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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO _________________
Commission File Number: 1-13471
INSIGNIA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1656308
--------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6470 Sycamore Court North, Maple Grove, MN 55369
------------------------------------------------
(Address of principal executive offices)
(763) 392-6200
------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable.
------------------------------------------------
(Former name, former address and former fiscal year if
changed since last report)
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 reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2).
[ ] Yes [ X ] No
Number of shares outstanding of Common Stock, $.01 par value, as of
July 24, 2003, was 12,344,019.
Page 1 of 19
INSIGNIA SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets - June 30, 2003 and December 31, 2002 (unaudited)
Statements of Operations -- Three and six months ended June 30,
2003 and 2002 (unaudited)
Statements of Cash Flows - Six months ended June 30, 2003 and
2002 (unaudited)
Notes to Financial Statements - June 30, 2003 (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBITS
Page 2 of 19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSIGNIA SYSTEMS, INC.
BALANCE SHEETS
June 30, December 31,
2003 2002
ASSETS (Unaudited)
- -------------------------------------------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,632,722 $ 6,471,581
Accounts receivable, net 4,584,027 5,263,701
Inventories 779,899 975,876
Prepaid expenses and other 467,152 77,248
------------ ------------
TOTAL CURRENT ASSETS 10,463,800 12,788,406
PROPERTY AND EQUIPMENT:
Production tooling, machinery and equipment 1,750,169 2,046,208
Office furniture and fixtures 257,547 257,547
Computer equipment 677,373 645,742
Leasehold improvements 258,767 174,143
Construction-in-progress -- 50,936
------------ ------------
2,943,856 3,174,576
Accumulated depreciation and amortization (2,123,993) (2,281,838)
------------ ------------
TOTAL PROPERTY AND EQUIPMENT 819,863 892,738
OTHER ASSETS:
Goodwill 3,090,579 3,041,186
Other 500,000 --
------------ ------------
TOTAL OTHER ASSETS 3,590,579 3,041,186
------------ ------------
TOTAL ASSETS $ 14,874,242 $ 16,722,330
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,602,740 $ 3,465,746
Accrued liabilities:
Commissions 264,374 269,323
Employee stock purchase plan 136,568 246,120
Other 693,644 406,061
Deferred revenue 274,026 1,077,002
------------ ------------
TOTAL CURRENT LIABILITIES 3,971,352 5,464,252
SHAREHOLDERS' EQUITY:
Common stock, par value $.01; authorized - 20,000,000 shares;
issued and outstanding June 30, 2003 - 12,344,019 shares;
December 31, 2002 - 11,767,255 shares 123,440 117,673
Additional paid-in capital 26,425,238 25,692,131
Accumulated deficit (15,645,788) (14,551,726)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 10,902,890 11,258,078
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,874,242 $ 16,722,330
============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 3 of 19
INSIGNIA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Services revenues $ 6,242,576 $ 4,536,590 $ 11,633,613 $ 9,347,749
Products sold 1,018,382 1,286,292 2,088,848 2,490,250
------------ ------------ ------------ ------------
TOTAL NET SALES 7,260,958 5,822,882 13,722,461 11,837,999
Cost of services 3,357,956 2,160,018 6,695,856 4,643,388
Cost of sales 629,228 630,570 1,179,079 1,221,373
------------ ------------ ------------ ------------
TOTAL COST OF SALES 3,987,184 2,790,588 7,874,935 5,864,761
------------ ------------ ------------ ------------
Gross Profit 3,273,774 3,032,294 5,847,526 5,973,238
OPERATING EXPENSES:
Selling 2,157,885 1,662,845 4,470,078 3,351,409
Marketing 354,302 411,645 740,367 722,136
General and administrative 755,993 662,451 1,765,941 1,277,290
------------ ------------ ------------ ------------
Total operating expenses 3,268,180 2,736,941 6,976,386 5,350,835
------------ ------------ ------------ ------------
Operating Income (Loss) 5,594 295,353 (1,128,860) 622,403
OTHER INCOME (EXPENSE):
Interest income 18,825 12,645 42,639 23,087
Interest expense (1,696) (14,829) (1,696) (28,698)
Other income (expense) 1,095 (91,456) (6,145) (95,174)
------------ ------------ ------------ ------------
18,224 (93,640) 34,798 (100,785)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 23,818 $ 201,713 $ (1,094,062) $ 521,618
============ ============ ============ ============
Net income (loss) per share:
Basic $ 0.00 $ 0.02 $ (0.09) $ 0 .05
============ ============ ============ ============
Diluted $ 0.00 $ 0.02 $ (0.09) $ 0 .04
============ ============ ============ ============
Shares used in calculation of
net income (loss) per share:
Basic 12,272,876 10,801,128 12,141,950 10,750,692
============ ============ ============ ============
Diluted 12,605,750 11,744,213 12,141,950 11,670,733
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 4 of 19
INSIGNIA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
--------------------------
2003 2002
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $(1,094,062) $ 521,618
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 146,716 74,736
Provision for bad debt expense 10,000 42,000
Changes in operating assets and liabilities:
Accounts receivable 669,674 (518,322)
Inventories 195,977 14,646
Prepaid expenses and other (889,904) (74,271)
Accounts payable (863,006) (574,398)
Accrued liabilities 173,082 595,129
Deferred revenue (802,976) 55,702
----------- -----------
Net cash provided by (used in) operating activities (2,454,499) 136,840
INVESTING ACTIVITIES:
Purchases of property and equipment (73,841) (93,050)
Maturities of marketable securities -- 80,000
Other (49,393) --
----------- -----------
Net cash used in investing activities (123,234) (13,050)
FINANCING ACTIVITIES:
Net change in line of credit -- (194,309)
Proceeds from issuance of common stock, net 738,874 522,194
----------- -----------
Net cash provided by financing activities 738,874 327,885
----------- -----------
Increase (decrease) in cash and cash equivalents (1,838,859) 451,675
Cash and cash equivalents at beginning of period 6,471,581 2,209,448
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,632,722 $ 2,661,123
=========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 5 of 19
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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(R)) in-store promotion program, which
includes both Insignia POPSign and VALUStix(R) 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.
----------------------
Financial statements for the interim periods included herein are unaudited;
however, they contain all adjustments, including normal recurring accruals,
which in the opinion of management, are necessary to present fairly the
financial position of the Company at June 30, 2003, and its results of
operations and cash flows for the three and six months ended June 30, 2003
and 2002. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. Results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year.
The financial statements do not include certain footnote disclosures and
financial information normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America and, therefore, should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 2002.
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.
The Summary of Significant Accounting Policies in the Company's 2002 Annual
Report on Form 10-K/A describes the Company's accounting policies.
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:
June 30, December 31,
2003 2002
-------------- ----------------
Raw materials $ 211,431 $ 328,713
Work-in-process 10,914 --
Finished goods 557,554 647,163
------- -------
$ 779,899 $ 975,876
======= =======
Page 6 of 19
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
PREPAID EXPENSES.
-----------------
During the six months ended June 30, 2003 the Company made a pre-payment of
approximately $1,000,000 to a retailer, in connection with a three-year
contract. The pre-payment is being amortized ratably over the three-year
contract using the straight-line method. At June 30, 2003 the balance of
the prepaid expense related to this retailer payment was approximately
$833,000, of which approximately $500,000 was classified as long-term.
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 1,309,000
shares of common stock with a weighted average exercise price of $8.91 were
outstanding at June 30, 2003 and were not included in the computation of
common stock equivalents for the three months ended June 30, 2003 because
their exercise prices were higher than the average fair market value of the
common shares during the reporting period. Options and warrants to purchase
approximately 1,043,000 shares of common stock with a weighted average
exercise price of $9.70 were outstanding at June 30, 2003 and were not
included in the computation of common stock equivalents for the six months
ended June 30, 2003 because their exercise prices were higher than the
average fair market value of the common shares during the reporting period.
Options and warrants to purchase approximately 196,000 shares of common
stock with a weighted average exercise price of $9.29 were outstanding at
June 30, 2002 and were not included in the computation of common stock
equivalents for the three and six months ended June 30, 2002 because their
exercise prices were higher than the average fair market value of the
common shares during the reporting periods.
For the six months ended June 30, 2003, the effect of options and warrants
was anti-dilutive due to the net loss incurred during the period. Had net
income been achieved, approximately 181,000 of common stock equivalents
would have been included in the computation of diluted net income per share
for the six months ended June 30, 2003.
Three Months Ended June 30 Six Months Ended June 30
-------------------------- -------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------
Denominator for basic net income (loss)
per share - weighted averages shares 12,272,876 10,801,128 12,141,950 10,750,692
Effect of dilutive securities:
Stock options and warrants 332,874 943,085 -- 920,041
- ------------------------------------------------------------------------------------------------------------------------
Denominator for diluted net income (loss)
per share - adjusted weighted average shares 12,605,750 11,744,213 12,141,950 11,670,733
RECLASSIFICATIONS.
------------------
Certain 2002 amounts have been reclassified to conform to the presentation
in the 2003 financial statements.
Page 7 of 19
INSIGNIA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
2. 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.
The following table summarizes the relevant information as if the fair
value recognition provisions of SFAS 123 had been applied to all
stock-based awards:
Six Months Ended June 30
------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------
Net income (loss)
As reported $ (1,094,062) $ 521,618
Deduct stock-based employee compensation
expense determined under fair value method 802,389 518,024
- -----------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ (1,896,451) $ 3,594
Basic net income (loss) per share:
As reported $ (0.09) $ 0.05
Pro forma $ (0.16) $ 0.00
Diluted net income (loss) per share:
As reported $ (0.09) $ 0.04
Pro forma $ (0.16) $ 0.00
3. COMMITMENTS.
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 six months ended June
30, 2003 and 2002 the Company incurred approximately $420,000 and $101,000
of costs related to these minimums, which were recorded in Cost of Services
in the Statements of Operations.
4. CONCENTRATIONS.
During the six months ended June 30, 2003 one customer accounted for 23% of
the Company's total net sales. At June 30, 2003 this customer represented
15% of the Company's total accounts receivable. During the six months ended
June 30, 2002 two other customers each accounted for 13% 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.
Page 8 of 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in the
Company's Statements of Operations as a percentage of total net sales.
Three Months ended June 30 Six Months ended June 30
-------------------------- ------------------------
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 54.9 47.9 57.4 49.5
- ----------------------------------------------------------------------------------------------------------
Gross profit 45.1 52.1 42.6 50.5
Operating expenses:
Selling 29.7 28.5 32.5 28.3
Marketing 4.9 7.1 5.4 6.1
General and administrative 10.4 11.4 12.9 10.8
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 45.0 47.0 50.8 45.2
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) 0.1 5.1 (8.2) 5.3
Other income (expense) 0.2 (1.6) 0.2 (0.9)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) 0.3% 3.5% (8.0)% 4.4%
- ----------------------------------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements 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. The significant accounting policies are discussed in Note 1 of
the Company's financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K/A for the year ended December 31, 2002.
These critical accounting policies are subject to judgements and uncertainties,
which affect the application of these policies. The Company bases its estimates
on historical experience and on various other assumptions believed to be
reasonable under the circumstances. On an on-going basis, the Company evaluates
its estimates. In the event estimates or assumptions prove to be different from
actual results, adjustments are made in subsequent periods to reflect more
current information.
THREE AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2002
NET SALES. Net sales for the three months ended June 30, 2003 increased 25% to
$7,260,958 compared to $5,822,882 for the three months ended June 30, 2002. Net
sales for the six months ended June 30, 2003 increased 16% to $13,722,461
compared to $11,837,999 for the six months ended June 30, 2002.
Service revenues from our POPSign programs for the three months ended June 30,
2003 increased 38% to $6,242,576 compared to $4,536,590 for the three months
ended June 30, 2002. Service revenues for the six months ended June 30, 2003
increased 24% to $11,633,613 compared to $9,347,749 for the six months ended
June 30, 2002. The increases were primarily due to an increase in the number of
retail stores on line. We expect our POPSign revenues to continue to increase
compared to the prior year, both
Page 9 of 19
in amount and as a percentage of our total net sales. Additionally, we expect to
begin generating revenues related to our recent VALUStix acquisition during the
second half of the fiscal year.
Product sales for the three months ended June 30, 2003 decreased 21% to
$1,018,382 compared to $1,286,292 for the three months ended June 30, 2002.
Product sales for the six months ended June 30, 2003 decreased 16% to $2,088,848
compared to $2,490,250 for the six months ended June 30, 2002. The decreases
were primarily due to decreasing sales of our other product categories based on
decreased demand for those products from our customers. We expect the 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 three months ended June 30, 2003 increased 8%
to $3,273,774 compared to $3,032,294 for the three months ended June 30, 2002.
Gross profit for the six months ended June 30, 2003 decreased 2% to $5,847,526
compared to $5,973,238 for the six months ended June 30, 2002. Gross profit as a
percentage of total net sales decreased to 45.1% for the three months ended June
30, 2003, compared to 52.1% for the three months ended June 30, 2002. Gross
profit as a percentage of total net sales decreased to 42.6% for the six months
ended June 30, 2003, compared to 50.5% for the six months ended June 30, 2002.
Gross profit from our POPSign program revenues for the three months ended June
30, 2003 increased 21% to $2,884,620 compared to $2,376,572 for the three months
ended June 30, 2002 due to the increase in POPSign revenues, partially offset by
increased payments to retailers, increased occupancy costs, and additional
equipment costs. Gross profit from our POPSign program revenues for the six
months ended June 30, 2003 increased 5% to $4,937,757 compared to $4,704,361 for
the six months ended June 30, 2002 due to the increase in POPSign revenues,
largely offset by changes in product mix, increased payments to retailers,
increased occupancy costs and increased cost due to additional equipment added
late in 2002.
Gross profit as a percentage of POPSign program revenues decreased to 46.2% for
the three months ended June 30, 2003, compared to 52.4% for the three months
ended June 30, 2002. Gross profit as a percentage of POPSign program revenues
decreased to 42.4% for the six months ended June 30, 2003, compared to 50.3% for
the six months ended June 30, 2002. The decreases were due to the factors
discussed above.
We expect the amount of gross profit from our POPSign revenues to continue to
increase compared to the prior year due to an expected increase in our POPSign
revenues compared to the prior year, but to be lower as a percentage of POPSign
revenue compared to the prior year, due to the factors discussed above.
Gross profit from our product sales for the three months ended June 30, 2003
decreased 41% to $389,154 compared to $655,722 for the three months ended June
30, 2002. Gross profit from our product sales for the six months ended June 30,
2003 decreased 28% to $909,769 compared to $1,268,877 for the six months ended
June 20, 2002. Gross profit as a percentage of other sales decreased to 38.2%
for the three months ended June 30, 2003 compared to 51.0% for the three months
ended June 30, 2002, primarily due to adjustments related to obsolescence and
lower-of cost or market and changes in product mix. Gross profit as a percentage
of other sales decreased to 43.6% for the six months ended June 30, 2003
compared to 51.0% for the six months ended June 30, 2002. The decreases were
primarily due to decreased sales from our other product categories based on
decreased demand for those products from our customers in addition to the other
factors discussed above.
Page 10 of 19
We expect the gross profit from the sales of our other product categories to
continue to decline as a percentage of our total gross profit.
OPERATING EXPENSES.
- -------------------
SELLING. Selling expenses for the three months ended June 30, 2003 increased 30%
to $2,157,885 compared to $1,662,845 for the three months ended June 30, 2002,
primarily due to increased commissions expense related to higher total net
sales, an increase in the number of sales related employees, the addition of
VALUStix employees and severance expense. Selling expenses as a percentage of
total net sales increased to 29.7% for the three months ended June 30, 2003
compared to 28.5% for the three months ended June 30, 2002, primarily due to the
factors discussed above, partially offset by the effect of higher net sales
during the quarter.
Selling expenses for the six months ended June 30, 2003 increased 33% to
$4,470,078 compared to $3,351,409 for the six months ended June 30, 2002.
Selling expenses as a percentage of total net sales increased to 32.5% for the
six months ended June 30, 2003 compared to 28.3% for the six months ended June
30, 2002, primarily due to the factors discussed above, partially offset by the
effect of higher net sales during the six months.
We expect selling expenses, exclusive of commissions, to remain at their current
level and to decline somewhat as a percentage of net sales due to an expected
increase in total net sales, as compared to the prior year.
MARKETING. Marketing expenses for the three months ended June 30, 2003 decreased
14% to $354,302 compared to $411,645 for the three months ended June 30, 2002,
primarily due to planned reductions in discretionary expenses, partially offset
by increased salaries to support the POPS programs. Marketing expenses as a
percentage of total net sales decreased to 4.9% for the three months ended June
30, 2003 compared to 7.1% for the three months ended June 30, 2002, primarily
due to the effect of higher net sales during the quarter, partially offset by
the factors discussed above.
Marketing expenses for the six months ended June 30, 2003 increased 3% to
$740,367 compared to $722,136 for the six months ended June 30, 2002. Marketing
expenses as a percentage of total net sales decreased to 5.4% for the six months
ended June 30, 2003 compared to 6.1% for the six months ended June 30, 2002,
primarily due to the effect of higher net sales during the six months.
We expect marketing expenses to remain at their current level and to decline
somewhat as a percentage of net sales due to an expected increase in total net
sales, as compared to the prior year.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
months ended June 30, 2003 increased 14% to $755,993 compared to $662,451 for
the three months ended June 30, 2002, primarily due to additions to our
management team, the increased cost of our new facilities and severance expense.
General and administrative expenses as a percentage of total net sales decreased
to 10.4% for the three months ended June 30, 2003 compared to 11.4% for the
three months ended June 30, 2002, due to the effect of higher net sales during
the quarter, partially offset by the factors discussed above.
General and administrative expenses for the six months ended June 30, 2003
increased 38% to $1,765,941 compared to $1,277,290 for the six months ended June
30, 2002. General and administrative expenses as a percentage of total net sales
increased to 12.9% for the six months ended June 30, 2003
Page 11 of 19
compared to 10.8% for the six months ended June 30, 2002, primarily due to the
factors discussed above and higher legal fees, partially offset by the effect of
higher net sales during the six months.
We expect general and administrative expenses to remain at their current level
and decline somewhat as a percentage of net sales due to an expected increase in
total net sales, as compared to the prior year.
OTHER INCOME (EXPENSE). Other income for the three months ended June 30, 2003
was $18,224 compared to other expense of $(93,640) for the three months ended
June 30, 2002. Other income for the six months ended June 30, 2003 was $34,798
compared to other expense of $(100,785) for the six months ended June 30, 2002.
The differences were primarily due to an increase in interest income as a result
of the funds received from the private placement financing in December 2002,
minimal interest expense as the line of credit was fully repaid during December
2002 and a one-time fee during 2002 to move to the NASDAQ National Market.
NET INCOME (LOSS). Net income for the three months ended June 30, 2003 was
$23,818 compared to net income of $201,713 for the three months ended June 30,
2002. Our net loss for the six months ended June 30, 2003 was $(1,094,062)
compared to net income of $521,618 for the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations with proceeds from public and private
equity placements. At June 30, 2003, working capital was $6,492,448 compared to
$7,324,154 at December 31, 2002. During the six months ended June 30, 2003, cash
and cash equivalents decreased $1,838,859.
Net cash used in operating activities during the six months ended June 30, 2003
was $2,454,499, primarily due to the net loss and an increase in prepaid
expenses due to a $1,000,000 pre-payment made to a retailer during 2003.
Accounts receivable decreased $669,674 during the six months ended June 30, 2003
due to collections related to the high levels of POPSign revenues during the
fourth quarter of 2002. Accounts payable decreased $863,006 during the six
months ended June 30, 2003 due to the payments made to retailers, relating to
the high levels of POPSign revenues during the fourth quarter of 2002. Deferred
revenue decreased $802,976 primarily due to the timing of the POPSign program
cycles at quarter-end.
Net cash of $123,234 was used in investing activities during the six months
ended June 30, 2003, primarily due to the purchase of property and equipment of
$73,841.
Net cash of $738,874 was provided by financing activities during the six months
ended June 30, 2003 from the issuance of common stock related to the exercise of
stock options and the issuance of shares related to the employee stock purchase
plan, net of expenses.
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 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.
Page 12 of 19
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Statements made in this quarterly report on Form 10-Q, 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
promotional 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 our manufacturer partners achieving sales lift;
we recently made our first business acquisition and may acquire other
businesses; we are dependent on members of our management team; we have a
significant amount of options and warrants outstanding that could affect the
market price of our common stock; the market price of our common stock has been
volatile and other factors detailed from time to time in our SEC reports.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management,
including the Company's Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of the end of the period covered by this report (the "Evaluation Date"). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in timely alerting them to the material information
relating to us required to be included in our periodic SEC filings.
(b) Changes in Internal Controls.
There were no significant changes made in our internal controls or, to
our knowledge, in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
Page 13 of 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 20, 2003.
The shareholders present in person or by proxy voted for an amendment
to the Company's Articles of Incorporation, which provides that the
Board shall be divided into three classes and each class will serve
for a period of three years with 4,792,073 shares in favor, 476,852
shares against, and 1,590 shares abstaining. This proposal did not
receive enough votes and thus, did not pass. As a result, the
election of the directors will be for a one year period and until
their successors are elected.
The shareholders present in person or by proxy voted to elect Scott
F. Drill, Erwin A. Kelen, Donald J. Kramer, W. Robert Ramsdell,
Gordon F. Stofer, Frank D. Trestman and Gary L. Vars as directors
with each director receiving the following votes:
FOR WITHHOLD AUTHORITY
--- ------------------
Scott F. Drill 10,666,197 98,898
Erwin A. Kelen 10,584,150 180,945
Donald J. Kramer 10,666,450 98,645
Gordon F. Stofer 10,584,150 180,945
W. Robert Ramsdell 10,584,050 181,045
Frank D. Trestman 10,584,150 180,945
Gary L. Vars 10,666,197 98,898
The shareholders present in person or by proxy voted to approve the
2003 Incentive Stock Option Plan and reserve 350,000 shares for the
grant of options under the Plan with 10,257,134 shares in favor,
477,616 shares against, and 30,345 shares abstaining.
ITEM 5. OTHER INFORMATION
None
Page 14 of 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
31.1 Certification of CEO
31.2 Certification of CFO
32 Section 1350 Certification of CEO and CFO
(b) Reports on Form 8-K
April 1, 2003 Press release dated April 1, 2003.
April 7, 2003 The Company filed a report on Form
8-K/A on April 7, 2003 under Item 7
to update the pro forma information
for the Company's acquisition of the
assets comprising the VALUStix
business, as described in Form 8-K
filed December 31, 2002.
April 17, 2003 Press release dated April 17, 2003.
SIGNATURES
Pursuant to the requirements 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.
Dated: July 28, 2003 Insignia Systems, Inc.
--------------------------------------------
(Registrant)
/s/ Scott F. Drill
-------------------------------------
Scott F. Drill
President and
Chief Executive Officer
/s/ Denni J. Lester
-------------------------------------
Denni J. Lester
Vice President, Finance and
Chief Financial Officer
Page 15 of 19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of CEO
31.2 Certification of CFO
32 Section 1350 Certification of CEO and CFO
Page 16 of 19