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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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or, |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE TRANSITION PERIOD
FROM TO |
Commission file number 0-27012
Insignia Solutions plc
(Exact name of Registrant as specified in its charter)
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England and Wales
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Not applicable |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. employer
identification number) |
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41300 Christy Street
Fremont
California 94538-3115
United States of America
(510) 360-3700 |
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Insignia House
The Mercury Centre
Wycombe Lane, Wooburn Green
High Wycombe, Bucks HP10 0HH
United Kingdom
(44) 1628-539500 |
(Address and telephone number of principal executive offices
and principal places of business)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
(Title of class)
Ordinary Shares (£0.20 nominal value)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
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
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part II of this
Form 10-K or any amendment of this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act): Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $22,457,265
as of March 17, 2005 based upon the closing sale price on
the Nasdaq SmallCap Market reported for such date. Ordinary
shares held by each officer and director and by each person who
owns 5% or more of the outstanding Ordinary share capital have
been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 17, 2005, there were 42,372,199 ordinary shares
of £0.20 each nominal value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2005 Annual Meeting of
Stockholders are incorporated by reference in Part III
hereof.
TABLE OF CONTENTS
PART I
This Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act) and Section 21E of
the Securities Exchange Act of 1934, as amended (the
Exchange Act) regarding the Company and its
business, financial condition, results of operations and
prospects. Words such as expects,
anticipates, intends, plans,
believes, seeks, estimates
and similar expressions or variations of such words are intended
to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in
this Report.
Although forward-looking statements in this Report reflect
the good faith judgment of our management, such statements can
only be based on facts and factors currently known by us.
Consequently, forward-looking statements are inherently subject
to risks and uncertainties, and actual results and outcomes may
differ materially from the results and outcomes discussed in the
forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include
without limitation those discussed below, as well as those
discussed elsewhere in this Report. You are urged not to place
undue reliance on these forward-looking statements, which speak
only as of the date of this Report. We undertake no obligation
to revise or update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date
of this Report. You are urged to review and consider carefully
the various disclosures made by us in this Report, which
attempts to advise interested parties of the risks and factors
that may affect our business, financial condition and results of
operations.
Company Overview
We commenced operations in 1986 and currently develop, market
and support software technologies that enable mobile operators
and phone manufacturers to update the firmware of mobile devices
using standard over-the-air (OTA) data networks.
Before 2003, our principal product line was the
Jeodetm
platform, based on our Embedded Virtual Machine
(EVMtm)
technology. The Jeode platform was our implementation of Sun
Microsystems, Inc.s (Sun) Java®
technology tailored for smart devices. During 2001, we began
development of a range of products (Secure System
Provisioning or SSP products) for the mobile
phone and wireless operator industry. The SSP product builds on
our position as a Virtual Machine (VM) supplier for
manufacturers of mobile devices and allow wireless operators and
phone manufacturers to reduce customer care and software recall
costs, as well as increase subscriber revenue by deploying new
mobile services based on dynamically provisional capabilities.
With the sale of our Jeode product line in April 2003, our sole
product line consists of our SSP product. We shipped our first
SSP product in December 2003, but have achieved only minimal
sales to date.
Industry Overview
The telecommunications industry is moving very quickly towards
providing sophisticated data services on a wide variety of
different mobile terminals. Mobile phones (terminals and other
portable devices) are becoming more sophisticated and
accordingly the software within them is becoming more complex
and hence less reliable. Operators want to introduce additional
services, but are limited by the capabilities of the existing
phones.
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The Trend Towards More Complex Software |
As more and more advanced features are packed into mobile
phones, the software becomes more complex, leading to more
software problems. However, consumers have come to expect the
same level of reliability and performance as that to which they
are accustomed from their traditional voice-only fixed phones.
Thus, the addition of more software on the mobile phones creates
a new critical challenge for operators and device
manufacturers ensuring consistent reliability and
performance.
Due to increased software functionality and hence complexity,
manufacturers are experiencing a high incidence of problems with
feature phones, adding a significant maintenance expense for the
telecommunica-
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tions industry. Mobile phone recalls can be expensive.
Manufacturers are often responsible for the entire recall
operation, ranging from notification and taking customer calls
to re-flashing and administering the entire process. The
additional costs of repairing and maintaining these increasingly
complex devices are restraining industry growth. Curbing these
costs through a comprehensive Over-The-Air
Repairtm
system will significantly reduce the manufacturers costs
by minimizing the need for in-store and through-the-mail repairs
and by reducing customer service personnel.
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Evolution of Mobile Terminals |
In the 1980s, when the first large scale commercial mobile
services were launched in the United States, the mobile handsets
or terminals available for services were analog
voice-only terminals. Even when the first digital terminals came
into the market, they were voice-only terminals. As the global
subscriber base for mobile services grew exponentially in the
1990s, static applications such as address books and games
as well as communication applications such as short message
service text messaging (SMS) were packed into the
terminals. With the Internet boom in the mid to late
1990s, mobile terminals evolved into sophisticated data
terminals as well by integrating them with web browsers. As the
need for data bandwidth grew, high-speed data technologies such
as General Packet Radio Service (GPRS) and Code
Division Multiple Access (CDMA) emerged, and the new
models of mobile phones incorporated these high-speed data
technologies. Toward the end of the 1990s, the mobile
terminals took another leap by introducing the concept of
downloadable applications to the mobile world. In addition,
evolving standards such as SyncML were introduced which allowed
the transfer and synchronization of data in the mobile terminals
with other devices such as personal computers (PCs)
and personal data assistants (PDAs).
With the wider deployment of an enhanced phone for photo
imaging, game playing and more messaging technologies, as well
as the increasing coverage of more robust networks, the number
of features built into mobile phones is going to increase
dramatically.
The result of this rapid transformation of mobile terminals from
voice-only terminals to sophisticated all-purpose consumer
devices is that the software running on the mobile terminal has
become extremely complex and hence vulnerable to problems.
Products and Support
The SSP product line has been available for sale since December
2003. The SSP product line revenue model is based on a
combination of indirect sales to customers through OEMs as well
as direct sales to customers. SSP product line revenues
accounted for 83%, 3% and 0% of total Insignia revenues in 2004,
2003 and 2002, respectively.
The SSP product is an open software system that enables mobile
operators and terminal manufacturers to repair the system
software on their subscribers terminals, as well as add
new capabilities over-the-air. This capability helps to avoid
terminal recalls due to software issues, reduces customer care
call center costs, reduces churn due to dissatisfaction, lowers
inventory, provides faster time to market and increases revenue
per subscriber by extending terminal capabilities for new
services.
On February 7, 2003, we entered into a loan agreement with
esmertec AG (esmertec) whereby esmertec loaned
Insignia $1.0 million at an interest rate of prime plus two
percent. The principal amount of $1.0 million was repaid on
January 15, 2004 by offsetting that amount with a
receivable relating to the product line purchase. All remaining
accrued interest of $55,161 was repaid on March 15, 2004 by
offsetting the accrued interest against prepaid royalties.
Accordingly, there are no outstanding balances or future amounts
due to esmertec under the loan agreement as of December 31,
2004.
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On March 4, 2003, we entered into several other agreements
(the Agreements) with esmertec, including a
definitive agreement to sell certain assets relating to our Java
Virtual Machine (JVM) product line in exchange for
$3.5 million due in installments through April 2004. The
transaction closed on April 23, 2003 and was amended on
June 30, 2004. The assets sold primarily included the fixed
assets, customer agreements and employees related to the JVM
product line. Under the terms of the Agreements, esmertec also
became the exclusive master distributor of the JVM technology in
exchange for $3.4 million in minimum guaranteed royalties
through October 2004.
Under the original agreements, Insignia could have earned up to
an additional $4.0 million over the subsequent three-year
period from the effective date of the agreement based on a
percentage of esmertecs sales of the JVM product during
the period. Additionally, the parties entered into a cooperative
agreement whereas esmertec would promote Insignias
Secure System Provisioning (SSP) software product to
esmertecs mobile platform customers.
As part of the sale of our JVM product line, we transferred 42
employees to esmertec, of which 31 were development engineers.
In addition, as part of the sale, esmertec entered into an
agreement with our U.K. building landlord in order to assume the
lease on one of the two buildings leased by Insignia.
On February 13, 2004, Insignia and esmertec executed the
final purchase agreement upon signing the Limited Assignment of
Rights of Technology License and Distribution Agreement. The
final purchase agreement transferred the intellectual property
of Jeode and the title for Insignias remaining prepaid
royalties to esmertec.
On June 30, 2004, Insignia and esmertec executed a
Termination and Waiver Agreement. The Agreement offset esmertec
related liabilities and deferred revenue totaling $853,000
against $600,000 of remaining guaranteed royalty payments due
from esmertec in exchange for a final cash payment of $185,000.
The resulting net gain of $302,000 was recorded as other income
in the second quarter of 2004 and is net of expenses. The final
payment was received from esmertec on July 8, 2004.
The Jeode platform had been our principal product line since the
third quarter of 1999. With the completion of the sale of our
JVM product line to esmertec in February 2004 and the
termination and waiver agreement dated June 30, 2004,
Insignias sole product line currently consists of its SSP
products for the mobile handset and wireless carrier industry.
We offer both pre-sales and post-sales support to our SSP
platform customers. Pre-sales support is provided at no charge.
After the sale of a license, each customer usually commits to at
least a one year annual maintenance contract which entitles the
customer to receive standard support, including: web-based
support, access to frequently asked questions
(FAQs), on-line publications and documentation,
email assistance, limited telephone support, and critical bug
fixes and product updates (collective bug fixes and minor
enhancements). Annual maintenance contracts are also usually
required during the time that the customer is developing and/or
shipping products.
Research and Development
In 2004, 2003 and 2002, we spent approximately
$2.8 million, $3.4 million and $5.6 million,
respectively, on research and development. At December 31,
2004, we had 18 full-time employees engaged in research and
development, of whom 9 were located at our facility in the
United Kingdom and 9 were located at our facility in Fremont,
California.
Proprietary Rights
We rely on a combination of copyright, trademark and trade
secret laws and confidentiality procedures to protect our
proprietary rights. We have filed in the United Kingdom and the
United States patent applications for innovative technologies
incorporated into our SSP product. As part of our
confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, consultants,
distributors and corporate
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partners, and we limit access to and distribution of our
software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party
to copy or otherwise to obtain and use our products or
technology without authorization, or to develop similar
technology independently. In addition, effective protection of
intellectual property rights may be unavailable or limited in
certain countries. We license technology from various third
parties.
We may, from time to time, receive communications from third
parties asserting that our products infringe, or may infringe,
on their proprietary rights. Licenses to disputed third-party
technology may not be available on reasonable commercial terms,
if at all. In addition, we may initiate claims or litigation
against third parties for infringement of our proprietary rights
or to establish the validity of our proprietary rights.
Litigation to determine the validity of any claims could result
in significant expense to us and divert the efforts of our
technical and management personnel from productive tasks,
whether or not such litigation is determined in our favor. In
the event of an adverse ruling in any such litigation, we may be
required to pay substantial damages, discontinue the use and
sale of infringing products, and expend significant resources to
develop non-infringing technology or obtain licenses to
infringing technology. In the event of a successful claim
against us and our failure to develop or license a substitute
technology, our business, financial condition and results of
operations would suffer. As the number of software products in
the industry increases and the functionality of these products
further overlaps, we believe that software developers may become
increasingly subject to infringement claims. Any such claims
against us, with or without merit, as well as claims initiated
by us against third parties, can be time consuming and expensive
to defend or prosecute and to resolve.
Sales and Marketing
SSP is being sold and marketed to mobile operators and device
manufacturers through direct channels and OEMs. After an initial
customer win, we may employ a channel approach for follow-on
sales of our SSP product. We plan to distribute the SSP client
through a variety of channel partners, who may include the code
as part of their reference design, silicon platform or operating
system.
Sales to distributors and OEMs representing more than 10% of
total revenue in each period accounted for the following
percentages of total revenue:
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Year Ended | |
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December 31, | |
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2004 | |
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2003 | |
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2002 | |
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Distributors:
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Telemobile Corporation
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28 |
% |
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Esmertec A.G.
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17 |
% |
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* |
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Insignia Asia Corporation
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14 |
% |
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Phoenix Technologies Ltd.
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* |
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* |
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58 |
% |
All Distributors
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60 |
% |
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47 |
% |
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70 |
% |
OEMs:
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Qindao Haier Telecom Company Limited
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21 |
% |
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Sophast Inter Corporation Company Limited
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18 |
% |
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Hewlett Packard Company
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26 |
% |
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All OEMs
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40 |
% |
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49 |
% |
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29 |
% |
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Strategic Alliances
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International Business Machines Corp.
(IBM) |
We are porting our SSP server software product onto the IBM
Websphere platform and integrating it with IBMs device
management software. We are co-selling and co-marketing, with
IBM, the solution to mobile operators and phone manufacturers
worldwide.
Symbian has entered into a definitive agreement with Insignia to
provide a royalty-free implementation of our SSP client software
alongside its operating system to all Symbian licensees. We
believe this implementation will enable rapid adoption of our
technology by leading smart-phone vendors and mobile operators
worldwide that are licensees of Symbian.
Competition
Our SSP product line is targeted for the mobile operator and
mobile device market. The market for these products is
fragmented and highly competitive. This market is also rapidly
changing, and there are many companies creating products that
compete or will compete with ours. As the industry develops, we
expect competition to increase in the future. This competition
may come from existing competitors or other companies that we do
not yet know about. Our main competitors include Bitfone,
InnoPath, 4thPass, OpenWave and RedBend.
If these competitors develop products that are less expensive or
provide better capabilities or functionality than does our SSP
product line, we will be unable to gain market share. Many of
our current competitors and potential competitors have greater
resources, including larger customer bases and greater financial
resources than we do, and we might not be able to compete
successfully against these companies. A variety of other
potential actions by our competitors, including increased
promotion and accelerated introduction of new or enhanced
products, could also harm our competitive position.
Employees
As of December 31, 2004, we employed 32 regular full-time
persons of which 20 were located in the United States and 12
were located in the United Kingdom. Of the 20 people in the
United States, 4 were in sales and marketing, 9 in research and
development and 7 in administration and finance. Of the 12
people located in the United Kingdom, 2 were in sales and
marketing, 9 in research and development and 1 in administration
and finance. None of our employees are represented by a labor
union, and we have experienced no work stoppages. We believe
that our employee relations are good.
Website Posting of SEC Filings
The Companys website provides a link to the Companys
Securities Exchange Commission (SEC) filings, which
are available on the same day such filings are made. The
specific location on the Companys website where these
reports can be found is
http://www.insignia.com/content/investor/sec.shtml
Incorporation
Insignia Solutions plc was incorporated under the laws of
England and Wales on November 20, 1985 under the name
Diplema Ninety Three Limited, changed its name to Insignia
Solutions Limited on March 5, 1986 and commenced operations
on March 17, 1986. On March 24, 1995, the Company was
re-registered as a public limited company under the name
Insignia Solutions plc. Our principal executive offices in the
United States are located at 41300 Christy Street, Fremont,
California 94538. Our telephone number at that location is
(510) 360-3700. Our registered office in the United Kingdom
is located at The Mercury Centre, Wycombe Lane, Wooburn Green,
High Wycombe, Bucks HP10 0HH. Our telephone number at that
location is (44) 1628-539500.
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Our headquarters and principal management, sales and marketing
and support facility is located in Fremont, California. On
April 8, 2003, we entered into a three-year contract lease
renewal for approximately 9,500 square feet. Our principal
European sales, research and development and administrative
facility is located in High Wycombe, in the United Kingdom, and
consists of approximately 5,000 square feet under a lease
that will expire in August 2013. In April 2003, as part of the
sale of the JVM product line to esmertec, esmertec entered into
an agreement with our U.K. building landlord to take over the
leasehold property on one of the two buildings located in High
Wycombe. Effective February 1, 2004, we subleased half of
our remaining U.K. office space. The agreement expires
December 31, 2009. Either party, with six-month prior
notice, may terminate the lease January 1, 2006 or
August 11, 2008.
We leased an office in Tokyo, Japan. This lease expired
February 28, 2003 and the Japan office was closed. We do
not anticipate expanding the size of our facilities in
California, the United Kingdom, or Japan in the foreseeable
future.
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Item 3 |
Legal Proceedings |
None
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Item 4 |
Submission of Matters to a Vote of Security Holders |
None
Executive Officers of the Registrant
The executive officers of Insignia as of March 18, 2005 are
as follows:
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Name |
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Age | |
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Position |
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Mark E. McMillan
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41 |
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Chief Executive Officer, President and a Director |
Robert E. Collins
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58 |
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Chief Financial Officer, Secretary and Vice President |
Paul Edmonds
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60 |
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Vice President Engineering |
Anders Furehed
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36 |
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Senior Vice President of European Operations |
Executive officers serve at the discretion of the Board of
Directors.
Mark E. McMillan was named Chief Executive Officer and a
director of Insignia in February 2003. Mr. McMillan joined
Insignia in November 1999 as Senior Vice President of Worldwide
Sales and Marketing, was promoted to Executive Vice President of
Worldwide Sales and Marketing in May 2000 and Chief Operating
Officer in October 2000. Mr. McMillan was promoted to
President in July 2001. Before joining Insignia,
Mr. McMillan served as Vice President of Sales, Internet
Division, for Phoenix Technologies Ltd. Prior to that,
Mr. McMillan served as Phoenixs Vice President and
General Manager of North American Operations.
Robert E. Collins was appointed Chief Financial Officer of the
Company on January 19, 2004. Mr. Collins has over
twenty-five years of industry experience with a background in
telecommunications, semiconductors and health care.
Mr. Collins served as Chief Financial Officer for both
public and private companies including P-Com from October 1998
to April 2000, Netgear from April 2000 to June 2001 and Array
Networks from October 2001 to May 2003. He also held several
senior management positions including Treasurer at Syntex
Corporation, a pharmaceutical company. Mr. Collins received
his B.S. from Adelphi University and an MBA in finance from
California State University at Hayward.
Paul Edmonds joined Insignia in April 2002 as Senior Director,
Server Engineering. In February 2003, Mr. Edmonds was
appointed Vice President of Engineering. Mr. Edmonds has
over 20 years of industry experience and has held a variety
of key engineering management positions with major companies in
the telecommunications and mobile services industries. Prior to
joining Insignia, Mr. Edmonds was a co-founder
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and Vice President of Engineering at @Motion, Inc. (acquired by
Openwave) from February 1998 to June 2001. He also was lead
inventor on two issued and three pending patents in scalable
fault tolerant computer systems. Mr. Edmonds holds a
Bachelor of Science degree from Trinity College and a Masters
Degree in Computer Science from Boston University.
Anders Furehed joined Insignia in March 2005 as Senior Vice
President of European Operations in connection with the closing
of Insignias acquisition of mi4e Device
Management AB, (mi4e) a Swedish provider of
client-provisioning device management software and services to
mobile phone operators. In July 2003, Mr. Furehed
co-founded mi4e and served as CEO of mi4e from July 2003 until
March 2005 when Insignia acquired mi4e. From February 2001 until
March 2003, Mr. Furehed was the founder of Syrei AB, a
Swedish telecommunications consulting company. From 1999 until
February 2001, Mr. Furehed was a technical manager for
Netcom Consultant, a telecommunications consulting company.
PART II
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Item 5 |
Market for Registrants Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities |
Price Range of Ordinary Shares
Our American Depositary Shares (ADSs), each
representing one ordinary share of 20 pence nominal value, have
been traded under the symbol INSGY from
Insignias initial public offering in November 1995 to
December 24, 2000, and INSG since then. Our
stock traded on the Nasdaq National Market from November 1995 to
January 2003 and has traded on the Nasdaq SmallCap Market since
then. The following table sets forth, for the periods indicated,
the high and low sales prices for our ADSs as reported by the
Nasdaq National Market or Nasdaq SmallCap Market as applicable:
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2004 Quarters Ended | |
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Dec 31 | |
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Sept 30 | |
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June 30 | |
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Mar 31 | |
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Quarterly per share stock price:
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High
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$ |
1.30 |
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$ |
0.92 |
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$ |
2.14 |
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$ |
3.47 |
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Low
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$ |
0.68 |
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$ |
0.50 |
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$ |
0.75 |
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$ |
0.88 |
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2003 Quarters Ended | |
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Dec 31 | |
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Sept 30 | |
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June 30 | |
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Mar 31 | |
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Quarterly per share stock price:
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High
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$ |
1.62 |
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$ |
1.79 |
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$ |
0.80 |
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$ |
0.45 |
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Low
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$ |
0.80 |
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$ |
0.39 |
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$ |
0.19 |
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$ |
0.20 |
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The closing sales price of our shares as reported on the Nasdaq
SmallCap Market on March 17, 2005 was $0.53 per share.
As of that date, there were approximately 218 holders of record
of our ordinary shares and ADSs, excluding those holders of ADSs
that are held in nominee or street name by brokers.
Dividends
We have not declared or paid any cash dividends on our ordinary
shares. We anticipate that we will retain any future earnings
for use in our business and do not anticipate paying any cash
dividends in the foreseeable future. Any payment of dividends
would be subject, under English law, to the Companies Act 1985,
and to our Memorandum and Articles of Association, and may only
be paid from our retained earnings, determined on a
pre-consolidated basis. As of December 31, 2004, Insignia
Solutions, plc (excluding Insignia Solutions, Inc.) had an
accumulated deficit of $26,823,449 on a pre-consolidated basis.
7
|
|
Item 6 |
Selected Consolidated Financial Data |
The tables that follow present portions of our consolidated
financial statements and are not complete. You should read the
following selected consolidated financial data in conjunction
with our consolidated financial statements and related notes
thereto and with Managements Discussion and Analysis
of Financial Condition and Results of Operations included
elsewhere in this Report. The consolidated statements of
operations data for the years ended December 31, 2004, 2003
and 2002, and the consolidated balance sheet data as of
December 31, 2004 and 2003 are derived from our audited
financial statements that are included elsewhere in this Report.
The consolidated statements of operations data for the years
ended December 31, 2001 and 2000 , and the consolidated
balance sheet data as of December 31, 2002, 2001 and 2000
are derived from audited consolidated financial statements that
are not included in this Report. The historical results
presented below are not necessarily indicative of the results to
be expected for any future fiscal year. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Due to our product line changes and other significant financial
events the comparability of the consolidated financial
statements from year to year may be affected materially. For
further clarity review the Sale of Java Virtual Machine Assets
in the following Management, Discussion and Analysis.
Selected Consolidated Financial Data
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Consolidated Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
541 |
|
|
$ |
710 |
|
|
$ |
7,256 |
|
|
$ |
10,273 |
|
|
$ |
10,766 |
|
Cost of net revenues
|
|
|
42 |
|
|
|
340 |
|
|
|
2,584 |
|
|
|
4,275 |
|
|
|
3,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
499 |
|
|
|
370 |
|
|
|
4,672 |
|
|
|
5,998 |
|
|
|
7,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,511 |
|
|
|
1,757 |
|
|
|
5,558 |
|
|
|
7,058 |
|
|
|
5,376 |
|
|
Research and development
|
|
|
2,807 |
|
|
|
3,373 |
|
|
|
5,640 |
|
|
|
6,220 |
|
|
|
5,960 |
|
|
General and administrative
|
|
|
2,579 |
|
|
|
2,676 |
|
|
|
3,356 |
|
|
|
4,155 |
|
|
|
3,733 |
|
|
Restructuring
|
|
|
|
|
|
|
498 |
|
|
|
296 |
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,897 |
|
|
|
8,304 |
|
|
|
14,850 |
|
|
|
17,725 |
|
|
|
15,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(7,398 |
) |
|
|
(7,934 |
) |
|
|
(10,178 |
) |
|
|
(11,727 |
) |
|
|
(7,594 |
) |
Interest and other income (expense), net
|
|
|
255 |
|
|
|
3,101 |
|
|
|
(356 |
) |
|
|
567 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(7,143 |
) |
|
|
(4,833 |
) |
|
|
(10,534 |
) |
|
|
(11,160 |
) |
|
|
(7,599 |
) |
Benefit from income taxes
|
|
|
(81 |
) |
|
|
(510 |
) |
|
|
(2,114 |
) |
|
|
(152 |
) |
|
|
(785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(7,062 |
) |
|
$ |
(4,323 |
) |
|
$ |
(8,420 |
) |
|
$ |
(11,008 |
) |
|
$ |
(6,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.23 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.57 |
) |
|
$ |
(0.47 |
) |
Weighted average ordinary shares and ordinary share equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
30,191 |
|
|
|
21,231 |
|
|
|
19,937 |
|
|
|
19,248 |
|
|
|
14,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, short-term investments and restricted
cash
|
|
$ |
952 |
|
|
$ |
2,232 |
|
|
$ |
976 |
|
|
$ |
8,893 |
|
|
$ |
17,351 |
|
Working capital
|
|
|
900 |
|
|
|
2,254 |
|
|
|
1,964 |
|
|
|
10,633 |
|
|
|
11,377 |
|
Total assets
|
|
|
2,587 |
|
|
|
6,794 |
|
|
|
6,453 |
|
|
|
17,768 |
|
|
|
22,336 |
|
Mandatorily redeemable warrants
|
|
|
|
|
|
|
38 |
|
|
|
1,440 |
|
|
|
1,440 |
|
|
|
1,440 |
|
Total shareholders equity
|
|
$ |
1,341 |
|
|
$ |
2,589 |
|
|
$ |
2,673 |
|
|
$ |
9,895 |
|
|
$ |
15,749 |
|
8
|
|
Item 7 |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Except for the historical information contained in this
Annual Report on Form 10-K, the matters discussed herein
are forward-looking statements. Words such as
anticipates, believes,
expects, future, and
intends, and similar expressions are used to
identify forward-looking statements. These and other statements
regarding matters that are not historical are forward-looking
statements. These matters involve risks and uncertainties that
could cause actual results to differ materially from those in
the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include
without limitation those discussed below as well as those
discussed elsewhere in this Report. Readers are cautioned not to
place undue reliance on these forward-looking statements, which
reflect managements analysis only as of the date hereof.
We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
Overview
We commenced operations in 1986 and currently develop, market
and support software technologies that enable mobile operators
and phone manufacturers to update the firmware of mobile devices
using standard over-the-air data networks. Before 2003, our
principal product line was the Jeode platform, based on our
Embedded Virtual Machine (EVM) technology. The Jeode
platform was our implementation of Sun Microsystems, Inc.s
(Sun) Java® technology tailored for smart
devices. During 2001, we began development of a range of
products (Secure System Provisioning or
SSP products) for the mobile phone and wireless
operator industry. These SSP products build on our position as a
Virtual Machine (VM) supplier for manufacturers of
mobile devices and allow wireless operators and phone
manufacturers to reduce customer care and software recall costs
as well as increase subscriber revenue by deploying new mobile
services based on dynamically provisional capabilities. With the
sale of our JVM product line in April 2003, our sole product
line consists of our SSP product. We shipped our first SSP
product in December 2003, but have achieved only minimal sales
to date.
Our operations outside of the United States are primarily in the
United Kingdom, where part of our research and development
operations and our European sales activities are located. We
sell our SSP platform directly to customers or through our
hosted partners such as Metrowerks and Accord Customer Care
Solutions. Sales to customers outside the United States were
derived mainly from customers in Europe and Asia, and
represented 72%, 42% and 7% of total revenues in 2004, 2003 and
2002, respectively. Economic conditions in Europe and Japan, as
well as fluctuations in the value of the Euro and Japanese yen
against the U.S. dollar and British pound sterling, could
impair our revenue and results of operations. Our revenues from
customers outside the United States are generally affected by
the same factors as our revenues from sales to customers in the
United States. The operating expenses of our operations outside
the United States are mostly incurred in Europe and relate to
our research and development and European sales activities. Such
expenses consist primarily of ongoing fixed costs and
consequently do not fluctuate in direct proportion to revenues.
In 2004, approximately 100% of our total revenues and over 61%
of our operating expenses were denominated in U.S. dollars.
Most of our remaining expenses are British pound sterling
denominated and, consequently, we are exposed to fluctuations in
British pound sterling exchange rates. Our expenses outside the
United States can fluctuate from period to period based on
movements in currency exchange rates. Historically, movements in
currency exchange rates have not had a material effect on our
revenues. We did not enter into any currency option hedge
contracts in 2004, 2003 or 2002.
We operate with the U.S. dollar as our functional currency,
with a majority of revenues and operating expenses denominated
in U.S. dollars. Pound sterling exchange rate fluctuations
against the dollar can cause U.K. expenses, which are translated
into dollars for financial statement reporting purposes, to vary
from period-to-period.
9
|
|
|
Significant Financial Events in 2004 |
In early January 2004, Insignia Solutions issued and sold to
certain institutional and other accredited investors, in a
private placement, 2,262,500 newly issued American Depository
Shares (ADSs), and warrants to purchase 565,625
ADSs, for a total purchase price of approximately
$1.8 million.
On June 30, 2004, Insignia and esmertec, a Swiss software
company focused on Java technologies, entered into a Termination
and Waiver Agreement, effectively concluding the remaining
business between the two companies and dissolving any ties going
forward between Insignia and the Java Virtual Machine
(JVM) product line it sold to esmertec in April
2003. As a result, esmertec agreed to pay Insignia $185,000 on
July 8, 2004 in full and final satisfaction of the deferred
consideration and waived all other consideration pursuant to the
Asset Purchase Agreement dated March 4, 2003. The new
agreement accelerated the termination under the Asset Purchase
Agreement from March 2006 to June 30, 2004. All existing
and future outstanding obligations between the two companies
were waived resulting in net other income of $302,000 to
Insignia.
On October 18, 2004, Insignia announced that it had closed
two equity financing transactions totaling approximately
$2.3 million, net of transaction costs. We closed a private
placement financing with certain institutional and other
accredited investors pursuant to which we sold newly issued ADSs
and warrants to purchase ADSs, for a total purchase price of
approximately $1.5 million, or $1.3 million net of
transaction costs. Additionally, under a previously executed
securities subscription agreement, we sold to Fusion Capital
Fund II, LLC (Fusion Capital)
2,500,000 shares of newly issued ADSs at a purchase price
of $0.40 per share, resulting in proceeds of approximately
$1.0 million, net of transaction costs.
In addition during the fourth quarter of 2004, we issued
additional shares under the October 17, 2002 Securities
Subscription agreement with Fusion Capital Fund II, LLC at
a rate of $10,000 per day. We issued an additional
600,060 shares and received an additional $470,000. At
December 31, 2004, $190,000 was due from Fusion Capital for
stock purchases made and the amount is included in other
receivables in the accompanying consolidated balance sheet in
Item 8 of this Form 10-K. Payment was received in
January 2005.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America. Certain of our accounting policies require
the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial
estimates. These estimates affect the reported amounts of assets
and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. By their nature, these judgments are subject to an
inherent degree of uncertainty. The most significant estimates
and assumptions relate to revenue recognition, the
recoverability of prepaid royalties, and the adequacy of
allowances for doubtful accounts. Actual amounts could differ
from these estimates.
We recognize revenue in accordance with Statement of Position
No. 97-2 (SOP 97-2), Software
Revenue Recognition and Statement of Position
No. 98-9, Modification of SOP No 97-2.
These Statements of Position require that four basic criteria
must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered;
(3) the fee is fixed or determinable; and
(4) collectibility is probable. Determination of criteria
(3) and (4) are based on managements judgments
regarding the fixed nature of the fee charged for services
rendered and products delivered and the collectibility of those
fees. Should changes in conditions cause management to determine
these criteria are not met for certain future transactions,
revenue recognized for any reporting period could be adversely
affected.
At the time of the transaction, we assess whether the fee
associated with our revenue transaction is fixed or determinable
and whether or not collection is reasonably assured. We assess
whether the fee is fixed or
10
determinable based on the payment terms associated with the
transaction. If a significant portion of a fee is due after the
normal payment terms, which are 30 to 90 days from invoice
date, we account for the fee as not being fixed or determinable.
In these cases, we recognize revenue on the earlier of due date
or the date on which cash is collected.
We assess collectibility based on a number of factors, including
past transaction history with the customer and the
credit-worthiness of the customer. We do not request collateral
from our customers. If we determine that collection of a fee is
not reasonably assured, we will defer the fee and recognize
revenue at the time collection becomes reasonably assured, which
is generally upon receipt of cash.
For all sales, we use either a signed license agreement or a
binding purchase order (primarily for maintenance renewals) as
evidence of an arrangement.
For arrangements with multiple obligations (for example,
undelivered maintenance and support), we will allocate revenue
to each component of the arrangement using the residual value
method based on the fair value of the undelivered elements,
which is specific to us. This means that we will defer revenue
from the arrangement fee equivalent to the fair value of the
undelivered elements. Fair value for the ongoing maintenance and
support obligation is based upon separate sales of renewals to
other customers or upon renewal rates quoted in the contracts.
Fair value of services such as training or consulting, is based
upon separate sales by us for these services to other customers.
Our arrangements do not generally include acceptance clauses.
However, if an arrangement includes an acceptance provision,
acceptance occurs upon the earlier of receipt of written
customer acceptance or expiration of the acceptance period.
We recognize revenue for maintenance services ratably over the
contract term. Our training and consulting services are billed
based on hourly rates, and we will generally recognize revenue
as these services are performed. However, at the time of
entering into a transaction, we will assess whether or not any
services included within the arrangement require us to perform
significant work either to alter the underlying software or to
build additional complex interfaces so that the software
performs as the customer requests. If these services are
included as part of an arrangement, we recognize the entire fee
using the percentage of completion method. We estimate the
percentage of completion based on our estimate of the total
costs estimated to complete the project as a percentage of the
costs incurred to date and the estimated costs to complete.
Our agreements with licensors sometimes require us to make
advance royalty payments and pay royalties based on product
sales. Prepaid royalties are capitalized and amortized to cost
of sales based on the contractual royalty rate based on actual
net product sales. We continually evaluate recoverability of
prepaid royalties and, if necessary, will charge to cost of
sales any amount that we deem unlikely to be recoverable in the
future.
|
|
|
Accounts receivable and allowance for doubtful
accounts |
We perform ongoing credit evaluations of our customers and will
adjust credit limits based upon payment history and the
customers current creditworthiness, as determined by our
review of their current credit information. We continuously
monitor collections and payments from our customers and maintain
an allowance for estimated credit losses based upon historical
experience and any specific customer collection issues that we
have identified. While such credit losses have historically been
within expectations and the allowance established, credit loss
rates may increase. Since our accounts receivable are
concentrated in a relatively few number of customers, a
significant change in the liquidity or financial position of any
one of these customers could have a material adverse impact on
the collectibility of accounts receivables and future operating
results.
The preparation of financial statements requires us to make
estimates of the uncollectibility of our accounts receivables.
We specifically analyze accounts receivable and analyze
historical bad debts, customer
11
concentrations, customer creditworthiness, current economic
trends and changes in our customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts.
|
|
|
Accounting for Income Taxes |
Our income tax policy records the estimated future tax effects
of temporary differences between the tax basis of assets and
liabilities and amounts reported in the accompanying balance
sheets, as well as operating loss and tax credit carry forwards.
We have recorded a full valuation allowance to reduce our
deferred tax asset. Based on available objective evidence, it is
more likely than not that the deferred tax asset will not be
realized. In the event that we were to determine that we would
be able to realize our deferred tax assets in the future, an
adjustment to the deferred tax asset would increase net income
in the period such determination was made.
Sale of Java Virtual Machine Assets
On February 7, 2003, we entered into a loan agreement with
esmertec whereby esmertec loaned Insignia $1.0 million at
an interest rate of prime plus two percent. The principal amount
of $1.0 million was repaid on January 15, 2004 by
offsetting that amount with a receivable relating to the product
line purchase. All remaining accrued interest of $55,161 was
repaid on March 15, 2004 by offsetting the accrued interest
against prepaid royalties. Accordingly, there are no outstanding
balances or future amounts due to esmertec under the loan
agreement as of December 31, 2004.
On March 4, 2003, we entered into several other agreements
(the Agreements) with esmertec, including a
definitive agreement to sell certain assets relating to our JVM
product line in exchange for $3.5 million due in
installments through April 2004. The transaction closed on
April 23, 2003 and was amended on June 30, 2004. The
assets sold primarily included the fixed assets, customer
agreements and employees related to the JVM product line. Under
the terms of the Agreements, esmertec also became the exclusive
master distributor of the JVM technology in exchange for
$3.4 million in minimum guaranteed royalties through
October 2004.
Under the original agreements, Insignia could have earned up to
an additional $4.0 million over the subsequent three-year
period from the effective date of the agreement based on a
percentage of esmertecs sales of the JVM product during
the period. Additionally, the parties entered into a cooperative
agreement whereas esmertec would promote Insignias
Secure System Provisioning (SSP) software product to
esmertecs mobile platform customers.
As part of the sale of our JVM product line, we transferred 42
employees to esmertec, of which 31 were development engineers.
In addition, as part of the sale, esmertec entered into an
agreement with our U.K. building landlord in order to assume the
lease on one of the two buildings leased by Insignia.
On February 13, 2004, Insignia and esmertec executed the
final purchase agreement upon signing the Limited Assignment of
Rights of Technology License and Distribution Agreement. The
final purchase agreement transferred the intellectual property
of Jeode and the title for Insignias remaining prepaid
royalties to esmertec.
On June 30, 2004, Insignia and esmertec executed a
Termination and Waiver Agreement. The Agreement offset esmertec
related liabilities and deferred revenue totaling $853,000
against $600,000 of remaining guaranteed royalty payments due
from esmertec in exchange for final cash payment of $185,000.
The resulting net gain of $302,000 was recorded as other income
in the second quarter of 2004 and is net of expenses. The final
payment was received from esmertec on July 8, 2004.
The Jeode platform had been our principal product line since the
third quarter of 1999. With the completion of the sale of our
JVM product line to esmertec in February 2004, Insignias
sole product line currently consists of its SSP products for the
mobile handset and wireless carrier industry. We began shipment
of our SSP product to customers in the fourth quarter of 2003,
but have achieved only minimal sales to date.
12
Results of operations
The following table sets forth statements of operations data for
the three years ended December 31, 2004 expressed as a
percentage of total revenues:
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change | |
|
|
|
% Change | |
|
|
|
|
2004 | |
|
2003 to 2004 | |
|
2003 | |
|
2002 to 2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
License revenues
|
|
$ |
521 |
|
|
|
0 |
% |
|
$ |
522 |
|
|
|
(91 |
)% |
|
$ |
5,714 |
|
Service revenues
|
|
|
20 |
|
|
|
(89 |
)% |
|
|
188 |
|
|
|
(88 |
)% |
|
|
1,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
541 |
|
|
|
(24 |
)% |
|
$ |
710 |
|
|
|
(90 |
)% |
|
$ |
7,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The SSP product line was our primary business for 2004. The
Jeode product line was our primary business for 2003 and 2002.
Both the SSP product line and the Jeode product line derive
revenue from four main sources: the sale of software licenses,
the sale of annual maintenance and support contracts as well as
services, per unit royalties and non-recurring engineering or
consulting activities. Revenues from the sale of development
licenses, packaged products and royalties received from OEMs are
classified as license revenue, while revenues from non-recurring
engineering activities, training, and annual maintenance
contracts are classified as service revenue.
In 2004, the SSP platform accounted for 83% of the revenue while
the Jeode product line accounted for 17% of the total revenue.
In 2003 and 2002, the Jeode platform accounted for 94% and 100%,
respectively, of total revenues. The SSP platform became
available for sale in December 2003 and the Jeode platform
became available for sale in 1999. Total revenues in 2004
decreased 24% from 2003 due to the transition from the Jeode
product line to the SSP product line. The Jeode product line was
sold in April 2003, and the service revenue from the support and
maintenance agreements associated with the Jeode product line
were also transferred at the time of the sale. Since that time
we have focused our efforts to develop and sell SSP products and
services on a full-time basis. In 2004, 2003 and 2002, license
revenue from the sale of SSP and Jeode accounted for 96%, 74%
and 79% respectively, of total revenues. Service revenue from
the SSP and Jeode platforms accounted for 4%, 26%, and 21% of
total revenues for 2004, 2003, and 2002 respectively. No future
revenues are expected from the Jeode product line.
License revenues did not change materially in 2004 compared to
2003 as the Company began its initial introduction of the new
SSP product in 2004. License revenues decreased 91% in 2003
compared to 2002 due to the sale of the Jeode product line in
March 2003.
Service revenue decreased by 89% in 2004 compared to 2003 due to
the decrease in the number of support and maintenance agreements
under the SSP product line. Service revenues decreased 88% in
2003 compared to 2002. The decrease was primarily due to the
sale of the Jeode product line.
13
|
|
|
Sales to OEMs and Distributors |
Sales to distributors and OEMs representing more than 10% of
total revenue in each period accounted for the following
percentages of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Distributors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Telemobile Corporation
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
Esmertec A.G.
|
|
|
17 |
% |
|
|
* |
|
|
|
|
|
Insignia Asia Corporation
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
Phoenix Technologies Ltd.
|
|
|
* |
|
|
|
* |
|
|
|
58 |
% |
All Distributors
|
|
|
60 |
% |
|
|
47 |
% |
|
|
70 |
% |
OEMs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Qindao Haier Telecom Company Limited
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
Sophast Inter Corporation Company Limited
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
Hewlett Packard Company
|
|
|
|
|
|
|
26 |
% |
|
|
* |
|
All OEMs
|
|
|
40 |
% |
|
|
49 |
% |
|
|
29 |
% |
Cost of revenues and gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change | |
|
|
|
% Change | |
|
|
|
|
2004 | |
|
2003 to 2004 | |
|
2003 | |
|
2002 to 2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Cost of license revenues
|
|
$ |
28 |
|
|
|
(90 |
)% |
|
$ |
288 |
|
|
|
(85 |
)% |
|
$ |
1,943 |
|
Gross margin: license revenues
|
|
|
95 |
% |
|
|
|
|
|
|
45 |
% |
|
|
|
|
|
|
66 |
% |
Cost of service revenues
|
|
$ |
14 |
|
|
|
(73 |
)% |
|
$ |
52 |
|
|
|
(92 |
)% |
|
$ |
641 |
|
Gross margin: service revenues
|
|
|
30 |
% |
|
|
|
|
|
|
72 |
% |
|
|
|
|
|
|
58 |
% |
Total cost of revenues
|
|
$ |
42 |
|
|
|
(88 |
)% |
|
$ |
340 |
|
|
|
(87 |
)% |
|
$ |
2,584 |
|
Gross margin: total revenues
|
|
|
92 |
% |
|
|
|
|
|
|
52 |
% |
|
|
|
|
|
|
64 |
% |
The cost of license revenue for 2004 consisted mainly of
commission paid to sales representatives on sales of our SSP
product line. The cost of license revenue for 2003 and 2002 was
mainly comprised of royalties to third parties on sales of our
Jeode product line. In all three years the cost of service
revenue was a result of costs associated with non-recurring
engineering activities and end-user support under maintenance
contracts.
The gross margin on sales of our SSP platform is typically
affected by whether we are using internal or external
representatives to sell the SSP product line and the percentage
commission negotiated with the sales people or companies selling
the SSP software.
We believe that the significant factors affecting the Jeode
platform gross margin in 2002 and 2003 included pricing of the
technology license, the unit usage and royalties to third
parties, in particular Sun Microsystems. License revenue gross
margins in 2004 were 95% compared to 45% in 2003. The increase
in gross margin was due to lower sales of our Jeode product in
2004, and hence lower royalties paid to Sun, as a result of our
sale of the Jeode business to esmertec in April 2003. License
revenue gross margins in 2003 were 45% compared to 66% in 2002.
The decrease was due to lower margins on 2003 revenue due to the
sale of the Jeode product line to esmertec A.G.
Gross margin for services revenue is impacted by the level of
and pricing terms of non-recurring engineering activities, which
can vary from customer to customer, from contract to contract
and based on the level of maintenance contracts sold. Service
revenue gross margins in 2004 were 30% compared to 72% in 2003.
The decrease in service revenue gross margin is primarily a
result of introducing our new SSP product
14
during 2004 and amortizing the cost of service employees over a
lower sales level. Service revenue gross margins in 2003 were
72% compared to 58% in 2002. The increase was primarily a result
of the transfer of customers, employees and related costs with
the sale of the Jeode product line.
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change | |
|
|
|
% Change | |
|
|
|
|
2004 | |
|
2004 to 2003 | |
|
2003 | |
|
2003 to 2002 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Sales and marketing
|
|
$ |
2,511 |
|
|
|
43 |
% |
|
$ |
1,757 |
|
|
|
(68 |
)% |
|
$ |
5,558 |
|
Percentage of total revenues
|
|
|
464 |
% |
|
|
|
|
|
|
247 |
% |
|
|
|
|
|
|
77 |
% |
Research and development
|
|
$ |
2,807 |
|
|
|
(17 |
)% |
|
$ |
3,373 |
|
|
|
(40 |
)% |
|
$ |
5,640 |
|
Percentage of total revenues
|
|
|
519 |
% |
|
|
|
|
|
|
475 |
% |
|
|
|
|
|
|
78 |
% |
General and administrative
|
|
$ |
2,579 |
|
|
|
(4 |
)% |
|
$ |
2,676 |
|
|
|
(20 |
)% |
|
$ |
3,356 |
|
Percentage of total revenues
|
|
|
477 |
% |
|
|
|
|
|
|
377 |
% |
|
|
|
|
|
|
46 |
% |
Restructuring
|
|
|
0 |
|
|
|
(100 |
)% |
|
$ |
498 |
|
|
|
68 |
% |
|
$ |
296 |
|
Percentage of total revenues
|
|
|
0 |
% |
|
|
|
|
|
|
70 |
% |
|
|
|
|
|
|
4 |
% |
Sales and marketing expenses consist primarily of
personnel and related overhead costs, salesperson commissions,
advertising and promotional expenses and trade shows.
Sales and marketing expenses increased by 43% in 2004 from 2003.
The increase in sales and marketing expenditures from $1,757,000
in 2003 to $2,511,000 in 2004 was primarily due to a non-cash
charge of $353,000 for warrants that were issued to outside
partners supporting the Companys SSP product launch,
$271,000 of expenses related to a strategic sales partner
promoting our product line in the Asian markets, $51,000 in
additional travel expenses and $70,000 for recruitment fees.
Sales and marketing expenses decreased by 68% in 2003 compared
to 2002 primarily due to decreased personnel costs, decreased
recruiting costs and decreased employee travel. Costs for sales
and marketing personnel decreased by $2.6 million due to a
decrease in sales and marketing employees in 2003 as a result of
a reduction in force program. The decreased headcount resulted
in a decrease in sales and marketing travel of $546,000 and a
$186,000 decrease in facility and telephone costs, as well as a
$50,000 decrease in recruiting costs. Allocated overhead costs
also decreased by $374,000 due to the resulting headcount
decrease. In addition, marketing programs and public relations
costs decreased by $454,000 as a result of cost cutting
measures. These costs decreases were offset by a $216,000
increase in costs for the French sales office and a $75,000
increase in costs to an outside sales firm targeting the Asian
markets. Both the increase in the French office and costs for
the outside sales firm were a result of increased sales efforts
for the SSP product.
Research and development expenses consist primarily of
personnel costs, overhead costs relating to occupancy, software
support and maintenance and equipment depreciation. In
accordance with Statement of Financial Accounting Standards
No. 86, software development costs are expensed as incurred
until technological feasibility is established, after which any
additional costs are capitalized. In 2004, 2003 and 2002, no
development expenditures were capitalized because there were no
amounts that qualified for capitalization.
Research and development expenses in 2004 decreased 17% from
2003. The decrease in research and development costs from
$3,373,000 in 2003 to $2,807,000 in 2004 was primarily due to
$346,000 of lower salary related expenses as a result of a
reduction in employees in the United Kingdom after the sale of
our Jeode product line in April of 2003 and a $200,000 decrease
in support and maintenance costs as a result of our transfer of
support agreements to esmertec with the sale of our Jeode
product line.
Research and development expenses in 2003 decreased 40% from
2002. The decrease of $2.3 million was due to a reduction
in personnel related costs resulting from the transferring of
employees to esmertec with the sale of the Jeode product line
and a $236,000 decrease from the nonrenewal of our related Java
support and maintenance contract. Recruiting costs and
professional consulting costs decreased by $57,000 and $90,000,
respectively. In addition, overhead costs for management
information systems and facilities decreased by
15
$449,000. These decreases were offset by $590,000 in engineering
consulting services and technical support services, which were
retained as engineering expenses and not allocated to cost of
sales as a result of lower sales in 2003.
General and administrative expenses consist primarily of
personnel and related overhead costs for finance, information
systems, human resources and general management.
General and administrative expenses decreased by 4%, or
approximately $100,000 from 2003 to 2004 primarily as a result
of higher legal costs of approximately $95,000 in 2003
associated with the sale of our Jeode product line, lower rent
expense in 2004 of approximately $100,000 resulting from the
sublease of part of our facility in the United Kingdom, and
$31,000 of lower salary related costs in the United Kingdom from
reduced headcount as a result of the sale of the Jeode product
line. These decreases were offset in part by an increase in 2004
recruiting costs of $40,000 and a $74,000 increase in printing
and documentation costs.
General and administrative expenses decreased by 20% in 2003
from 2002. The decrease was a result of a $665,000 decrease in
compensation expenses due to headcount reductions and a $478,000
decrease in facility costs primarily as a result of $292,000 of
expenses incurred in 2002 in order to restore our vacated United
Kingdom facility to its original condition and lower rent costs
in 2003 due to a reduction in office space. Travel costs
decreased by $105,000 in 2003 compared to 2002 due to decreased
headcount and cost-cutting measures, and insurance costs
decreased by $121,000. These decreases were partially offset by
$837,000, which was a result of fewer overhead costs being
allocated out to other departments in 2003.
Restructuring
In the third quarter of 2002, we completed a worldwide reduction
of headcount of approximately 11% of our staff. Restructuring
expenses of $296,000 consisted of severance payments made during
the third and fourth quarters of 2002.
On February 11, 2003, we announced a restructuring of the
organization to focus on the SSP technology. The restructuring
charges for 2003 were $498,000 for employee termination
benefits. Restructuring expenses represented 70% of total
revenues for 2003.
There were no restructuring costs in 2004.
Interest income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change | |
|
|
|
% Change | |
|
|
|
|
2004 | |
|
2003 to 2004 | |
|
2003 | |
|
2002 to 2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Interest income (expense), net
|
|
$ |
6 |
|
|
|
115 |
% |
|
$ |
(40 |
) |
|
|
(153 |
)% |
|
$ |
75 |
|
Percentage of total revenues
|
|
|
1 |
% |
|
|
|
|
|
|
(6 |
)% |
|
|
|
|
|
|
1 |
% |
Net interest income (expense) changed from net interest
expense of $40,000 in 2003 to net interest income of $6,000 in
2004. This change was primarily due to interest expense that was
paid in 2003 on a $1,000,000 loan from esmertec which was
settled in the first quarter of 2004.
Net interest income decreased from net interest income of
$75,000 in 2002 to net interest expense of $40,000 in 2003. The
change from net interest income to net interest expense was
primarily due to a combination of lower interest earned on cash
and cash equivalent balances and interest expense on a loan
received from esmertec in February 2003. Our cash, cash
equivalents and restricted cash increased from $1.0 million
at December 31, 2002 to $2.2 million at
December 31, 2003 as a result of continued financing to
fund our business operations.
16
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change | |
|
|
|
% Change | |
|
|
|
|
2004 | |
|
2003 to 2004 | |
|
2003 | |
|
2002 to 2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Other income (expense), net
|
|
$ |
249 |
|
|
|
92 |
% |
|
$ |
3,141 |
|
|
|
829 |
% |
|
$ |
(431 |
) |
Percentage of total revenues
|
|
|
46 |
% |
|
|
|
|
|
|
442 |
% |
|
|
|
|
|
|
6 |
% |
Other income (expense), net decreased from $3,141,000 of net
other income in 2003 to $249,000 of net other income in 2004.
Other income of $249,000 in 2004 was primarily due to the gain
on the sale of the Jeode product line. The decrease was
primarily due to a gain on the sale of our Jeode product line in
2003.
Other income (expense), net changed from net other expense of
$431,000 in 2002 to net other income of $3,141,000 in 2003. The
change was primarily due to the gain of $3.1 million
recognized on the sale of the Jeode product line in 2003.
We have, at times, an investment portfolio of fixed income
securities that are classified as
available-for-sale-securities. These securities,
like all fixed income instruments, are subject to interest rate
risk and will fall in value if market interest rates increase.
We attempt to limit this exposure by investing primarily in
short-term securities.
Benefit from income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change | |
|
|
|
% Change | |
|
|
|
|
2004 | |
|
2003 to 2004 | |
|
2003 | |
|
2002 to 2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
($ in thousands) | |
Benefit from income taxes
|
|
$ |
(81 |
) |
|
|
(84 |
)% |
|
$ |
(510 |
) |
|
|
(76 |
)% |
|
$ |
(2,114 |
) |
Effective income tax rate
|
|
|
(1 |
)% |
|
|
|
|
|
|
(11 |
)% |
|
|
|
|
|
|
(20 |
)% |
The benefit from income taxes for 2004 primarily represented two
significant items. The first item was a net benefit of $187,000
due to a reduction for potential tax liabilities related to our
former Jeode product line. The booked liability was no longer
necessary due to our accumulated operating loss carry forwards,
tax receivables and the lack of tax assessments or expenses.
In addition, in 2004 there was an offsetting write down of tax
benefit of $104,000. This write down of tax benefit was related
to the reduction of expected benefit relating to the 2003 and
2004 refunds to be received from the United Kingdom for research
and development claims. The tax credit for United Kingdom
research and development expenditures was a tax refund for
qualifying research and development expenditures and not an
offset against a tax liability.
At December 31, 2004, we recorded a full valuation
allowance against all deferred tax assets, primarily comprised
of net operating losses, on the basis that significant
uncertainty exists with respect to their realization.
From 2000 through 2002, certain research and development
expenditures incurred in the United Kingdom qualified for a tax
credit. The tax credit did not offset any tax liability but
rather was a refund. The estimated refund for 2004 is $134,000.
The estimated refund for 2003 reported in the 2003
Form 10-K was $391,000. The actual amount received for 2003
was $188,000 and was received in January of 2005. The difference
of $203,000 between actual United Kingdom tax credit and the
actual refund received for 2003 was due to the research and
development expenses for SSP incurred in the United States were
disallowed as the office in the United Kingdom was not leading
the research and development process. Our estimates have since
been updated for future years.
Quarterly financial data
The following table has been derived from unaudited consolidated
financial statements that, in the opinion of management, include
all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of this
information when read in conjunction with our annual audited
consolidated
17
financial statements and notes thereto appearing elsewhere in
this Report. These operating results are not necessarily
indicative of results of any future period.
The following table provides selected quarterly consolidated
financial data (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
319 |
|
|
$ |
107 |
|
|
$ |
107 |
|
|
$ |
8 |
|
|
Gross profit (loss)
|
|
|
296 |
|
|
|
102 |
|
|
|
107 |
|
|
|
(6 |
) |
|
Net loss
|
|
|
(1,910 |
) |
|
|
(1,304 |
) |
|
|
(1,729 |
) |
|
|
(2,119 |
) |
|
Basic and diluted net loss per share
|
|
$ |
(0.07 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.06 |
) |
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
379 |
|
|
$ |
|
|
|
$ |
201 |
|
|
$ |
130 |
|
|
Gross profit (loss)
|
|
|
212 |
|
|
|
(36 |
) |
|
|
131 |
|
|
|
63 |
|
|
Net income (loss)
|
|
|
(3,199 |
) |
|
|
2,273 |
|
|
|
(1,656 |
) |
|
|
(1,741 |
) |
|
Basic and diluted net income (loss) per share
|
|
$ |
(0.16 |
) |
|
$ |
0.11 |
|
|
$ |
(0.08 |
) |
|
$ |
(0.07 |
) |
Liquidity and capital resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Cash, cash equivalents and restricted cash at December 31
|
|
$ |
952 |
|
|
$ |
2,232 |
|
|
$ |
976 |
|
Working capital at December 31
|
|
$ |
900 |
|
|
$ |
2,254 |
|
|
$ |
1,964 |
|
Net cash used in operating activities
|
|
$ |
(7,583 |
) |
|
$ |
(4,235 |
) |
|
$ |
(8,446 |
) |
In 2003, we sold the Jeode product line and transitioned our
product focus to our SSP product line. This change in product
focus has resulted in a redirection of available resources from
our historical revenue base towards the development and
marketing efforts associated with the SSP product. Cash used in
operating activities totaled $7.6 million during 2004,
compared to $4.2 million during 2003, and $8.4 million
in 2002. The $7.6 million in cash used in operations in
2004 was primarily the result of our $7.1 million net loss.
There was a $353,000 non-cash charge for warrant issuances as
well as $82,000 equity in the net loss of our Korean affiliate
and a gain on the sale of the Jeode product line of $302,000. In
addition, the payment of accounts payable resulted in a use of
cash of $155,000 as did the payment of accrued liabilities of
$392,000. An additional use of cash resulted from an increase in
trade accounts receivable of $125,000. The cash used in
operations in 2003 resulted primarily from a net loss of
$4.3 million, the gain on the sale of the Jeode product
line of $3.1 million and a decrease of accounts payable of
$187,000. Partially offsetting these uses of cash were an
increase in deferred revenue of $1,085,000, a decrease of
accounts receivable of $931,000, a decrease of other noncurrent
assets of $319,000, and a decrease of tax receivable of
$311,000. In fiscal 2002, cash used in operations resulted
primarily from a net loss of $8.4 million, an increase of
tax receivable of $702,000, an increase of prepaid royalties of
$1.2 million and a reduction of deferred revenue of
$3.5 million.
Cash provided by investing activities in 2004 was $998,000 which
consisted primarily of $1.3 million in proceeds received
from the sale of the Jeode product line. The $1.3 million
in proceeds received from the sale of the Jeode product line was
offset in part by $150,000 of investments in our Korean joint
venture affiliate and $90,000 of purchased property and
equipment. Cash provided by investing activities in 2003 was
$2.0 million, which consisted primarily of
$1.9 million of net proceeds from the sale of the Jeode
product line and $230,000 being released from restricted cash.
Cash used in investing activities in 2002 was $125,000, which
consisted primarily of purchases of property and equipment.
18
Cash provided by financing activities in 2004 was
$5.3 million, which consisted primarily of
$4.3 million, net of transaction costs, proceeds from two
private placements and issuance of shares under the Fusion
Capital Fund II, LLC securities subscription agreement,
$610,000 in proceeds from the exercise of options and $390,000
in proceeds from the exercise of warrants. Cash provided by
financing activities in 2003 was $3.7 million, which
consisted primarily of proceeds from the issuance of shares
under the Fusion Capital Fund, II LLC securities
subscription agreement of $1.9 million, net of transaction
costs, proceeds from the exercise of warrants of $841,000 and
proceeds from a note payable of $1.0 million. Cash provided
by financing activities in 2002 was $654,000, which consisted
primarily of proceeds from exercise of warrants of $480,000 and
from the issuance of common stock under employee benefit plans
of $175,000.
As of December 31, 2004, we had the following contractual
cash obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating | |
|
|
|
|
Leases | |
|
Total | |
|
|
| |
|
| |
Year ending December 31,
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
317 |
|
|
$ |
317 |
|
2006
|
|
|
226 |
|
|
|
226 |
|
2007
|
|
|
198 |
|
|
|
198 |
|
2008
|
|
|
198 |
|
|
|
198 |
|
2009
|
|
|
198 |
|
|
|
198 |
|
Thereafter
|
|
|
918 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
$ |
2,055 |
|
|
$ |
2,055 |
|
|
|
|
|
|
|
|
As of December 31, 2004, two customers accounted for 100%
of the gross accounts receivable balance.
We have granted extended payment terms to customers from time to
time depending on various factors, including the length of the
requested payment extension and the creditworthiness of the
customer. We report these future payments as accounts receivable
and either recognized revenue or deferred revenue. Deferred
revenue decreased by $1,450,000 for 2004. The decrease was
primarily the result of assigning our Jeode support and
maintenance contracts to esmertec in early 2004.
Insignia warrants its software products against defects in
material and workmanship under normal use and service for a
period of ninety days. There is no warranty accrual recorded
because potential future payments either are not probable or we
have yet to incur the expense.
On October 17, 2002, we entered into a securities
subscription agreement with Fusion Capital Fund II, LLC
(Fusion Capital), pursuant to which Fusion Capital
agreed to purchase, on each trading day following the
effectiveness of a registration statement covering the American
Depository Shares (ADSs) to be purchased by Fusion
Capital, $10,000 of our ADSs up to an aggregate of
$6.0 million over a period of 30 months. The purchase
price of the ADSs was based on a formula based on the market
price at the time of each purchase. In 2004, we sold
3,100,060 shares to Fusion Capital for aggregate proceeds
of $1.5 million, net of transaction costs, under the 2002
Fusion Capital securities subscription agreement. During 2003,
we issued and sold to Fusion Capital 3,380,132 ADSs resulting in
proceeds of $1.9 million, net of transaction costs, under
the 2002 Fusion Capital securities subscription agreement.
In addition to the shares purchasable by Fusion Capital under
the 2002 Fusion Capital securities subscription agreement, we
also issued warrants to purchase an aggregate of
2,000,000 shares to Fusion Capital, with a per share
exercise price of the United States dollar equivalent of 20.5
pence. As of December 31, 2002, the estimated value of the
warrants, using the Black-Scholes model, was $544,000. Fusion
Capital exercised the warrants in 2003. Upon exercise of the
warrants, we issued Fusion Capital 2,000,000 ADSs for a total of
$668,000, net of issuance costs.
During January 2005, we sold 299,007 shares for $200,000
under the 2002 Fusion Capital agreement. On February 9,
2005, Insignia sold to Fusion Capital 3,220,801 ADSs at a
purchase price of $0.40 per share, resulting in proceeds of
approximately $1.3 million. These shares were issued to
Fusion Capital in a private
19
placement, and the shares are not resaleable under the
Companys existing Form S-1 registration statement.
Insignia intends to file as soon as practicable (and within
30 days of Fusion Capitals request) a registration
statement on Form S-3 in order to register the resale of
these shares.
On February 9, 2005, Insignia and Fusion Capital entered
into a mutual termination agreement pursuant to which the 2002
Fusion Capital securities subscription agreement was terminated.
As a result of this termination, the 2,000,000 shares
issued on exercise of the warrants (described above) may be
resold by Fusion Capital under the Companys existing S-1
registration statement.
On February 9, 2005, Insignia entered into a new securities
subscription agreement with Fusion Capital to sell up to
$12 million in ADSs, representing ordinary shares, to
Fusion Capital over a period of 30 months (subject to daily
maximum purchase amounts) (the 2005 Fusion Capital
securities subscription agreement). The shares will be
priced based on a market-based formula at the time of purchase.
The commencement of funding under the 2005 Fusion Capital
securities subscription agreement is subject to certain
conditions, including the declaration of effectiveness by the
Securities and Exchange Commission of a registration statement
covering the ADSs to be purchased by Fusion Capital under the
2005 Fusion Capital securities subscription agreement. Under the
rules and regulations of the Nasdaq SmallCap Market, the Company
would be required to obtain shareholder approval to sell more
than 19.99% of the issued and outstanding shares as of
February 9, 2005 under this agreement. Insignia currently
expects that commencement of funding under the 2005 Fusion
Capital securities subscription agreement will begin during the
second quarter of 2005, however the timing and certainty of the
commencement of funding under the 2005 Fusion Capital securities
subscription agreement are not within Insignias control.
Any delay in the commencement of funding under the 2005 Fusion
Capital securities subscription agreement could jeopardize our
business.
Our cash, cash equivalents and restricted cash totaled
$1.0 million at December 31, 2004, compared to
$2.2 million at December 31, 2003. We had recurring
net losses of $7.1 million, $4.3 million, and
$8.4 million for the years ended December 31, 2004,
2003, and 2002, respectively, and we also had net cash used in
operations of $7.6 million, $4.2 million, and
$8.4 million for the years ended December 31, 2004,
2003, and 2002, respectively. These conditions raise substantial
doubt about our ability to continue as a going concern. Based
upon our current forecasts and estimates, including the timely
closing of the 2005 Fusion Capital securities subscription
agreement and the achievement of our target revenues,
cost-cutting and accounts receivable collection goals, our
current forecasted cash and cash equivalents will be sufficient
to meet our operating and capital requirements through
December 31, 2005. If cash currently available from all
sources is insufficient to satisfy our liquidity requirements,
we may seek additional sources of financing, including selling
additional equity or debt securities. If additional funds are
raised through the issuance of equity or debt securities, these
securities could have rights, preferences and privileges senior
to holders of our shares, and the terms of such securities could
impose restrictions on our operations. The sale of additional
equity or debt securities could result in additional dilution to
our shareholders. We may not be able to obtain additional
financing on acceptable terms, if at all. If we are unable to
obtain additional financing as and when needed and on acceptable
terms our business may be jeopardized.
On March 16, 2005, we closed our acquisition of mi4e Device
Management AB (mi4e), a private company
headquartered in Stockholm, Sweden. Mi4e was founded in 2003 and
is a leading provider of client provisioning device-management
software and services to mobile operators, virtual operators and
value added service providers. This acquisition enables Insignia
to offer a more complete solution to mobile network operators
and handset manufacturers. Importantly, it also secures the
necessary infrastructure and customer references to allow the
combined company to aggressively pursue new customers, contracts
and strategic relationships. The consideration paid in the
transaction was 2,969,692 American depositary shares (ADSs)
representing ordinary shares and another 989,896 ADSs is payable
on March 31, 2006. In addition up to a maximum of 700,000
euros is payable in a potential earnout based on a percentage of
future revenue collected from sales of existing mi4e products.
20
New accounting pronouncements
In March 2004, the Emerging Issues Task Force
(EITF) reached a consensus on Issue
No. 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
(EITF 03-01). EITF 03-01 provides guidance
on other-than-temporary impairment models for marketable debt
and equity securities accounted for under Statements of
Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and SFAS No. 124, Accounting
for Certain Investments Held by Not-for-Profit
Organizations, and non-marketable equity securities
accounted for under the cost method. The EITF developed a basic
three-step model to evaluate whether an investment is
other-than-temporarily impaired. The Financial Accounting
Standards Board (FASB) issued EITF 03-01-1 in
September 2004 which delayed the effective date of the
recognition and measurement provisions of EITF 03-01. We do
not expect the adoption of EITF 03-01 to have a material
impact on our results of operations or financial condition.
In April 2004, the EITF issued Statement No. 03-06,
Participating Securities and the Two-Class Method
Under FASB Statement No. 128, Earnings Per Share
(EITF 03-06). EITF 03-06 addresses a
number of questions regarding the computation of earnings per
share by companies that have issued securities other than common
stock that contractually entitle the holder to participate in
dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating
earnings per share, clarifying what constitutes a participating
security and how to apply the two-class method of computing
earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings
to such a security. EITF 03-06 is effective for fiscal
periods beginning after March 31, 2004. The adoption of
EITF 03-06 did not have a material effect on
Insignias results of operations or financial position.
In November 2004, the FASB issued SFAS 151, Inventory
Costs (SFAS 151). SFAS 151 requires
the allocation of fixed production overhead costs be based on
the normal capacity of the production facilities and unallocated
overhead costs recognized as an expense in the period incurred.
In addition, other items such as abnormal freight, handling
costs and wasted materials require treatment as current period
charges rather than a portion of the inventory cost.
SFAS 151 is effective beginning in our first quarter of
fiscal 2006. We do not expect the adoption of SFAS 151 to
have a material impact on our results of operations or financial
condition.
In December 2004, the FASB issued SFAS 123 (revised 2004),
Share-Based Payment (SFAS 123R).
SFAS 123R requires measurement of all employee stock-based
compensation awards using a fair value method and the recording
of such expense in the consolidated financial statements. In
addition, the adoption of SFAS 123R will require additional
accounting related to the income tax effects and additional
disclosure regarding the cash flow effects resulting from
share-based payment arrangements. SFAS 123R is effective
beginning in our third quarter of fiscal 2005. We are evaluating
the requirements of SFAS 123R and we expect that the
adoption of SFAS 123R will have a material impact on our
results of operations and financial condition. We have not yet
determined whether the adoption of SFAS 123R will result in
stock-based compensation charges that are similar to the current
pro forma disclosures under SFAS 123.
In December 2004, the FASB issued SFAS 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion
No. 29 (SFAS 153). SFAS 153
addresses the measurement of exchanges of nonmonetary assets and
redefines the scope of transactions that should be measured
based on the fair value of the assets exchanged. SFAS 153
is effective for nonmonetary asset exchanges beginning in our
first quarter of fiscal 2006. We do not believe adoption of
SFAS 153 will have a material impact on our results of
operations or financial condition.
21
Risk Factors
In addition to the other information in this report, the
following factors should be considered carefully in evaluating
our business and prospects:
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|
|
We may need additional financing to sustain our
operations, and we may not be able to continue to operate as a
going concern. |
We had cash, cash equivalents, and restricted cash of
$1.0 million at December 31, 2004. We had recurring
net losses of $7.1 million, $4.3 million, and
$8.4 million for the years ended December 31, 2004,
2003, and 2002, respectively, and we also had net cash used in
operations of $7.6 million, $4.2 million, and
$8.4 million for the years ended December 31, 2004,
2003, and 2002, respectively. These conditions raise substantial
doubt about our ability to continue as a going concern.
Our cash, cash equivalents and restricted cash totaled
$1.0 million at December 31, 2004, compared to
$2.2 million at December 31, 2003. Based upon our
current forecasts and estimates, including the timely closing of
the 2005 Fusion Capital securities subscription agreement and
the achievement of our target revenues, cost-cutting and
accounts receivable collection goals, our current forecasted
cash and cash equivalents will be sufficient to meet our
operating and capital requirements through December 31,
2005. If cash currently available from all sources is
insufficient to satisfy our liquidity requirements, we may seek
additional sources of financing including selling additional
equity or debt securities. If additional funds are raised
through the issuance of equity or debt securities, these
securities could have rights, preferences and privileges senior
to holders of our shares, and the terms of such securities could
impose restrictions on our operations. The sale of additional
equity or debt securities could result in additional dilution to
our shareholders. We may not be able to obtain additional
financing on acceptable terms, if at all. If we are unable to
obtain additional financing as and when needed and on acceptable
terms our business may be jeopardized.
Pursuant to the 2002 Fusion Capital agreement, Insignia sold to
Fusion Capital 3,220,801 ADSs at a purchase price of
$0.40 per share, resulting in proceeds of approximately
$1.3 million. These shares were issued to Fusion Capital in
a private placement, and the shares are not resaleable under the
Companys existing Form S-1 registration statement.
Insignia intends to file as soon as practicable (and within
30 days of Fusion Capitals request) a registration
statement on Form S-3 in order to register the resale of
these shares.
On February 9, 2005, Insignia and Fusion Capital entered
into a mutual termination agreement pursuant to which the 2002
Fusion Capital securities subscription agreement was terminated.
As a result of this termination the 2,000,000 shares issued
on exercise of the warrants may be resold by Fusion Capital
under the Companys existing S-1 registration statement.
On February 9, 2005, Insignia entered into a new securities
subscription agreement with Fusion Capital to sell up to
$12 million in ADSs, representing ordinary shares, to
Fusion Capital over a period of 30 months (the 2005
Fusion Capital securities subscription agreement). The
shares will be priced based on a market-based formula at the
time of purchase. The commencement of funding under the 2005
Fusion Capital securities subscription agreement is subject to
certain conditions, including the declaration of effectiveness
by the Securities and Exchange Commission of a registration
statement covering the ADSs to be purchased by Fusion Capital
under the 2005 Fusion Capital securities subscription agreement.
Under the rules and regulations of the Nasdaq SmallCap Market,
the Company would be required to obtain shareholder approval to
sell more than 19.99% of the issued and outstanding shares as of
February 9, 2005 under this agreement. Insignia currently
expects that commencement of funding under the 2005 Fusion
Capital securities subscription agreement will begin during the
second quarter of 2005, however the timing and certainty of the
commencement of funding under the 2005 Fusion Capital securities
subscription agreement are not within Insignias control.
Any delay in the commencement of funding under the 2005 Fusion
Capital securities subscription agreement could jeopardize our
business.
22
|
|
|
Our stock could be delisted from Nasdaq. |
Insignias shareholders equity at December 31,
2004 was $1,341,000, which was below the minimum $2,500,000 in
shareholders equity required for continued listing on the
Nasdaq SmallCap Market. The Company believes that its recent
financing of $1,300,000 with Fusion Capital announced on
February 10, 2005 should raise its shareholders
equity above the minimum required by Nasdaq. We also announced
on February 10, 2005 that we have entered into a new
$12 million securities subscription agreement with Fusion
Capital LLC. The commencement of funding under the 2005 Fusion
Capital securities subscription agreement is subject to certain
conditions, including the declaration of effectiveness by the
Securities and Exchange Commission of a registration statement
covering the ADSs to be purchased by Fusion under the 2005
Fusion Capital securities subscription agreement. Under the
rules and regulations of the Nasdaq SmallCap Market, the Company
would be required to obtain shareholder approval to sell more
than 19.99% of the issued and outstanding shares as of
February 9, 2005 under this agreement. Insignia currently
expects that commencement of funding under the 2005 Fusion
Capital securities subscription agreement will be closed by the
second quarter of 2005, however the timing and certainty of the
closing of the 2005 Fusion Capital securities subscription
agreement are not within Insignias control. Any delay in
the commencement of funding under the 2005 Fusion Capital
securities subscription agreement could jeopardize our business.
|
|
|
The sale of our shares to Fusion Capital may cause
dilution, and the sale of the shares by Fusion Capital could
cause the price of our shares to decline. |
The subscription price for the shares to be issued to Fusion
Capital pursuant to the 2005 securities subscription agreement
with Fusion Capital will fluctuate based on the price of our
shares. Shares sold to Fusion Capital under the securities
subscription agreement will be freely tradable. Fusion Capital
may sell none, some or all of the shares purchased from us at
any time. We expect that the shares to be sold to Fusion Capital
will be sold over a period of up to 30 months from the
effective date of the registration statement filed in connection
with the transaction.
Depending upon market liquidity at the time, a sale of such
shares at any given time could cause the trading price of our
shares to decline. The sale of a substantial number of shares,
or anticipation of such sales, could make it more difficult for
us to sell equity or equity-related securities in the future at
a time and at a price that we might otherwise wish to effect
sales.
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|
|
We have achieved minimal sales of our SSP product line to
date. |
Our future performance depends upon sales of products of our SSP
product line, which is our sole product line. We only began
shipping the SSP product in December 2003 and have achieved only
minimal sales to date, including revenues of only $450,000
relating to sales of the SSP product in 2004. If we are unable
to gain the necessary customer traction for our SSP product, our
business may be jeopardized.
Our SSP product represents the next-generation of
products that enable carriers to repair and update mobile phones
over-the-air without having their customers send
back their handsets to the carrier for repair or update. To the
extent that carriers continue to use the current generation of
over-the-air products, such as those offered by
Bitfone, Innopath, Openwave and Mformation, to make repairs and
updates and do not believe that the next generation products,
such as our SSP product, offer a sufficiently important
improvement at a reasonable cost, then we may not achieve our
targeted sales and our business could fail.
In addition, some prospective customers have been reticent to
buy our SSP product because of our current financial position.
While we believe that upon the commencement of funding under the
2005 Fusion Capital securities subscription agreement, we will
have an adequate funding source through 2005, to the extent that
prospective customers believe that we are under-capitalized,
they may be hesitant to buy our SSP product. In addition, the
commencement of funding under the 2005 Fusion Capital securities
subscription agreement is subject to conditions, the timing and
certainty of which are not within our control.
23
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|
|
The long and complex process of licensing our SSP product
makes our revenue unpredictable. |
Our revenue is dependent upon our ability to license our SSP
product to third parties. Licensing our SSP product has to date
been a long and complex process, longer than the typical six to
nine months sales cycle for our former product. Before
committing to license our products, potential customers must
generally consider a wide range of issues including product
benefits, infrastructure requirements, functionality,
reliability and our ability to work with existing systems. The
process of entering into a development license with a company
typically involves lengthy negotiations. Because of the sales
cycle, it is difficult for us to predict when, or if, a
particular prospect might sign a license agreement. Development
license fees may be delayed or reduced because of this process.
We only began shipping the SSP product in December 2003 and have
achieved only minimal sales to date.
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We rely on third parties for software development tools,
which we distribute with some of our products. |
We license software development tool products from other
companies to distribute with some of our products. These third
parties may not be able to provide competitive products with
adequate features and high quality on a timely basis or to
provide sales and marketing cooperation. Furthermore, our
products compete with products produced by some of our
licensors. When these licenses terminate or expire, continued
license rights might not be available to us on reasonable terms,
or at all. We might not be able to obtain similar products to
substitute into our tool suites.
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If handset manufacturers (and other third parties) do not
achieve substantial sales of their products that incorporate our
SSP technology, we will not receive royalty payments on our
licenses. |
Our success depends upon the use of our technology by our
licensees in their smart devices. Our licensees undertake a
lengthy process of developing systems that use our technology.
Until a licensee has sales of its systems incorporating our
technology, they will not pay commercial use royalties to us. We
expect that the period of time between entering into a
development license and actually recognizing commercial use
royalties will be lengthy and difficult to predict.
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We have a history of losses and we must generate
significantly greater revenue if we are to achieve
profitability. |
We have experienced operating losses in each quarter since the
second quarter of 1996. To achieve profitability, we will have
to increase our revenue significantly. Our ability to increase
revenue depends upon the success of our SSP product line, and to
date we have received only minimal revenue. If we are unable to
create revenue from SSP in the form of development license fees,
maintenance and support fees, commercial use royalties and
nonrecurring engineering services, our current revenue will be
insufficient to sustain our business.
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|
We need to increase our sales and marketing expenditures
in order to achieve sales of our SSP product; however, this
increase in expenses is expected to decrease our cash
position. |
In 2004 and 2003, we spent 464% and 247%, respectively, of our
total revenue on sales and marketing. We expect to continue to
incur disproportionately high sales and marketing expenses in
the future. To market SSP effectively, we must develop client
and server channel markets. We will continue to incur the
expenses for a sales and marketing infrastructure before we
recognize significant revenue from sales of the product. Because
customers in the smart device market tend to remain with the
same vendor over time, we believe that we must devote
significant resources to each potential sale. If potential
customers do not design our products into their systems, the
resources we have devoted to the sales prospect would be lost.
If we fail to achieve and sustain significant increases in our
quarterly sales, we may not be able to continue to increase our
investment in these areas. With increased expenses, we must
significantly increase our revenue if we are to become
profitable.
24
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Our business strategy is focused on our sole product line,
the SSP product line. |
We face significant risks associated with the development and
future deployment of our SSP product and the successful
execution of the related business strategy. With the sale of the
Jeode product line to esmertec, SSP is our sole product line. We
only began shipping the SSP product in December 2003 and have
achieved only minimal sales to date.
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If we are unable to stay abreast of technological changes,
evolving industry standards and rapidly changing customer
requirements, our business reputation will likely suffer and
revenue may decline. |
The market for mobile devices is fragmented and characterized by
technological change, evolving industry standards and rapid
changes in customer requirements. SSP will need to be
continually improved to meet emerging market conditions, such as
new interoperability standards, new methods of wireless
notifications, new flash silicon technologies and new telecom
infrastructure elements. Our existing products will become less
competitive or obsolete if we fail to introduce new products or
product enhancements that anticipate the features and
functionality that customers demand. The success of our new
product introductions will depend on our ability to:
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accurately anticipate industry trends and changes in technology
standards; |
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complete and introduce new product designs and features in a
timely manner; |
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continue to enhance our existing product lines; and |
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respond promptly to customers requirements and preferences. |
Development delays are commonplace in the software industry. We
have experienced delays in the development of new products and
the enhancement of existing products in the past and are likely
to experience delays in the future. We may not be successful in
developing and marketing, on a timely basis or at all,
competitive products, product enhancements and new products that
respond to technological change, changes in customer
requirements and emerging industry standards.
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Our targeted market is highly competitive. |
Our SSP product line is targeted for the mobile operator and
mobile device market. The market for these products is
fragmented and highly competitive. This market is also rapidly
changing, and there are many companies creating products that
compete or will compete with ours. As the industry develops, we
expect competition to increase in the future. This competition
may come from existing competitors or other companies that we do
not yet know about. Our main competitors include Bitfone,
InnoPath, 4thPass, OpenWave and RedBend.
If these competitors develop products that are less expensive or
provide better capabilities or functionality than does our SSP
product line, we will be unable to gain market share. Many of
our current competitors and potential competitors have greater
resources, including larger customer bases and greater financial
resources than we do, and we might not be able to compete
successfully against these companies. A variety of other
potential actions by our competitors, including increased
promotion and accelerated introduction of new or enhanced
products, could also harm our competitive position.
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Our revenue model may not succeed. |
Competition could force us to reduce the prices of our products,
which would result in reduced gross margins and could harm our
ability to provide adequate service to our customers and our
business. Our pricing model for our software products is a
combination of (1) initial license fees, (2) activated
subscriber fees, (3) support and maintenance fees, and
currently (4) engineering service fees, any of which may be
subject to significant pricing pressures. Also, the market may
demand alternative pricing models in the future, which could
decrease our revenues and gross margins.
25
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Fluctuations in our quarterly results could cause the
market price of our shares to decline. |
Our quarterly operating results can vary significantly depending
on a number of factors. These factors include:
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the volume and timing of orders received during the quarter; |
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the mix of and changes in customers to whom our products are
sold; |
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the mix of product and service revenue received during the
quarter; |
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the mix of development license fees and commercial use royalties
received; |
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the timing and acceptance of new products and product
enhancements by us or by our competitors; |
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changes in product pricing; |
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foreign currency exchange rate fluctuations; and |
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ability to recognize revenue on orders received. |
All of these factors are difficult to forecast. Our future
operating results may fluctuate due to these and other factors,
including our ability to continue to develop innovative and
competitive products. Due to all of these factors, we believe
that period-to-period comparisons of our results of operations
are not necessarily meaningful and should not be viewed as an
indication of our future performance.
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We have engineering and other operations both in the
United States and foreign countries, which is expensive and can
create logistical challenges. |
We currently have 20 employees in the United States and 12
employees in the United Kingdom. In the past, the geographic
distance between our engineering personnel in the United Kingdom
and our principal offices in California and primary markets in
Asia, Europe and the United States has led to logistical and
communication difficulties. In the future, we may experience
similar difficulties, which may have an adverse impact on our
business. Further, because a substantial portion of our research
and development operations is located in the United Kingdom, our
operations and expenses are directly affected by economic and
political conditions in the United Kingdom.
Economic conditions in Europe and fluctuations in the value of
the euro against the U.S. dollar and British pound sterling
could impair our revenue and results of operations.
International operations are subject to a number of other
special risks. These risks include foreign government
regulation, reduced protection of intellectual property rights
in some countries where we do business, longer receivable
collection periods and greater difficulty in accounts receivable
collection, unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and other
barriers and restrictions, potentially adverse tax consequences,
the burdens of complying with a variety of foreign laws and
staffing and managing foreign operations, general geopolitical
risks, such as political and economic instability, hostilities
with neighboring countries and changes in diplomatic and trade
relationships, and possible recessionary environments in
economies outside the United States.
In March 2005, we acquired mi4e Device Management, AB, a
Scandinavian company headquartered in Sweden. We now have
approximately 42 employees and an office in Sweden. It takes
substantial management time and financial resources to integrate
operations in connection with an acquisition, and the potential
logistical, personnel and customer challenges are exacerbated
when, as in this case, the acquirer and target companies are
separated by great geographic distance.
|
|
|
International sales of our products, which we expect to
comprise a significant portion of total revenue, expose us to
the business and economic risks of international
operations. |
Sales from outside of the United States accounted for
approximately 72% and 42% of our total revenue for 2004 and
2003, respectively. We expect to market SSP to mobile operators
and handset manufacturers in Europe. Economic conditions in
Europe and fluctuations in the value of the euro against the
U.S. dollar and
26
British pound sterling in particular could impair our revenue
and results of operations. International operations are subject
to a number of other risks. These risks include:
|
|
|
|
|
longer receivable collection periods and greater difficulty in
accounts receivable collection; |
|
|
|
foreign government regulation; |
|
|
|
reduced protection of intellectual property rights in some
countries where we do business; |
|
|
|
unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and other
barriers and restrictions; |
|
|
|
potentially adverse tax consequences; |
|
|
|
the burdens of complying with a variety of foreign laws and
staffing and managing foreign operations; |
|
|
|
general geopolitical risks, such as political and economic
instability, terrorism, hostilities with neighboring countries
and changes in diplomatic and trade relationships; and |
|
|
|
possible recessionary environments in economies outside the
United States. |
|
|
|
Product defects can be expensive to fix and may cause us
to lose customers. |
Our software products, like all software products, may have
undetected errors or compatibility problems. Software errors are
particularly common when a product is first introduced or a new
version is released. Despite thorough testing, our products
might be shipped with errors. If this were to happen, customers
could reject our products, or there might be costly delays in
correcting the problems. Our products are increasingly used in
systems that interact directly with the general public, such as
in transportation and medical systems. In these public-facing
systems, the failure of our product could cause substantial
property damage or personal injury, which could expose us to
product liability claims. Our products are used for applications
in business systems where the failure of our product could be
linked to substantial economic loss. Our agreements with our
customers typically contain provisions designed to limit our
exposure to potential product liability and other claims. It is
likely, however, that these provisions are not effective in all
circumstances and in all jurisdictions. We may not have adequate
insurance against product liability risks, and renewal of our
insurance may not be available to us on commercially reasonable
terms. Further, our errors and omissions insurance may not be
adequate to cover claims. If we ever had to recall our product
due to errors or other problems, it would cost us a great deal
of time, effort and expense.
Our operations depend on our ability to protect our computer
equipment and the information stored in our databases against
damage by fire, natural disaster, power loss, telecommunications
failure, unauthorized intrusion and other catastrophic events.
The measures we have taken to reduce the risk of interruption in
our operations may not be sufficient. As of the date of this
report, we have not experienced any major interruptions in our
operations because of a catastrophic event.
|
|
|
If we lose key personnel or are unable to hire additional
qualified personnel as necessary, we may not be able to
successfully manage our business or sell our products. |
Our future performance depends to a significant degree upon the
continued contributions of our key management, product
development, sales, marketing and operations personnel. We do
not have agreements with any of our key personnel that require
them to work for us for a specific term, and we do not maintain
any key person life insurance policies. We currently intend to
hire additional salespeople and believe our future success will
depend in large part upon our ability to attract and retain
highly skilled managerial, engineering, sales, marketing and
operations personnel, many of whom are in great demand.
Competition for qualified personnel can be intense in the
San Francisco Bay Area, where our U.S. operations are
headquartered.
27
|
|
|
If we fail to protect our intellectual property rights,
competitors could introduce similar or superior products, and we
could lose market share. |
We depend on our proprietary technology. Despite our efforts to
protect our proprietary rights, it may be possible for
unauthorized third parties to copy our products or to reverse
engineer or otherwise obtain and use information that we
consider proprietary. Our competitors could independently
develop technologies that are substantially equivalent or
superior to our technologies. Policing unauthorized use of our
products is difficult, and while we are unable to determine the
extent to which software piracy of our products exists, software
piracy can be expected to be a persistent problem. Effective
protection of intellectual property rights may be unavailable or
limited in foreign countries. The status of U.S. patent
protection in the software industry is not well defined and will
evolve as the United States Patent and Trademark Office grants
additional patents. Patents have been granted on fundamental
technologies in software, and patents may be issued that relate
to fundamental technologies incorporated into our products.
|
|
|
Our products may infringe the intellectual property rights
of third parties, which may result in lawsuits and prevent us
from selling our products. |
As the number of patents, copyrights, trademarks and other
intellectual property rights in our industry increases, products
based on our technology may increasingly become the subject of
infringement claims. Third parties could assert infringement
claims against us in the future. Infringement claims, with or
without merit, could be time consuming, result in costly
litigation, cause product shipment delays or require us to enter
into royalty or licensing agreements. Royalty or licensing
agreements, if required, might not be available on terms
acceptable to us. We may initiate claims or litigation against
third parties for infringement of our proprietary rights or to
establish the validity of our proprietary rights. Litigation to
determine the validity of any claims, whether or not the
litigation is resolved in our favor, could result in significant
expense to us and divert the efforts of our technical and
management personnel from productive tasks. If there is an
adverse ruling against us in any litigation, we may be required
to pay substantial damages, discontinue the use and sale of
infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to infringing
technology. Our failure to develop or license a substitute
technology could prevent us from selling our products.
|
|
|
We are at risk of securities litigation which, regardless
of the outcome, could result in substantial costs and divert
management attention and resources. |
Stock market volatility has had a substantial effect on the
market prices of securities issued by us and other high
technology companies, often for reasons unrelated to the
operating performance of the specific companies. Following
periods of volatility in the market price of a companys
securities, securities class action litigation has often been
instituted against high technology companies. We have in the
past been, and may in the future be, the target of similar
litigation. Regardless of the outcome, securities litigation may
result in substantial costs and divert management attention and
resources.
|
|
|
Our investors may have difficulty enforcing judgments
against us in U.S. courts because many of our assets and
some of our management are located in England. |
Insignia is incorporated under the laws of England and Wales.
Two of our directors reside in England. All or a substantial
portion of the assets of these persons, and a portion of our
assets, are located outside of the United States. It may not be
possible for investors to serve a complaint within the United
States upon these persons or to enforce against them or against
us, in U.S. courts, judgments obtained in U.S. courts
based upon the civil liability provisions of
U.S. securities laws. There is doubt about the
enforceability outside of the United States, in original actions
or in actions for enforcement of judgments of U.S. courts,
of civil liabilities based solely upon U.S. securities
laws. The rights of holders of our shares are governed by
English law, including the Companies Act 1985, and by our
memorandum and articles of association. The rights of holders of
our ADSs are also affected by English law. These rights differ
from the rights of security holders in typical
U.S. corporations.
28
|
|
|
Insignia has undergone a class action lawsuit and an SEC
investigation in the past eight years. |
On April 3, 1996, a class-action lawsuit was filed against
us alleging that we misrepresented our business, the strength of
our sales force and our financial health. The suit stemmed from
our failure to achieve the consensus earnings estimates of
research analysts in the first quarter following our initial
public offering in November 1995. In August 1997, we reached a
memorandum of understanding to settle the suits. Although we
never agreed with the allegations, we paid $8.0 million to
the plaintiffs, of which our insurance company paid
$7.5 million. In February 1997, we restated our financial
results for the quarters ended March 31 and June 30,
1996. We revised our revenue and net income numbers downward for
these two quarters due to inflated revenue resulting from
misstatement of inventory levels of one of our resellers by two
of our sales and marketing personnel. We agreed with the SEC to
cease and desist from engaging in similar accounting practices.
The two Insignia sales and marketing people involved in the
revenue misstatement are no longer with Insignia and were forced
to pay significant fines. We did not have to pay any fines.
|
|
Item 7A |
Quantitative and Qualitative Disclosures about Market
Risk |
At December 31, 2004, we had $109,000 in cash held in
foreign currencies as translated at period end foreign currency
exchange rates. Most of our foreign currencies are British pound
sterling and are primarily used for paying the local operating
expenses of our U.K. office. The effect of foreign exchange rate
fluctuations on operations resulted in income of $21,000 and
$35,000 for the years ended December 31, 2004 and 2003,
respectively. For the years ended December 31, 2004 and
2003, we did not engage in any foreign currency hedging
activities.
We have, at times, an investment portfolio of fixed income
securities that are classified as
available-for-sale-securities. These securities,
like all fixed income instruments, are subject to interest rate
risk and will fall in value if market interest rates increase.
We attempt to limit this exposure by investing primarily in
short-term securities.
29
|
|
Item 8 |
Consolidated Financial Statements and Supplementary
Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Document |
|
Page | |
|
|
| |
|
|
|
31 |
|
|
|
|
32 |
|
|
|
|
33 |
|
|
|
|
34 |
|
|
|
|
35 |
|
|
|
|
55 |
|
30
INSIGNIA SOLUTIONS PLC
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(Amounts in thousands, | |
|
|
except share and per | |
|
|
share data) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
902 |
|
|
$ |
2,212 |
|
|
Restricted cash
|
|
|
50 |
|
|
|
20 |
|
|
Accounts receivable
|
|
|
175 |
|
|
|
50 |
|
|
Other receivables
|
|
|
241 |
|
|
|
1,153 |
|
|
Tax receivable
|
|
|
322 |
|
|
|
391 |
|
|
Prepaid royalties
|
|
|
|
|
|
|
2,185 |
|
|
Prepaid expenses
|
|
|
456 |
|
|
|
410 |
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,146 |
|
|
|
6,421 |
|
Property and equipment, net
|
|
|
140 |
|
|
|
154 |
|
Investment in affiliate
|
|
|
68 |
|
|
|
|
|
Other noncurrent assets
|
|
|
233 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
$ |
2,587 |
|
|
$ |
6,794 |
|
|
|
|
|
|
|
|
|
LIABILITIES, MANDATORILY REDEEMABLE WARRANTS AND
SHAREHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
241 |
|
|
$ |
428 |
|
|
Accrued liabilities
|
|
|
995 |
|
|
|
1,279 |
|
|
Note payable
|
|
|
|
|
|
|
1,000 |
|
|
Deferred revenue
|
|
|
10 |
|
|
|
1,460 |
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,246 |
|
|
|
4,167 |
|
|
|
|
|
|
|
|
Mandatorily redeemable warrants
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred shares, £0.20 par value:
3,000,000 shares authorized; no shares issued
|
|
|
|
|
|
|
|
|
|
Ordinary shares, £0.20 par value:
75,000,000 shares authorized; 35,722,205 shares and
25,169,494 shares issued and outstanding in 2004 and 2003,
respectively
|
|
|
11,939 |
|
|
|
8,111 |
|
|
Additional paid-in capital
|
|
|
64,459 |
|
|
|
61,898 |
|
|
Common stock subscription
|
|
|
|
|
|
|
575 |
|
|
Accumulated deficit
|
|
|
(74,596 |
) |
|
|
(67,534 |
) |
|
Accumulated other comprehensive loss
|
|
|
(461 |
) |
|
|
(461 |
) |
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,341 |
|
|
|
2,589 |
|
|
|
|
|
|
|
|
|
|
$ |
2,587 |
|
|
$ |
6,794 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
31
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(Amounts in thousands, | |
|
|
except per share data) | |
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
$ |
521 |
|
|
$ |
522 |
|
|
$ |
5,714 |
|
|
Service
|
|
|
20 |
|
|
|
188 |
|
|
|
1,542 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
541 |
|
|
|
710 |
|
|
|
7,256 |
|
|
|
|
|
|
|
|
|
|
|
Costs of net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
28 |
|
|
|
288 |
|
|
|
1,943 |
|
|
Service
|
|
|
14 |
|
|
|
52 |
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of net revenues
|
|
|
42 |
|
|
|
340 |
|
|
|
2,584 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
499 |
|
|
|
370 |
|
|
|
4,672 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,511 |
|
|
|
1,757 |
|
|
|
5,558 |
|
|
Research and development
|
|
|
2,807 |
|
|
|
3,373 |
|
|
|
5,640 |
|
|
General and administrative
|
|
|
2,579 |
|
|
|
2,676 |
|
|
|
3,356 |
|
|
Restructuring
|
|
|
|
|
|
|
498 |
|
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,897 |
|
|
|
8,304 |
|
|
|
14,850 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(7,398 |
) |
|
|
(7,934 |
) |
|
|
(10,178 |
) |
Interest income (expense), net
|
|
|
6 |
|
|
|
(40 |
) |
|
|
75 |
|
Other income (expense), net
|
|
|
249 |
|
|
|
3,141 |
|
|
|
(431 |
) |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(7,143 |
) |
|
|
(4,833 |
) |
|
|
(10,534 |
) |
Benefit from income taxes
|
|
|
(81 |
) |
|
|
(510 |
) |
|
|
(2,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(7,062 |
) |
|
$ |
(4,323 |
) |
|
$ |
(8,420 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.23 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.42 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average shares and ordinary share equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
30,191 |
|
|
|
21,231 |
|
|
|
19,937 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements
32
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
Total | |
|
|
Ordinary Shares | |
|
Additional | |
|
Common | |
|
|
|
Other | |
|
Share- | |
|
|
| |
|
Paid-In | |
|
Stock | |
|
Accumulated | |
|
Comprehensive | |
|
holders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Subscription | |
|
Deficit | |
|
Loss | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Amounts in thousands, except share data) | |
Balances, December 31, 2001
|
|
|
19,500,313 |
|
|
$ |
6,278 |
|
|
$ |
58,869 |
|
|
|
|
|
|
$ |
(54,791 |
) |
|
$ |
(461 |
) |
|
$ |
9,895 |
|
|
Shares issued under employee stock plans
|
|
|
183,226 |
|
|
|
53 |
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175 |
|
|
Shares issued upon exercise of warrants
|
|
|
400,000 |
|
|
|
113 |
|
|
|
367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480 |
|
|
Warrant issue costs per Black-Scholes model
|
|
|
|
|
|
|
|
|
|
|
544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544 |
|
|
Shares issued under private placement, net of issuance costs
|
|
|
60 |
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,420 |
) |
|
|
|
|
|
|
(8,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2002
|
|
|
20,083,599 |
|
|
|
6,444 |
|
|
|
59,901 |
|
|
|
|
|
|
|
(63,211 |
) |
|
|
(461 |
) |
|
|
2,673 |
|
|
Shares issued under employee stock plans
|
|
|
25,673 |
|
|
|
8 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
Shares issued upon exercise of warrants
|
|
|
2,446,677 |
|
|
|
796 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
841 |
|
|
Warrant issue costs per Black-Scholes model
|
|
|
|
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121 |
|
|
Reclassification of mandatorily redeemable warrants
|
|
|
|
|
|
|
|
|
|
|
1,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,407 |
|
|
Shares issued under private placement, net of issuance costs
|
|
|
2,613,545 |
|
|
|
863 |
|
|
|
423 |
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
1,861 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,323 |
) |
|
|
|
|
|
|
(4,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2003
|
|
|
25,169,494 |
|
|
|
8,111 |
|
|
|
61,898 |
|
|
|
575 |
|
|
|
(67,534 |
) |
|
|
(461 |
) |
|
|
2,589 |
|
|
Shares issued under employee stock plans
|
|
|
142,079 |
|
|
|
52 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76 |
|
|
Shares issued upon exercise of warrants
|
|
|
470,000 |
|
|
|
172 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390 |
|
|
Warrant issue costs per Black-Scholes model
|
|
|
|
|
|
|
|
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
353 |
|
|
Shares issued upon the exercise of employee stock options
|
|
|
602,906 |
|
|
|
220 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534 |
|
|
Shares issued under private placement, net of issuance costs
|
|
|
9,337,726 |
|
|
|
3,384 |
|
|
|
1,614 |
|
|
|
(575 |
) |
|
|
|
|
|
|
|
|
|
|
4,423 |
|
|
Reclassification of expired mandatorily redeemable warrants
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,062 |
) |
|
|
|
|
|
|
(7,062 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2004
|
|
|
35,722,205 |
|
|
$ |
11,939 |
|
|
$ |
64,459 |
|
|
$ |
|
|
|
$ |
(74,596 |
) |
|
$ |
(461 |
) |
|
$ |
1,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
33
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(Amounts in thousands) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(7,062 |
) |
|
$ |
(4,323 |
) |
|
$ |
(8,420 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
104 |
|
|
|
143 |
|
|
|
242 |
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
(50 |
) |
|
|
(438 |
) |
|
Gain on sale of product line
|
|
|
(302 |
) |
|
|
(3,056 |
) |
|
|
|
|
|
Non-cash charge for warrants
|
|
|
353 |
|
|
|
126 |
|
|
|
544 |
|
|
Gain on sale of fixed assets
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
Equity in net loss of affiliate
|
|
|
82 |
|
|
|
|
|
|
|
|
|
Net changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(125 |
) |
|
|
931 |
|
|
|
5,522 |
|
|
Other receivable
|
|
|
(40 |
) |
|
|
(53 |
) |
|
|
|
|
|
Tax receivable
|
|
|
69 |
|
|
|
311 |
|
|
|
(702 |
) |
|
Prepaid royalties
|
|
|
|
|
|
|
196 |
|
|
|
(1,242 |
) |
|
Prepaid expenses
|
|
|
(46 |
) |
|
|
163 |
|
|
|
156 |
|
|
Other current assets
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
Other noncurrent assets
|
|
|
(14 |
) |
|
|
319 |
|
|
|
|
|
|
Accounts payable
|
|
|
(155 |
) |
|
|
(187 |
) |
|
|
(346 |
) |
|
Accrued liabilities
|
|
|
(392 |
) |
|
|
160 |
|
|
|
(229 |
) |
|
Accrued royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
(55 |
) |
|
|
1,085 |
|
|
|
(3,520 |
) |
|
Income taxes payable
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(7,583 |
) |
|
|
(4,235 |
) |
|
|
(8,446 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
Investment in affiliate
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
(30 |
) |
|
|
230 |
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(90 |
) |
|
|
(89 |
) |
|
|
(127 |
) |
|
Proceeds from sale of product line, net
|
|
|
1,268 |
|
|
|
1,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
998 |
|
|
|
2,010 |
|
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
Proceeds from issuance of shares, net of issuance costs
|
|
|
4,275 |
|
|
|
1,861 |
|
|
|
(1 |
) |
|
Proceeds from exercise of warrants, net of issuance costs
|
|
|
390 |
|
|
|
841 |
|
|
|
480 |
|
|
Proceeds from exercise of stock options and employee stock
purchase plan, net
|
|
|
610 |
|
|
|
9 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,275 |
|
|
|
3,711 |
|
|
|
654 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,310 |
) |
|
|
1,486 |
|
|
|
(7,917 |
) |
|
Cash and cash equivalents at beginning of the year
|
|
|
2,212 |
|
|
|
726 |
|
|
|
8,643 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$ |
902 |
|
|
$ |
2,212 |
|
|
$ |
726 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of mandatorily redeemable warrants to
additional paid-in capital
|
|
$ |
38 |
|
|
$ |
1,407 |
|
|
$ |
|
|
Non-cash settlement of assets and liabilities related to sale of
product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in assets
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
Change in liabilities
|
|
|
(2,904 |
) |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
34
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1 |
Summary of Significant Accounting Policies: |
Organization and business
Insignia Solutions plc (Insignia, we,
us, and our refer to Insignia Solutions
plc and its subsidiaries) commenced operations in 1986, and
currently develops, markets and supports software technologies
that enable mobile operators and phone manufacturers to update
the firmware of mobile devices using standard over-the-air data
networks. Before 2003, our principal product line was the
Jeodetm
platform, based on our Embedded Virtual Machine
(EVMtm)
technology. The Jeode platform was our implementation of Sun
Microsystems, Inc.s (Sun) Java®
technology tailored for smart devices. The product became
available for sale in March 1999 and had been our principal
product line since the third quarter of 1999. The Jeode product
line was sold in April 2003.
During 2001, we began development of a range of products
(Secure System Provisioning or SSP
products) for the mobile phone and wireless operator industry.
These SSP products build on our position as a Virtual Machine
(VM) supplier for manufacturers of mobile devices
and allow wireless operators and phone manufacturers to reduce
customer care and software recall costs as well as increase
subscriber revenue by deploying new mobile services based on
dynamically provisional capabilities. With the sale of our JVM
product line in April 2003, our sole product line consists of
our SSP product. We shipped our first SSP product in December
2003, but have achieved only minimal sales to date.
Liquidity going concern
The consolidated financial statements contemplate the
realization of assets and satisfaction of liabilities in the
normal course of business. We have had recurring net losses of
$7.1 million, $4.3 million, and $8.4 million for
the years ended December 31, 2004, 2003, and 2002,
respectively, and net cash used in operations of
$7.6 million, $4.2 million, and $8.4 million for
the years ended December 31, 2004, 2003, and 2002,
respectively. These conditions raise substantial doubt about our
ability to continue as a going concern. The consolidated
financial statements do not contain any adjustments that might
result from the outcome of this uncertainty.
We have sustained significant losses for the last several years
and there can be no assurance that we will attain profitability.
During the past two years, we have incurred an aggregate loss
from operations and negative operating cash flows of $15,332,000
and $11,818,000, respectively. At December 31, 2004, we had
an accumulated deficit of $74,596,000. We have undertaken
measures to reduce operating expenses and redesign our
commercial efforts to adapt to new developments.
On February 9, 2005, Insignia entered into a new securities
subscription agreement with Fusion Capital to sell up to
$12 million in ADSs, representing ordinary shares, to
Fusion Capital over a period of 30 months (subject to daily
maximum purchase amounts) (the 2005 Fusion Capital
securities subscription agreement). The shares will be
priced based on a market-based formula at the time of purchase.
The closing of the 2005 Fusion Capital securities subscription
agreement is subject to certain closing conditions, including
the receipt of shareholder approval (if the shares issuable in
the transaction exceed 19.99% of the issued and outstanding
shares) and the declaration of effectiveness by the Securities
and Exchange Commission of a Form S-1 registration
statement covering the ADSs to be purchased by Fusion Capital
under the 2005 Fusion Capital securities subscription agreement.
Insignia currently expects that the 2005 Fusion Capital
securities subscription agreement will be closed by the second
quarter of 2005, however the timing and certainty of the closing
of the 2005 Fusion Capital securities subscription agreement are
not within Insignias control. Any delay in the closing of
the 2005 Fusion Capital securities subscription agreement could
jeopardize our business.
35
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our cash, cash equivalents and restricted cash totaled
$1.0 million at December 31, 2004, compared to
$2.2 million at December 31, 2003. Based upon our
current forecasts and estimates, including the timely closing of
the 2005 Fusion Capital securities subscription agreement and
the achievement of our target revenues, cost-cutting and
accounts receivable collection goals, our current forecasted
cash and cash equivalents will be sufficient to meet our
operating and capital requirements through December 31,
2005. If cash currently available from all sources is
insufficient to satisfy our liquidity requirements, we may seek
additional sources of financing including selling additional
equity or debt securities. If additional funds are raised
through the issuance of equity or debt securities, these
securities could have rights, preferences and privileges senior
to holders of our shares, and the terms of such securities could
impose restrictions on our operations. The sale of additional
equity or debt securities could result in additional dilution to
our shareholders. We may not be able to obtain additional
financing on acceptable terms, if at all. If we are unable to
obtain additional financing as and when needed and on acceptable
terms our business may be jeopardized.
Use of estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of
Insignia and its wholly owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in
consolidation.
Financial instruments
We consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash,
cash equivalents, and restricted cash at December 31, 2004
and 2003 are comprised of cash and restricted cash. Restricted
cash aggregated $50,000 and $20,000 at December 31, 2004
and 2003, respectively. In 2003, restricted cash of $20,000
represented a letter of credit for a building deposit and in
2004 restricted cash of $50,000 represented deposits for the
building and a credit card account.
Amounts reported for cash and cash equivalents, receivables,
accounts payable and accrued liabilities are considered to
approximate fair value primarily due to their short maturities.
Revenue recognition
We primarily entered into license arrangements for the sale of
the SSP product as well as the Jeode product to OEMs and
distributors. Service revenues were derived from non-recurring
engineering activities, training and annual maintenance
contracts.
Revenue from licenses is recognized when persuasive evidence of
an agreement exists, delivery of the product has occurred, the
fee is fixed or determinable, and collectibility is probable.
For contracts with multiple elements, and for which
vendor-specific objective evidence of fair value for the
undelivered elements exists, we recognize revenue for the
delivered elements using the residual method as prescribed by
Statement of Position (SOP) No 98-9,
Modification of SOP No 97-2 with Respect to Certain
Transactions. If vendor-specific objective evidence does
not exist for all undelivered elements, all revenue is deferred
until evidence exists, or all elements have been delivered.
Generally we have vendor-specific objective evidence of fair
value for the maintenance element of software arrangements based
on the renewal rates for maintenance in future years as
specified in the contracts. In such cases, we defer the
maintenance revenue at the outset of the arrangement and
recognize it ratably over the period during which the
maintenance is to be provided,
36
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which generally commences on the date the software is delivered.
Vendor-specific objective evidence of fair value for the service
element is determined based on the price charged when those
services are sold separately. We occasionally enter into license
agreements with extended payment terms. Provided all other
revenue recognition criteria are met, revenue from these
contracts are recognized at the earlier of when the cash is
received from the customer or the quarter in which the payments
become due and payable. In the event that we do not have a
payment history with a customer or particular region, we may
decide to defer the revenue until the collection of cash is
received.
We have also entered into license agreements with certain
distributors, which provide for minimum guaranteed royalty
payments throughout the term of the agreement. Provided all
other revenue recognition criteria are met, minimum guaranteed
royalty revenue is recognized when the payments become due and
payable. Royalty revenue that exceeds the minimum guarantees is
recognized when reported to us by distributors.
Revenue for non-recurring engineering is recognized on a
percentage of completion basis, which is computed using the
input measure of labor cost. Revenues from training are
recognized when the training is performed. Payments for
non-recurring engineering activities, training and maintenance
contracts received in advance of revenue recognition are
recorded as deferred revenue.
We do not grant return rights or price protection under license
agreements for our SSP product.
License revenue and service revenue on contracts involving
significant implementation, customization or services which are
essential to the functionality of the software is recognized
over the period of each engagement, using the percentage of
completion method. Labor hours incurred is generally used as the
measure of progress towards completion.
Property and equipment
Property and equipment is recorded at cost, or if leased, at the
lesser of the fair value or present value of the minimum lease
payments, less accumulated depreciation and amortization.
Depreciation and amortization is provided using the
straight-line method over the estimated useful lives which range
from three to four years or the lease term if shorter. When
property and equipment is retired or otherwise disposed of, the
cost and accumulated depreciation are relieved from the accounts
and the net gain or loss is included in the determination of
income.
Impairment of long-lived assets
We evaluate our long-lived assets for indicators of possible
impairment by comparison of the carrying amounts to future net
undiscounted cash flows expected to be generated by such assets
when events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Should an impairment
exist, the impairment loss would be measured based on the excess
carrying value of the asset over the assets fair value or
discounted estimates of future cash flows. We have not
identified any such impairment losses to date.
Foreign currency translation
Our functional currency for our non-U.S. operations is the
U.S. dollar. Certain monetary assets and liabilities of the
non-U.S. operating companies are denominated in local
currencies (i.e. not the U.S. dollar). Upon a change in the
exchange rate between the non-U.S. currency and the
U.S. dollar, we must remeasure the local
non-U.S. denominated assets and liabilities to avoid
carrying unrealized gains or losses on our balance sheet.
Non-U.S. dollar denominated monetary assets and liabilities
are remeasured using the exchange rate in effect at the balance
sheet date, while nonmonetary items are remeasured at historical
rates. Revenues and expenses are translated at the average
exchange rates in effect during each period, except for
37
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
those expenses related to balance sheet amounts, which are
translated at historical exchange rates. Remeasurement
adjustments and transaction gains or losses are recognized in
the statement of operations during the period of occurrence. In
2004, the aggregate foreign exchange loss recorded on the
statement of operations was $21,000. In 2003 and 2002, the
aggregate foreign exchange gains recorded on the statements of
operations were $35,000 and $113,000, respectively. During our
early years of existence, we used the pound sterling as the
functional currency for our non-U.S. operations.
Accordingly, translation gains and losses recognized during such
periods have been included in the accumulated comprehensive
income account.
We conduct most of our business in U.S. dollars. All
amounts included in the financial statements and in the notes
herein are in U.S. dollars unless designated
£ in which case they are in British pound
sterling. The exchange rates used between the U.S. dollar
and the British pound sterling were $1.89, $1.78 and $1.56
(expressed in U.S. dollars per British pound sterling) at
December 31, 2004, 2003 and 2002, respectively.
Foreign currency financial instruments
We have, in prior years, entered into foreign currency option
contracts to hedge against exchange risks associated with the
British pound sterling denominated operating expenses of our
U.K. operations. The gains and losses on these contracts are
generally included in the statement of operations when the
related operating expenses are recognized. At December 31,
2004, 2003 and 2002, there were no outstanding currency options.
From time to time, we also entered into short-term forward
exchange contracts, although we did not enter into any such
contracts in 2004, 2003 or 2002. To date, we do not use hedge
accounting for the forward exchange contracts. No forward
exchange contracts were outstanding at December 31, 2004,
2003 and 2002.
Software development costs
We capitalize internal software development costs incurred after
technological feasibility has been demonstrated. We define
establishment of technological feasibility as the completion of
a working model. Such capitalized amounts are amortized
commencing with the introduction of that product at the greater
of the straight-line basis utilizing its estimated economic
life, generally six months to one year, or the ratio of actual
revenues achieved to the total anticipated revenues over the
life of the product. At December 31, 2004, 2003 and 2002,
no software development costs were capitalized.
Research and development
We expense the cost of research and development as incurred.
Research and development expenses consist primarily of personnel
costs, overhead costs relating to occupancy, software support
and maintenance and equipment depreciation.
38
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-based compensation
Insignia accounts for stock based employee compensation using
the intrinsic value method under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related
interpretations and complies with the disclosure provisions of
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure an Amendment of FASB Statement
No. 123. The following table illustrates the effect
on net loss and net loss per share if we had applied the fair
value recognition provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock
Based Compensation (SFAS 123) to stock
based compensation, (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net loss-as reported
|
|
$ |
(7,062 |
) |
|
$ |
(4,323 |
) |
|
$ |
(8,420 |
) |
Less stock based compensation expense determined under fair
value based method
|
|
|
(636 |
) |
|
|
(1,131 |
) |
|
|
(2,469 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$ |
(7,698 |
) |
|
$ |
(5,454 |
) |
|
$ |
(10,899 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share-basic and diluted as reported
|
|
$ |
(0.23 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.42 |
) |
Net loss per share-basic and diluted pro forma
|
|
$ |
(0.25 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.55 |
) |
In accordance with the disclosure provisions of SFAS 123,
the fair value of employee stock options granted during fiscal
2004, 2003 and 2002 were estimated at the date of grant using
the Black-Scholes model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility range
|
|
|
139%-276% |
|
|
|
47%-264% |
|
|
|
68% |
|
Risk-free interest rate range
|
|
|
1.11%-4.07% |
|
|
|
1.05%-3.16% |
|
|
|
1.8-4.4% |
|
Dividend yield
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Expected life (years)
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
Employee Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility range
|
|
|
66%-198% |
|
|
|
59% |
|
|
|
68% |
|
Risk-free interest rate range
|
|
|
1.13%-1.25% |
|
|
|
1.17% |
|
|
|
1.1-1.2% |
|
Dividend yield
|
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Expected life (years)
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Income taxes
We account for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
events that have been recognized in our financial statements or
tax returns. In estimating future tax consequences, we generally
consider all expected future events other than enactments of
changes in the tax law or rates.
Concentrations of risk
Financial instruments that potentially subject us to significant
concentrations of credit risk consist principally of cash, cash
equivalents, restricted cash and trade accounts receivable. We
place our cash, cash
39
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equivalents and restricted cash in bank accounts and
certificates of deposit with high credit quality financial
institutions.
The Jeode platform had been our principal product line since the
third quarter of 1999 and generated 94% of our total revenues
for 2003. For 2004, SSP revenue accounted for 83% of our total
revenues.
We sell our products primarily to original equipment
manufacturers and distributors. We perform ongoing credit
evaluations of our customers financial condition and
generally require no collateral from our customers. We maintain
an allowance for uncollectible accounts receivable based upon
the expected collectibility of all accounts receivable. At
December 31, 2004 and 2003, our allowance for uncollectible
accounts was zero. At December 31, 2003, one customer
accounted for 100% of our accounts receivables. For the year
ended December 31, 2003, one customer accounted for 26% of
total revenues. In 2004, four customers accounted for 81% of
total revenues. At December 31, 2004, two customers
accounted for 100% of our accounts receivables.
The Jeode platform had been our principal product line since the
third quarter of 1999. With the completion of the sale of our
JVM product line to esmertec in February 2004 and the
termination and waiver agreement dated June 30, 2004,
Insignias sole product line currently consists of its SSP
products for the mobile handset and wireless carrier industry.
Comprehensive income
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income
(SFAS 130), requires that all items recognized
under accounting standards as components of comprehensive income
(loss), be reported in an annual statement that is displayed
with the same prominence as other annual financial statements.
SFAS 130 also requires that an entity classify items of
other comprehensive income (loss) by their nature in an annual
financial statement. Comprehensive income (loss), as defined,
includes all changes in equity during a period from non-owner
sources. The comprehensive loss is equal to the net loss for all
periods presented.
Net income (loss) per share
Net income (loss) per share is presented on a basic and diluted
basis, and is computed by dividing net income (loss) by the
weighted average number of ordinary shares and ordinary
equivalent shares outstanding during the period. Ordinary
equivalent shares consist of warrants and stock options (using
the treasury stock method). Under the basic method of
calculating net income (loss) per share, ordinary equivalent
shares are excluded from the computation. Under the diluted
method of calculating net income (loss) per share, ordinary
equivalent shares are excluded from the computation only if
their effect is anti-dilutive.
At December 31, 2004, approximately 4,461,074 stock options
and 2,130,911 warrants were excluded from the calculation of
diluted earnings per share because their inclusion would have
been anti-dilutive. These stock options and warrants could be
dilutive in the future. At December 31, 2003 and 2002, the
excluded stock options were approximately 4,525,105 and
3,585,339, respectively. The excluded warrants at
December 31, 2003 and 2002 were approximately 739,657 and
4,191,334, respectively.
Reclassifications
Certain previously reported amounts have been reclassified to
conform with the current period presentation. These
reclassifications did not change previously reported
shareholders equity or net loss.
40
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
New accounting pronouncements
In March 2004, the Emerging Issues Task Force
(EITF) reached a consensus on Issue
No. 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments
(EITF 03-01). EITF 03-01 provides guidance
on other-than-temporary impairment models for marketable debt
and equity securities accounted for under Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities, and No. 124, Accounting for Certain
Investments Held by Not-for-Profit Organizations, and
non-marketable equity securities accounted for under the cost
method. The EITF developed a basic three-step model to evaluate
whether an investment is other-than-temporarily impaired. The
Financial Accounting Standards Board
(FASB) issued EITF 03-01-1 in September
2004 which delayed the effective date of the recognition and
measurement provisions of EITF 03-01. We do not expect the
adoption of EITF 03-01 to have a material impact on our
results of operations or financial condition.
In April 2004, the EITF issued Statement No. 03-06,
Participating Securities and the Two
Class Method Under FASB Statement No. 128, Earnings
Per Share (EITF 03-06). EITF 03-06
addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities
other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and
if, it declares dividends on its common stock. The issue also
provides further guidance in applying the two-class method of
calculating earnings per share, clarifying what constitutes a
participating security and how to apply the tow-class method of
computing earnings per share once it is determined that a
security is participating, including how to allocate
undistributed earnings to such a security. EITF 03-06 is
effective for fiscal periods beginning after March 31,
2004. The adoption of EITF 03-06 did not have a material
effect on Insignias results of operations or financial
position.
In November 2004, the FASB issued SFAS 151, Inventory
Costs (SFAS 151). SFAS 151 requires
the allocation of fixed production overhead costs be based on
the normal capacity of the production facilities and unallocated
overhead costs recognized as an expense in the period incurred.
In addition, other items such as abnormal freight, handling
costs and wasted materials require treatment as current period
charges rather than a portion of the inventory cost.
SFAS 151 is effective beginning in our first quarter of
fiscal 2006. We do not expect the adoption of SFAS 151, to
have a material impact on our results of operations or financial
condition.
In December 2004, the FASB issued SFAS 123 (revised 2004),
Share-Based Payment (SFAS 123R).
SFAS 123R requires measurement of all employee stock-based
compensation awards using a fair value method and the recording
of such expense in the consolidated financial statements. In
addition, the adoption of SFAS 123R will require additional
accounting related to the income tax effects and additional
disclosure regarding the cash flow effects resulting from
share-based payment arrangements. SFAS 123R is effective
beginning in our third quarter of fiscal 2005. We are evaluating
the requirements of SFAS 123R and we expect that the
adoption of SFAS 123R will have a material impact on our
results of operations and financial condition. We have not yet
determined whether the adoption of SFAS 123R will result in
stock-based compensation charges that are similar to the current
pro forma disclosures under SFAS 123.
In December 2004, the FASB issued SFAS 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion
No. 29 (SFAS 153). SFAS 153 addresses
the measurement of exchanges of nonmonetary assets and redefines
the scope of transactions that should be measured based on the
fair value of the assets exchanged. SFAS 153 is effective
for nonmonetary asset exchanges beginning in our first quarter
of fiscal 2006. We do not expect the adoption of SFAS 153
will have a material impact on our results of operations or
financial condition.
41
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 2 |
Balance Sheet Detail: |
The following table provides details of the major components of
the indicated balance sheet accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
Computers and other equipment
|
|
$ |
1,692 |
|
|
$ |
1,604 |
|
|
Leasehold improvements
|
|
|
381 |
|
|
|
380 |
|
|
Furniture and fixtures
|
|
|
75 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
2,148 |
|
|
|
2,059 |
|
|
Less accumulated depreciation and amortization
|
|
|
2,008 |
|
|
|
1,905 |
|
|
|
|
|
|
|
|
|
|
$ |
140 |
|
|
$ |
154 |
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
|
Accrued legal and professional services
|
|
$ |
666 |
|
|
$ |
559 |
|
|
Accrued compensation and payroll taxes
|
|
|
242 |
|
|
|
301 |
|
|
Accrued interest on note payable
|
|
|
|
|
|
|
58 |
|
|
Accrued income taxes payable
|
|
|
|
|
|
|
187 |
|
|
Other
|
|
|
87 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
$ |
995 |
|
|
$ |
1,279 |
|
|
|
|
|
|
|
|
We have four stock option plans, which provide for the issuance
of stock options to employees and outside consultants of
Insignia to purchase ordinary shares. At December 31, 2004,
2003, and 2002, approximately 1,772,147, 1,311,022 and 2,271,351
ordinary shares were available for future grants of stock
options, respectively. Stock options are generally granted at
prices of not less than 100% of the fair market value of the
ordinary shares on the date of grant. Options granted under our
option plans generally vest over a four year period. Options are
exercisable until the tenth anniversary of the date of grant
unless they lapse before that date.
42
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes activity on stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1986 and 1996 | |
|
1988 and 1995 | |
|
|
|
Weighted | |
|
|
U.K. | |
|
U.S. | |
|
|
|
Average | |
|
|
Share Option | |
|
Stock Option | |
|
|
|
Exercise | |
|
|
Schemes | |
|
Plans | |
|
Total | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding at December 31, 2001
|
|
|
936,123 |
|
|
|
2,955,577 |
|
|
|
3,891,700 |
|
|
$ |
3.15 |
|
Granted
|
|
|
89,000 |
|
|
|
503,000 |
|
|
|
592,000 |
|
|
$ |
1.49 |
|
Exercised
|
|
|
(3,124 |
) |
|
|
(71,352 |
) |
|
|
(74,476 |
) |
|
$ |
1.06 |
|
Lapsed
|
|
|
(277,291 |
) |
|
|
(546,594 |
) |
|
|
(823,885 |
) |
|
$ |
2.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
744,708 |
|
|
|
2,840,631 |
|
|
|
3,585,339 |
|
|
$ |
3.04 |
|
Granted
|
|
|
611,400 |
|
|
|
1,687,700 |
|
|
|
2,299,100 |
|
|
$ |
0.43 |
|
Exercised
|
|
|
(9,896 |
) |
|
|
(10,667 |
) |
|
|
(20,563 |
) |
|
$ |
0.39 |
|
Lapsed
|
|
|
(633,199 |
) |
|
|
(705,572 |
) |
|
|
(1,338,771 |
) |
|
$ |
2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
713,013 |
|
|
|
3,812,092 |
|
|
|
4,525,105 |
|
|
$ |
1.69 |
|
Granted
|
|
|
229,962 |
|
|
|
1,080,038 |
|
|
|
1,310,000 |
|
|
$ |
1.23 |
|
Exercised
|
|
|
(48,958 |
) |
|
|
(553,948 |
) |
|
|
(602,906 |
) |
|
$ |
0.89 |
|
Lapsed
|
|
|
(62,423 |
) |
|
|
(708,702 |
) |
|
|
(771,125 |
) |
|
$ |
2.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
831,594 |
|
|
|
3,629,480 |
|
|
|
4,461,074 |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
|
Average | |
|
Average | |
|
|
Number | |
|
Remaining | |
|
Exercise | |
Range of Exercise Prices |
|
Outstanding | |
|
Contractual Life | |
|
Price | |
|
|
| |
|
| |
|
| |
$0.01-$2.00
|
|
|
3,129,377 |
|
|
|
8.1 years |
|
|
$ |
0.73 |
|
$2.01-$4.00
|
|
|
869,697 |
|
|
|
6.1 years |
|
|
$ |
2.75 |
|
$4.01-$6.00
|
|
|
453,750 |
|
|
|
4.5 years |
|
|
$ |
5.17 |
|
$6.01-$8.00
|
|
|
8,250 |
|
|
|
4.5 years |
|
|
$ |
6.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,461,074 |
|
|
|
7.3 years |
|
|
$ |
1.59 |
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
Number | |
|
Exercise | |
Range of Exercise Prices |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
$0.01-$2.00
|
|
|
1,474,643 |
|
|
$ |
0.85 |
|
$2.01-$4.00
|
|
|
584,749 |
|
|
$ |
2.78 |
|
$4.01-$6.00
|
|
|
452,865 |
|
|
$ |
5.17 |
|
$6.01-$8.00
|
|
|
8,250 |
|
|
$ |
6.84 |
|
|
|
|
|
|
|
|
|
|
|
2,520,507 |
|
|
$ |
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Exercisable options
|
|
|
2,520,507 |
|
|
|
2,644,401 |
|
|
|
2,534,047 |
|
Weighted average exercise price of exercisable options
|
|
$ |
2.09 |
|
|
$ |
2.41 |
|
|
$ |
3.03 |
|
Weighted average fair value of options granted
|
|
$ |
0.89 |
|
|
$ |
0.26 |
|
|
$ |
1.29 |
|
43
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 1995, Insignias shareholders adopted the 1995
Employee Share Purchase Plan (the Purchase Plan)
with 275,000 ordinary shares reserved for issuance thereunder.
On July 21, 1998 the number of shares reserved for issuance
was increased to 525,000. On May 27, 1999 the number was
increased to 900,000 and on June 30, 2004 the number was
further increased to 1,200,000. The Purchase Plan enables
employees to purchase ordinary shares at approximately 85% of
the fair market value of the ordinary shares at the beginning or
end of each six-month offering period. The Purchase Plan
qualifies as an employee stock purchase plan under
section 423 of the U.S. Internal Revenue Code. During
2004, 2003 and 2002 we issued 142,079, 5,110 and
108,750 shares under the Purchase Plan, respectively. At
December 31, 2004 and 2003 approximately 334,799 and
176,878 ordinary shares were reserved for future Purchase Plan
issuances, respectively.
In June 2003, we approved the issuance of options to purchase up
to 250,000 ordinary shares to an outside consultant. The options
are issued and exercisable upon achievement of certain
milestones. The exercise price is $0.47 per share and the
options expire 3 years from the date of issuance. As of
December 31, 2003, 75,000 options were earned and
exercisable. An additional 50,000 options were earned in January
2004 and the balance lapsed with the expiration of the contract
in January 2004. In November 2003, we also entered into another
agreement with an outside partner to purchase up to 500,000
warrants based upon the achievement of certain milestones. In
January 2004, the partner achieved the first milestone and
earned 200,000 warrants at a price of $1.03. None of the
remaining milestones have been achieved to date. In accordance
with Emerging Issues Task Force 96-18 Accounting for
Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or
Services (EITF 96-18), we recorded a
charge of approximately $353,000 to earnings and an increase in
the value of additional paid-in capital, based on the number of
options vested. The warrant will be revalued as it vests and
future charges will be recorded based on the number of options
that vest using the Black-Scholes pricing model.
|
|
Note 4 |
Employee Benefit and Pension Plans: |
We have a 401(k) plan covering all of our U.S. employees
and a defined contribution pension plan covering all our United
Kingdom employees. Under both of these plans, employees may
contribute a percentage of their compensation and we make
certain matching contributions. Both the employees and
Insignias contributions are fully vested and
nonforfeitable at all times. The assets of both these plans are
held separately from those of Insignia in independently managed
and administered funds. Our contributions to these plans
aggregated $50,000 in 2004, $98,000 in 2003 and $227,000 in 2002.
The components of loss before income taxes are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
(4,288 |
) |
|
$ |
(3,798 |
) |
|
$ |
(5,149 |
) |
United Kingdom and other countries
|
|
|
(2,855 |
) |
|
|
(1,035 |
) |
|
|
(5,385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(7,143 |
) |
|
$ |
(4,833 |
) |
|
$ |
(10,534 |
) |
|
|
|
|
|
|
|
|
|
|
44
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the benefit from income taxes are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
U.S. state and local
|
|
|
(182 |
) |
|
|
2 |
|
|
|
20 |
|
|
United Kingdom and other countries
|
|
|
101 |
|
|
|
(512 |
) |
|
|
(2,134 |
) |
|
|
|
|
|
|
|
|
|
|
Total benefit
|
|
$ |
(81 |
) |
|
$ |
(510 |
) |
|
$ |
(2,114 |
) |
|
|
|
|
|
|
|
|
|
|
Our actual benefit from income taxes differs from the benefit
computed by applying the statutory federal income tax rate to
loss before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
U.S. federal statutory rate
|
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
|
|
(34.0 |
)% |
State and local taxes, net of U.S. federal benefit
|
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
Foreign income taxes at other than U.S. rate
|
|
|
1.4 |
|
|
|
(10.6 |
) |
|
|
(20.1 |
) |
Valuation allowance for net deferred income tax assets
|
|
|
34.0 |
|
|
|
34.0 |
|
|
|
34.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(1.1 |
)% |
|
|
(10.6 |
)% |
|
|
(20.1 |
)% |
|
|
|
|
|
|
|
|
|
|
The components of net deferred income tax assets are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net operating loss carryforwards
|
|
$ |
18,846 |
|
|
$ |
15,998 |
|
|
$ |
19,008 |
|
Tax credit carryforwards
|
|
|
452 |
|
|
|
402 |
|
|
|
402 |
|
Accrued expenses, allowance and other temporary differences
|
|
|
109 |
|
|
|
98 |
|
|
|
200 |
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax assets before valuation allowance
|
|
|
19,407 |
|
|
|
16,498 |
|
|
|
19,610 |
|
Deferred income tax asset valuation allowance
|
|
|
(19,407 |
) |
|
|
(16,498 |
) |
|
|
(19,610 |
) |
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2004, we had available net operating
loss (NOL) carryforwards of approximately
$51.7 million for U.S. federal tax purposes, which
expire in various years from 2016 to 2024.
As of December 31, 2004, we had available net operating
loss carryforwards of approximately $22.2 million for
California tax purposes, which expire in various years from 2005
to 2014. As a result of the suspension of the use of NOLs
for 2002 and 2003, California extended the carryover terms for
NOLs created in 2000 and 2001 from 10 years to
12 years and for NOLs originating in 2002, the
carryover period extended from 10 years to 11 years.
Based on the available objective evidence, management believes
it is more likely than not that the net deferred income tax
assets will not be fully realizable. Accordingly, the Company
has provided a full valuation allowance against its net deferred
tax assets at December 31, 2004 and 2003.
The tax reform act of 1986 limits the use of net operating loss
and tax credit carryforwards in certain situations where changes
occur in stock ownership of a company. In the event we have a
change in ownership, utilization of the federal and state
carryforwards could be restricted.
45
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Starting for tax years 2002 and retroactive to 2000, certain
research and development expenditures incurred in the United
Kingdom qualified for a tax credit. The tax credit does not
offset tax liability but rather is a refund. The estimated
refund for 2004 is $134,000. The estimated refund for 2003
reported in the 2003 Form 10-K was $391,000. The actual
amount received for 2003 was $188,000 and was received in
January of 2005. The difference of $203,000 between the actual
United Kingdom tax credit and the actual refund received for
2003 was due to the research and development expenses for SSP
incurred in the United States, which were disallowed as the
office in the United Kingdom was not leading the research and
development process. Our estimates have since been updated for
future years.
|
|
Note 6 |
Commitments and Contingencies: |
Insignia is party to a number of noncancelable operating lease
agreements.
The following are future minimum payments under operating leases
as of December 31, 2004 (in thousands):
|
|
|
|
|
|
|
Operating | |
Year Ending December 31, |
|
Leases | |
|
|
| |
2005
|
|
$ |
213 |
|
2006
|
|
|
122 |
|
2007
|
|
|
95 |
|
2008
|
|
|
95 |
|
2009
|
|
|
95 |
|
Thereafter
|
|
|
918 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
1,538 |
|
|
|
|
|
Operating lease commitments above are net of sublease income of
$104,000 for the years 2005, 2006, 2007, 2008, and 2009. The
rental expense under all operating leases was $334,000, $425,000
and $822,000 in 2004, 2003 and 2002, respectively. Rental
expense was net of sublease rental income of $94,000 in 2004, $0
in 2003 and $13,000 in 2002.
Guarantee Agreements
Insignia, as permitted under Delaware law and in accordance with
our Bylaws, indemnifies our officers and directors for certain
events or occurrences, subject to certain limits, while the
officer is or was serving at our request in such capacity. The
term of the indemnification period is for the officers or
directors lifetime. The maximum amount of potential future
indemnification is unlimited; however, we do have a Director and
Officer Insurance Policy that limits our exposure and enables us
to recover a portion of any future amounts paid. As a result of
the insurance policy coverage we believe the fair value of these
indemnification agreements is minimal.
In our sales agreements, we typically agree to indemnify our
customers for any expenses or liability resulting from claimed
infringements of patents, trademarks or copyrights of third
parties. The terms of these indemnification agreements are
generally perpetual any time after execution of the agreement.
The maximum amount of potential future indemnification is
unlimited. To date we have not paid any amounts to settle claims
or defend lawsuits.
Insignia, on a limited basis, has granted price protection for
the Jeode product line. The terms of these agreements were
generally perpetual. We have not recorded any liabilities for
these potential future payments either because they are not
probable or we have yet to incur the expense.
46
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Insignia warrants its software products against defects in
material and workmanship under normal use and service for a
period of ninety days. There is no warranty accrual recorded
because potential future payments either are not probable or we
have yet to incur any expense.
Change of Control Severance Arrangements
We have entered into change of control severance arrangements
with three of our executive officers, pursuant to which we will
continue to pay salary for up to six months if any of these
employees are terminated in connection with a change of control
of the Company.
Rent Agreement
During 1998, we sublet until March 2002 facilities that we
previously occupied in the United Kingdom, on substantially the
same terms as those applicable to us. In January 2002, we
entered into an agreement with the landlord to terminate the
lease on April 13, 2002. The termination agreement required
us to pay on April 3, 2002 a surrender payment of
approximately $470,000.
|
|
Note 7 |
Segment Reporting: |
Statement of Financial Accounting Standards 131,
Disclosures about Segments of an Enterprise and Related
Information (SFAS 131), provides for
segment reporting based upon the management
approach. The management approach designates the internal
organization that is used by management for making operating
decisions and assessing performance as the source of
Insignias reportable segments. SFAS 131 also requires
disclosures about products and services, geographic areas, and
major customers.
We operate in a single industry segment providing software
technologies that enable mobile operators and phone
manufacturers to update the firmware of mobile devices using
standard over-the-air data networks. In 2004, the SSP and Jeode
product lines accounted for 83% and 17%, respectively, of the
total revenue. The Jeode revenue related to royalties received
from esmertec. Esmertec A.G. accounted for 100% of the Jeode
revenue. The SSP revenue generated in 2004 was comprised
primarily of Telemobile Corporation, Qindao Haier Telecom
Company Limited, Sophast Inter Corporation Company Limited and
Insignia Asia Corporation each accounting for 28%, 21%, 18% and
14%, respectively. In 2003, the Jeode product line accounted for
94% of the total revenue of which Hewlett Packard Company
accounted for 26% of total revenues. In 2002, Phoenix
Technologies, Ltd. (Phoenix) accounted for 58% of
total revenues. No other customer accounted for 10% or more of
our total revenues during 2004, 2003 or 2002.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
SSP
|
|
$ |
450 |
|
|
$ |
20 |
|
|
$ |
|
|
Jeode
|
|
|
91 |
|
|
|
670 |
|
|
|
7,256 |
|
SoftWindows
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
541 |
|
|
$ |
710 |
|
|
$ |
7,256 |
|
|
|
|
|
|
|
|
|
|
|
Revenues from United States operations included export sales of
$391,000, $59,000 and $311,000 in 2004, 2003 and 2002
respectively, which were primarily to customers in Asia and
Europe. Revenues are attributed to countries based on the
principal address of the customer.
47
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue by geographic area for the year ended December 31,
2004 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. | |
|
|
|
|
|
|
U.S. | |
|
Exports | |
|
Europe | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
OEM
|
|
$ |
|
|
|
$ |
215 |
|
|
$ |
|
|
|
$ |
215 |
|
Distributor
|
|
|
150 |
|
|
|
85 |
|
|
|
91 |
|
|
|
326 |
|
End user
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
150 |
|
|
$ |
300 |
|
|
$ |
91 |
|
|
$ |
541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue
|
|
|
28 |
% |
|
|
55 |
% |
|
|
17 |
% |
|
|
100 |
% |
Revenue by geographic area for the year ended December 31,
2003 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. | |
|
|
|
|
|
|
U.S. | |
|
Exports | |
|
Europe | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
OEM
|
|
$ |
69 |
|
|
$ |
35 |
|
|
$ |
232 |
|
|
$ |
336 |
|
Distributor
|
|
|
7 |
|
|
|
11 |
|
|
|
6 |
|
|
|
24 |
|
End user
|
|
|
334 |
|
|
|
13 |
|
|
|
3 |
|
|
|
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
410 |
|
|
$ |
59 |
|
|
$ |
241 |
|
|
$ |
710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue
|
|
|
58 |
% |
|
|
8 |
% |
|
|
34 |
% |
|
|
100 |
% |
Revenue by geographic area for the year ended December 31,
2002 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. | |
|
|
|
|
|
|
U.S. | |
|
Exports | |
|
Europe | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
OEM
|
|
$ |
1,876 |
|
|
$ |
161 |
|
|
$ |
98 |
|
|
$ |
2,135 |
|
Distributor
|
|
|
4,851 |
|
|
|
139 |
|
|
|
67 |
|
|
|
5,057 |
|
End user
|
|
|
18 |
|
|
|
11 |
|
|
|
35 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
6,745 |
|
|
$ |
311 |
|
|
$ |
200 |
|
|
$ |
7,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue
|
|
|
93 |
% |
|
|
4 |
% |
|
|
3 |
% |
|
|
100 |
% |
Substantially all of our long-lived assets are located in the
United States.
Note 8 Equity Transactions and Warrants:
Recent Sales of Unregistered Securities
In 1999, a private placement transaction resulted in an
allocation of $1.4 million to mandatorily redeemable
warrants, of which $590,000 was allocated to the warrants
issued, and $850,000 was allocated to additional warrants
issuable under certain circumstances. During the quarter ended
June 30, 2003, $850,000, which represented the relative
fair value of the additional warrants issuable in connection
with the 1999 private placement, was reclassified from
manditorily redeemable warrants to additional paid-in capital.
The reclassification was a result of the expiration of our
obligation to issue these warrants.
Amounts classified as warrants will remain outside of
shareholders equity for the life of the warrant or until
they are exercised, whichever occurs first. This classification
reflects certain potential cash payments that may occur, should
we complete a major transaction, such as a takeover, during the
life of the warrants.
In August 2003, warrants issued in the 1999 private placement
were modified to reduce their exercise price to $0.40 per
share. The modification was accounted for in accordance with
SFAS 123 and resulted in a charge of approximately $88,000
to earnings and an increase in the value of the mandatorily
redeemable warrants. In September 2003 and November 2003,
warrants to purchase 334,177 and 112,500 ordinary shares
48
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
were exercised for net proceeds of approximately $128,000 and
$92,000, respectively. In connection with the exercise of the
warrants, $640,000 was reclassified from mandatorily redeemable
warrants to additional paid-in capital. In December 2004, the
remaining warrants outstanding expired and $38,000 was
reclassified from mandatorily redeemable warrants to additional
paid-in capital. Fusion Capital exercised warrants to
purchase 2,000,000 ordinary shares in September 2003
resulting in net proceeds of approximately $668,000.
On November 24, 2000, we issued a total of 3,600,000
ordinary shares at a price of $5.00 per unit. Each share
comprises one ADS and one half of one warrant to purchase one
ADS. The registration statement became effective on
December 24, 2000. The warrants expired on
November 24, 2004. As compensation for services in
connection with this private placement, we (i) issued five
year warrants to purchase 225,000 of our ADSs at an
exercise price of $5.00 per share, and (ii) paid a
cash compensation equal to 6% of the gross proceeds received by
us in the private placement to the placement agent. These
warrants remain outstanding and expire November 24, 2005.
On February 12, 2001, we entered into agreements whereby we
issued 940,000 ordinary shares in ADS form at a price of
$5.00 per share to a total of 4 investors, including Wind
River Systems, Inc., and a member of our board of directors. We
also issued warrants to purchase 470,000 ADSs to the
investors, at an exercise price per share of the lower of the
average quoted closing sale price of our ADSs for the ten
trading days ending on the day preceding the date of the warrant
holders intent to exercise less a 10% discount, and
$6.00 per share. We received $4.7 million less
offering expenses totaling $0.5 million. All of these
warrants were exercised in January 2004, resulting in proceeds
of approximately $400,000 with $10,000 of issuance costs. We
also issued warrants to purchase 25,000 ADSs to the
placement agent exercisable at a price of $5.00 per share.
These warrants are exercisable and expire on February 12,
2006. The securities were issued in reliance upon the exemption
from registration provided under Regulation D promulgated
under the Securities Act.
In September 2003, 1,613,465 ordinary shares in ADS form were
purchased under the Fusion Capital securities subscription
agreement resulting in proceeds of $827,000 less offering
expenses of $89,000. In November 2003, Fusion Capital purchased
1,766,667 ordinary shares in ADS form. We received
$1.3 million less offering expenses totaling $114,000. In
accordance with the subscription agreement, Fusion Capital may
not beneficially own more than 9.9% of the total ordinary
shares. As a result, Fusion Capital requested that we only issue
1,000,000 shares and issue the balance at a later date.
This resulted in $575,000 recorded as stock subscription in the
equity section of the balance sheet as of December 31,
2003. In January 2004, new ordinary shares of 766,667 were
issued to Fusion Capital Fund II, LLC, (Fusion
Capital) a Chicago-based institutional investor, for
$575,000 net of issuance expenses of $10,000, pursuant to a
binding commitment to deliver such shares entered into in
November 2003.
In November 2003, we issued a warrant to purchase up to 500,000
ADSs to a strategic partner. The warrant becomes exercisable
upon achievement of certain milestones and terminates on the
third anniversary of the final milestone. The exercise price is
$1.03 per share with respect to the first milestone, and
the average of $1.03 and the then-current market price with
respect to the other milestones. At December 31, 2004,
200,000 of the warrants were vested, exercisable, and were
recorded with a charge of $129,000 to expense and additional
paid-in capital in the first quarter of 2004. The warrant will
be valued as it vests and future charges will be recorded based
on the amount of the warrant that vests using the Black-Scholes
pricing model.
On January 5, 2004, we issued 2,262,500 ordinary shares in
ADS form at a price of $0.80 to a total of 10 investors. We also
issued warrants to purchase 565,625 ADSs to the investors
at an exercise price of $1.04. The warrants are exercisable
immediately and expire January 5, 2009. We received
$1.81 million less offering expenses totaling approximately
$0.2 million in this transaction. We also issued warrants
to purchase 108,562 ADSs to the two principals of the
placement agent, half of which are exercisable at a price of
$1.09 per share and the other half at $0.92 per share.
These warrants are exercisable immediately and expire
January 5, 2009.
49
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On October 18, 2004, Insignia closed two equity financing
transactions in which we raised over $2.3 million, net of
transaction costs. We closed a private placement financing with
certain institutional and other accredited investors pursuant to
which we issued and sold 3,208,499 newly issued ADSs and
warrants to purchase 802,127 ADSs, for a total purchase
price of approximately $1.5 million, or $1.3 million
net of transaction costs. The shares were priced at
$0.48 per share, and the warrants have an exercise price of
$1.06 per share. The warrants may be exercised any time
after the date that is six months after the closing of the
private placement until the earlier of April 18, 2010 or a
change of control of Insignia. Nash Fitzwilliams Ltd. served as
the private placement agent in the private placement. We issued
warrants to purchase an aggregate of 204,597 ADSs to the two
principals of Nash Fitzwilliams Ltd. as placement agent. The
warrants issued to the Nash Fitzwilliams Ltd.s
principals have the same exercise price and terms as the
warrants issued to the investors in the private placement. As
part of the transaction, we agreed to file a resale registration
statement on Form S-3 with the Securities and Exchange
Commission within 30 days after closing for the purpose of
registering the resale of the shares, and the shares underlying
the warrants, issued in the private placement.
Additionally, under a previously executed securities
subscription agreement, we sold to Fusion Capital
2,500,000 shares of newly issued ADSs at a purchase price
of $0.40 per share, resulting in proceeds of approximately
$1.0 million, net of transaction costs. As of
October 18, 2004, we had sold an aggregate of
$3.152 million of Insignias ADSs (out of a total
potential issuance of $6 million under the securities
subscription agreement) to Fusion Capital.
Two investors in the private placement on October 18, 2004
were related parties of Insignia. Mark McMillan, our Chief
Executive Officer, invested $25,000 to purchase 52,083 ADSs
and warrants to purchase 13,021 ADSs. In addition Vincent
Pino, one of our directors, and his immediate family invested
$200,000 to purchase 416,667 ADSs and warrants to
purchase 104,167 ADSs.
Subscription Agreement
On October 17, 2002, we entered into a securities
subscription agreement (Agreement) with Fusion
Capital Fund II, LLC (Fusion Capital), pursuant
to which Fusion Capital has agreed to purchase, on each trading
day following the effectiveness of a registration statement
covering the American Depository Shares to be purchased by
Fusion Capital, $10,000 of our American Depository Shares up to
an aggregate of $6.0 million over a period of
30 months. The purchase price of the American Depository
Shares will be equal to a price based upon the future market
price of the shares without any fixed discount to the market
price. In order to be in compliance with Nasdaq rules, we could
not sell our ordinary shares to Fusion Capital at a price below
$0.38, which represents the greater of the book value per share
of our ordinary shares as of September 30, 2002 or the
closing sale price per share of our ADSs on October 16,
2002. If we elect to sell our shares to Fusion Capital at a
price per share below $0.38, we first would be required to
obtain shareholder approval in order to be in compliance with
applicable Nasdaq rules. Under the laws of England and Wales, we
are not permitted to sell our ADSs at a purchase price that is
less than the nominal value of our ordinary shares. Currently,
the nominal value per ordinary share is the U.S. dollar
equivalent of 20.5 pence. As of December 31, 2004, new
ordinary shares of 6,480,192 were purchased under the Fusion
Capital securities subscription agreement for a total of
$3.6 million, net of issuance costs. Of this amount,
$190,000 was recorded as an other receivable on the consolidated
balance sheet at December 31, 2004 as payment was not
received until January 2005.
Under the terms of the Agreement, we issued to Fusion Capital
one redeemable warrant for American Depository Shares
representing 1,000,000 ordinary shares, and one non-redeemable
warrant for American Depository Shares representing 1,000,000
ordinary shares. The exercise price per share of each warrant
was the U.S. dollar equivalent of 20.5 pence. Each warrant
expires on September 30, 2007. The fair value of the
warrants was estimated at $544,000 on the date of grant using
the Black-Scholes pricing model with the following assumptions:
no dividend yield; risk-free rate of 2.5%; volatility of 101%;
and expected life of five
50
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
years. The fair value of the warrants have been expensed in
other expense entirely in the year-ended December 31, 2002.
Unless an event of default (including termination of the
agreement) occurs under the Agreement, the shares issuable upon
exercise of these warrants must be held by Fusion Capital until
30 months from the date of the Agreement or the date the
Agreement is terminated. Fusion Capital exercised their
2,000,000 warrants for $668,000, net of issuance costs.
The following table summarizes activity on warrants:
|
|
|
|
|
|
|
|
|
|
|
|
Warrants | |
|
Warrants | |
|
|
Outstanding | |
|
Outstanding | |
|
|
and Exercisable | |
|
Exercise Price | |
|
|
| |
|
| |
Balance, December 31, 2001
|
|
|
2,591,334 |
|
|
|
$4.77 - $6.00(1) |
|
|
Granted
|
|
|
2,000,000 |
|
|
|
par value |
|
|
Exercised
|
|
|
(400,000 |
) |
|
|
$1.24 |
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
4,191,334 |
|
|
|
par value - $6.00(1) |
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,446,677 |
) |
|
|
$0.345-$0.8371 |
|
|
Lapsed
|
|
|
(1,005,000 |
) |
|
|
$6.00(1) |
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
739,657 |
|
|
|
$4.77-$6.00(1) |
|
|
Granted
|
|
|
1,880,911 |
|
|
|
$0.92-$1.09 |
|
|
Exercised
|
|
|
(470,000 |
) |
|
|
$6.00(1) |
|
|
Lapsed
|
|
|
(19,657 |
) |
|
|
$4.77(1) |
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
2,130,911 |
|
|
|
$0.92 - $5.00(1) |
|
|
|
|
|
|
|
|
|
|
(1) |
The $6.00 warrants are the lesser of $6.00 or 90% of 10-day
average market value. |
Note 9 Sale of Java Virtual Machine
Assets:
On February 7, 2003, we entered into a loan agreement with
esmertec AG (esmertec) whereby esmertec loaned
Insignia $1.0 million at an interest rate of prime plus two
percent. The principal amount of $1.0 million was repaid on
January 15, 2004 by offsetting that amount with a
receivable from esmertec relating to the product line purchase.
All remaining accrued interest of $55,161 was repaid on
March 15, 2004 by offsetting the accrued interest against
prepaid royalties. Accordingly, there are no outstanding
balances or future amounts due to esmertec under the loan
agreement as of December 31, 2004.
On March 4, 2003, we entered into several other agreements
(the Agreements) with esmertec including a
definitive agreement to sell certain assets relating to our Java
Virtual Machine (JVM) product line in exchange for
$3.5 million due in installments through April 2004. The
transaction closed on April 23, 2003 and was amended on
June 30, 2004. The assets sold primarily included the fixed
assets, customer agreements and employees related to the JVM
product line. Under the terms of the Agreements, esmertec also
became the exclusive master distributor of the JVM technology in
exchange for $3.4 million in minimum guaranteed royalties
through October 2004.
Under the original agreements, Insignia could have earned up to
an additional $4.0 million over the subsequent three year
period from the effective date of the agreement based on a
percentage of esmertecs sales of the JVM product during
the period. Additionally, the parties entered into a cooperative
agreement whereas esmertec would promote Insignias
Secure System Provisioning (SSP) software product to
esmertecs mobile platform customers.
51
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As part of the sale of our JVM product line, we transferred 42
employees to esmertec, of which 31 were development engineers.
In addition, as part of the sale, esmertec entered into an
agreement with our U.K. building landlord in order to assume the
lease on one of the two buildings leased by Insignia.
On February 13, 2004, Insignia and esmertec executed the
final purchase agreement upon signing the Limited Assignment of
Rights of Technology License and Distribution Agreement. The
final purchase agreement transferred the intellectual property
of Jeode and the title for Insignias remaining prepaid
royalties to esmertec.
On June 30, 2004, Insignia and esmertec executed a
Termination and Waiver Agreement. The Agreement offset esmertec
related liabilities and deferred revenue totaling $853,000
against $600,000 of remaining guaranteed royalty payments due
from esmertec in exchange for a final cash payment of $185,000.
The resulting net gain of $302,000 was recorded as other income
in the second quarter of 2004 and is net of expenses. The final
payment was received from esmertec on July 8, 2004.
The Jeode platform had been our principal product line since the
third quarter of 1999. With the completion of the sale of our
JVM product line to esmertec in February 2004, Insignias
sole product line currently consists of its SSP products for the
mobile handset and wireless carrier industry. We began shipment
of our SSP product to customers in the fourth quarter of 2003.
|
|
Note 10 |
Line of Credit: |
On March 28, 2002, Insignias U.S. subsidiary,
Insignia Solutions, Inc. (Insignia U.S.) entered
into an accounts receivable financing agreement with Silicon
Valley Bank. The financing agreement allowed Insignia
U.S. to borrow an amount up to 80% of eligible receivables
not to exceed $1,200,000 with interest at the banks prime
rate plus two percentage points. Borrowings are subject to
compliance with certain covenants, including a requirement to
maintain specific financial ratios. Borrowings were secured by
substantially all of the assets of Insignia U.S. There were
no outstanding borrowings under this credit facility, and the
credit line was cancelled on February 12, 2003.
On February 13, 2001, we entered into a promissory note
with Richard M. Noling, then President and Chief Executive
Officer (and currently a director) of Insignia whereby
Mr. Noling borrowed $150,000 from the U.S.-based subsidiary
of Insignia. The promissory note was due in three equal
installments, on each annual anniversary from the date of the
note. The note was amended on January 24, 2002 to extend
the first and subsequent installments one year. The first
installment was due on February 13, 2003.
Mr. Nolings employment was terminated with Insignia
effective February 14, 2003. We forgave, effective
March 6, 2003 the balance of the loan, $125,363, in lieu of
any bonus compensation. Interest accrued on the unpaid principal
balance at a rate per annum equal to the prime lending rate of
interest as listed in the Wall Street Journal plus 1%. Accrued
interest was due and payable monthly in arrears on the last
calendar day of each month.
Two investors in the private placement on October 18, 2004
were related parties of Insignia. Mark McMillan, our Chief
Executive Officer, invested $25,000 to purchase 52,083 ADSs
and warrants to purchase 13,021 ADSs. In addition Vincent
Pino, one of our directors, and his immediate family invested
$200,000 to purchase 416,667 ADSs and warrants to
purchase 104,167 ADSs
At December 31, 2004, the Company has $190,000 of other
receivables due from Fusion Capital relating to the purchase of
ADSs under the October 17, 2002 subscription agreement.
This amount was received in January 2005.
52
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 12 |
Joint Venture Agreement: |
On December 31, 2003, we entered into a joint venture
agreement with J-Tek Corporation to form Insignia Asia
Chusik Hoesa (Insignia Asia). We own 50% of the
newly formed entity and are accounting for this investment under
the equity method of accounting. During the year we made two
investments of $75,000 each and shared in losses recognized of
approximately $82,000. During the twelve months ended
December 31, 2004, Insignia recognized license revenue of
$75,000 from Insignia Asia.
In February 2003, we announced a restructuring of the
organization to focus on the SSP technology. We restructured in
both March and June resulting in a 62% headcount reduction and
restructuring charges and payments of $498,000 from March
through December 2003. In the third quarter of 2002, we
completed a worldwide reduction of headcount of approximately
11% of our staff. Restructuring expenses of $296,000 consisted
of severance payments made during the third and fourth quarters
of 2002. Restructuring expenses which represented 70% and 4% of
total revenues in 2003 and 2002, respectively, consisted of
costs related to terminated employees, including severance
payments as well as national insurance costs where legally
required. At December 31, 2004 we have no future liability
to any of the terminated employees.
|
|
Note 14 |
Significant Post Balance Sheet Events: |
In March 2005, Insignia closed on the acquisition of mi4e Device
Management AB (mi4e), a private company
headquartered in Stockholm, Sweden. mi4e was founded in 2003 and
is a leading provider of client provisioning device-management
software and services to mobile operators, virtual operators and
value added service providers. The consideration paid in the
transaction was 2,969,692 American depositary shares (ADSs)
representing ordinary shares (valued at $2.7 million as of
the date of the agreement) and another 989,896 ADSs is payable
on March 31, 2006. In addition, up to a maximum of 700,000
euros is payable in a potential earn out based on a percentage
of future revenue collected from sales of existing mi4e products.
On February 9, 2005 Insignia received approximately
$1.3 million through the sale of 3,220,801 ADSs
representing ordinary shares pursuant to its October 17,
2002 securities subscription agreement with Fusion Capital. The
Company and Fusion Capital mutually terminated that agreement,
under which the Company has received $5.1 million in
aggregate funding.
On February 10, 2005, Insignia entered into a new
$12 million securities subscription agreement with Fusion
Capital, with an option for a second $12 million tranche of
equity financing at the Companys sole discretion. Upon the
commencement of funding under the new agreement, Insignia will
have access to up to $12 million in equity financing, over
a 30 month period, (subject to daily maximum purchase
amounts), that can be received at Insignias option after a
registration statement covering the transaction is declared
effective by the Securities and Exchange Commission. The shares
will be priced based on a market-based formula at the time of
purchase. The securities subscription agreement also provides
for the issuance of warrants to purchase 4,000,000 ADSs as
a commitment fee to Fusion Capital. This agreement with Fusion
Capital does not constitute an offer to sell securities. An
offer to sell securities will only be made if certain conditions
are met, including the declaration of effectiveness by the
Securities and Exchange Commission of the registration statement
referenced above. Under the rules and regulations of the Nasdaq
SmallCap Market, the Company would be required to obtain
shareholder approval to sell more than 19.99% of the issued and
outstanding shares as of February 9, 2005 under this
agreement.
53
Insignia Solutions plc
Schedule II
Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
Beginning of | |
|
|
|
Deductions | |
|
End of | |
|
|
Period | |
|
Additions |
|
(Write-offs) | |
|
Period | |
|
|
| |
|
|
|
| |
|
| |
|
|
(in thousands) | |
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Year ended December 31, 2003
|
|
$ |
50 |
|
|
$ |
|
|
|
$ |
(50 |
) |
|
$ |
|
|
Year ended December 31, 2002
|
|
$ |
488 |
|
|
$ |
|
|
|
$ |
(438 |
) |
|
$ |
50 |
|
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Insignia Solutions plc:
We have audited the accompanying consolidated balance sheets of
Insignia Solutions plc and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of
operations, shareholders equity, and cash flows for each
of the two years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in
Item 15(a)(2) as of and for the years ended
December 31, 2004 and 2003. The consolidated financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Insignia Solutions plc and subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the two years in the
period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, the Companys recurring losses from operations
raise substantial doubt about its ability to continue as a going
concern. Managements plans as to these matters are also
described in Note 1. The 2004 consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
|
|
|
/s/ Burr, Pilger & Mayer LLP |
Palo Alto, California
February 2, 2005, except for Note 14,
which is as of March 16, 2005
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Insignia Solutions
plc
Fremont, California
In our opinion, the accompanying consolidated financial
statements of operations, cash flows and changes in
shareholders equity for the year ended December 31,
2002 present fairly, in all material respects, the results of
the operations and the cash flows of Insignia Solutions plc and
its subsidiaries for the year ended December 31, 2002 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards of the Public
Company Accounting Oversight Board (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, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
March 28, 2005
56
|
|
Item 9 |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
N/A.
|
|
Item 9A |
Controls and Procedures |
Our Chief Executive Officer and our Chief Financial Officer,
after evaluating the effectiveness of the Companys
disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rule 13a-15(e) and
15d-15(e)) as of the end of the period covered by this annual
report (the Evaluation Date), have concluded that as
of the Evaluation Date, our disclosure controls and procedures
were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made
known to them by others within those entities.
|
|
Item 9B |
Other Information |
None.
PART III
|
|
Item 10 |
Directors and Executive Officers of the Registrant |
Information regarding our Executive Officers required hereunder
is set forth in Item 4A of Part 1
Business Executive Officers of the
Registrant. The information required hereunder regarding
our Directors is incorporated by reference from our Proxy
Statement to be filed in connection with our annual meeting of
stockholders for the year ended December 31, 2004 (the
2005 Annual Meeting of Stockholders).
Section 16(a) Beneficial Ownership Reporting
Compliance
The information required hereunder regarding Compliance with
Section 16(a) of the Securities Exchange Act is
incorporated by reference from our Proxy Statement to be filed
in connection with our 2005 Annual Meeting of Stockholders.
Shareholder Nominations
Information required by this Item is incorporated by reference
to the information under the heading Deadline for Receipt
of Shareholder Proposals contained in Insignias
definitive Proxy Statement for its 2005 Annual Meeting of
Stockholders.
Code
of Ethics
The Company has adopted the Code of Ethics, which applies to,
among others, the Chief Executive Officer and the Chief
Financial Officer, who are the principal accounting officers
(collectively, the Finance Managers). If any
substantive amendments are made to the Code of Ethics or the
Board of Directors grants any waiver, including any implicit
waiver, from a provision of the code to any of the directors or
officers of the Company. The Company will disclose the nature of
such amendment or waiver in a report on Form 8-K.
Audit
Committee and Audit Committee Financial Experts
Information required by this Item is incorporated by reference
to the information under the heading Audit Committee
Report contained in Insignias definitive Proxy
Statement for its 2005 Annual Meeting of Stockholders.
|
|
Item 11 |
Executive Compensation |
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our 2005
Annual Meeting of Stockholders.
57
|
|
Item 12 |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our 2005
Annual Meeting of Stockholders.
|
|
Item 13 |
Certain Relationships and Related Transactions |
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our 2005
Annual Meeting of Stockholders.
|
|
Item 14 |
Principal Accountant Fees and Services |
The information required hereunder is incorporated by reference
from our Proxy Statement to be filed in connection with our 2005
Annual Meeting of Stockholders.
|
|
Item 15 |
Exhibits and Financial Statement Schedules |
(a) Documents filed as part of this report:
1. Financial Statements and Reports
The consolidated financial statements included in Part II,
Item 8 of this Annual Report on Form 10-K are filed as
part of this Report.
2. Financial Statements Schedule
Schedule II Valuation and Qualifying Accounts
for the three years ended December 31, 2004 has been filed
as part of this Annual Report
All other financial statement schedules have been omitted
because either the required information (i) is not present,
(ii) is not present in amounts sufficient to require
submission of the schedule or (iii) is included in the
Consolidated Financial Statements and Notes thereto under
Part II, Item 8 of this Form 10-K.
(b) Exhibits
The following exhibits are filed as part of this Report:
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
|
3 |
.02(1) |
|
Registrants Articles of Association. |
|
3 |
.04(1) |
|
Registrants Memorandum of Association. |
|
4 |
.01(1) |
|
Form of Specimen Certificate for Registrants Ordinary
Shares. |
|
4 |
.02(2) |
|
Deposit Agreement between Registrant and The Bank of New York. |
|
4 |
.03(2) |
|
Form of American Depositary Receipt (included in
Exhibit 4.02). |
|
4 |
.04(4) |
|
American Depositary Shares Purchase Agreement dated
January 5, 2004. |
|
4 |
.05(4) |
|
Registration Rights Agreement dated January 5, 2004. |
|
4 |
.06(4) |
|
Form of Warrant to Purchase American Depositary Shares dated
January 5, 2004 and issued to the purchasers of American
Depositary Shares. |
|
|
4 |
.07(4) |
|
Form of Warrant to Purchase American Depositary Shares dated
January 5, 2004 and issued to the principals of Nash
Fitzwilliams, Ltd., as placement agent. |
|
|
10 |
.01(1) |
|
Registrants 1986 Executive Share Option Scheme, as
amended, and related documents. |
|
|
10 |
.02(1) |
|
Registrants 1988 U.S. Stock Option Plan, as amended,
and related documents. |
|
|
10 |
.03(5) |
|
Registrants 1995 Incentive Stock Option Plan for
U.S. Employees and related documents, as amended. |
|
|
10 |
.05(1) |
|
Insignia Solutions Inc. 401(k) Plan. |
58
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Exhibit Title |
| |
|
|
|
|
10 |
.06(1) |
|
Registrants Small Self-Administered Pension Plan
Definitive Deed and Rules. |
|
|
10 |
.14(1) |
|
Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers such
obligations are immediately accelerated, with no required
notice, if the default results from the dissolution, winding up
or liquidation of Hartford Life. |
|
|
10 |
.28 |
|
Registrants U.K. Employee Share Option Scheme 1996, as
amended (incorporated by reference to Exhibit 4.05 to
Registrants Registration Statement on Form S-8 filed
on December 13, 2000 (File No. 333-51760). |
|
|
10 |
.34(3) |
|
Consulting Agreement effective April 1, 1997 between
Registrant and Nicholas, Viscount Bearsted. |
|
|
10 |
.38 |
|
Lease Agreement between Insignia Solutions, Inc. and
Lincoln-Whitehall Pacific, LLC, dated December 22, 1997
(incorporated by reference to the exhibit of the same number
from Registrants Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998). |
|
|
10 |
.42(5) |
|
Registrants 1995 Employee Share Purchase Plan, as amended. |
|
|
10 |
.44 |
|
Lease agreement between Registrant and Comland Industrial and
Commercial Properties Limited dated
August 12th,
1998 for the Apollo House premises and the Saturn House premises
(incorporated by reference to the exhibit of the same number
from Registrants Annual Report on Form 10-K for the
year ended December 31, 1998). |
|
|
10 |
.62 |
|
Warrant Agreement, dated as of November 24, 2000, between
Registrant and Jefferies & Company, Inc. (incorporated
by reference to Exhibit 10.53 to Registrants Current
Report on Form 8-K filed on November 29, 2000). |
|
|
10 |
.63 |
|
Form of ADSs Purchase Warrant issued November 24, 2000
(incorporated by reference to Exhibit 4.11 to
Registrants Current Report on Form 8-K filed on
November 29, 2000). |
|
|
10 |
.64 |
|
ADSs Purchase Warrant issued to Jefferies & Company,
Inc., dated November 24, 2000 (incorporated by reference to
Exhibit 4.12 to Registrants Current Report on
Form 8-K filed on November 29, 2000). |
|
|
10 |
.67 |
|
Warrant Agreement, dated as of February 12, 2001, between
Registrant and Jefferies & Company, Inc. (incorporated
by reference to Exhibit 10.55 to Registrants Current
Report on Form 8-K filed on February 15, 2001). |
|
|
10 |
.68 |
|
Form of ADSs Purchase Warrant issued February 12, 2001
(incorporated by reference to Exhibit 4.13 to
Registrants Current Report on Form 8-K filed on
February 15, 2001). |
|
|
10 |
.69 |
|
ADSs Purchase Warrant issued to Jefferies & Company,
Inc., dated February 12, 2001 (incorporated by reference to
Exhibit 4.14 to Registrants Current Report on
Form 8-K filed on February 15, 2001). |
|
|
10 |
.74 |
|
Form of Registration Rights Agreement by and between Registrant
and Fusion Capital II, LLC (incorporated by reference to
Exhibit 10.74 to Registrants Current Report on
Form 8-K filed on October 22, 2002). |
|
|
10 |
.85(7) |
|
Warrant Agreement between Insignia Solutions plc and
International Business Machines Corporation dated
November 24, 2003** |
|
|
10 |
.87 |
|
American Depositary Shares Purchase Agreement between the
Registrant and the Purchasers, as defined therein, dated
October 18, 2004 (the October 2004 ADS Purchase
Agreement) (incorporated by reference to
Exhibit 10.87 to Registrants Current Report on
Form 8-K filed on October 18, 2004). |
|
|
10 |
.88 |
|
Form of Warrant issued to Purchasers, as defined in the October
2004 ADS Purchase Agreement (incorporated by reference to
Exhibit 10.88 to Registrants Current Report on
Form 8-K filed on October 18, 2004). |
|
|
10 |
.89 |
|
Registration Rights Agreement between the Registrant and the
Purchasers, as defined in the October 2004 ADS Purchase
Agreement, dated October 18, 2004 (incorporated by
reference to Exhibit 10.89 to Registrants Current
Report on Form 8-K filed on October 18, 2004). |
|
|
10 |
.90(8) |
|
Stock Purchase and Sale Agreement dated February 9, 2005
between, among others, Insignia Solutions plc, Kenora Ltd and
the Sellers (as defined therein). |
59
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Exhibit Title |
| |
|
|
|
|
10 |
.91(9) |
|
Securities Subscription Agreement by and between Insignia and
Fusion Capital II, LLC dated February 10, 2005. |
|
|
10 |
.92(9) |
|
Registration Rights Agreement by and between Insignia and Fusion
Capital II, LLC dated February 10, 2005. |
|
|
10 |
.93(9) |
|
Warrant by and between Insignia and Fusion Capital II, LLC. |
|
|
10 |
.94(9) |
|
Warrant by and between Insignia and Fusion Capital II, LLC. |
|
|
10 |
.95(9) |
|
Notice of termination of Securities Subscription Agreement by
and between Insignia and Fusion Capital dated October 17,
2002. |
|
|
10 |
.96(10) |
|
Termination and Waiver Agreement dated June 30, 2004
between the Registrant and esmertec A.G. (incorporated by
reference to Exhibit 10.87 from Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30,
2004). |
|
|
14 |
.0(7) |
|
Code of Ethics. |
|
|
21 |
.01 |
|
List of Registrants subsidiaries. |
|
|
23 |
.01 |
|
Consent of Burr, Pilger & Mayer LLP, Independent
Registered Public Accounting Firm |
|
|
23 |
.02 |
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm. |
|
|
24 |
.01 |
|
Power of Attorney (included on signature page). |
|
|
31 |
.1 |
|
Section 302 certification of Chief Executive Officer |
|
|
31 |
.2 |
|
Section 302 certification of Chief Financial Officer |
|
|
32 |
.1 |
|
Section 906 certification of Chief Executive Officer |
|
32 |
.2 |
|
Section 906 certification of Chief Financial Officer |
|
|
** |
Confidential treatment has been granted with respect to certain
portions of this agreement. Such portions were omitted from this
filing and filed separately with the Securities and Exchange
Commission. |
|
|
(1) |
Incorporated by reference to the exhibit of the same number from
Registrants Registration Statement on Form F-1 (File
No. 33-98230) declared effective by the Commission on
November 13, 1995. |
|
(2) |
Incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year
ended December 31, 1995. |
|
(3) |
Incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year
ended December 31, 1997. |
|
(4) |
Incorporated by reference to the exhibit of the same number from
Registrants Registration Statement on Form S-3 (File
No. 333-112607) filed on February 9, 2004. |
|
(5) |
Incorporated by reference to the exhibit of the same number from
Registrants Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004. |
|
(6) |
Incorporated by reference to the exhibit of the same number from
Registrants Current Report on From 8-K filed on
February 10, 2005 (Items 1.01, 1.02 and 9.01) |
|
(7) |
Incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year
ended December 31, 2003. |
|
(8) |
Incorporated by reference to the exhibit of the same number from
Registrants Current Report on Form 8-K filed on
February 10, 2005 (Items 1.01 and 9.01). |
|
(9) |
Incorporated by reference to the exhibit of the same number from
Registrants Current Report on Form 8-K filed on
February 10, 2005 (Items 1.01, 1.02 and 9.01). |
|
|
(10) |
Renumbered from previously filed Exhibit 10.87 in order to
correct duplicate exhibit number. |
60
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 on March 29, 2005.
|
|
|
______________________________________
Mark E. McMillan |
|
Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Mark E.
McMillan and Robert E. Collins, and each or any one of them, as
his true and lawful attorney-in-fact and agent 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 of Insignia
Solutions plc, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission, grant unto said attorney-in-fact and
agent, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about
the foregoing, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent, or his substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated:
|
|
|
|
|
|
|
Signature |
|
Capacity |
|
Date |
|
|
|
|
|
|
/s/ Mark E. McMillan
Mark
E. McMillan |
|
Chief Executive Officer, President and a Director (Principal
Executive Officer and Director) |
|
March 29, 2005 |
|
/s/ Robert E. Collins
Robert
E. Collins |
|
Chief Financial Officer and Secretary (Principal Financial
Officer and Principal Accounting Officer) |
|
March 29, 2005 |
|
Additional Directors: |
|
|
|
/s/ Nicholas, Viscount
Bearsted
Nicholas,
Viscount Bearsted |
|
Director |
|
March 29, 2005 |
|
/s/ Vincent S. Pino
Vincent
S. Pino |
|
Director |
|
March 29, 2005 |
|
/s/ David G. Frodsham
David
G. Frodsham |
|
Director |
|
March 29, 2005 |
|
/s/ Richard M. Noling
Richard
M. Noling |
|
Director |
|
March 29, 2005 |
61
INDEX TO EXHIBITS
The following exhibits are filed as part of this Report:
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
|
|
|
3 |
.02(1) |
|
Registrants Articles of Association. |
|
3 |
.04(1) |
|
Registrants Memorandum of Association. |
|
4 |
.01(1) |
|
Form of Specimen Certificate for Registrants Ordinary
Shares. |
|
4 |
.02(2) |
|
Deposit Agreement between Registrant and The Bank of New York. |
|
4 |
.03(2) |
|
Form of American Depositary Receipt (included in
Exhibit 4.02). |
|
4 |
.04(4) |
|
American Depositary Shares Purchase Agreement dated
January 5, 2004. |
|
4 |
.05(4) |
|
Registration Rights Agreement dated January 5, 2004. |
|
4 |
.06(4) |
|
Form of Warrant to Purchase American Depositary Shares dated
January 5, 2004 and issued to the purchasers of American
Depositary Shares. |
|
|
4 |
.07(4) |
|
Form of Warrant to Purchase American Depositary Shares dated
January 5, 2004 and issued to the principals of Nash
Fitzwilliams, Ltd., as placement agent. |
|
|
10 |
.01(1) |
|
Registrants 1986 Executive Share Option Scheme, as
amended, and related documents. |
|
|
10 |
.02(1) |
|
Registrants 1988 U.S. Stock Option Plan, as amended,
and related documents. |
|
|
10 |
.03(5) |
|
Registrants 1995 Incentive Stock Option Plan for
U.S. Employees and related documents, as amended. |
|
|
10 |
.05(1) |
|
Insignia Solutions Inc. 401(k) Plan. |
|
|
10 |
.06(1) |
|
Registrants Small Self-Administered Pension Plan
Definitive Deed and Rules. |
|
|
10 |
.14(1) |
|
Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers such
obligations are immediately accelerated, with no required
notice, if the default results from the dissolution, winding up
or liquidation of Hartford Life. |
|
|
10 |
.28 |
|
Registrants U.K. Employee Share Option Scheme 1996, as
amended (incorporated by reference to Exhibit 4.05 to
Registrants Registration Statement on Form S-8 filed
on December 13, 2000 (File No. 333-51760). |
|
|
10 |
.34(3) |
|
Consulting Agreement effective April 1, 1997 between
Registrant and Nicholas, Viscount Bearsted. |
|
|
10 |
.38 |
|
Lease Agreement between Insignia Solutions, Inc. and
Lincoln-Whitehall Pacific, LLC, dated December 22, 1997
(incorporated by reference to the exhibit of the same number
from Registrants Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998). |
|
|
10 |
.42(5) |
|
Registrants 1995 Employee Share Purchase Plan, as amended. |
|
|
10 |
.44 |
|
Lease agreement between Registrant and Comland Industrial and
Commercial Properties Limited dated
August 12th,
1998 for the Apollo House premises and the Saturn House premises
(incorporated by reference to the exhibit of the same number
from Registrants Annual Report on Form 10-K for the
year ended December 31, 1998). |
|
|
10 |
.62 |
|
Warrant Agreement, dated as of November 24, 2000, between
Registrant and Jefferies & Company, Inc. (incorporated
by reference to Exhibit 10.53 to Registrants Current
Report on Form 8-K filed on November 29, 2000). |
|
|
10 |
.63 |
|
Form of ADSs Purchase Warrant issued November 24, 2000
(incorporated by reference to Exhibit 4.11 to
Registrants Current Report on Form 8-K filed on
November 29, 2000). |
|
|
10 |
.64 |
|
ADSs Purchase Warrant issued to Jefferies & Company,
Inc., dated November 24, 2000 (incorporated by reference to
Exhibit 4.12 to Registrants Current Report on
Form 8-K filed on November 29, 2000). |
|
|
10 |
.67 |
|
Warrant Agreement, dated as of February 12, 2001, between
Registrant and Jefferies & Company, Inc. (incorporated
by reference to Exhibit 10.55 to Registrants Current
Report on Form 8-K filed on February 15, 2001). |
62
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Exhibit Title |
| |
|
|
|
|
10 |
.68 |
|
Form of ADSs Purchase Warrant issued February 12, 2001
(incorporated by reference to Exhibit 4.13 to
Registrants Current Report on Form 8-K filed on
February 15, 2001). |
|
|
10 |
.69 |
|
ADSs Purchase Warrant issued to Jefferies & Company,
Inc., dated February 12, 2001 (incorporated by reference to
Exhibit 4.14 to Registrants Current Report on
Form 8-K filed on February 15, 2001). |
|
|
10 |
.74 |
|
Form of Registration Rights Agreement by and between Registrant
and Fusion Capital II, LLC (incorporated by reference to
Exhibit 10.74 to Registrants Current Report on
Form 8-K filed on October 22, 2002). |
|
|
10 |
.85(7) |
|
Warrant Agreement between Insignia Solutions plc and
International Business Machines Corporation dated
November 24, 2003** |
|
|
10 |
.87 |
|
American Depositary Shares Purchase Agreement between the
Registrant and the Purchasers, as defined therein, dated
October 18, 2004 (the October 2004 ADS Purchase
Agreement) (incorporated by reference to
Exhibit 10.87 to Registrants Current Report on
Form 8-K filed on October 18, 2004). |
|
|
10 |
.88 |
|
Form of Warrant issued to Purchasers, as defined in the October
2004 ADS Purchase Agreement (incorporated by reference to
Exhibit 10.88 to Registrants Current Report on
Form 8-K filed on October 18, 2004). |
|
|
10 |
.89 |
|
Registration Rights Agreement between the Registrant and the
Purchasers, as defined in the October 2004 ADS Purchase
Agreement, dated October 18, 2004 (incorporated by
reference to Exhibit 10.89 to Registrants Current
Report on Form 8-K filed on October 18, 2004). |
|
|
10 |
.90(8) |
|
Stock Purchase and Sale Agreement dated February 9, 2005
between, among others, Insignia Solutions plc, Kenora Ltd and
the Sellers (as defined therein). |
|
|
10 |
.91(9) |
|
Securities Subscription Agreement by and between Insignia and
Fusion Capital II, LLC dated February 10, 2005. |
|
|
10 |
.92(9) |
|
Registration Rights Agreement by and between Insignia and Fusion
Capital II, LLC dated February 10, 2005. |
|
|
10 |
.93(9) |
|
Warrant by and between Insignia and Fusion Capital II, LLC. |
|
|
10 |
.94(9) |
|
Warrant by and between Insignia and Fusion Capital II, LLC. |
|
|
10 |
.95(9) |
|
Notice of termination of Securities Subscription Agreement by
and between Insignia and Fusion Capital dated October 17,
2002. |
|
|
10 |
.96(10) |
|
Termination and Waiver Agreement dated June 30, 2004
between the Registrant and esmertec A.G. (incorporated by
reference to Exhibit 10.87 from Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30,
2004). |
|
|
14 |
.0(7) |
|
Code of Ethics. |
|
|
21 |
.01 |
|
List of Registrants subsidiaries. |
|
|
23 |
.01 |
|
Consent of Burr, Pilger & Mayer LLP, Independent
Registered Public Accounting Firm |
|
|
23 |
.02 |
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm. |
|
|
24 |
.01 |
|
Power of Attorney (included on signature page). |
|
|
31 |
.1 |
|
Section 302 certification of Chief Executive Officer |
|
|
31 |
.2 |
|
Section 302 certification of Chief Financial Officer |
|
|
32 |
.1 |
|
Section 906 certification of Chief Executive Officer |
|
32 |
.2 |
|
Section 906 certification of Chief Financial Officer |
|
|
** |
Confidential treatment has been granted with respect to certain
portions of this agreement. Such portions were omitted from this
filing and filed separately with the Securities and Exchange
Commission. |
|
|
(1) |
Incorporated by reference to the exhibit of the same number from
Registrants Registration Statement on Form F-1 (File
No. 33-98230) declared effective by the Commission on
November 13, 1995. |
63
|
|
(2) |
Incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year
ended December 31, 1995. |
|
(3) |
Incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year
ended December 31, 1997. |
|
(4) |
Incorporated by reference to the exhibit of the same number from
Registrants Registration Statement on Form S-3 (File
No. 333-112607) filed on February 9, 2004. |
|
(5) |
Incorporated by reference to the exhibit of the same number from
Registrants Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004. |
|
(6) |
Incorporated by reference to the exhibit of the same number from
Registrants Current Report on From 8-K filed on
February 10, 2005 (Items 1.01, 1.02 and 9.01) |
|
(7) |
Incorporated by reference to the exhibit of the same number from
Registrants Annual Report on Form 10-K for the year
ended December 31, 2003. |
|
(8) |
Incorporated by reference to the exhibit of the same number from
Registrants Current Report on Form 8-K filed on
February 10, 2005 (Items 1.01 and 9.01). |
|
(9) |
Incorporated by reference to the exhibit of the same number from
Registrants Current Report on Form 8-K filed on
February 10, 2005 (Items 1.01, 1.02 and 9.01). |
|
|
(10) |
Renumbered from previously filed Exhibit 10.87 in order to
correct duplicate exhibit number. |
64