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, 2001 Commission File Number 0-19380
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INSIGNIA SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1656308
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5025 Cheshire Lane North
Plymouth, MN 55446-3715
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(Address of principal executive offices)
Registrant's telephone number, including area code: (763) 392-6200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____
Number of shares of outstanding Common Stock, $.01 par value, as of February 28,
2002 was 10,717,003.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 2002 was approximately $82,949,603 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 22, 2002 are incorporated by reference into Part
III of this Form 10-K.
BUSINESS REVIEW PART 1
PART 1
ITEM 1 BUSINESS
GENERAL
Insignia Systems, Inc. (the "Company") markets in-store promotional programs
and services to retailers and manufacturers. Since its inception in 1990, the
Company has marketed point-of-purchase merchandising systems and resources to
merchants in over 30 classes of retail trade. The Company started with simple
standalone printers, trade-named Impulse(R) and SIGNright!(R), and later
developed a fully featured ODBC (Open Database Connectivity) compliant software
application, trade-named Stylus(R). This PC-based software is used by retail
chains to produce signs, labels and posters, and is currently marketed directly.
The Company continues to make these products available and supports the supply
and service needs of domestic clients. The Company actively markets these
products internationally through independent distributors.
In 1998, Insignia formally launched Insignia Point-Of-Purchase Services
(POPS(R)), an in-store, shelf-edge sign promotion program that was developed by
combining the Company's expertise in signage and in-store merchandising with its
Stylus software products. Funded by consumer goods manufacturers, the account-
and product-specific program combines vital product selling information and
graphics from manufacturers with the retailer's logo and current store price on
a sign designed to fit each participating retailer's decor and merchandising
theme.
For retailers, Insignia POPS is a source of incremental revenue and is the first
in-store promotion signing program that delivers a complete "call to action" on
a product- and store-specific basis, with all participating retail stores
updated weekly. For consumer goods manufacturers, Insignia POPS provides access
to the optimum retail promotion site for their products -- the retail
shelf-edge. In addition, manufacturers benefit from short lead times 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 six years.
During this time, management also restructured the organization and redirected
the Company's activities to leverage the Company's in-store experience, acquire
promotion industry expertise and develop the necessary operational and systems
foundation to successfully compete in the in-store promotion industry.
INDUSTRY & MARKET BACKGROUND
With 70% of brand purchase decisions being made in-store, product
manufacturers are constantly seeking in-store vehicles to motivate consumers to
buy their branded products. Industry studies estimate that manufacturers spend
approximately $1 billion annually on in-store promotion efforts. The Company's
market studies indicate that the shelf-edge sign represents the final and best
opportunity for manufacturers to convince the consumer to buy. In fact, a 1996
industry study concluded the shelf is second only to end-aisle displays for
in-store effectiveness.
Many consumers seek product information beyond price in order to make educated
buying decisions. The Company's marketing studies indicate the most effective
sign contains information supplied by the product manufacturer in combination
with the retailer's price and design look.
COMPANY PRODUCTS
INSIGNIA POPS
Insignia POPS is an in-store, shelf-edge point-of- purchase promotional
signing program that enables manufacturers to deliver account-specific messages
quickly and accurately -- in designs and formats that have been pre-approved and
supported by participating retailers. Insignia POPS combines vital product
information, such as product features and benefits, nutritional information,
product uses, advertising tag lines and product images from the manufacturer
with the retailer's logo, colors and current store price
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BUSINESS REVIEW PART 1
on a sign that is displayed directly in front of the manufacturer's product in
the participating retailer's stores. Insignia offers program features and
enhancements, such as Advantage and Custom Advantage flags, that allow
manufacturers to highlight any message at-shelf. In 2001, the Company introduced
Insignia Color POPS,(TM) a customizable, full-color option that delivers
image-building full-color graphics.
Utilizing proprietary technology, the Company collects and organizes the data
from both manufacturers and retailers, then formats, prints and delivers the
signs to retailers for distribution and display. The signs are placed at the
shelf by store personnel for two-week display cycles. The Company charges
manufacturers, on average, $5.25 per sign/per week/per store. Retailers are paid
a flat fee per sign/per store/per display cycle by the Company based upon
third-party compliance audits and retailer-supplied product movement data
provided to Insignia.
THE SIGNRIGHT! SIGN SYSTEM
In 1996, the Company replaced the Impulse Retail System, a system developed
by an independent product design and development firm (the "Developer") with the
SIGNright! Sign System. In 1998, the Company ceased the active domestic sales of
the SIGNright! Sign System.
Cardstock for the two systems are sold by the Company in a variety of sizes and
colors that can be customized to include pre-printed custom artwork, such as a
retailer's logo. Approximately 14% of 2001 revenues came from the sale of
cardstock. The Company expects this percentage to be lower in the future as
Insignia POPS revenue increases.
STYLUS SOFTWARE
In late 1993, the Company introduced Stylus, a PC-based software application
used by retailers to produce signs, labels and posters. The Stylus software
allows retailers to create store signs, labels and posters by manually entering
the information or by importing information from a database. Approximately 3% of
2001 revenues came from the sale of Stylus products and maintenance. The Company
expects this percentage to be lower in the future as POPS revenue increases.
MARKETING & SALES
The Company directly markets the POPS program to food and drug manufacturers
and retailers. By utilizing the Insignia POPS program, these manufacturers and
retailers can easily accomplish what had previously been either impossible or
extremely difficult: tailoring national promotional programs to regional and
local needs with minimal effort. In addition to the benefits provided to
manufacturers and retailers, Insignia POPS signs provide consumers more
information and clearer messages to aid in purchasing decisions. The Company
believes Insignia POPS is the most complete in-store sign promotion program
available, benefiting consumer, retailer and manufacturer.
Through April 1998, the Company marketed the SIGNright! Sign System through
telemarketing by in-house sales personnel and independent sales representatives.
In May 1998, the Company discontinued the active sale of the SIGNright! Sign
System to U.S. customers, but continues to market it through the Company's
international distributors covering 20 countries.
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.
During 2001, 2000 and 1999, foreign sales accounted for approximately 4%, 8% and
16% of total sales, respectively. The Company expects sales to foreign
distributors will be approximately 3% of total sales in 2002.
PATENTS AND TRADEMARKS
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 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
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BUSINESS REVIEW PART 1
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 used by the Impulse Sign Systems. Although a patent has been
issued to the Developer which covers the use of the barcode, there is no
assurance that the Company will be able to prevent other suppliers of cardstock
from copying the barcode used by the Company. However, the Company believes that
the number, relatively small size and geographic dispersal of Impulse and
SIGNright! users, their relationship with the Company and the Company's
retention of its customer list as a trade secret will discourage other sign card
suppliers from offering barcoded sign cards for use on the Impulse and
SIGNright! machines.
The Company has obtained trademark registration in the United States of the
trademark "Stylus" for use on sign and label software.
The Company is in the process of obtaining trademark registration in the United
States for the trademarks "Insignia Color POPS" and "POPS Select".
PRODUCT DEVELOPMENT
Product development for Insignia POPS has been conducted internally and
includes the proprietary data management and operations system, as well as the
current offering of point-of-purchase and other promotion products. Ongoing
internal systems enhancements, as well as the development of point-of-purchase
and other promotion products, will be conducted utilizing both internal and
external resources where appropriate.
Product development on the SIGNright! Sign System was primarily conducted by the
Developer on a contract basis. The Company continues to introduce complementary
products such as new cardstock formats, styles and colors.
From 1992 to 1997, the Stylus software was developed on a contract basis. In
1993, the Company hired in-house employees to develop and modify portions of the
product. The Company plans no further development to the product.
SUPPLIERS
The thermal paper used by the Company in its SIGNright! and Impulse thermal
sign cards is purchased exclusively from one supplier. While the Company
believes that an alternative supplier would be available if necessary, any
disruption in the relationship with or deliveries by the current supplier could
have an adverse effect on the Company.
COMPETITION
INSIGNIA POPS
Insignia POPS is competing for the marketing expenditures of branded product
manufacturers for at-shelf advertising or promotion-related signage. Insignia
POPS has two major competitors in its market: News America Marketing
In-Store(R)(News America) and FLOORgraphics(R), Inc. (FLOORgraphics).
News America offers a network for in-store advertising, promotion and sales
merchandising services. News America has branded their in-store shelf signage
products as SmartSource Shelftalk,(TM) SmartSource Shelfvision(TM) and
SmartSource Price Pop.(TM)
FLOORgraphics offers a network for in-store advertising and promotion programs.
FLOORgraphics has branded their advertising shelf signage product
IN-STOREplus!(R).
The main strengths of Insignia POPS in relation to its competitors are:
- the linking of manufacturers to retailers at a central coordination point
- providing a complete "call to action"
- supplying account-specific, product-specific and store-specific messages at
the retail shelf
EMPLOYEES
As of February 28, 2002, the Company had 104 full-time employees. The
full-time employees included, 31 in sales and marketing positions, 63 in
operations and customer service, 7 in administration and accounting functions
and 3 in senior management positions. None of the Company's employees are
represented by unions.
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BUSINESS REVIEW PART 1
ITEM 2 PROPERTIES
The Company is located in approximately 31,000 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 August 2000, News America Marketing In-Store, Inc., (News America) brought
suit against the Company in U.S. District Court in New York, New York. The
complaint alleges that News America has exclusive promotional agreements with
certain grocery store retailers and that the promotional agreements prevented
those retailers from contracting for the Company's POPS program. The complaint
also accuses the Company of unfair competition, false advertising and
interfering with business relationships. The Company has denied any wrongful or
improper action and brought a counterclaim against News America. This
counterclaim alleges that News America has engaged in anti-competitive practices
and is attempting to use its dominant position in the market to stifle
competition and that News America's use of exclusive dealing clauses and other
anti-competitive behavior violate the anti-trust laws and are unenforceable. The
case is in the discovery phase.
After consulting with legal counsel, management believes the litigation will not
have a material adverse effect on the Company's ongoing business and revenue.
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 2001.
ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Company's executive officers are as
follows:
NAME AGE POSITION
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Scott F. Drill 49 President and Chief
Executive Officer
Gary L. Vars 61 Chairman, Executive Vice
President and General
Manager, POPS Division
John R. Whisnant 56 Vice President of Finance,
Chief Financial Officer and
Acting Secretary
SCOTT F. DRILL has been President and Chief Executive Officer of the Company
since February 1998. In May 1996 Mr. Drill became a partner in Minnesota
Management Partners (MMP), a venture capital firm located in Minneapolis,
Minnesota. He remains a partner in MMP, which completed investment of its
capital in January 1998. From 1983 through March 1996 Mr. Drill was President
and Chief Executive Officer of Varitronic Systems, Inc. and Chairman since 1990.
Prior to starting Varitronics, Mr. Drill held senior management positions in
sales and marketing at Conklin Company and Kroy, Inc.
GARY L. VARS has been Chairman since March 2001 and Executive Vice President
and General Manager of the POPS Division since September 1998. Prior to joining
the Company, Mr. Vars spent 22 years as a marketing and business development
consultant to Fortune 500 companies. From 1966 to 1976 Mr. Vars held various
management positions at the Pillsbury Co., including Director of Marketing and
New Product Development, Grocery Products Division.
JOHN R. WHISNANT joined the Company as Vice President of Finance and Chief
Financial Officer of the Company in October 1995. From June 1994 to September
1995 he was self-employed as a franchise consultant. From June 1992 to June 1994
he served as President of AmericInn, Inc. a motel franchising company. From 1987
to 1992 he served as President of International Market Square, a design center
and furniture mart. From 1981 to 1987 he served as general counsel for Omni
Ventures, Ltd. From 1975 to 1981 he had a private law practice and from 1971 to
1975 he was a tax accountant for Arthur Anderson. Mr. Whisnant is a Certified
Public Accountant and a licensed attorney in the State of Minnesota.
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BUSINESS REVIEW PART 2
PART 2
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.
2001 HIGH LOW
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First Quarter $ 9.625 $ 4.875
Second Quarter 9.750 6.480
Third Quarter 8.840 5.150
Fourth Quarter 8.500 5.400
2000 HIGH LOW
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First Quarter $ 4.625 $ 2.625
Second Quarter 7.875 3.000
Third Quarter 8.250 4.531
Fourth Quarter 8.000 4.500
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of February 28, 2002, the Company had one class of Common Stock
beneficially held by 2,156 persons.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business and does not anticipate paying cash dividends in the foreseeable
future.
6
BUSINESS REVIEW PART 2
ITEM 6 SELECTED FINANCIAL DATA
(In thousands, except per share amounts.)
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 1998 1997
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Net sales $ 19,933 $ 12,830 $ 9,287 $ 8,704 $ 13,321
Operating income (loss) 119 (809) (1,394) (3,396) (3,393)
Net income (loss) 121 (824) (1,411) (3,416) (3,380)
Net income (loss) per share:
Basic and diluted $ .01 $ (.08) $ (.16) $ (.44) $ (.50)
Shares used in calculation of
net income (loss) per share:
Basic 10,470 9,880 8,828 7,714 6,790
Diluted 11,540 9,880 8,828 7,714 6,790
Working capital $ 2,883 $ 2,362 $ 1,798 $ 2,232 $ 3,462
Total assets 6,631 5,065 4,043 4,069 5,855
Long-term debt and lease obligation -- -- -- 72 186
Total stockholders' equity 3,239 2,612 2,017 2,430 3,795
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 2001 2000 1999
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Net sales 100.0% 100.0% 100.0%
Cost of sales 43.0 42.8 44.7
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Gross profit 57.0 57.2 55.3
Operating expenses:
Sales and marketing 44.9 49.8 52.8
General and administrative 11.6 13.6 17.5
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Total Operating Expenses 56.5 63.5 70.3
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Operating income (loss) .6 (6.3) (15.0)
Other income -- (0.1) (0.2)
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Net Income (Loss) .6% (6.4)% (15.2)%
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The Company's critical accounting policies, including the assumptions and
judgements underlying them, are disclosed in the Note 2 to the Financial
Statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition, depreciation methods,
asset impairment recognition and deferred tax valuation allowances. While the
estimates and judgements associated with the application of these policies may
be affected by different assumptions or conditions, the Company believes the
7
BUSINESS REVIEW PART 2
estimates and judgements associated with the reported amounts are appropriate in
the circumstances.
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES:
Net sales for the year ended December 31, 2001 increased 55% to $19,933,000
compared to sales of $12,830,000 in 2000.
The increase in sales in 2001 resulted primarily from increased POPS program
sales. POPS program revenue was $14,455,000 in 2001 compared to $6,481,000 in
2000. Machine and machine related revenue was $398,000 in 2001 compared to
$691,000 in 2000. Stylus software and maintenance revenue was $552,000 in 2001
compared to $772,000 in 2000. Thermal sign card revenue was $2,813,000 in 2001
compared to $3,366,000 in 2000.
GROSS PROFIT:
The Company's gross profit increased 55% in 2001 to $11,361,000 as compared
to $7,334,000 in 2000. Gross profit as a percentage of net sales decreased
slightly to 57.0% for 2001 compared to 57.2% for 2000. The Company's foreign
sales were 4% in 2001 and 8% in 2000. The Company expects that sales to foreign
distributors will be approximately 3% in 2002.
OPERATING EXPENSES:
Operating expenses increased 38% in 2001. Sales expenses increased 42% in
2001 as a result of the continued investment in the POPS program. Marketing
expenses increased 33% in 2001 as a result of increased promotion expenses for
the POPS program. General and Administrative expenses increased 31% in 2001 as a
result of increased legal expenses and facility rent. The Company expects that
its operating expenses will increase in 2002 as the Company continues to invest
in the POPS program.
Operating expenses as a percentage of net sales were 56.5% in 2001. The decrease
as a percentage of net sales in 2001 was due primarily to higher sales volume in
2001. The Company expects its operating expenses as a percentage of net sales to
decrease as its net sales increase at a faster rate than operating expenses.
NET INCOME (LOSS):
The Company had a net income of $121,000 in 2001 compared to a net loss of
$824,000 in 2000. The net income in 2001 resulted primarily from increased sales
of the Insignia POPS program.
FISCAL 2000 COMPARED TO FISCAL 1999
NET SALES:
Net sales for the year ended December 31, 2000 increased 38% to $12,830,000
compared to sales of $9,287,000 in 1999.
The increase in sales in 2000 resulted primarily from increased POPS program
sales. POPS program revenue was $6,481,000 in 2000 compared to $2,211,000 in
1999. Machine and machine related revenue was $691,000 in 2000 compared to
$923,000 in 1999. Stylus software revenue and maintenance was $772,000 in 2000
compared to $751,000 in 1999. Thermal sign card revenue was $3,366,000 in 2000
compared to $4,069,000 in 1999.
GROSS PROFIT:
The Company's gross profit increased 43% in 2000 to $7,334,000 as compared to
$5,131,000 in 1999. Gross profit as a percentage of net sales increased to 57.2%
for 2000 compared to 55.3% for 1999. The increase in 2000 was due primarily to
the overall increase in net sales and change in product mix. The Company's
foreign sales were 8% in 2000 and 16% in 1999.
OPERATING EXPENSES:
Operating expenses increased 25% in 2000. Sales expenses increased 36% in
2000. The increase in 2000 was due primarily to the continued investment in the
POPS program. Marketing expenses increased 12% in 2000 as a result of increased
promotional expenses for the POPS program.
Operating expenses as a percentage of net sales were 63.5% in 2000. The decrease
as a percentage of net sales in 2000 was due primarily to an increase in sales
of 38% while operating expenses only increased 25% in 2000.
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BUSINESS REVIEW PART 2
NET LOSS:
The Company had a net loss of $824,000 in 2000 compared to a net loss of
$1,411,000 in 1999. The net loss in 2000 resulted primarily from the costs of
investing in the POPS program.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations with proceeds from public and private
equity placements. At December 31, 2001, working capital was $2,883,000 compared
to $2,362,000 at December 31, 2000. During the same period total cash and cash
equivalents increased $1,103,000.
Net cash provided by operating activities during 2001 was $903,000, primarily
due to the net income, the decrease in inventory and increase in accounts
payable, offset by an increase in accounts receivable. Accounts receivable
increased $837,000 due to increasing POPS program sales during the last few
months of 2001. Accounts payable increased $1,152,000 as a result of increasing
payments to participating retail stores resulting from increasing Insignia POPS
program sales. Inventories decreased $398,000 due to the sale of SIGNright!
machines. The Company expects accounts receivable to increase during 2002 as the
POPS program continues to grow. The Company also expects inventory levels to
remain flat during 2002.
Net cash of $195,000 was used in investing activities in 2001. The net cash
decrease was due to the purchase of property and equipment of $275,000, offset
by the maturity of marketable securities in the amount of $80,000.
Net cash of $395,000 was provided by financing activities, primarily from the
proceeds from the issuance of common stock of $486,000, offset by payments to
the line of credit in the amount of $91,000.
The Company anticipates that its working capital needs will remain consistent
with prior years. During 2001, the Company entered into a $2 million line of
credit agreement with a financial institution.
As of December 31, 2001 there was an outstanding balance on the line of credit
of $512,000 and the borrowing availability was approximately $1,500,000. 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.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Statements made in this annual report on Form 10-K, in the Company's other
SEC filings, in press releases and in oral statements to stockholders and
securities analysts, which are not statements of historical or current facts
are "forward looking statements." Such forward looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results or performance of the Company to be materially different from the
results or performance expressed or implied by such forward looking statements.
The words "believes," "expects," "anticipates," "seeks" and similar expressions
identify forward looking statements. Readers are cautioned not to place undue
reliance on these forward looking statements, which speak only as of the date
the statement was made. These statements are subject to risks and uncertainties
that could cause actual results to differ materially and adversely from the
forward looking statements. These risks and uncertainties include, but are not
limited to: adverse changes in the sales lift results achieved by the Insignia
POPS program; competition from other providers of at-shelf advertising or
promotion signage; adverse changes in the number of retailers who participate in
the Insignia POPS program; reductions in advertising and promotional
expenditures by branded product manufacturers due to changes in economic
conditions, marketing strategies or other factors; the receipt of information
from both retailers and manufacturers; and adverse changes in the costs of raw
materials for producing signs.
9
BUSINESS REVIEW PART 2
ITEM 7A QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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:
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Report of Independent Auditors ......................................... 11
Balance Sheets as of December 31, 2001 and 2000 ........................ 12
Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ............................... 13
Statement of Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999 ............................... 14
Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ............................... 15
Notes to Financial Statements .......................................... 16
10
REPORT OF INDEPENDENT AUDITORS PART 2
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
INSIGNIA SYSTEMS, INC.
We have audited the balance sheets of Insignia Systems, Inc. as of December
31, 2001 and 2000, and the related statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. Our audits also include the financial statement schedule listed in the
index at Item 14. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth herein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Minneapolis, Minnesota
February 2, 2002
11
BALANCE SHEETS PART 2
AS OF DECEMBER 31 2001 2000
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,209,448 $ 1,106,160
Marketable securities 80,000 160,000
Accounts receivable - net of $174,000 allowance in 2001
and $106,000 in 2000 2,995,527 2,089,786
Inventories 843,965 1,242,402
Prepaid expenses 146,002 216,792
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Total Current Assets 6,274,942 4,815,140
PROPERTY AND EQUIPMENT:
Production tooling, machinery and equipment 1,740,462 1,713,240
Office furniture and fixtures 243,051 201,457
Computer equipment 517,510 399,447
Leasehold improvements 266,836 178,796
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2,767,859 2,492,940
Accumulated depreciation and amortization (2,411,900) (2,242,887)
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Total Property and Equipment 355,959 250,053
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TOTAL ASSETS $ 6,630,901 $ 5,065,193
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 511,619 $ 602,852
Accounts payable 2,140,452 988,707
Accrued compensation and benefits 509,636 439,795
Accrued expenses 25,028 34,494
Deferred revenue 151,214 313,072
Warranty reserve -- 15,840
Other 53,618 58,201
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Total Current Liabilities $ 3,391,567 $ 2,452,961
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STOCKHOLDERS' EQUITY:
Common stock, par value $.01:
Authorized shares - 20,000,000. Issued and outstanding
shares - 10,614,098 in 2001 and 10,287,371 in 2000 106,141 102,874
Additional paid-in capital 18,017,617 17,524,200
Unearned compensation -- (9,588)
Accumulated deficit (14,884,424) (15,005,254)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 3,239,334 2,612,232
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,630,901 $ 5,065,193
======================================================================================================
See accompanying notes
12
STATEMENT OF OPERATIONS PART 2
YEAR ENDED DECEMBER 31 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
NET SALES $ 19,933,166 $ 12,830,172 $ 9,286,888
Cost of sales 8,571,771 5,496,131 4,155,391
- ------------------------------------------------------------------------------------------------------------
Gross Profit 11,361,395 7,334,041 5,131,497
OPERATING EXPENSES:
Sales 7,242,481 5,115,558 3,764,502
Marketing 1,697,784 1,276,440 1,139,229
General and administrative 2,302,361 1,751,019 1,621,418
- ------------------------------------------------------------------------------------------------------------
Total Operating Expenses 11,242,626 8,143,017 6,525,149
- ------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 118,769 (808,976) (1,393,652)
OTHER INCOME (EXPENSE):
Interest income 61,895 85,607 52,472
Interest expense (69,828) (122,053) (89,042)
Other income (expense) 9,994 21,853 18,765
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 120,830 $ (823,569) $ (1,411,457)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ .01 $ (.08) $ (.16)
Diluted $ .01 $ (.08) $ (.16)
- ------------------------------------------------------------------------------------------------------------
Shares used in calculation of net income (loss) per share:
Basic 10,470,075 9,879,546 8,827,549
Diluted 11,539,760 9,879,546 8,827,549
- ------------------------------------------------------------------------------------------------------------
See accompanying notes
13
STATEMENT OF SHAREHOLDERS' EQUITY PART 2
COMMON STOCK ADDITIONAL
------------ PAID-IN UNEARNED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 8,499,800 $ 84,998 $ 15,163,071 $ (47,932) $(12,770,228) $ 2,429,909
Employee stock purchase plan 20,030 200 22,234 -- -- 22,434
Exercise of stock options 181,666 1,817 250,474 -- -- 252,291
Exercise of stock warrants 551,450 5,514 577,098 -- -- 582,612
Issuance of common stock
under META-4 settlement 75,000 750 121,125 -- -- 121,875
Amortization of unearned
compensation -- -- -- 19,168 -- 19,168
Net loss -- -- -- -- (1,411,457) (1,411,457)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 9,327,946 93,279 16,134,002 (28,764) (14,181,685) 2,016,832
Employee stock purchase plan 56,537 566 62,755 -- -- 63,321
Exercise of stock options 135,000 1,350 192,448 -- -- 193,798
Exercise of stock warrants 767,888 7,679 1,068,896 -- -- 1,076,575
Stock option repricing -- -- 66,099 -- -- 66,099
Amortization of unearned
compensation -- -- -- 19,176 -- 19,176
Net loss -- -- -- -- (823,569) (823,569)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 10,287,371 102,874 17,524,200 (9,588) (15,005,254) 2,612,232
Sale of common stock 51,735 517 153,394 -- -- 153,911
Exercise of stock options 212,869 2,129 330,351 -- -- 332,480
Exercise of stock warrants 62,123 621 (621) -- -- --
Stock option repricing -- -- 10,293 -- -- 10,293
Amortization of unearned
compensation -- -- -- 9,588 -- 9,588
Net income -- -- -- -- 120,830 120,830
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 10,614,098 $ 106,141 $ 18,017,617 $ -- $(14,884,424) $ 3,239,334
==============================================================================================================================
See accompanying notes
14
STATEMENT OF CASH FLOW PART 2
YEAR ENDED DECEMBER 31 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 120,830 $ (823,569) $(1,411,457)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 169,013 150,150 220,071
Provision for bad debt expense (68,971) 35,000 --
Provision for obsolete inventory -- (11,401) 96,000
Amortization of unearned compensation 9,588 19,176 19,168
Stock option repricing 10,293 66,099 --
Loss on sale of equipment -- 3,791 --
Issuance of stock for litigation settlement -- -- 121,875
Changes in operating assets and liabilities:
Accounts receivable (836,770) (821,699) (1,133)
Inventories 398,437 (13,217) (103,284)
Prepaid expenses 70,791 (142,654) 113,646
Accounts payable 1,151,744 601,311 (131,133)
Accrued compensation and benefits 69,840 230,779 32,270
Deferred revenue (161,858) (80,248) (79,277)
Warranty reserve (15,840) -- (10,000)
Accrued expenses and other (14,049) (39,315) (126,775)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided By (Used in) Operating Activities 903,048 (825,797) (1,260,029)
INVESTING ACTIVITIES
Purchases of property and equipment (274,919) (184,693) (169,266)
Purchase of marketable securities -- (160,000) --
Maturities of marketable securities 80,000 240,000 858,167
- ----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (194,919) (104,693) 688,901
FINANCING ACTIVITIES
Net change in line of credit (91,233) (204,168) 807,020
Proceeds from issuance of common stock 486,392 1,333,694 857,337
Principal payments on long-term debt -- (81,967) (104,138)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 395,159 1,047,559 1,560,219
- ----------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 1,103,288 117,069 989,091
Cash and Cash Equivalents at Beginning of Year 1,106,160 989,091 --
- ----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,209,448 $ 1,106,160 $ 989,091
- ----------------------------------------------------------------------------------------------------
See accompanying notes
15
NOTES TO FINANCIAL STATEMENTS PART 2
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") markets
in-store promotional programs and services to retailers and consumer goods
manufacturers. The Company's products include the Insignia Point-Of-Purchase
Services (POPS) in-store promotion program, thermal sign card supplies for
the Company's SIGNright! and Impulse systems, Stylus software and laser
printable cardstock and label supplies.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash equivalents.
Cash equivalents are carried at cost which approximates market value.
REVENUE RECOGNITION. The Company recognizes revenue associated with
equipment, software and sign card sales at the time the products are shipped
to customers. Revenue associated with maintenance agreements are recognized
over the life of the contract. Revenue associated with Insignia POPS is
recognized over the period of service.
MARKETABLE SECURITIES. Marketable securities are composed of debt securities
and are classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income.
INVENTORIES. Inventories are primarily comprised of Impulse machines,
SIGNright! machines, sign card and accessories. Inventory is valued at lower
of cost or market using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost.
Depreciation is provided using the straightline method over the estimated
useful lives of the assets as follows:
Machinery and equipment 5 years
Office furniture and fixtures 3 years
Computer equipment 3 years
Leasehold improvements are amortized over the shorter of the term of the
lease or life of the asset.
PRODUCTION TOOLING COSTS. Expenditures relating to the purchase and
installation of production tooling are capitalized and amortized over the
anticipated useful life of the product.
INCOME TAXES. Income taxes are accounted for under the liability method.
Deferred income taxes are provided for temporary differences between
financial reporting and tax basis 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 No. 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
auditing principles generally accepted in the United States 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 INCOME (LOSS) PER SHARE. Basic income (loss) per share is computed by
dividing the net income by the weighted average shares outstanding and
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share gives effect to all diluted potential
common shares outstanding during the year. In 2000 and 1999, 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.
16
NOTES TO FINANCIAL STATEMENTS PART 2
2001 2000 1999
- ------------------------------------------------------------------------------------------
Denominator for basic net income (loss) per
share -- weighted average shares 10,470,075 9,879,546 8,827,549
Effect of dilutive securities:
Stock options and warrants 1,069,695 -- --
Denominator for diluted net income (loss) per
share -- adjusted weighted average shares 11,539,760 9,879,546 8,827,549
ADVERTISING COSTS. Advertising costs are charged to operations as incurred.
Advertising expenses were approximately $971,838, $762,757, and $259,018 in
2001, 2000 and 1999, respectively.
RESEARCH AND DEVELOPMENT. Research and development expenditures are charged
to operations as incurred.
RECLASSIFICATION. Certain reclassifications have been made to the Fiscal Year
2000 and Fiscal Year 1999 financial statements to conform to the Fiscal Year
2001 presentation.
2. MARKETABLE SECURITIES.
Marketable securities consist of a certificate of deposit, which is pledged
as collateral for the building lease agreement (see Note 8). Investments are
classified as available-for-sale and are stated at amortized cost which
approximates fair market value. As a result no unrealized gains or losses
were recognized at December 31, 2001 and 2000.
3. FINANCING AGREEMENTS AND LONG-TERM DEBT.
The Company has a $2 million line of credit with a finance institution
against which $511,619 was outstanding at December 31, 2001. 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 $3,125. The
line of credit agreement accrues interest at a rate of 2.5% over the bank's
reference rate (the reference rate was 5.5% at December 31, 2001) per annum
and expires on December 31, 2002. The Company pledged as security all
inventory, accounts receivable, equipment and general intangibles. The
carrying amount of the Company's debt instruments approximates fair value.
In 1995, the Company borrowed $500,000 and pledged certain printing press
assets and U.S. Treasury Debt Securities as collateral against this facility.
During 1999, the securities were released under terms of the agreement. The
loan which accrues interest at a rate of 10.05% per annum expired and was
repaid in its entirety in August 2000. Cash paid during the year for interest
was $69,828, $122,053 and $89,042 in 2001, 2000, and 1999, respectively.
4. SHAREHOLDERS' EQUITY.
In June 1998, the Company issued 1,600,000 shares of its common stock and
warrants to purchase additional 800,000 shares of common stock. 634,000 of
these warrants were exercised prior to 2001. During 2001, 4,904 warrants were
exercised and 1,096 were cancelled and at December 31, 2001, 160,000 of these
warrants remain exercisable at $1.625 per share and expire June 2002.
In 1998, the Company issued three year warrants to outside consultants to
purchase 70,000 shares of common stock at $1.625 per share. The Company
valued these warrants at $58,100 and is recognizing consulting expense
associated with these warrants over the vesting period. The Company
recognized expenses of $9,588, $19,176 and $19,168 in 2001, 2000 and 1999,
respectively, associated with these warrants. During 2001, 57,219 of these
warrants were exercised and 12,781 of these warrants were cancelled.
During 2000, various warrant holders exercised 767,888 warrants to purchase
shares of the Company's common stock at prices ranging from $1.25 to $2.125.
The Company received proceeds of $1,076,575 as a result of these warrant
exercises.
17
NOTES TO FINANCIAL STATEMENTS PART 2
During 1999, various warrant holders exercised 551,450 warrants to purchase
shares of the Company's common stock at prices ranging from $1.00 to $2.125.
The Company received proceeds of $582,612 as a result of these warrant
exercises.
During 1997, a non-employee Board member providing strategic planning and
advisory assistance to the Company was granted a warrant to purchase 25,000
shares of common stock at $2.31 per share. The warrant expires on September
26, 2002.
During 1994, the Company issued five year warrants to a consultant to
purchase a total of 15,000 shares of common stock exercisable at a price of
$1.50 per share. During 1999, these warrants were extended to November 22,
2004.
In May 1999, the Company issued warrants to non-employee Board members to
purchase a total of 150,000 shares of Common Stock in recognition for
services performed as Board members of the Company. The warrants are
exercisable at $2.00 per share and expire on September 28, 2004.
During 1995, the Company issued five year warrants to an outside consultant
to purchase 1,000 shares of common stock at $1.50 per share. The warrants
were exercised in 2000.
The Company repriced certain stock options resulting in compensation expense
of $10,293 and $66,099, in 2001 and 2000, respectively.
5. STOCK OPTIONS.
STOCK OPTION PLAN. The Company has a stock option plan (the Plan) for its
employees and directors. Under the terms of the Plan, the Company grants
incentive stock options to employees at an exercise price at or above 100% of
fair market value on the date of grant. The Plan also allows the Company to
grant non-qualified options at an exercise price of less than 100% of fair
market value at the date of grant. The stock options expire five or ten years
after the date of grant and typically vest in one-third increments on the
first, second and third anniversaries of the grant date.
The following tables summarizes activity under the plan:
PLAN SHARES PLAN WEIGHTED
AVAILABLE OPTIONS AVERAGE EXERCISE
FOR GRANT OUTSTANDING PRICE PER SHARE
- -----------------------------------------------------------------------------------------------------------------
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
Reserved 200,000 -- --
Granted (261,600) 261,600 4.84
Exercised -- (135,000) 1.44
Cancelled 54,350 (54,350) 1.50
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 5,193 1,356,250 2.04
Reserved 500,000 -- --
Granted (582,600) 582,600 7.52
Exercised -- (212,869) 1.56
Cancelled 129,165 (129,165) 6.58
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 51,758 1,596,816 $ 3.74
- -----------------------------------------------------------------------------------------------------------------
The number of options exercisable under the Plan were:
December 31, 1999 610,503
December 31, 2000 849,994
December 31, 2001 911,294
18
NOTES TO FINANCIAL STATEMENTS PART 2
The following table summarizes information about the stock options
outstanding at December 31, 2001:
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, 2001 PER SHARE
- -----------------------------------------------------------------------------------------------------------
$ 1.50 - $ 4.00 36,200 Less than 1 year $3.11 36,066 $3.11
- -----------------------------------------------------------------------------------------------------------
1.06 - 2.38 652,000 1 to 2 years 1.32 601,500 1.28
- -----------------------------------------------------------------------------------------------------------
0.75 - 1.50 203,916 2 to 3 years 1.28 122,252 1.30
- -----------------------------------------------------------------------------------------------------------
4.00 - 4.28 137,834 3 to 4 years 4.28 50,829 4.28
- -----------------------------------------------------------------------------------------------------------
4.00 - 9.38 566,866 4 to 10 years 7.31 100,647 6.08
- -----------------------------------------------------------------------------------------------------------
$ 0.75 - $ 9.38 1,596,816 3 years $3.74 911,294 $2.05
- -----------------------------------------------------------------------------------------------------------
Options outstanding under the Plan expire at various dates during the period
February 2002 through December 2011.
The weighted average fair value of options granted during the years ended
December 31, 2001, 2000 and 1999 was $4.63, $2.58, and $0.76, 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 2001, 2000 and 1999: risk-free interest rate of 5.12%, 6.0%
and 6.0%, respectively; dividend yield of 0%; volatility factor of the
expected market price of the Company's common stock of .898, .766, and .917,
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:
2001 2000 1999
- --------------------------------------------------------------------------------
Proforma
net loss $ (540,434) $(1,323,099) $(1,726,999)
Pro forma
net loss per
common
share $ (.05) $ (.13) $ (.20)
The pro forma effect on the net loss for 2001, 2000 and 1999 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.
19
NOTES TO FINANCIAL STATEMENTS PART 2
6. EMPLOYEE STOCK PURCHASE PLAN.
The Company adopted an Employee Stock Purchase Plan (the 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 2001, 2000, and 1999, employees purchased 51,735, 56,537,
and 20,030 shares, respectively, under the Plan. At December 31, 2001,
222,639 shares are reserved for future employee purchases of common stock
under the Plan.
7. INCOME TAXES.
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $15,100,000 which are available to offset future taxable
income. These carryforwards are subject to the limitations of Internal
Revenue Code Section 382. This section provides limitations on the
availability of net operating losses to offset current taxable income if an
ownership change has occurred as defined by Internal Revenue Code Section
382. These carryforwards will begin expiring in 2005.
The Company has established a valuation allowance equal to the net deferred
tax assets due to uncertainties regarding the realization of deferred tax
assets based on the Company's lack of earnings.
The Company will continue to assess the valuation allowance and to the extent
it is determined that said allowance is no longer required, the tax benefit
of the remaining deferred tax assets will be recognized in the future.
Included as part of the Company's net operating loss carryforwards are
approximately $600,000 in tax deductions that resulted from the exercise of
stock options. When these loss carryforwards are realized the corresponding
changes in valuation allowance will be recorded as additional paid-in
capital.
Significant components of the deferred tax assets are as follows:
AS OF DECEMBER 31 2001 2000
- --------------------------------------------------------------------------------
Deferred Tax Assets
Net operating loss carryforwards $ 5,588,300 $ 5,360,600
Depreciation 49,400 83,800
Accounts receivable allowance 64,500 39,300
Inventory reserve 64,300 41,500
Other 20,500 21,000
- --------------------------------------------------------------------------------
Net deferred tax assets before valuation
allowance 5,787,000 5,546,200
Less valuation allowance (5,787,000) (5,546,200)
- --------------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
- --------------------------------------------------------------------------------
20
NOTES TO FINANCIAL STATEMENTS PART 2
8. LEASES.
The Company leases its office space under a five year operating lease. The
term of the operating lease is January 1, 1999 through March 31, 2004. The
future noncancelable lease payments, exclusive of costs associated with the
landlord operating costs, due on the operating lease as of December 31, 2001
are as follows:
2002 $ 259,814
2003 259,814
2004 64,953
- --------------------------------------------------------------------------------
$ 584,581
================================================================================
The Company incurred approximately $399,268, $308,869, and $253,000 in rent
expense in 2001, 2000 and 1999, respectively.
9. 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 2001 and 2000, the
Company made no matching contributions.
10. CUSTOMER SALES.
No single customer represented a significant portion of total sales. Export
sales accounted for 4%, 8%, and 16% of total sales in 2001, 2000 and 1999,
respectively.
11. SOURCE OF SUPPLY.
The Company currently buys the components of its products from sole
suppliers. Although there are a limited number of manufacturers capable of
manufacturing its products, management believes that other manufacturers
could adapt to provide the products on comparable terms. The time required to
locate and qualify other manufacturers, however, could cause a delay in
manufacturing that may be financially disruptive to the Company.
12. LITIGATION.
In August 2000, News America Marketing In-Store, Inc., (News America) brought
suit against the Company in U.S. District Court in New York, New York. The
complaint alleges that News America has exclusive promotional agreements with
certain grocery store retailers and that the promotional agreements prevented
those retailers from contracting for the Company's POPS program. The
complaint also accuses the Company of unfair competition, false advertising
and interfering with business relationships. The Company has denied any
wrongful or improper action and brought a counterclaim against News America.
This complaint alleges that News America has engaged in anti-competitive
practices and is attempting to use its dominant position in the market to
stifle competition and that News America's use of exclusive dealing clauses
and other anti-competitive behavior violate the anti-trust laws and are
unenforceable. The case is in the discovery phase.
After consulting with legal counsel, management believes the litigation will
not have a material adverse effect on the Company's ongoing business and
revenue.
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.
21
NOTES TO FINANCIAL STATEMENTS PART 2
13. Quarterly Financial Data.
(Unaudited)
Quarterly data for 2001 and 2000 was as follows:
YEAR ENDED DECEMBER 31, 2001 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- --------------------------------------------------------------------------------------------
Net sales $ 5,147,500 $ 4,625,223 $ 3,997,460 $ 6,162,983
Gross profit 2,928,967 2,659,885 2,247,178 3,525,365
Net income (loss) 301,127 (99,173) (492,523) 411,399
- --------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic $ .03 $ (.01) $ (.05) $ .04
Diluted $ .03 $ (.01) $ (.05) $ .04
YEAR ENDED DECEMBER 31, 2000 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- --------------------------------------------------------------------------------------------
Net sales $ 2,878,226 $ 3,047,996 $ 2,863,480 $ 4,040,470
Gross profit 1,573,249 1,634,535 1,691,342 2,434,915
Net loss (253,806) (248,896) (295,331) (25,536)
- --------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic $ (.03) $ (.03) $ (.03) $ --
Diluted $ (.03) $ (.03) $ (.03) $ --
ITEM 9 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART 3
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 2002 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 2002 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 2002 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 2002 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.
22
EXHIBITS PART 4
PART 4
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 Lawrence McGourty Exhibit 10.1 of the Registrant's Registration
and the Company dated January 23, 1990, as amended Statement of Form S-18, Reg. No. 33-40765C
10.2 Barcode License and Support Agreement between Thomas Exhibit 10.2 of the Registrant's Registration
and Lawrence McGourty and the Company dates January 23, 1990 Statement of Form S-18, Reg. No. 33-40765C
10.3 The Company's 1990 Stock Plan, as amended 26
10.6 Lease Agreement between Plymouth Partners II, Exhibit 10.6 of the Registrant's Annual Report on
and the Company, dated October 5, 1998 Form 10-K for the year ended December 31, 1998
10.9 Employee Stock Purchase Plan, as amended Exhibit 10.9 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000
10.15 Loan Amendment between Itasca Business Credit, Inc. and the 27
Company dated December 20, 2001
23 Consent of Ernst & Young 32
25 Power of Attorney (See signature page of this Form 10-K) 25
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during 2001.
23
VALUATION AND QUALIFYING ACCOUNT PART 4
SCHEDULE II VALUATION AND QUALIFYING ACCOUNT
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE PERIOD
- -----------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Allowance for doubtful accounts $ 106,242 $ 69,500 $ 1,548(1) $ 174,194
Provision for normal returns and rebates 15,840 -- 15,840(2) --
Provision for obsolete inventory 67,209 33,000 53,844(3) 46,365
- -----------------------------------------------------------------------------------------------------
Year ended December 31, 2000
Allowance for doubtful accounts 70,917 45,000 9,675(1) 106,242
Provision for normal returns and rebates 15,840 15,840
Provision for obsolete inventory 61,960 91,000 85,751(3) 67,209
- -----------------------------------------------------------------------------------------------------
Year ended December 31, 1999
Allowance for doubtful accounts 96,350 25,433(1) 70,917
Provision for normal returns and rebates 25,842 10,002(2) 15,840
Provision for obsolete inventory 89,506 96,000 123,546(3) 61,960
- -----------------------------------------------------------------------------------------------------
(1) Uncollectable accounts written off, net of recoveries.
(2) Credited to income.
(3) Inventory scrapped and disposed of.
24
SIGNATURES PART 4
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 22, 2002
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 the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue thereof.
SIGNATURE TITLE DATE
- -------------------------------------------------------------------------------------------------------------
/s/ Gary L. Vars Chairman, Executive Vice President and March 22, 2002
- ------------------------ General Manager, POPS Division
Gary L. Vars
/s/ Scott Drill President and Chief Executive March 22, 2002
- ------------------------ Officer (principal executive officer)
Scott Drill
/s/ John R. Whisnant Vice President of Finance, Chief Financial March 22, 2002
- ------------------------ Officer and Acting Secretary (principal financial officer)
John R. Whisnant
/s/ G. L. Hoffman Director March 22, 2002
- ------------------------
G. L. Hoffman
/s/ Erwin A. Kelen Director March 22, 2002
- ------------------------
Erwin A. Kelen
/s/ W. Robert Ramsdell Director March 22, 2002
- ------------------------
W. Robert Ramsdell
/s/ Gordon F. Stofer Director March 22, 2002
- ------------------------
Gordon F. Stofer
/s/ Frank D. Trestman Director March 22, 2002
- ------------------------
Frank D. Trestman
25