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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999 Commission File Number 0-19380
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INSIGNIA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1656308
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5025 Cheshire Lane North
Plymouth, MN 55446-3715
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(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 392-6200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X___ No _______
Number of shares of outstanding Common Stock, $.01 par value, as of March 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
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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
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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.
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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.
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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
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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.
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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
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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
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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
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First Quarter 2 1/2 1 1/8
Second Quarter 1 7/8 1 1/4
Third Quarter 1 1/2 3/4
Fourth Quarter 4 7/8
1998 HIGH LOW
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First Quarter 1 15/16 1
Second Quarter 2 15/16 1 5/32
Third Quarter 3 1 1/2
Fourth Quarter 2 3/8 1
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.
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ITEM 6 SELECTED FINANCIAL DATA
(In thousands, except per share amounts.)
FOR THE YEARS ENDED
DECEMBER 31 1999 1998 1997 1996 1995
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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
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Net Sales 100.0% 100.0% 100.0%
Cost of Sales 44.7 53.7 51.3
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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
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Total Operating Expenses 70.3 85.4 74.2
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Operating Loss (15.0) (39.0) (25.5)
Other Income (0.2) (0.2) 0.1
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Net Loss (15.2)% (39.2)% (25.4)%
===========================================================================================================
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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
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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