994 to September 1995 he was self employed as a franchise consultant. From June 1992 to June 1994 he served as President of AmericInn, Inc. a motel franchising company. PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY MARKET INFORMATION The Company's common stock trades on the Nasdaq Small-Cap Market System under the symbol ISIG. The following table sets forth the range of high and low bid prices reported on the Nasdaq System. These quotations represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions. 1999 HIGH LOW - -------------------------------------------------------------------------------- First Quarter 2 1/2 1 1/8 Second Quarter 1 7/8 1 1/4 Third Quarter 1 1/2 3/4 Fourth Quarter 4 7/8 1998 HIGH LOW - -------------------------------------------------------------------------------- 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 APPROXIMATE NUMBER OF HOLDER OF COMMON STOCK As of March 15, 2000, the Company had 155 shareholders of record and approximately 950 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. 9 BUSINESS REVIEW - -------------------------------------------------------------------------------- ITEM 6 SELECTED FINANCIAL DATA
(In thousands, except per share amounts.) FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Net sales $ 9,287 $ 8,704 $ 13,321 $ 14,667 $ 15,547 Operating loss (1,394) (3,396) (3,393) (999) (1,470) Net loss (1,411) (3,416) (3,380) (999) (1,451) Net loss per share: Basic and diluted $ (.16) $ (.44) $ (.50) $ (.18) $ (.27) Shares used in calculation of net loss per share: Basic and diluted 8,828 7,714 6,790 5,404 5,360 Working capital $ 1,798 $ 2,232 $ 3,462 $ 3,512 $ 4,351 Total assets 4,043 4,069 5,855 6,426 6,832 Long-term debt and lease obligation 0 72 186 289 383 Total stockholders' equity 2,017 2,430 3,795 4,174 5,118
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items in the Company's statements of operations as a percentage of net sales.
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- Net Sales 100.0% 100.0% 100.0% Cost of Sales 44.7 53.7 51.3 - ----------------------------------------------------------------------------------------------------------- Gross Profit 55.3 46.3 48.7 Operating Expenses: Sales and Marketing 52.8 51.3 53.0 Product Development -- 4.7 3.7 General and Administrative 17.5 23.1 15.1 Restructuring Charge -- 6.3 2.4 - ----------------------------------------------------------------------------------------------------------- Total Operating Expenses 70.3 85.4 74.2 - ----------------------------------------------------------------------------------------------------------- Operating Loss (15.0) (39.0) (25.5) Other Income (0.2) (0.2) 0.1 - ----------------------------------------------------------------------------------------------------------- Net Loss (15.2)% (39.2)% (25.4)% ===========================================================================================================
10 BUSINESS REVIEW - -------------------------------------------------------------------------------- FISCAL 1999 COMPARED TO FISCAL 1998 NET SALES: Net sales for the year ended December 31, 1999 increased 7% to $9,287,000 compared to sales of $8,704,000 in 1998. The increase in sales in 1999 resulted primarily from increased POPS program sales. POPS program revenue was $2,211,000 in 1999 compared to $359,000 in 1998. Machine and machine related revenue was $923,000 in 1999 compared to $997,000 in 1998. Stylus software and maintenance revenue was $751,000 in 1999 compared to $712,000 in 1998. GROSS PROFIT: The Company's gross profit increased 27% in 1999 to $5,131,000 as compared to $4,033,000 in 1998. Gross profit as a percentage of net sales increased to 55.3% for 1999 compared to 46.3% for 1998. The increase in 1999 was due primarily to the overall increase in net sales and change in product mix. The Company's foreign sales were 16% in 1999, 16% in 1998 and 14% in 1997. The Company expects that sales to foreign distributors will be approximately 10% in 2000. OPERATING EXPENSES: Operating expenses decreased 12% in 1999. In 1998 the Company recorded a restructuring charge of $546,000. Sales expenses increased 3% in 1999. Marketing expenses increased 44% in 1999 as a result of increased promotion expenses for the POPS program. Product development expenses decreased 100% in 1999 as the Company eliminated any further independent product development of its Stylus software. The Company expects that its operating expenses will increase in 2000 as the Company continues to invest in the POPS program. Operating expenses as a percentage of net sales were 70.3% in 1999. The decrease as a percentage of net sales in 1999 was due primarily to higher sales volume in 1999 along with no product development expenses in 1999. The Company expects its operating expenses as a percentage of net sales to decrease as the Company increases its POPS program revenues at a faster rate than operating expenses. NET LOSS: The Company had a net loss of $1,411,000 in 1999 compared to a net loss of $3,416,000 in 1998. The net loss in 1999 resulted primarily from the costs of investing in the sales and marketing of the Insignia POPS program. 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 11 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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 2000 as the Company continues to invest in POPS. 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 POPS program. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations with proceeds from public and private equity placements. At December 31, 1999, working capital was $1,798,000 compared to $2,232,000 at December 31, 1998. During the same period total cash and cash equivalents increased $64,000. Net cash used in operating activities during 1999 was $1,260,000, primarily due to the net loss and the decrease in accrued expenses and accounts payable, offset by the decrease in prepaids. Accrued expenses decreased $123,000 and accounts payable decreased $131,000. Accrued expenses decreased in 1999 as a result of payments made for severance and moving expenses accrued as of December 31, 1998. Prepaid expenses decreased $114,000 primarily due to the conversion of pre-paid SIGNright machine deposits into inventory. The Company expects accounts receivable to remain relatively flat during 2000. The Company also expects inventory levels to remain flat during 2000. Net cash of $236,000 was used in investing activities in 1999. The net cash decrease was due to the purchase of marketable securities in the amount of $925,000 and the purchase of property and equipment of $169,000 offset by the maturity of marketable securities in the amount of $858,000. Net cash of $1,560,000 was provided by financing activities, primarily from the proceeds from the issuance of common stock of $857,000 and borrowings from the line of credit in the amount of $807,000, offset by payments on long term debt of $104,000. 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 division of a U.S. Bank. The bank issued the Company a line of credit in the amount of $3,000,000. During 1999, the Company amended its line of credit agreement which reduced the overall line of credit to $2.35 million. As of December 31, 1999 there was an outstanding balance on the line of credit of $807,000 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. 12 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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 is 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. YEAR 2000 COMPLIANCE In prior years, the Company developed and implemented plans to become Year 2000 ready and in late 1999 completed remediation and testing of systems. As a result of those implementation efforts, the Company experienced no significant disruptions in critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. Expenses resulting from the Company's Year 2000 efforts were not material. The Company is not aware of any material problems resulting fromYear 2000 issues, either with services, internal systems, or the products and services of third parties. The Company will continue to monitor its critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. 13 BUSINESS REVIEW - -------------------------------------------------------------------------------- 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, 1999 and 1998 .............................................. F-2 Statements of Operations for the years ended December 31, 1999, 1998, and 1997 ............... F-3 Statement of Shareholders' Equity for the years ended December 31, 1999, 1998, and 1997 ...... F-4 Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 ............... F-5 Notes to Financial Statements ................................................................ F-6
14 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, 1999 and 1998, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also include the financial statement schedule listed in the index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Insignia Systems, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP /s/ Ernst & Young LLP Minneapolis, Minnesota February 18, 2000 F-1 BALANCE SHEETS - --------------------------------------------------------------------------------
AS OF DECEMBER 31 1999 1998 - ---------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 64,091 $ -- Marketable securities 1,186,933 1,120,100 Accounts receivable - net of $71,000 allowance in 1999 and $96,000 in 1998 1,281,154 1,280,021 Inventories 1,217,784 1,210,500 Prepaid expenses 74,138 187,784 - ---------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 3,824,100 3,798,405 PROPERTY AND EQUIPMENT: Production tooling, machinery and equipment 1,743,020 1,894,577 Office furniture and fixtures 262,767 358,602 Computer equipment 833,440 954,096 Leasehold improvements 105,151 35,134 - ---------------------------------------------------------------------------------------------------- 2,944,378 3,242,409 Accumulated depreciation and amortization (2,725,077) (2,972,303) - ---------------------------------------------------------------------------------------------------- Total Property and Equipment 219,301 270,106 - ---------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 4,043,401 $ 4,068,511 ==================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 807,020 $ -- Accounts payable 387,396 518,529 Accrued compensation and benefits 209,016 176,746 Accrued expenses 149,800 85,138 Deferred revenue 321,617 404,729 Warranty reserve 15,840 25,840 Other 53,913 241,515 Current portion of long-term debt 81,967 114,087 - ---------------------------------------------------------------------------------------------------- Total Current Liabilities 2,026,569 1,566,584 LONG-TERM DEBT -- 72,018 STOCKHOLDERS' EQUITY: Common stock, par value $.01: Authorized shares - 20,000,000 issued and outstanding shares - 9,327,946 in 1999 and 8,499,800 in 1998 93,279 84,998 Additional paid-in capital 16,134,002 15,163,071 Unearned compensation (28,764) (47,932) Accumulated deficit (14,181,685) (12,770,228) - ---------------------------------------------------------------------------------------------------- Total Stockholders' Equity 2,016,832 2,429,909 - ---------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,043,401 $ 4,068,511 ==================================================================================================== SEE ACCOMPANYING NOTES
F-2 STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- NET SALES $ 9,286,888 $ 8,703,604 $ 13,321,124 Cost of Sales 4,155,391 4,670,419 6,832,609 - ------------------------------------------------------------------------------------------------------- Gross Profit 5,131,497 4,033,185 6,488,515 OPERATING EXPENSES: Sales 3,764,502 3,672,173 5,557,557 Marketing 1,139,229 790,981 1,501,242 Product development -- 407,409 493,686 General and administrative 1,621,418 2,012,899 2,014,322 Restructuring charge -- 545,992 314,568 - ------------------------------------------------------------------------------------------------------- Total Operating Expenses 6,525,149 7,429,454 9,881,375 - ------------------------------------------------------------------------------------------------------- Operating Loss (1,393,652) (3,396,269) (3,392,860) OTHER INCOME (EXPENSE): Interest income 52,472 56,936 84,667 Interest expense (89,042) (113,672) (56,717) Other income (expense) 18,765 37,426 (14,602) - ------------------------------------------------------------------------------------------------------- NET LOSS $ (1,411,457) $ (3,415,579) $ (3,379,512) Net loss per share: Basic and diluted $ (.16) $ (.44) $ (.50) - ------------------------------------------------------------------------------------------------------- Shares used in calculation of net loss per share: - ------------------------------------------------------------------------------------------------------- Basic and diluted 8,827,549 7,714,522 6,790,484 - ------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES
F-3 STATEMENT OF SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ------------ PAID-IN UNEARNED ACCUMULATED SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 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 December 31, 1997 6,857,721 68,578 13,083,563 (2,250) (9,354,649) 3,795,242 Sale of common stock 1,600,000 16,000 1,961,252 -- -- 1,977,252 Exercise of stock options 40,066 400 55,898 -- -- 56,298 Exercise of stock warrants 2,013 20 4,258 -- -- 4,278 Issuance of stock warrants in lieu of services -- -- 58,100 (47,932) -- 10,168 Amortization of stock grant -- -- -- 2,250 -- 2,250 Net loss -- -- -- -- (3,415,579) (3,415,579) - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 8,499,800 84,998 15,163,071 (47,932) (12,770,228) 2,429,909 Employee stock purchase plan 20,030 200 22,234 -- -- 22,434 Exercise of stock options 181,666 1,817 250,474 -- -- 252,291 Exercise of stock warrants 551,450 5,514 577,098 -- -- 582,612 Issuance of common stock under META-4 settlement 75,000 750 121,125 -- -- 121,875 Amortization of unearned compensation -- -- -- 19,168 -- 19,168 Net loss -- -- -- -- (1,411,457) (1,411,457) - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 9,327,946 $ 93,279 $ 16,134,002 $ (28,764) $(14,181,685) $ 2,016,832 - ---------------------------------------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES
F-4 STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss $(1,411,457) $(3,415,579) $(3,379,512) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 220,071 336,613 662,279 Provision for bad debt expense -- 72,000 185,000 Provision for obsolete inventory 96,000 69,500 71,500 Amortization of unearned compensation 19,168 2,250 5,063 Gain on sale of equipment -- (2,444) -- Issuance of stock warrants in lieu of services -- 10,168 -- Issuance of stock for litigation settlement 121,875 -- -- Changes in operating assets and liabilities: Accounts receivable (1,133) 1,360,484 (252,654) Inventories (103,284) 337,578 326,885 Prepaid expenses 113,646 352,244 (324,466) Accounts payable (131,133) 94,168 (257,800) Accrued compensation and benefits 32,270 (57,545) 5,272 Deferred revenue (83,112) 42,753 268,052 Warranty reserve (10,000) (72,590) 55,590 Accrued expenses and other (122,940) 41,102 137,705 - ---------------------------------------------------------------------------------------------------------- Net Cash Used in Operating Activities (1,260,029) (829,298) (2,497,086) INVESTING ACTIVITIES Purchases of property and equipment (169,266) (116,279) (230,651) Proceeds from sale of equipment -- 31,680 -- Purchase of marketable securities (925,000) (1,700,967) (1,812,307) Maturities/marketable securities 858,167 1,045,704 1,496,897 - ---------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (236,099) (739,862) (546,061) FINANCING ACTIVITIES Net change in line of credit 807,020 (365,447) (307,834) Proceeds from issuance of Common Stock 857,337 2,037,827 2,995,704 Principal payments on long-term debt (104,138) (103,220) (93,391) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 1,560,219 1,569,160 2,594,479 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 64,091 -- (448,668) Cash and Cash Equivalents at Beginning of Year -- -- 448,688 - ---------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 64,091 $ -- $ -- ========================================================================================================== SEE ACCOMPANYING NOTES
F-5 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") markets in-store promotional programs, products and services to retailers and consumer goods manufacturers. The Company's products include the Insignia Point-Of-Purchase Services (POPS) in-store promotion program, thermal cardstock supplies for the Company's SIGNrights and Impulse sign systems, Stylus software and laser printable cardstock and label supplies. CASH EQUIVALENTS. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost which approximates market value. REVENUE RECOGNITION. The Company recognizes revenue associated with equipment, software and cardstock 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, cardstock, and accessories. Inventory is valued at lower of cost or market using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost. Depreciation is provided using the straightline method over the estimated useful lives of the assets as follows: Machinery and equipment 5 years Office furniture and fixtures 3 years Computer equipment 3 years Leasehold improvements are amortized over the shorter of the term of the lease or life of the asset. PRODUCTION TOOLING COSTS. Expenditures relating to the purchase and installation of production tooling are capitalized and amortized over the anticipated useful life of the product. INCOME TAXES. Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. STOCK-BASED COMPENSATION. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, but applies ACCOUNTING PRINCIPLES BOARD OPINION No. 25 (APB 25) and related interpretations in accounting for its plans. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. IMPAIRMENT OF LONG-LIVED ASSETS. The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. USE OF ESTIMATES. The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. NET LOSS PER SHARE. Basic loss per share excludes any dilutive effects of options, warrants and convertible securities. Diluted loss per share for the Company is the same as basic earnings per share because the effect of options and warrants is anti-dilutive. F-6 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- ADVERTISING COSTS. Advertising costs are charged to operations as incurred. Advertising expenses were approximately $259,018, $361,500 and $677,195 in 1999, 1998 and 1997, respectively. RESEARCH AND DEVELOPMENT. Research and development expenditures are charged 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 processes, 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. 2. 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 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 it a 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. 3. MARKETABLE SECURITIES Marketable securities consist of U.S. Treasury Debt Securities which mature in February 2000 and certificates of deposit. Approximately $160,000 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, 1999 and 1998. 4. FINANCING AGREEMENTS AND LONG-TERM DEBT During the year, the Company amended its line of credit agreement with a finance corporation against which $807,020 was outstanding at December 31, 1999. The amendment reduced the overall line of credit from $3 million to $2.35 million. The credit agreement provides that the minimum amount of interest due and payable in any month under the line of credit agreement will be not less than $7,500. The line of credit agreement accrues interest at a rate of 2 percent over the bank's reference rate (the reference rate was 9.5% at December 31, 1999) per annum and expires on September 1, 2000. The Company pledged as security all inventory, accounts receivable, equipment and general intangibles. The carrying amount of the Company's debt instruments approximates fair value. In 1995, the Company borrowed $500,000 and pledged certain printing press assets and U.S. Treasury F-7 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Debt Securities as collateral against this facility. During 1999, the securities were released under terms of the agreement. The loan which accrues interest at a rate of 10.50 percent per annum and expires on August 1, 2000 had an outstanding balance of $81,967 as of December 31, 1999. Cash paid during the year for interest was $89,042, $113,672 and $56,166 in 1999, 1998 and 1997, respectively. 5. STOCKHOLDERS' EQUITY In January 1997, the Company issued 1,373,660 shares of its Common Stock and warrants to purchase an additional 686,830 shares of Common Stock. The Company received net proceeds of approximately $2,900,000. The warrants are exercisable at $2.125 per share and expire in January 2000. During 1999, various warrant holders exercised 551,450 of these warrants to purchase shares of the Company's Common Stock at prices ranging from $1.00 to $2.125. The Company received proceeds of $582,612 as a result of these warrant exercises. In June 1998, the Company issued 1,600,000 shares of its Common Stock and warrants to purchase an additional 800,000 shares of Common Stock. The Company received net proceeds of approximately $2,000,000. The warrants are exercisable at $1.625 per share and expire in June 2001. 6. STOCK OPTIONS AND WARRANTS STOCK OPTION PLAN. The Company has a stock option plan for its employees and directors. Under the terms of the plan, the Company grants incentive stock options to employees at an exercise price at or above 100% of fair market value on the date of grant. The plan also allows the Company to grant non-qualified options at an exercise price of less than 100% of fair market value at the date of grant. The stock options expire five 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, 1996 222,743 459,200 $ 1.79 Granted (199,000) 199,000 2.84 Exercised -- (13,768) 2.59 Cancelled 5,632 (5,632) 2.86 - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 29,375 638,800 1.98 Reserved 600,000 -- -- Granted (749,000) 749,000 1.25 Exercised -- (40,066) 1.41 Cancelled 236,734 (236,734) 2.21 - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 117,109 1,111,000 1.54 Reserved 250,000 -- -- Granted (455,500) 455,500 1.31 Exercised -- (181,666) 1.39 Cancelled 100,834 (100,834) 2.61 - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 12,443 1,284,000 $ 1.38 ============================================================================================================= The number of options exercisable under the plan were: December 31, 1997 342,523 December 31, 1998 541,623 December 31, 1999 610,503
F-8 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following tables summarizes information about the stock options outstanding at December 31, 1999.
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, 1999 Per Share - ------------------------------------------------------------------------------------------------------------ $1.38 - $1.88 34,500 1 Year $1.48 30,750 $1.45 1.25 - 1.38 95,000 2 Years 1.36 95,000 1.36 1.50 - 3.63 61,000 3 Years 2.60 48,332 2.76 1.06 - 2.38 678,500 4 Years 1.33 366,421 1.24 .75 - 1.50 415,000 5 Years 1.29 70,000 1.50 - ------------------------------------------------------------------------------------------------------------ $ .75 - $3.63 1,284,000 3 Years $1.38 610,503 $1.42 ============================================================================================================
Options outstanding under the plan expire at various dates during the period January 2000 through December 2004. The weighted average fair value of options granted during the years ended December 31, 1999, 1998 and 1997 was $.76, $.75 and $1.63, 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 income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997: risk-free interest rate of 6.0%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of .917, .978 and .882, respectively, and a weighted average expected life of the option of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: 1999 1998 1997 - -------------------------------------------------------------------------------- Pro forma net loss $(1,726,999) $(3,715,870) $(3,508,528) Pro forma net loss per common share $ (.20) $ (.48) $ (.52) The pro forma effect on the net loss for 1999, 1998 and 1997 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. F-9 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- WARRANTS. During 1995, the Company issued five year warrants to an outside consultant to purchase 1,000 shares of Common Stock at $1.50 per share. The warrants expire on August 25, 2000. In 1998, the Company issued three year warrants to outside consultants to purchase 70,000 shares of Common Stock at $1.625 per share. The Company valued these warrants at $58,100 and is recognizing consulting expense associated with these warrants over the vesting period. The Company recognized expense of $19,168 and $10,168 in 1999 and 1998, respectively, associated with these warrants. The warrants expire on June 22, 2001. During 1997, a non-employee Board member providing strategic planning and advisory assistance to the Company was granted a warrant to purchase 25,000 shares of Common Stock at $2.31 per share. The warrant expires on September 26, 2002. During 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 1999, at which time they expired. During 1994, the Company issued five year warrants to a consultant to purchase a total of 15,000 shares of Common Stock exercisable at a price of $1.50 per share. During 1999, these warrants were extended to November 22, 2004. In May 1999, the Company issued warrants to non-employee Board members to purchase a total of 15,000 shares of Common Stock in recognition for services performed as Board members of the Company. The warrants were exercisable at $2.00 per share and expire on September 28, 2004. 7. EMPLOYEE STOCK PURCHASE PLAN The Company adopted an Employee Stock Purchase Plan effective January 1, 1993. The plan enables employees to contribute up to 10% of their compensation toward the purchase of the Company's Common Stock at 85% of market value. In 1999, 1998 and 1997, employees purchased 20,030, 0 and 66,435 shares, respectively, under the plan. At December 31, 1999, 130,911 shares are reserved for future employee purchases of Common Stock under the plan. 8. INCOME TAXES At December 31, 1999, the Company had net operating loss carryforwards of approximately $13,326,000 which are available to offset future taxable income. These carryforwards will begin expiring in 2005. 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 1999 1998 - -------------------------------------------------------------------------------- Net operating loss carryforwards $ 4,930,700 $ 4,383,600 Depreciation 256,200 144,000 Accounts receivable allowance 26,200 35,600 Allowance for machine returns 5,900 9,500 Inventory reserve 45,800 87,400 Restructuring reserve -- 57,400 Other (9,200) 20,500 - -------------------------------------------------------------------------------- Total deferred tax assets 5,255,600 4,738,000 Valuation allowance (5,255,600) (4,738,000) Net deferred tax assets $ -- $ -- ================================================================================ F-10 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 9. LEASES The Company leases its office space under a five year operating lease. The term of the operating lease is January 1, 1999 through March 31, 2004. The future noncancelable lease payments, exclusive of costs associated with the landlord operating costs, due on the operating lease as of December 31, 1999 are as follows: 2000 $ 209,484 2001 209,484 2002 209,484 2003 209,484 2004 52,371 ================================================================================ $ 890,307 - -------------------------------------------------------------------------------- The Company incurred approximately $253,000, $312,567 and $506,000 in rent expense in 1999, 1998 and 1997, respectively. 10. COMMITMENTS PRODUCT DESIGN AGREEMENTS. The Company entered into an exclusive agreement with the developer of the Impulse machine whereby in exchange for all rights to market the product, the Company would pay royalties of $21 per machine purchased by the Company and was to make all reasonable efforts to purchase 20,000 units by December 31, 1994. Since the Company did not purchase the required number of units by December 31, 1994, the Company no longer has a guarantee of exclusivity. However, the developer does not intend to grant similar rights to another company. The Company could regain the guarantee of exclusive rights by prepaying royalties on any remaining units. The Company ceased selling the Impulse machine as of December 31, 1996. 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. The Company has the rights to use and distribute certain fontware technology developed for its Impulse Retail System. The agreement required a one time payment of $25,000 for source code rights and $1,500 for each fontware outline licensed. In addition, the Company has agreed to pay royalties of $3.75 for fontware outline sold. HARDWARE PURCHASE AGREEMENT. The Company has a purchase agreement with a Japanese company that holds the rights to supplies for 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, 1999, the Company had paid $222,000 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. 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 1999, 1998 and 1997, the Company made no matching contributions. 12. CUSTOMER SALES No single customer represented a significant portion of total sales. Export sales accounted for 16%, 16%, and 14% of total sales in 1999, 1998 and 1997, respectively. 13. 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 F-11 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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. 14. LITIGATION In December 1997, Meta-4, Inc. the developer of the DOSversion of the Company's Stylus software product, brought suit against the Company in U.S. District Court in the State of Minnesota. The complaint alleged copyright infringement and breach of contract in connection with the Company's distribution of the Company's Stylus software product. This lawsuit was settled in March 1999. Under the settlement, Meta-4 assigned all its rights to the Stylus software to the Company in consideration of $15,000 in cash and 75,000 shares of the Company's Common Stock. In 1999, the Company recognized $136,875 as expense associated with this settlement. ITEM 9 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. F-12 ITEMS 10 THROUGH 13 - -------------------------------------------------------------------------------- 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 2000 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 2000 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 2000 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 2000 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. 15 EXHIBITS - -------------------------------------------------------------------------------- PART IV ITEM 14 EXHIBITS, SCHEDULE AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT PAGE NUMBER OR INCORPORATION NUMBER DESCRIPTION BY REFERENCE TO - ------------------------------------------------------------------------------------------------------------------- 3.1 Articles of incorporation of Registrant, Exhibit 3.1 of the Registrant's Registration as amended to date Statement of Form S-18, Reg. No. 33-40765C 3.2 By laws, as amended to date Exhibit 3.2 of the Registrant's Registration Statement of Form S-18, Reg. No. 33-40765C 4.1 Specimen Common Stock Certificate Exhibit 4.1 of the Registrant's Registration of Registrant Statement of Form S-18, Reg. No. 33-40765C 10.1 License Agreement between Thomas and Exhibit 10.1 of the Registrant's Registration Lawrence McGourty and the Company dated Statement of Form S-18, Reg. No. 33-40765C January 23, 1990, as amended 10.2 Barcode Licence and Support Agreement Exhibit 10.2 of the Registrant's Registration between Thomas and Lawrence McGourty Statement of Form S-18, Reg. No. 33-40765C and the Company dates January 23, 1990 10.3 The Company's 1990 Stock Plan, as amended 19 10.4 Sign Printer Sales Agreement between the Exhibit 10.4 of the Registrant's Registration Company and Creative Machineries Statement of Form S-18, Reg. No. 33-40765C International, Inc. dates January 29, 1990, as amended 10.6 Lease Agreement between Plymouth Partners II, Exhibit 10.6 of the Registrant's Annual and the Company, dated October 5, 1998 Report on Form 10-K for the year ended December 31, 1998. 10.7 Common Stock Warrant Dated September 28, Exhibit 10.7 of the Registrant's Registration 1990 issued to Erwin Kelen Statement of Form S-18, Reg. No. 33-40765C 10.8 Non Competition and Consulting Agreement Exhibit 10.12 of the Registrant's Registration between Varitronics and G.L. Hoffman dated Statement of Form S-18, Reg. No. 33-40765C January 12, 1990 10.9 Employee Stock Purchase Plan, as amended 20 10.10 Loan and Security Agreement between FBS Exhibit 10.15 of the Registrant's Annual Report Business Finance Corporation and the on Form 10-K for the year ended Company dated July 31, 1995 December 31, 1995 10.11 Loan Agreement between Republic Acceptance Exhibit 10.16 of the Registrant's Annual Corporation and the Company dated Report on Form 10-K for the year ended December 20, 1997 December 31, 1997 10.12 First Amendment to the Loan Agreement Exhibit 10.12 on the Registrant's Annual between Republic Acceptance Corporation Report on Form 10-K for the year ended and the Company dated December 31, 1998 December 31, 1998 10.13 Second Amendment to the Loan Agreement between Republic Acceptance Corporation 21 and the Company dated June 30, 1999 23 Consent of Ernst & Young 30 25 Power of Attorney (See signature page of this Form 10-K) 18 27 Financial Data Schedule 31
16 VALUATION AND QUALIFYING ACCOUNTS - -------------------------------------------------------------------------------- (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during 1999. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
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, 1999 Allowance for doubtful accounts $ 96,350 $ 25,433(1) $ 70,917 Provision for normal returns and rebates 25,842 10,002(6) 15,840 Provision for obsolete inventory 89,506 $ 96,000 123,546(2) 61,960 Year ended December 31, 1998 Allowance for doubtful accounts 204,382 72,000 180,032(1) 96,350 Provision for normal returns and rebates 102,925 9,629 86,712(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
(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. (6) Credited to income. 17 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 27, 2000 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 27, 2000 - ----------------------- G. L. Hoffman /s/ Scott F. Drill President and Chief Executive Officer March 27, 2000 - ----------------------- (principal executive officer) Scott F. Drill /s/ John R. Whisnant Vice President of Finance and Chief March 27, 2000 - ----------------------- Financial Officer (principal John R. Whisnant financial officer) /s/ Gary L. Vars Executive Vice President and March 27, 2000 - ----------------------- General Manager POPS Division Gary L. Vars /s/ Erwin A. Kelen Director March 27, 2000 - ----------------------- Erwin A. Kelen /s/ Don E. Schultz Director March 27, 2000 - ----------------------- Don E. Schultz /s/ W. Robert Ramsdell Director March 27, 2000 - ----------------------- W. Robert Ramsdell /s/ Gordon F. Stofer Director March 27, 2000 - ----------------------- Gordon F. Stofer /s/ Frank D. Trestman Director March 27, 2000 - ----------------------- Frank D. Trestman 18 EX-10.3 2 AMENDED 1990 STOCK PLAN EXHIBIT 10.3 AMENDMENT TO INSIGNIA SYSTEMS, INC. 1990 STOCK PLAN Pursuant to an Amendment to the 1990 Stock Plan, adopted by the Board of Directors and approved by the Company's shareholders on May 20, 1999, Section 3 of the Employee Stock Purchase Plan is hereby amended as follows: SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 1,770,000. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned ceased to be subject to Options, or if any shares subject to any Restricted Stock award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding options granted under the Plan, and in the number of share subject to Restricted Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. 19 EX-10.9 3 AMENDED EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.9 AMENDMENT TO INSIGNIA SYSTEMS, INC. EMPLOYEE STOCK PURCHASE PLAN Pursuant to an Amendment to the Employee Stock Purchase Plan, adopted by the Board of Directors and approved by the Company's shareholders on May 21, 1998, paragraph 4.(a) of the Employee Stock Purchase Plan is hereby amended as follows: 4.(a). Duration and Phases of the Plan. The Plan will commence on January 1, 1998 and will terminate December 31, 2000, except that any phase commenced prior to such termination shall , if necessary, be allowed to continue beyond such termination until completion. Notwithstanding the foregoing, this Plan shall be considered of no force and effect and any options granted shall be considered null and void unless the holders of a majority of all the issued and outstanding shares of the common stock of the Company approve the Plan within twelve (12) months after the date of its option by the Board of Directors. 20 EX-10.13 4 SECOND AMENDMENT TO FINANCING AGREEMENT EXHIBIT 10.13 SECOND AMENDMENT TO FINANCING AGREEMENT THIS SECOND AMENDMENT TO FINANCING AGREEMENT (this "Amendment"), made and entered into as of June 30, 1999, is by and between INSIGNIA SYSTEMS, INC., a Minnesota corporation ("Borrower"), and U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC., f/k/a Republic Acceptance Corporation, a Minnesota corporation (the "Lender"). RECITALS 1. The Lender and the Borrower entered into a Financing Agreement dated as of December 29, 1997, as amended by that First Amendment to Financing Agreement dated as of September 30, 1998 (as amended, the "Financing Agreement"); 2. The Borrower and the Lender desire to amend certain provisions of the Financing Agreement. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Financing Agreement, unless the context shall otherwise require. SECTION 2. AMENDMENTS. The Financing Agreement is hereby amended in its entirety as follows: 2.1 DEFINITIONS. The definition of Eligible Inventory contained in Section 1.1 of the Financing Agreement is modified in its entirety as follows: "Eligible Inventory": Inventory of the Borrower which the Lender, in its sole and absolute discretion, deems eligible for Advances, but which meets the following minimum requirements: (a) it is owned by the Borrower, is subject to a first priority perfected 21 security interest in favor of the Lender, and is not subject to any assignment, claim or Lien other than (i) a Lien in favor of the Lender and (ii) Liens consented to by the Lender in writing; (b) it consists of raw materials or non-customer specific finished goods paper stock (not including work in process and supplies); (c) if held for sale or lease or furnishing under contracts of service, it is (except as the Lender may otherwise consent in writing) new and unused; (d) except as the Lender may otherwise consent, it is not stored with a bailee, warehouseman or similar party; if so stored with the Lender's consent, such bailee, warehouseman or similar party has issued and delivered to the Lender, in form and substance acceptable to the Lender, such documents and agreements as the Lender may require, including, without limitation, warehouse receipts therefor in the Lender's name; (e) it is not software, or inventory of Impulse or SIGNright machines; (f) the Lender has determined, in its sole and absolute discretion, that it is not unacceptable due to age, type, category, quality and/or quantity; (g) it is not held by the Borrower on consignment and is not subject to any other repurchase or return agreement; (h) it is not held by a customer of the Borrower or any other Person on consignment; (i) it complies with all standards imposed by any governmental agency having regulatory authority over such goods and/or their use, manufacture or sale; and (j) the warranties, representations and covenants contained in any security agreement or other agreement of the Borrower with or given to the Lender relating directly or indirectly to the Borrower's Inventory are applicable to it without exception. 2.2 THE ADVANCES. Section 2.1 of the Financing Agreement is amended in its entirety as follows: Section 2.1 The Advances. On the terms and subject to the conditions hereof, at the Borrower's request, the Lender, in its absolute and sole discretion and without any commitment to do so, may make the following Advances available to the Borrower: 2.1(a) up to seventy-five percent (75%) of the net amount of Eligible Accounts which are listed in the Borrower's most current Borrowing Base Certificate and which are deemed eligible for advances by the Lender, or such greater or lesser percentage at the Lender's sole and absolute discretion, not to exceed a maximum amount of $2,350,000 (the "Accounts Advances"); 22 2.1(b) up to thirty percent (30%) of the net amount of Eligible Inventory which is listed in the Borrower's most current Borrowing Base Certificate and which is deemed eligible for advances by the Lender, or such greater or lesser percentage at the Lender's sole and absolute discretion, not to exceed a maximum amount of $500,000 (the "Inventory Advances"); 2.1(c) Letters of Credit. Until September 1, 2000, the Lender agrees the Borrower may cause to be issued through an Affiliate of the Lender, in the sole and absolute discretion of such Affiliate, standby or documentary letters of credit, provided, however, that the total amount of all unexpired letters of credit and unreimbursed draws under letters of credit (the "LC Obligations") shall not at any time exceed $240,000 and the total amount of the outstanding principal balance of the Advances under clauses 2.1(a) and 2.1(b) plus 125% of the LC Obligations (the "Total Revolving Outstandings") shall not at any time exceed $2,350,000. If issued, all letters of credit shall be subject to a 1% fee payable to the issuer, and the Borrower will execute such applications, security or pledge agreements and other documents required by Lender's Affiliate and shall pay the Lender's and such Affiliate's fees and expenses related to such letters of credit. Each letter of credit shall be for a period not to exceed one year, but may be renewable annually for additional one year periods not to exceed three years in the aggregate. Any draw under a letter of credit may, at the option of the Lender, be repaid through an Advance, which the Lender may make, and which the Borrower is obligated to repay, even though (a) any agreement of the Lender to make Advances in its sole discretion may have expired or terminated, (b) the Borrower is at that time the debtor in any bankruptcy, reorganization or insolvency proceeding, or (c) the Total Revolving Outstandings exceed the availability under the most recent Borrower Base Certificate or $2,350,000. The total amounts advanced under Section 2.1(a), 2.1(b) and 2.1(c) is the Facility Amount. Notwithstanding the previous clauses 2.1(a), 2.1(b)and 2.1(c), the maximum aggregate amount advanced against all Eligible Accounts and all Eligible Inventory from time to time shall not exceed $2,350,000. 23 Loans for additional sums requested by the Borrower may be made at the Lender's sole discretion based upon the Lender's valuation of the Borrower's collateral or other factors. The Borrower acknowledges and agrees that the Lender may from time to time, for the Lender's convenience, segregate or apportion the Borrower's collateral for purposes of determining the amounts and maximum amounts of Advances which may be made hereunder. Nevertheless, the Lender's security interest in all such collateral, and any other collateral rights, interests and properties which may now or hereafter be available to the Lender, shall secure and may be applied to the payment of any and all Advances and other indebtedness secured by the Lender's security interest, in any order or manner of application and without regard to the method by which the Lender determines to make Advances hereunder. 2.3 INTEREST RATES AND INTEREST PAYMENTS. Section 2.3 of the Financing Agreement is amended in its entirety as follows: Section 2.3 Interest Rates and Interest Payments. Interest shall accrue on the unpaid balance of the Advances at a floating rate per annum equal to the sum of the Reference Rate plus 3% (the "Applicable Rate") and shall be due and payable monthly in arrears on the last day of each calendar month; provided, however, that upon the occurrence and during the continuance of any failure by the Borrower to comply with any agreement or covenant of the Borrower under any Loan Document, the unpaid balance of the Advances shall thereafter bear interest at a floating rate equal to the sum of (a) the Applicable Rate, plus (b) 2% and shall be due and payable on demand; and provided further that the minimum amount of interest due and payable in any month shall not be less than $7,500. SECTION 2.4 YEAR 2000. A new Section 5.12 is added to provide as follows: Section 5.12 The Borrower has reviewed and assessed its business operations and computer systems and applications to address the "year 2000 problem" (that is, computer applications used by Borrower, directly or indirectly through third parties, may be unable to properly perform date-sensitive functions before, during and after January 1, 2000). Borrower reasonably believes that the year 2000 problem will not result in a material adverse change in Borrower's business condition (financial or otherwise), operations, properties or prospects or ability to repay Lender. Borrower is 24 in the process of implementing a plan to remediate year 2000 problems and will complete implementation of such plan with respect to any material year 2000 problems, and testing thereof, by September 30, 1999. Borrower agrees that this representation will be true and correct on and shall be deemed made by Borrower on each date Borrower requests any advance under this Agreement or delivers any information to Lender. Borrower will promptly deliver to Lender such information relating to this representation and covenant as Lender requests from time to time. SECTION 2.5 TERMINATION. Article VII of the Financing Agreement is amended in its entirety to provide as follows: ARTICLE VII TERMINATION BY BORROWER This agreement shall continue in effect until terminated upon not less than 30 days' prior written notice delivered by the Borrower to Lender by certified mail. Termination shall not impair or affect the Lender's rights existing as of the time notice of Termination is given. Borrowers obligations with respect to payment of any Termination fee shall be fixed and owing as of date such notice is given and not when such notice becomes effective. In the event that the Borrower gives notice to the Lender of the termination of this Agreement under Section VII hereof at any time prior to September 1, 2000, the Borrower will pay to the Lender a prepayment charge, as additional compensation for the Lender's costs of entering into this Agreement, in the amount of (i) 3% of the Facility Amount if the notice of termination occurs prior to September 1, 1999; and (ii) 2% of the Facility Amount if the notice of termination occurs after September 1, 1999, but before September 1, 2000, unless the outstanding amount of Borrower's obligations hereunder are refinanced in full by an affiliate of U.S. Bancorp. SECTION 3. EFFECTIVENESS OF AMENDMENTS. The amendments contained in this Amendment shall become effective upon delivery by the Borrower of, and compliance by the Borrower with, the following: 3.1 This Amendment, duly executed by the Borrower. 3.2 A copy of the resolutions of each of the Borrower authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary, along with a certification by such Secretary (i) certifying that there has been no amendment to the Articles of Incorporation or Bylaws of the 25 Borrower since true and accurate copies of the same were delivered to the Lender with a certificate of the Secretary of the Borrower dated December 29, 1997, and (ii) identifying each officer of the Borrower authorized to execute this Amendment and any other instrument or agreement executed by the Borrower in connection with this Amendment, and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. SECTION 4. REPRESENTATIONS; ACKNOWLEDGMENTS. The Borrower hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Financing Agreement, and in any and all other Loan Documents of the Borrower, are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Financing Agreement, or which relates to changes in the financial condition of the Borrower that are reflected in the financial statements furnished to Lender or in the nature of prospects in the Borrower's business that have been delivered to Lender, and (b) the Borrower is in compliance with all covenants and agreements of the Borrower as set forth in the Financing Agreement and in any and all other Loan Documents of the Borrower. The Borrower represents and warrants that the Borrower has the power and legal right and authority to enter into this Amendment and has duly authorized as appropriate the execution and delivery of this Amendment and other agreements and documents executed and delivered by the Borrower in connection herewith or therewith by proper corporate action. The Borrower acknowledges and agrees that its obligations to the Lender under the Financing Agreement exist and are owing without offset, defense or counterclaim assertable by the Borrower against the Lender. The Borrower further acknowledges and agrees that its obligations to the Lender under the Financing Agreement, as amended, constitute "Obligations" within the meaning of the Security Agreement and are secured by the Security Agreement, as amended. SECTION 5. AFFIRMATION, FURTHER REFERENCES. Except as expressly modified under this Amendment, all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under the Financing Agreement, the Security Agreement, and any and all other Loan Documents entered into with respect to the obligations under the Financing Agreement are incorporated herein by reference are hereby ratified and affirmed in all respects by the Borrower. All references in the Financing Agreement to "this Agreement," "herein," "hereof," and similar references, and all references in the other Loan Documents to the "Agreement," shall be deemed to refer to the Agreement, as amended by this Amendment. SECTION 6. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into it all prior oral and written 26 agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. SECTION 7. SEVERABILITY. Whenever possible, each provision of this Amendment and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. SECTION 8. SUCCESSORS. This Amendment shall be binding upon the Borrower and the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Lender and the successors and assigns of the Lender. SECTION 9. LEGAL EXPENSES. The Borrower agrees to reimburse the Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorneys' fees and legal expenses of Dorsey & Whitney, counsel for the Lender) incurred in connection with the Financing Agreement, including in connection with the negotiation, preparation and execution of this Amendment and all other documents negotiated, prepared and executed in connection with this Amendment, and in enforcing the obligations of the Borrower under the Financing Agreement, as amended by this Amendment, which obligations of the Borrower shall survive any termination of the Financing Agreement. SECTION 10. HEADINGS. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. SECTION 11. COUNTERPARTS. This Amendment may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to this Amendment may execute any such agreement by executing a counterpart of such agreement. 27 SECTION 12. GOVERNING LAW. The Amendment Documents shall be governed by the internal laws of the State of Minnesota, without giving effect to conflict of law principles thereof. [The remainder of this page is intentionally left blank.] 28 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. INSIGNIA SYSTEMS, INC. By: /s/ John R. Whisnant --------------------- Its: VP Finance ------------ U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. By: /s/Scott Sousek ----------------- Its: Vice President ---------------- 29 EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-60243 and 333-79915) and Registration Statements (Form S-8 Nos. 33-47003, 33-92376, 333-43781, 333-59709 and 333-80261) pertaining to the 1990 Stock Plan and in Registration Statements (Form S-8 Nos. 33-75372 and 33-92374) pertaining to the Employee Stock Purchase Plan of Insignia Systems, Inc. of our report dated February 18, 2000, with respect to the financial statements and schedule of Insignia Systems, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/Ernst & Young, LLP Minneapolis, Minnesota March 24, 2000 30 EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1999 DEC-31-1999 64,091 1,186,933 1,352,072 70,918 1,217,784 3,824,100 2,944,378 (2,725,077) 4,043,401 2,026,569 0 0 0 16,227,281 (28,764) 4,043,401 9,286,888 9,358,125 4,155,391 4,155,391 6,525,149 0 89,042 0 0 (1,411,457) 0 0 0 (1,411,457) (.16) (.16)
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