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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, 2002 Commission File Number 0-19380
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INSIGNIA SYSTEMS, INC.
(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)
6470 Sycamore Court North
Maple Grove, MN 55369
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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 [ ]
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 ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2).
Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of the last business day of the second
quarter (June 28, 2002) was approximately $62,344,000 based upon the last sale
price of the registrant's Common Stock on such date.
Number of shares outstanding of Common Stock, $.01 par value, as of March
3, 2003, was 12,167,748.
DOCUMENTS INCORPORATED BY REFERENCE:
Insignia Systems, Inc. Proxy Statement to be filed for the
Annual Meeting of Shareholders to be held on May 20, 2003
(Part III - Items 10, 11, 12 and 13)
TABLE OF CONTENTS
PART I. 1
Item 1. Business..........................................................................................1
Item 2. Properties........................................................................................5
Item 3. Legal Proceedings.................................................................................5
Item 4. Submission of Matters to a Vote of Security Holders...............................................6
Item 4A. Executive Officers of the Registrant..............................................................6
PART II. 7
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........................7
Item 6. Selected Financial Data...........................................................................8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......................................12
Item 8. Financial Statements and Supplementary Data......................................................13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures............28
PART III. 29
Item 10. Directors and Executive Officers of the Registrant...............................................29
Item 11. Executive Compensation...........................................................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management...................................29
Item 13. Certain Relationships and Related Transactions...................................................29
Item 14. Controls and Procedures..........................................................................29
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................30
PART I.
Item 1. Business
GENERAL
Insignia Systems, Inc., (the "Company") markets in-store promotional
products, programs and services to retailers and consumer packaged goods
manufacturers. Since 1998, the Company has been focusing all of its efforts on
providing promotional services through the Insignia Point-Of-Purchase Services
(POPS) division of the Company. The Insignia POPS(R) division provides the
Insignia POPSign(TM) and VALUStix(R) programs.
Insignia's POPSign is a national, account-specific in-store promotion program.
Funded by consumer packaged goods manufacturers, the program combines vital
product selling information from manufacturers with each retailer's
store-specific prices and is displayed on the retailer's unique sign format that
includes the retailer's logo, headline and store colors. The combining of
manufacturer and retailer information produces a complete "call to action" that
gets consumers the information they want and need to make purchasing decisions,
while building store and brand equity.
For retailers, Insignia's POPSign program 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 POPSign
program provides access to the optimum retail promotion site for their products
- - the retail shelf-edge. In addition, manufacturers benefit from short lead
times, micro-marketing capabilities, such as store-specific and multiple
language options, and a wide variety of program features and enhancements that
provide unique promotion advantages.
The Company acquired the VALUStix program through an acquisition in December
2002, which gave the Company the opportunity to expand the offerings in its POPS
division. The VALUStix program is a proprietary system that allows retailers and
manufacturers to attach coupons and other promotional materials to products that
are sold in grocery stores and other retail locations. The VALUStix program can
deliver immediately actionable offers and information to shoppers at the
point-of-purchase. The Company believes the VALUStix program will complement the
POPSign program and expects there will be definite synergies to our existing
business.
The Company's Internet address is www.insigniasystems.com. The Company intends
to make available on its Web site, beginning in April 2003, all of the reports
it files with the SEC. Until then, copies can be obtained free of charge by
requesting them from Insignia Systems, Inc., 6470 Sycamore Court North, Maple
Grove, Minnesota 55359-6032; Attention: CFO; telephone 763-392-6200.
INDUSTRY AND MARKET BACKGROUND
According to Point-Of-Purchase Advertising International (POPAI), an
industry non-profit trade association, more than 70% of brand purchase decisions
are being made in-store. As a result, product manufacturers are constantly
seeking in-store vehicles to motivate consumers to buy their branded products.
Industry studies estimate that manufacturers spend approximately $850 million
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.
Page 1
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 POPSIGN PROGRAM
Insignia's POPSign program is an in-store, shelf-edge point-of-purchase
promotional signing program that enables manufacturers to deliver
product-specific messages quickly and accurately - in designs and formats that
have been pre-approved and supported by participating retailers. Insignia
POPSign program delivers vital product selling information from manufacturers,
such as product uses and features, nutritional information, advertising tag
lines and product images. The brand information is combined with the retailer's
store-specific prices and is displayed on the retailer's unique sign format that
includes their logo, headline and store colors. Each sign is displayed directly
in front of the manufacturer's product in the participating retailer's stores.
Insignia's POPSign program offers special features and enhancements, such as
Advantage and Custom Advantage flags that allow manufacturers to add visibility
and highlight any message at-shelf. Insignia Color POPSign(TM) is a
customizable, full-color version of POPSign that delivers image-building
full-color graphics. In 2002, the Company introduced Insignia UltraColor(TM),
which offers 75 percent more area for the full-color creative than Color
POPSigns.
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. Store personnel place the signs
at the shelf for two-week or four-week display cycles. The Company charges
manufacturers for the signs placed, per cycle, and generally per store.
Retailers are paid a flat fee per sign, per display cycle, by the Company based
upon compliance and retailer-supplied product movement data provided to
Insignia.
VALUSTIX PROGRAM
The VALUStix program is a proprietary system that allows retailers and
manufacturers to attach coupons and other promotional materials to products that
are sold in grocery stores and other retail locations. Coupons and promotional
materials are applied to any product at the point-of-production in pressure
sensitive booklets via customized equipment. The booklets can be adhered to all
categories of products, including frozen foods, refrigerated foods, dairy
products and packaged produce.
THE SIGNRIGHT SIGN SYSTEM
Prior to 1996, the Company's primary product offering was the Impulse
Retail System, a system developed by an independent product design and
development firm (the "Developer"). In 1996, the Company replaced the Impulse
Retail System 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
color that can be customized to include pre-printed custom artwork, such as a
retailer's logo. Approximately 9% of 2002 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 signs, labels and posters by manually
entering the information or by importing information from a database.
Approximately 2% of 2002
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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 AND SALES
The Company directly markets the Insignia POPSign program to food and
drug manufacturers and retailers. By utilizing the Insignia POPSign 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 POPSign program
provides consumers more information and clearer messages to aid in purchasing
decisions. The Company believes its Insignia's POPSign program 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 Open Database
Connectivity design and publishing component into their retail data and
information management software applications.
During 2002, 2001 and 2000, foreign sales accounted for approximately 2%, 4% and
8% of total net sales. The Company expects sales to foreign distributors will be
less than 2% of total net sales in 2003.
COMPETITION
INSIGNIA POPSIGN PROGRAM
Our Insignia POPSign program is competing for the marketing
expenditures of branded product manufacturers for at-shelf advertising or
promotion-related signage. The Insignia POPSign program has two major
competitors in its market: News America Marketing In-Store(R), Inc. (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 SHELFplus!(R).
The main strengths of the Insignia POPSign program in relation to its
competitors are:
- the linking of manufacturers to retailers at a central coordination
point
- providing a complete "call to action"
- supplying product-specific and store-specific messages at the retail
shelf
- short lead times
Page 3
PATENTS AND TRADEMARKS
The Company has developed and is using a number of trademarks, service
marks, slogans, logos and other commercial symbols to advertise and sell its
products. The Company owns U.S. registered trademarks for Insignia POPS(R),
VALUStix(R), Stylus(R) and Insignia Systems, Inc. (R) (and Design).
The Company is in the process of obtaining trademark registration in the United
States for the trademarks "Insignia Color POPS," "POPS Select," "POPSign,"
"UltraColor," Insignia E-POPS," and "POPSRx."
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 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
bar-coded sign cards for use on the Impulse and SIGNright machines.
Key employees are required to enter into nondisclosure and invention assignment
agreements, and customers, vendors and other third parties also must agree to
nondisclosure restrictions prior to disclosure of our trade secrets or other
confidential or proprietary information.
PRODUCT DEVELOPMENT
Product development for Insignia's POPSign program 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 promotional products, will be conducted utilizing
both internal and external resources as 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.
The Company plans no further development to the Stylus software product.
CUSTOMERS
Kellogg Company and General Mills Company accounted for 13% and 12% of
the Company's total net sales for the year ended December 31, 2002. Pillsbury
Company accounted for 14% of the Company's total net sales for the year ended
December 31, 2001. No customers accounted for greater than 10% of the Company's
total net sales for the year ended December 31, 2000.
BACKLOG
Sales backlog at February 28, 2003 was approximately $15 million, all
of which is for delivery during 2003. The orders are believed to be firm but
there is no assurance that all of the backlog will actually result in sales.
Page 4
SEASONALITY
Our results of operations have fluctuated from quarter to quarter due
to variations in net sales and operating expenses. We generate a significant
portion of our operating income in the fourth quarter of the fiscal year because
of seasonal events that affect when our customers purchase Insignia POPSign
programs. Any factor that negatively affects our net sales or increases our
operating expenses could negatively affect our annual results of operations, and
in particular, our annual results. As a result of the seasonality of our
business, we may incur losses in a given quarter. In certain quarters we may
realize strong sales but due to increased promotional activities and investments
in growing the business, experience reduced operating income. Our results of
operations fluctuate from quarter to quarter as a result of the following:
o The timing of seasonal events for our customers;
o The timing of new retail stores being added;
o Costs associated with various promotional activities; and
o Expenses incurred to support expansion strategies.
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.
The Company subcontracts with one vendor for the printing and application of the
VALUStix program coupons. Although there are a limited number of printers
capable of providing this service, management believes that other printers could
provide the coupons on comparable terms. The time required to locate and qualify
other printers, however, could cause a delay that may be financially disruptive
to the Company.
WORKING CAPITAL PRACTICES
No special or unusual practices affect the Company's working capital.
The Company generally requires payment from its customers within 30 days and
pays its vendors within 45-60 days. Given the nature of the Company's business,
there are no significant investments in inventory required.
EMPLOYEES
As of February 28, 2003, the Company had 140 employees, including all
full-time and part-time employees.
Item 2. Properties
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The Company is located in approximately 47,000 square feet of office
and warehouse space in suburban Minneapolis, Minnesota, which has been leased
until January 2010. The Company believes that this facility is meeting the
Company's current and foreseeable needs.
Item 3. Legal Proceedings
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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 alleged that News America had exclusive promotional agreements
Page 5
with certain grocery store retailers and that the promotional agreements
prevented those retailers from contracting for the Company's POPSign program.
The complaint also accused the Company of unfair competition, false advertising
and interfering with business relationships. The Company denied any wrongful or
improper action and brought a counterclaim against News America. This
counterclaim alleged that News America had engaged in anti-competitive practices
and was 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 and counterclaim were settled in November 2002. The terms of the settlement
agreement are confidential. The settlement did not impact the Company's current
operating results, nor is it expected to affect future operating results.
Item 4. Submission of Matters to a Vote of Security Holders
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No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2002.
Item 4A. Executive Officers of the Registrant
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The names, ages and positions of the Company's executive officers are
as follows:
Name Age Position
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Scott F. Drill 50 President and Chief Executive Officer
Gary L. Vars 62 Chairman of the Company and President,
POPS Division
Denni J. Lester 44 Vice President of Finance, Chief Financial
Officer and Treasurer
John R. Whisnant 57 Vice President of Administration and
Secretary
Scott F. Drill has been President and Chief Executive Officer of the
Company since February 24, 1998. From 1998 to December 2002, he was also a
partner in Minnesota Management Partners (MMP), a venture capital firm located
in Minneapolis, Minnesota. Mr. Drill co-founded Varitronic Systems, Inc. in
1983, and was its President and CEO until it was sold in 1996. 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 President of the
POPS Division since December 2002. From September 1998 to December 2002, he held
the position of Executive Vice President and General Manager of the POPS
Division. Prior to joining the Company in 1998, 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.
Denni J. Lester has been Vice President of Finance, Chief Financial
Officer and Treasurer since December 2002. Prior to joining the Company, Ms.
Lester spent 22 years at Grant Thornton LLP, a national public accounting firm,
including the most recent nine years as a partner. Ms. Lester is a Certified
Public Accountant.
John R. Whisnant has been Vice President of Administration and
Secretary since December 2002. He was Vice President of Finance and Chief
Financial Officer of the Company from October 1995 to December 2002. 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. Mr. Whisnant is a Certified Public
Accountant and a licensed attorney in the State of Minnesota.
Page 6
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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MARKET INFORMATION
The Company's common stock trades on the Nasdaq National Market System
under the symbol ISIG. The following table sets forth the range of high and low
bid prices reported on the Nasdaq System. These quotations represent prices
between dealers and do not reflect retail market-ups, markdowns or commission.
2002 High Low
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First Quarter $ 9.200 $6.700
Second Quarter 10.150 6.950
Third Quarter 9.210 6.980
Fourth Quarter 11.480 8.100
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
SALES OF UNREGISTERED SECURITIES
On December 18, 2002, the Company completed a private placement of
stock and warrants to a small group of accredited investors. The details of the
transaction are described in Note 6 to the Company's Audited Financial
Statements, included in this report. The transaction was exempt from
registration under Rule 506 of Regulation D, and a notice of the sale was filed
with the SEC on Form D.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
As of February 28, 2003, the Company had one class of Common Stock
beneficially held by approximately 2,840 owners.
DIVIDENDS
The Company has never paid cash dividends on its common stock. The
Board of Directors presently intends to retain all earnings for use in the
Company's business and does not anticipate paying cash dividends in the
foreseeable future.
Page 7
Item 6. Selected Financial Data
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(In thousands, except per share amounts.)
For the Years Ended
December 31 2002 2001 2000 1999 1998
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Net sales $ 24,821 $ 19,933 $ 12,830 $ 9,287 $ 8,704
Operating income (loss) 543 119 (809) (1,394) (3,396)
Net income (loss) 333 121 (824) (1,411) (3,416)
Net income (loss) per share:
Basic and diluted $ .03 $ .01 $ (.08) $ (.16) $ (.44)
Shares used in calculation of
Net income (loss) per share:
Basic 10,872 10,470 9,880 8,828 7,714
Diluted 11,800 11,540 9,880 8,828 7,714
Working capital $ 7,324 $ 2,883 $ 2,362 $ 1,798 $ 2,232
Total assets 16,722 6,631 5,065 4,043 4,069
Long-term debt and lease obligation - - - - 72
Total shareholders' equity 11,258 3,239 2,612 2,017 2,430
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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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 total net sales.
Year ended December 31 2002 2001 2000
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Net sales 100.0% 100.0% 100.0%
Cost of sales 49.1 53.3 54.9
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Gross profit 50.9 46.7 45.1
Operating expenses:
Selling 29.6 29.2 31.9
Marketing 7.8 5.4 5.9
General and administrative 11.3 11.5 13.6
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Total operating expenses 48.7 46.1 51.4
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Operating income (loss) 2.2 0.6 (6.3)
Other income (expense) (0.9) - (0.1)
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Net income (loss) 1.3% 0.6% (6.4)%
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The Company's critical accounting policies, including the assumptions and
judgments underlying them, are disclosed in Note 1 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 asset valuation allowances. While the
estimates and judgments associated with the application of these policies may be
affected by different assumptions or conditions, the Company believes the
estimates and judgments associated with the reported amounts are appropriate in
the circumstances.
Page 8
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES. Net sales for the year ended December 31, 2002 increased 24.5% to
$24,821,361 compared to $19,933,166 for the year ended December 31, 2001.
Service revenues from our POPSign programs for the year ended December 31, 2002
increased 39.1% to $20,114,132 compared to $14,455,158 for the year ended
December 31, 2001. The increase was primarily due to a significant increase in
the number of POPSign programs sold to manufacturers and partially due to a
higher average selling price due to color enhancements to our POPSign program.
We expect our POPSign revenues to continue to increase, both in dollar amount
and as a percentage of our total net sales. We expect to generate revenues
related to our recent VALUStix acquisition, primarily during the second half of
the fiscal year.
Product sales for the year ended December 31, 2002 decreased 14.1% to $4,707,229
compared to $5,478,008 for the year ended December 31, 2001. The decrease was
primarily due to decreasing sales of our other product categories based on
decreased demand for those products from our customers. We expect our sales of
our other product categories to continue to decline, both in dollar amount and
as a percentage of our total net sales.
GROSS PROFIT. Gross profit for the year ended December 31, 2002 increased 35.6%
to $12,634,871 compared to $9,316,268 for the year ended December 31, 2001.
Gross profit as a percentage of total net sales increased to 50.9% for 2002
compared to 46.7% for 2001.
Gross profit from our POPSign program revenues for the year ended December 31,
2002 increased 52.6% to $10,090,502 compared to $6,611,436 for the year ended
December 31, 2001. The increase was primarily due to a significant increase in
volume. Gross profit as a percentage of POPSign program revenues increased to
50.2% for 2002 compared to 45.7% for 2001, primarily due to a higher average
selling price due to color enhancements to our POPS programs. We expect our
gross profit from our POPS revenues to increase in dollar amount due to an
expected increase in our POPS revenues and to decrease somewhat as a percentage
of POPS revenue due to additional production equipment obtained during the
fourth quarter of 2002 and the increased cost of facilities due to our corporate
move in December 2002.
Gross profit from our product sales for the year ended December 31, 2002
decreased 5.9% to $2,544,369 compared to $2,704,832 for the year ended December
31, 2001. The decrease was primarily due to decreased sales from our other
product categories based on decreased demand for those products from our
customers. Gross profit as a percentage of other sales increased to 54.1% for
2002 compared to 49.4% for 2001, primarily due to the write-off of inventory in
2001. We expect the gross profit from the sales of our other product categories
to continue to decline in dollar amount and as a percentage of our total gross
profit.
OPERATING EXPENSES
SELLING. Selling expenses for the year ended December 31, 2002 increased 26.5%
to $7,354,296 compared to $5,815,454 for the year ended December 31, 2001,
primarily due to an increase in the number of sales related employees due to the
significant increase in the volume of POPSign program revenues and the related
increased commissions expense. Selling expenses as a percentage of total net
sales increased to 29.6% in 2002 compared to 29.2% in 2001, primarily due to
increase decribed, net of the effect of increased total net sales. We expect
selling expenses to continue to increase in dollar amount due to an expected
increase in POPS revenues and the addition of employees due to the VALUStix
acquisition and to decline somewhat as a percentage of net sales due to the
expected increase in total net sales.
MARKETING. Marketing expenses for the year ended December 31, 2002 increased
78.0% to $1,921,838 compared to $1,079,684 for the year ended December 31, 2001,
primarily due to increased promotion expenses for the POPSign programs,
including those related to expanding our program to the retail drug
Page 9
industry. Marketing expenses as a percentage of total net sales increased to
7.8% in 2002 compared to 5.4% in 2001, primarily due to the increased promotion
expenses, partially offset by the effect of higher net sales during the year. We
expect marketing expenses to continue to increase in dollar amount due to
expected continued investments in our POPS programs, including those related to
the VALUStix program, and to decline somewhat as a percentage of net sales due
to an expected increase in total net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the year
ended December 31, 2002 increased 22.3% to $2,816,219 compared to $2,302,361 for
the year ended December 31, 2001, primarily due to increased legal fees related
to the News America litigation that was settled during the fourth quarter of
2002 and expenses related to our corporate move during December 2002. General
and administrative expenses as a percentage of total net sales decreased to
11.3% in 2002 compared to 11.5% in 2001, primarily due to the effect of higher
total net sales during the year, offset substantially by the effect of the
moving expenses and higher legal fees. We expect general and administrative
expenses to be similar in dollar amount primarily due to additions to our
management team, the VALUStix acquisition and the increased cost of our new
facilities, offset by lower legal fees and no moving expenses, and to decline
somewhat as a percentage of net sales due to an expected increase in total net
sales.
OTHER INCOME (EXPENSE). Other expenses of $209,820 for the year ended December
31, 2002 were primarily due to the disposition of assets related to our
corporate move and a one-time fee to move to the NASDAQ National Market.
NET INCOME. Our net income for the year ended December 31, 2002 was $332,698
compared to $120,830 for the year ended December 31, 2001.
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES. Net sales for the year ended December 31, 2001 increased 55.4% to
$19,933,166 compared to $12,830,172 for the year ended December 31, 2000.
Service revenues from our POPSign programs for the year ended December 31, 2001
increased 123% to $14,455,158 compared to $6,481,341 for the year ended December
31, 2000. The increase was primarily due to a significant increase in the number
of POPSign programs sold to manufacturers.
Product sales for the year ended December 31, 2000 decreased 13.7% to $5,478,008
compared to $6,348,831 for the year ended December 31, 2000. The decrease was
primarily due to decreasing sales of our other product categories based on
decreased demand for those products from our customers.
GROSS PROFIT. Gross profit for the year ended December 31, 2001 increased 60.8%
to $9,316,268 compared to $5,792,546 for the year ended December 31, 2000. Gross
profit as a percentage of total net sales increased to 46.7% for 2001 compared
to 45.1% for 2000.
Gross profit from our POPSign program revenues for the year ended December 31,
2001 increased 191.4% to $6,611,436 compared to $2,268,688 for the year ended
December 31, 2000. The increase was primarily due to a significant increase in
volume. Gross profit as a percentage of POPSign revenues increased to 45.7% for
2001 compared to 35.0% for 2000, primarily due to the significant increase in
volume.
Gross profit from our product sales for the year ended December 31, 2001
decreased 23.2% to $2,704,832 compared to $3,523,858 for the year ended December
31, 2000. The decrease was primarily due to decreased sales from our other
product categories based on decreased demand for those products from our
customers. Gross profit as a percentage of other sales decreased to 49.4% for
2001 compared to 55.5% for 2000, primarily due to the write-off of inventory in
2001 and the effect of lower sales.
Page 10
OPERATING EXPENSES.
SELLING. Selling expenses for the year ended December 31, 2001 increased 42.1%
to $5,815,454 compared to $4,092,805 for the year ended December 31, 2000,
primarily due to increased commissions expense due to the significant increase
in total net sales. Selling expenses as a percentage of total net sales
decreased to 29.2% in 2001 compared to 31.9% in 2000, primarily due to the
increased expenses being more than fully offset by the effect of increased total
net sales.
MARKETING. Marketing expenses for the year ended December 31, 2001 increased
42.5% to $1,079,684 compared to $757,698 for the year ended December 31, 2000,
primarily due to increased promotion expenses for the POPS programs. Marketing
expenses as a percentage of total net sales decreased to 5.4% in 2001 compared
to 5.9% in 2000, primarily due to the effect of higher total net sales during
the year, somewhat offset by the increased expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the year
ended December 31, 2001 increased 31.5% to $2,302,361 compared to $1,751,019 for
the year ended December 31, 2000, primarily due to legal fees and facility rent.
General and administrative expenses as a percentage of total net sales decreased
to 11.5% in 2001 compared to 13.6% in 2000, primarily due to the effect of
higher total net sales during the year, somewhat offset by the increased
expenses.
OTHER INCOME (EXPENSE). Other income was $2,061 for the year ended December 31,
2001 compared to other expense of $14,593 for the year ended December 31, 2000,
primarily due lower interest expense.
NET INCOME. Our net income for the year ended December 31, 2001 was $120,830
compared to a net loss of $823,569 for the year ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations with proceeds from public and private
equity placements. At December 31, 2002, working capital was $7,324,154 compared
to $2,883,375 at December 31, 2001. During the same period total cash and cash
equivalents increased $4,262,133.
Net cash provided by operating activities during 2002 was $898,330, primarily
due to the net income and the increase in operating liabilities in excess of
operating assets. Accounts receivable increased $2,215,296 in 2002 due to
increased POPS revenues. Accounts payable increased $1,326,360 as a result of
increased payments due to participating retailers, resulting from increased POPS
revenue. Deferred revenue increased $925,788 due to the timing of the POPS
program cycles at year-end. The Company expects accounts receivable to increase
during 2003 as POPS revenue continues to grow. The Company expects inventory
levels to remain flat during 2003.
Net cash of $3,811,826 was used in investing activities in 2002, primarily due
to the $3,056,186 acquisition of the VALUStix business and the purchase of
property and equipment of $835,640.
Net cash of $7,175,629 was provided by financing activities including $7,687,248
from the issuance of common stock, offset by payments on the line of credit of
$511,619. The issuance of common stock included $7,041,340, net of expenses,
related to a private placement of 816,100 shares to a small group of accredited
investors during December 2002. The remaining amount related to the exercise of
stock options and warrants and the issuance of shares related to the employee
stock purchase plan.
The Company anticipates that its working capital needs will remain consistent
with prior years. The Company's $2 million line of credit with a finance
institution was paid in full during 2002 and the related
Page 11
agreement expired on December 31, 2002. The Company believes that it has
sufficient cash 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 shareholders 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 the 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: we
historically have not achieved significant earnings; our results of operations
may be subject to significant fluctuations; we face significant competition from
other providers of at-shelf advertising or promotion signage; reductions in
advertising and promotional expenditures by branded product manufacturers due to
changes in economic conditions would adversely affect us; we are dependent on
the number of retailer partners; we are dependent on the success of the Insignia
POPS program and expansion of the program to the retail drug industry; we may
not be able to manage growth effectively; we are dependent on manufacturer
partners achieving sales lift; we recently made our first business acquisition
and may acquire other businesses; we are dependent on members of management
team; we have a significant amount of options and warrants outstanding that
could affect market price of our common stock; and the market price of our
common stock has been volatile.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Not applicable.
Page 12
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..............................................................................14
Balance Sheets as of December 31, 2002 and 2001.............................................................15
Statements of Operations for the years ended December 31, 2002, 2001 and 2000...............................16
Statement of Changes in Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000........................................................................17
Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000................................18
Notes to Financial Statements...............................................................................19
Page 13
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Insignia Systems, Inc.
We have audited the balance sheets of Insignia Systems, Inc. as of December 31,
2002 and 2001, and the related statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. Our audits also include the financial statement schedule listed in the
Index at Item 15. 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, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002, 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
Minneapolis, Minnesota
January 31, 2003
Page 14
INSIGNIA SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31 2002 2001
- ---------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,471,581 $ 2,209,448
Marketable securities - 80,000
Accounts receivable - net of $132,000 allowance in 2002
and $174,000 in 2001 5,263,701 2,995,527
Inventories 975,876 843,965
Prepaid expenses 77,248 146,002
- ---------------------------------------------------------------------------------------------
Total Current Assets 12,788,406 6,274,942
PROPERTY AND EQUIPMENT:
Production tooling, machinery and equipment 2,046,208 1,740,462
Office furniture and fixtures 257,547 243,051
Computer equipment 645,742 517,510
Leasehold improvements 174,143 266,836
- ---------------------------------------------------------------------------------------------
Construction-in-progress 50,936 -
3,174,576 2,757,859
Accumulated depreciation and amortization (2,281,838) (2,411,900)
- ---------------------------------------------------------------------------------------------
Total Property and Equipment 892,738 355,959
- ---------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill 3,041,186 -
TOTAL ASSETS $ 16,722,330 $ 6,630,901
- ---------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ - $ 511,619
Accounts payable 3,465,746 2,139,386
Accrued liabilities
Commission 269,323 247,110
Employee stock purchase plan 246,120 192,624
Other 406,061 149,614
Deferred revenue 1,077,002 151,214
- ---------------------------------------------------------------------------------------------
Total Current Liabilities 5,464,252 3,391,567
SHAREHOLDERS' EQUITY:
Common stock, par value $.01:
Authorized shares - 20,000,000
Issued and outstanding shares - 11,767,255 in 2002 and
10,614,098 in 2001 117,673 106,141
Additional paid-in capital 25,692,131 18,017,617
Accumulated deficit (14,551,726) (14,884,424)
- ---------------------------------------------------------------------------------------------
Total Shareholders' Equity 11,258,078 3,239,334
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,722,330 $ 6,630,901
- ---------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
Page 15
INSIGNIA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------
Services revenues $ 20,114,132 $ 14,455,158 $ 6,481,341
Products sold 4,707,229 5,478,008 6,348,831
- ---------------------------------------------------------------------------------------------------------
Total net sales 24,821,361 19,933,166 12,830,172
Cost of services 10,023,630 7,843,722 4,212,653
Cost of goods sold 2,162,860 2,773,176 2,824,973
- ---------------------------------------------------------------------------------------------------------
Total cost of sales 12,186,490 10,616,898 7,037,626
- ---------------------------------------------------------------------------------------------------------
Gross Profit 12,634,871 9,316,268 5,792,546
OPERATING EXPENSES:
Selling 7,354,296 5,815,454 4,092,805
Marketing 1,921,838 1,079,684 757,698
General and administrative 2,816,219 2,302,361 1,751,019
- ---------------------------------------------------------------------------------------------------------
Total Operating Expenses 12,092,353 9,197,499 6,601,522
- ---------------------------------------------------------------------------------------------------------
Operating Income (Loss) 542,518 118,769 (808,976)
OTHER INCOME (EXPENSE):
Interest income 51,810 61,895 85,607
Interest expense (61,216) (69,828) (122,053)
Other income (expense) (200,414) 9,994 21,853
- ---------------------------------------------------------------------------------------------------------
(209,820) 2,061 (14,593)
- ---------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 332,698 $ 120,830 $ (823,569)
- ---------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ .03 $ .01 $ (.08)
Diluted $ .03 $ .01 $ (.08)
- ---------------------------------------------------------------------------------------------------------
Shares used in calculation of net income (loss) per share:
Basic 10,871,594 10,470,075 9,879,546
Diluted 11,799,837 11,539,760 9,879,546
- ---------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
Page 16
INSIGNIA SYSTEMS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Additional
------------ Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
- -------------------------------------------------------------------------------------------------------------------
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
Employee stock purchase plan 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
Sale of common stock, net 816,100 8,161 7,033,179 - - 7,041,340
Employee stock purchase plan 43,653 437 192,074 - - 192,511
Exercise of stock options 136,944 1,369 394,240 - - 395,609
Exercise of stock warrants 156,460 1,565 56,223 - - 57,788
Other - - (1,202) - - (1,202)
Net income - - - - 332,698 332,698
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 11,767,255 $117,673 $25,692,131 $ - $(14,551,726) $11,258,078
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
Page 17
Insignia Systems, Inc.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 2002 2001 2000
- --------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 332,698 $ 120,830 $ (823,569)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 187,720 169,013 150,150
Provision for bad debt expense (52,878) 71,790 45,000
Amortization of unearned compensation - 9,588 19,176
Stock option repricing - 10,293 66,099
Loss on disposal of property and equipment 126,141 - 3,791
Other (1,202) - -
Changes in operating assets and liabilities:
Accounts receivable (2,215,296) (977,531) (831,699)
Inventories (131,911) 398,437 (24,618)
Prepaid expenses 68,754 70,791 (142,654)
Accounts payable 1,326,360 1,152,811 601,311
Accrued liabilities 332,156 38,884 191,464
Deferred revenue 925,788 (161,858) (80,248)
- --------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities 898,330 903,048 (825,797)
INVESTING ACTIVITIES:
Purchases of property and equipment (835,640) (274,919) (184,693)
Purchase of marketable securities - - (160,000)
Maturities of marketable securities 80,000 80,000 240,000
Cash paid for business acquisition (3,056,186) - -
- --------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities (3,811,826) (194,919) (104,693)
FINANCING ACTIVITIES:
Net change in line of credit (511,619) (91,233) (204,168)
Proceeds from issuance of common stock, net 7,687,248 486,392 1,333,694
Principal payments on long-term debt - - (81,967)
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 7,175,629 395,159 1,047,559
- --------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 4,262,133 1,103,288 117,069
Cash and Cash Equivalents at Beginning of Year 2,209,448 1,106,160 989,091
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 6,471,581 $ 2,209,448 $ 1,106,160
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the year for interest $ 61,216 $ 69,828 $ 122,053
- --------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
Page 18
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") markets
in-store promotional products, programs and services to retailers and
consumer packaged goods manufacturers. The Company's products include the
Insignia Point-of-Purchase Services (POPS) in-store promotion program,
which includes both Insignia POPSign and VALUStix programs, thermal sign
card supplies for the Company's SIGNright and Impulse systems, Stylus
software and laser printable cardstock and label supplies.
BASIS OF PRESENTATION. The Company has included in its financial statements
the assets and liabilities recorded in connection with the acquisition of
the assets comprising the VALUStix business. The results of operations
related to VALUStix since December 23, 2002, the effective date, have been
included in the Company's statement of operations.
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 stated at cost, which approximates fair value. At
December 31, 2002, $5,567,693 was invested in an overnight repurchase
account and $817,861 was invested in a short-term money market account.
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 any unrealized gains and losses,
net of tax, reported as a separate component of shareholders' 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.
ACCOUNTS RECEIVABLE. The Company grants credit to customers in the normal
course of business, but generally does not require collateral or any other
security to support amounts due. Management performs ongoing credit
evaluations of customers and maintains allowances for potential credit
losses which, when realized, have generally been within management
expectations.
INVENTORIES. Inventories are primarily comprised of Impulse machines,
SIGNright machines, sign cards, and accessories. Inventory is valued at the
lower of cost or market using the first-in, first-out (FIFO) method and
consist of the following:
December 31,
---------------------------------
2002 2001
---- ----
Raw materials $ 328,713 $ 250,788
Finished goods 647,163 593,177
----------- ---------
$ 975,876 $ 843,965
=========== =========
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost.
Depreciation is provided using the straight-line 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.
Page 19
GOODWILL. Goodwill represents the excess of the purchase price over the
fair value of the assets acquired. The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141
"BUSINESS COMBINATIONS," which was effective for all business combinations
initiated after June 30, 2001. The statement requires that all business
combinations be accounted for under the purchase method and certain
intangible assets acquired in business combinations be recorded separately
from goodwill if certain requirements are met. The FASB also issued SFAS
142 "GOODWILL AND OTHER INTANGIBLE ASSETS," which was effective January 1,
2002. SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and requires that assets with an
indefinite life, such as goodwill, no longer be amortized to earnings, but
instead be reviewed for impairment, at least annually or whenever an
impairment indicator arises. Management expects to perform a goodwill
impairment test annually, which will be done on the basis of the Company as
one reporting unit.
IMPAIRMENT OF LONG-LIVED ASSETS. The FASB issued SFAS 144 "ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS," which was effective
January 1, 2002. SFAS 144 supercedes SFAS 121 and further clarifies the
accounting for disposals 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.
INCOME TAXES. Income taxes are accounted for under the liability method.
Deferred income taxes are provided for temporary differences between the
financial reporting and tax basis of assets and liabilities. All of the
goodwill is deductible for tax purposes.
STOCK-BASED COMPENSATION. As described in Note 6, the Company has elected
to follow the accounting provisions of Accounting Principles Board Opinion
No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations in accounting for stock-based compensation and to furnish
the pro forma disclosure required under SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND Disclosure. 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.
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 is
recognized ratably over the life of the contract. Revenue associated with
Insignia POPS is recognized over the period of service.
ADVERTISING COSTS. Advertising costs are charged to operations as incurred.
Advertising expenses were approximately $385,000, $336,000 and $221,000
during the years ended December 31, 2002, 2001 and 2000.
NET INCOME (LOSS) PER SHARE. Basic net income (loss) per share is computed
by dividing net income (loss) by the weighted average shares outstanding
and excludes any dilutive effects of options, warrants and convertible
securities. Diluted net income per share gives effect to all diluted
potential common shares outstanding during the year. Options and warrants
to purchase approximately 599,000 and 455,000 shares of common stock with
weighted average exercise prices of $11.04 and $7.76 were outstanding at
December 31, 2002 and 2001 and were not included in the computation of
common stock equivalents because their exercise prices were higher than the
average fair market value of the common shares during the reporting period.
For the year ended December 31, 2000, the effect of options and warrants
was anti-dilutive due to the net loss incurred during the period.
Page 20
2002 2001 2000
- --------------------------------------------------------------------------------------------
Denominator for basic net income (loss)
per share - weighted averages shares 10,871,594 10,470,075 9,879,546
Effect of dilutive securities:
Stock options and warrants 928,243 1,069,685 -
- --------------------------------------------------------------------------------------------
Denominator for diluted net income (loss) per
share - adjusted weighted average shares 11,799,837 11,539,760 9,879,546
USE OF ESTIMATES. The preparation of financial statements in conformity
with accounting 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.
RECLASSIFICATIONS. Certain 2001 and 2000 amounts have been reclassified to
conform to the presentation in the 2002 financial statements.
2. ACQUISITION. On December 23, 2002, the Company acquired all of the assets
comprising the VALUStix business from Paul A. Richards, Inc., a New York
company ("PAR"), for $3,000,000 in cash, plus a five-year royalty based on
annual net sales over a threshold amount, pursuant to an Asset Purchase
Agreement dated December 23, 2002 between the Company and PAR. PAR is not
related to the Company in any manner.
The price was determined based on the value of the assets acquired and
expectations concerning future sales of the product line. The assets
acquired consisted primarily of a turnkey operation related to the VALUStix
business and thus most of the purchase price has been allocated to
goodwill.
In connection with the transaction, the Company also entered into an
Employment Agreement with Paul A. Richards that is effective for five
years, provides for an annual salary of $150,000 and can be terminated
under certain terms and conditions, as defined in the Employment Agreement.
Additionally, the Company entered into a Royalty Agreement with PAR that is
effective for five years and provides for royalties to be paid to PAR for
net sales of VALUStix products, based upon certain annual thresholds and
varying rates of royalties, as defined in the Royalty Agreement.
The Company funded the cash payment for the acquisition using a portion of
the funds received from a private placement of the Company's common stock
(see note 6).
The acquisition was accounted for as a purchase, and accordingly, results
of operations relating to the purchased assets have been included in the
statement of operations from the date of acquisition. The purchase price
was allocated as follows:
Goodwill $3,041,186
Property and equipment 15,000
Contingent royalties will also be recorded as part of the purchase price at
the time they are actually incurred.
Page 21
Unaudited pro forma results of operations as if the acquisition had
occurred as of January 1, 2001 are as follows:
Year ended December 31,
2002 2001
---------------- -----------------
Net sales $ 24,918,112 $20,046,787
Net loss (428,042) (848,536)
Net loss per share (.04) (.08)
3. MARKETABLE SECURITIES. Marketable securities consisted of a certificate of
deposit, which was pledged as collateral for the building lease agreement.
Investments are classified as available-for-sale and are stated at
amortized cost, which approximates fair value. As a result no unrealized
gains or losses were recognized at December 31, 2001.
4. LINE OF CREDIT. The Company had a $2 million line of credit agreement with
a finance institution that expired on December 31, 2002. The amount
outstanding under the credit agreement was paid in full during December
2002. The credit agreement required minimum monthly interest amounts and
accrued 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. The Company had
pledged as security all inventory, accounts receivable, equipment and
general intangibles.
5. COMMITMENTS AND CONTINGENCIES.
OPERATING LEASES. The Company conducts its operations in leased facilities
and moved to a new location in December 2002. The Company incurred
approximately $200,000 of expenses during the year ended December 31, 2002
as a result of its relocation, including the write-off of approximately
$132,000 of leasehold improvements and furniture at its former location.
The new operating lease is effective until January 2010. The Company also
leases equipment under operating lease agreements effective through
September 2005. Rent expense under all of these leases was approximately
$563,000, $399,000 and $309,000 for the years ended December 13, 2002, 2001
and 2000.
Minimum future lease obligations under these leases, excluding operating
costs, are approximately as follows for the years ending December 31:
2003 $ 1,125,000
2004 1,154,000
2005 1,014,000
2006 597,000
2007 597,000
Thereafter 1,194,000
LEGAL. 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 alleged that News America had exclusive
promotional agreements with certain grocery store retailers and that the
promotional agreements prevented those retailers from contracting for the
Company's POPSign program. The complaint also accused the Company of unfair
competition, false advertising and interfering with business relationships.
The Company denied any wrongful or improper action and brought a
counterclaim against News America. This counterclaim alleged that News
America had engaged in anti-competitive practices and was 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 and
counterclaim were settled in November 2002. The terms of the settlement
agreement are confidential. The settlement did not impact the Company's
current operating results, nor is it expected to affect future operating
results.
Page 22
The Company is subject to various legal proceedings in the normal course of
business. Management believes the outcome of these proceedings will not
have a material adverse effect on the Company's financial position or
results of operations.
RETAILER AGREEMENTS. The Company has contracts in the normal course of
business with various retailers, some of which provide for minimum annual
program levels. If those minimum levels are not met, the Company is
obligated to pay the contractual difference to the retailers. During the
years ended December 31, 2002, 2001 and 2000 the Company incurred
approximately $112,000, $330,000 and $103,000 of costs related to these
minimums. The amounts were recorded in Cost of Services in the Statements
of Operations.
Aggregate minimum commitment amounts under these agreements with retailers
are approximately as follows for the years ending December 31:
2003 $ 5,500,000
2004 6,400,000
2005 4,600,000
2006 700,000
6. SHAREHOLDERS' EQUITY.
PRIVATE PLACEMENT. On December 18, 2002, the Company closed a private
placement of $7,500,000 of common stock to a small group of accredited
investors at a price of $9.19 per share, pursuant to a Securities Purchase
Agreement. The price represented a 15% discount from the average closing
bid price of the Company's common stock over the five days prior to the
closing.
In connection with this transaction, the Company entered into a
Registration Rights Agreement that requires the Company to register the
newly issued shares within a prescribed timeframe.
The Company also issued warrants to the investors entitling them to
purchase an additional 244,827 shares of the Company's common stock at an
exercise price of $12.44 per share for a five-year period. The warrants are
callable by the Company after one year if, among other conditions, the
Company's common stock has traded at 175% of the exercise price for 30
consecutive trading days. Additionally, a warrant to purchase 40,805 shares
with the same terms was issued to the Placement Agent. The warrants are all
exercisable at December 31, 2002.
WARRANTS. 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 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 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 recognized consulting expense
associated with these warrants over the vesting period including $9,588 and
$19,176 during the years ended December 31, 2001 and 2000. During 2001,
57,219 of these warrants were exercised and 12,781 of these warrants were
cancelled.
During 2002, various warrant holders exercised 185,000 warrants at prices
ranging from $1.625 to $2.31 to purchase 156,460 net shares of the
Company's common stock. The Company received proceeds of $57,788 as a
result of these warrant exercises.
Page 23
During 2001, various warrant holders executed a cashless exercise of 76,000
warrants at $1.625 to purchase 62,123 net shares of the Company's common
stock.
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.
At December 31, 2002, an aggregate of 450,632 warrants are outstanding and
exercisable.
STOCK OPTIONS. The Company has elected to follow APB No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for
its stock-based compensation. In addition, the Company provides pro forma
disclosure of stock-based compensation, as measured under the fair value
requirements of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
These pro forma disclosures are provided as required under SFAS No. 148,
ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE.
APB No. 25 requires no recognition of compensation expense for most of the
stock-based compensation arrangements provided by the Company, namely,
broad-based employee stock purchase plans and option grants where the
exercise price is equal to the market value at the date of grant. However,
APB No. 25 requires recognition of compensation expense for variable award
plans over the vesting periods of such plans, based upon the then-current
market values of the underlying stock. In contrast, SFAS No. 123 requires
recognition of compensation expense for grants of stock, stock options, and
other equity instruments over the vesting periods of such grants, based on
the estimated grant-date fair values of those grants.
The Company has a Stock Option Plan (the "Option Plan") for its employees
and directors. Under the terms of the Option 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 Option 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.
Page 24
The following tables summarizes activity under the Option Plan:
Plan Shares Plan Weighted
Available Options Average Exercise
for Grant Outstanding Price Per Share
- --------------------------------------------------------------------------------------------------------------
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
Reserved 250,000 - -
Granted (400,800) 400,800 9.36
Exercised - (136,944) 2.86
Cancelled 114,665 (114,665) 7.08
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002 15,623 1,746,007 $ 4.88
- --------------------------------------------------------------------------------------------------------------
The number of options exercisable under the Option Plan were:
December 31, 2000 849,994
December 31, 2001 911,294
December 31, 2002 1,102,758
The following table summarizes information about the stock options
outstanding at December 31, 2002:
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, 2002 Per share
------------------ ---------------- -------------------- ----------------- ---------------------- ------------------
$0.75 - $1.06 461,333 0.3 years $1.05 461,333 $1.05
1.25 - 2.38 331,416 1.6 years 1.62 313,916 1.63
4.00 - 6.12 190,259 4.5 years 4.65 135,393 4.72
6.35 - 8.97 455,199 8.8 years 7.92 172,049 7.91
9.30 - 11.36 307,600 9.8 years 9.77 20,067 9.30
------------------ ---------------- -------------------- ----------------- ---------------------- ------------------
$0.75 - $11.36 1,746,007 5.0 years $4.88 1,102,758 $2.89
Options outstanding under the Option Plan expire at various dates during
the period January 2003 through December 2012.
In electing to continue to follow APB No. 25 for expense recognition
purposes, the Company is obliged to provide the expanded disclosures
required under SFAS No. 148 for stock-based compensation granted,
including, if materially different from reported results, disclosure of pro
forma net income (loss) and net income (loss) per share had compensation
expense relating to grants been measured under the fair value recognition
provisions of SFAS No. 123.
Page 25
The weighted average fair values of options granted during the years ended
December 31, 2002, 2001 and 2000 were $4.98, $4.63 and $2.58 and were
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants during the years
ended December 31, 2002, 2001 and 2000: risk-free interest rate of 4.09%,
5.12% and 6.0%; dividend yield of 0%; volatility factor of the expected
market price of the Company's common stock of .784, .898 and .766 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 on a straight-line basis over the options'
vesting period. The Company's pro forma information is as follows:
2002 2001 2000
- -------------------------------------------------------------------------------
Net income (loss) as reported $ 332,698 $ 120,830 $ (823,569)
Pro forma effect of
stock-based compensation (1,113,786) (661,264) (499,530)
----------- ------------ ------------
Pro forma net (loss) $ (781,088) $ (540,434) $ (1,323,099)
Pro forma net (loss) per share $ (.07) $ (.05) $ (.13)
These effects may not be representative of the future effects of applying
the fair value method.
EMPLOYEE STOCK PURCHASE PLAN. The Company has an Employee Stock Purchase
Plan (the "Plan") that enables employees to contribute up to 10% of their
compensation toward the purchase of the Company's common stock at 85% of
market value. During the years ended December 31, 2002, 2001 and 2000,
employees purchased 43,653, 51,735 and 56,537 shares under the Plan. At
December 31, 2002, 178,986 shares are reserved for future employee
purchases of common stock under the Plan.
7. INCOME TAXES. At December 31, 2002, the Company had net operating loss
carryforwards of approximately $15,000,000, 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 due to uncertainties
regarding the realization of deferred tax assets based on the Company's
lack of historical 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 $1,300,000 in tax deductions that resulted from the
exercise of stock options. When these loss carryforwards are realized the
corresponding changes in the valuation allowance will be recorded as
additional paid-in capital.
Page 26
Significant components of the deferred taxes are as follows:
As of December 31 2002 2001
- -------------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 5,805,000 $ 5,588,300
Depreciation - 49,400
Accounts receivable allowance 49,000 64,500
Inventory reserve 34,000 64,300
Other 21,000 20,500
- -------------------------------------------------------------------------------
Deferred tax assets 5,909,000 5,787,000
Less valuation allowance (5,909,000) (5,787,000)
- -------------------------------------------------------------------------------
Net deferred taxes $ - $ -
===============================================================================
8. 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. During the years ended December 31,
2002, 2001 and 2000, the Company made no matching contributions.
9. CONCENTRATIONS.
MAJOR CUSTOMERS. During the year ended December 31, 2002 two customers
accounted for 13% and 12% of the Company's total net sales. At December 31,
2002 these two customers represented 7% and 20% of the Company's total
accounts receivable. During the year ended December 31, 2001 another
customer accounted for 14% of the Company's total net sales.
Although there are a number of customers that the Company sells to, the
loss of a major customer could cause a delay in and possible loss of sales,
which would adversely affect operating results.
EXPORT SALES. Export sales accounted for 2%, 4% and 8% of total net sales
during the years ended December 31, 2002, 2001 and 2000.
SUPPLIERS. The Company currently buys the components of its products from
sole suppliers. Although there are a limited number of manufacturers
capable of manufacturing these components, management believes that other
manufacturers could adapt to provide the components 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.
The Company subcontracts with one vendor for the printing and application
of the VALUStix coupons. Although there are a limited number of printers
capable of providing this service, management believes that other printers
could provide the coupons on comparable terms. The time required to locate
and qualify other printers, however, could cause a delay that may be
financially disruptive to the Company.
Page 27
10. QUARTERLY FINANCIAL DATA. (Unaudited)
Quarterly data for the years ended December 31, 2002 and 2001 was as follows:
YEAR ENDED DECEMBER 31, 2002 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 6,015,117 $ 5,822,882 $ 5,075,908 $ 7,907,454
Gross profit 2,940,944 3,032,294 2,239,125 4,422,508
Net income (loss) 319,905 201,713 (499,216) 310,296
Net income (loss) per share:
Basic $ .03 $ .02 $ (.05) $ .03
Diluted $ .03 $ .02 $ (.05) $ .03
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 2,445,568 2,046,731 1,700,027 3,123,942
Net income (loss) 301,127 (99,173) (492,523) 411,399
Net income (loss) per share:
Basic $ .03 $ (.01) $ (.05) $ .04
Diluted $ .03 $ (.01) $ (.05) $ .04
Reclassifications of certain selling and marketing expenses to cost of sales
have been made for all periods presented to be consistent with the annual
presentation of the Statements of Operations.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -------------------------------------------------------------------------
Financial Disclosures
---------------------
None.
Page 28
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 2003 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 2003 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 2003 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 2003 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 14. Controls and Procedures
- ---------------------------------
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer, Scott F. Drill, and Chief
Financial Officer, Denni J. Lester, have reviewed the Company's disclosure
controls and procedures within 90 days prior to the filing of this report. Based
upon this review, these officers believe that the Company's disclosure controls
and procedures are effective in ensuring that material information related to
the Company is made known to them by others within the Company.
(b) Changes in Internal Controls.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the year
covered by this report or from the end of the reporting period to the date of
this Form 10-K.
Page 29
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
The following financial statements of Insignia Systems, Inc. are included in
Item 8:
Report of Independent Auditors
Balance Sheets as of December 31, 2002 and 2001
Statements of Operations for the years ended December 31, 2002, 2001 and 2000
Statements of Changes in Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000
Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
Notes to Financial Statements
The following schedule of Insignia Systems, Inc. is included in Item 15:
Schedule II. Valuation and Qualifying Accounts
(a) Exhibits
Exhibit Page Number or Incorporation
Number Description By Reference To
- ---------------- ---------------------------------------- -------------------------------------------------
2 Asset Purchase Agreement dated Exhibit 2 of the Registrant's Form 8-K filed
December 23, 2002 between Insignia December 31, 2002
Systems, Inc. and Paul A. Richards,
Inc. (omitted schedules available upon
request)
3.1 Articles of Incorporation of Exhibit 3.1 of the Registrant's Registration
Registrant, as amended to date Statement on Form S-18, Reg. No. 33-40765C
3.2 Bylaws, as amended to date Exhibit 3.2 of the Registrant's Registration
Statement on Form S-18, Reg. No. 33-40765C
4.1 Specimen Common Stock Certificate of Exhibit 4.1 of the Registrant's Registration
Registrant Statement on Form S-18, Reg. No. 33-40765C
4.2 Securities Purchase Agreement dated Exhibit 4.1 of the Registrant's Form 8-K filed
December 18, 2002 among Insignia December 31, 2002
Systems, Inc. and the Purchasers
4.3 Registration Rights Agreement dated Exhibit 4.2 of the Registrant's Form 8-K filed
December 18, 2002 among Insignia December 31, 2002
Systems, Inc. and the Purchasers
4.4 Form of Warrant dated December 18, Exhibit 4.3 of the Registrant's Form 8-K filed
2002 between Insignia Systems, Inc. December 31, 2002
and the Holders
10.1 Employment Agreement dated December Exhibit 10.1 of the Registrant's Form 8-K filed
23, 2002 between Insignia Systems, December 31, 2002
Inc. and Paul A. Richards
10.2 Royalty Agreement dated December 23, Exhibit 10.2 of the Registrant's Form 8-K filed
2002 between Insignia Systems, Inc. December 31, 2002
and Paul A. Richards, Inc.
10.3 The Company's 1990 Stock Plan, as Exhibit 10.3 of the Registrant's Annual Report
amended on Form 10-K for the year ended December 31,
2001
10.4 Certificate of Amendment to 1990 Stock Filed herewith
Option Plan
10.5 Lease Agreement between Plymouth Exhibit 10.6 of the Registrant's Annual Report
Partners II, and the Company, dated on Form 10-K for the year ended December 31,
October 5, 1998 1998
10.6 Lease Agreement between 321 Filed herewith
Corporation and the Company, dated
October 31, 2002
Page 30
Exhibit Page Number or Incorporation
Number Description By Reference To
- ---------------- ---------------------------------------- -------------------------------------------------
10.7 License Agreement between Thomas and Exhibit 10.1 of the Registrant's Registration
Lawrence McGourty and the Company Statement on Form S-18, Reg. No. 33-40765C
dated January 23, 1990, as amended
10.8 Barcode License and Support Agreement Exhibit 10.2 of the Registrant's Registration
between Thomas and Lawrence McGourty Statement on Form S-18, Reg. No. 33-40765C
and the Company dated January 23, 1990
10.9 Employee Stock Purchase Plan, as Exhibit 10.9 of the Registrant's Annual Report
amended on Form 10-K for the year ended December 31,
2000
23 Consent of Ernst & Young LLP Filed herewith
25 Power of Attorney (See signature page Filed herewith
of this Form 10-K)
99.1 Certification of CEO Filed herewith
99.2 Certification of CFO Filed herewith
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on December 31, 2002 under Items 2
and 5, to report the acquisition of the assets comprising the VALUStix business
and the completion of a private placement of $7,500,000 of common stock.
Page 31
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs and Deductions End of Period
Description of Period Expenses Describe
- -------------------------------------- ------------ ------------- -------------- ---------------
Year ended December 31, 2002
Allowance for doubtful accounts $ 174,194 $(52,878) $(10,684) (1) $ 132,000
Provision for obsolete inventory 46,365 55,000 51,592 (3) 49,773
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Allowance for doubtful accounts 106,242 71,790 3,838 (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
- --------------------------------------------------
(1) Uncollectable accounts written off, net of recoveries.
(2) Credited to income.
(3) Inventory scrapped and disposed of.
Page 32
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 F. Drill
---------------------------
Scott F. Drill
President and CEO
Dated: March 10, 2003
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 Denni J.
Lester 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 her substitute
or substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Title Date
- ------------------------------- -------------------------------------------------- -----------------------
/s/ Gary L. Vars Chairman of the Company and March 10, 2003
- --------------------------- President, Insignia POPS Division
Gary L. Vars
/s/ Scott F. Drill President and Chief Executive Officer (principal March 10, 2003
- --------------------------- executive officer)
Scott F. Drill
/s/ Denni J. Lester Vice President, Finance, CFO and Treasurer March 10, 2003
- --------------------------- (principal financial officer)
Denni J. Lester
/s/ Erwin A. Kelen Director March 10, 2003
- ---------------------------
Erwin A. Kelen
/s/ Donald Kramer Director March 10, 2003
- ---------------------------
Donald Kramer
/s/ W. Robert Ramsdell Director March 10, 2003
- ---------------------------
W. Robert Ramsdell
/s/ Gordon F. Stofer Director March 10, 2003
- ---------------------------
Gordon F. Stofer
/s/ Frank D. Trestman Director March 10, 2003
- ---------------------------
Frank D. Trestman
Page 33
CERTIFICATIONS
I, Scott F. Drill, certify that:
1. I have reviewed this annual report on Form 10-K of Insignia Systems, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others within the
Company, particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 10, 2003 /s/ Scott F. Drill
-----------------------------------
Scott F. Drill
President and
Chief Executive Officer
34
I, Denni J. Lester, certify that:
1. I have reviewed this annual report on Form 10-K of Insignia Systems, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others within the
Company, particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 10, 2003 /s/ Denni J. Lester
--------------------------
Denni J. Lester
Vice President, Finance
And Chief Financial Officer
35