-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVYlqfMb686AZVCZvd4Gm8SAIYPDVV2NyCZ1Fpzju6lNMbMVJhiCd+40TESliL2d 5DTBpCeOJ3iWNjCsiGTf2w== 0000897101-97-000339.txt : 19970329 0000897101-97-000339.hdr.sgml : 19970329 ACCESSION NUMBER: 0000897101-97-000339 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGNIA SYSTEMS INC/MN CENTRAL INDEX KEY: 0000875355 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 411656308 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19380 FILM NUMBER: 97567972 BUSINESS ADDRESS: STREET 1: 10801 RED CIRCLE DRIVE CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129308200 MAIL ADDRESS: STREET 2: 10801 RED CIRCLE DRIVE CITY: MINNETONKA STATE: MN ZIP: 55343 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1996 Commission File Number 0-19380 INSIGNIA SYSTEMS, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1656308 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 10801 Red Circle Drive Minnetonka, MN 55343 (Address of principal executive offices) Registrant's telephone number, including area code: (612) 930-8200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Number of shares of outstanding Common Stock, $.01 par value, as of March 14, 1997 was 6,860,081. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 14, 1997 was approximately $29,584,099 based upon the last sale price of the registrant's Common Stock on such date. Documents Incorporated By Reference: Portions of registrant's 1996 Annual Report to Shareholders are incorporated by reference in Part II; portions of the registrant's proxy statement for the Annual Meeting of Shareholders scheduled for May 8, 1997 are incorporated by reference into Part III. PART I. Item 1. Business GENERAL Insignia Systems, Inc. (the "Company") markets sign and label production software and equipment primarily to retailers. The Company's first product, the Impulse(R) Retail System, was sold to retail merchants between 1990 and November 1996 to quickly and easily produce high quality signs in their stores. The Company has replaced the Impulse Retail System with the SIGNright(TM) system, which performs essentially the same functions as the Impulse, but currently has a list price of approximately one-half of what was the Impulse system's list price. The Company's business strategy with the Impulse system, and now with the SIGNright system, is to obtain both initial revenue from the sale of electronic sign production equipment and software, and recurring revenue from the sale of the sign cards, label supplies, and accessories used with them. The Company's second product, a PC-based software product tradenamed Stylus(R), is used by retail chains to produce signs, labels, and posters. The Company markets its sign systems, supplies and accessories primarily through an integrated telesales and direct marketing process in the United States and through independent distributors in foreign markets. INDUSTRY AND MARKET BACKGROUND The Company estimates that there are approximately 1.1 million retail stores in the United States. Retailers often use signs in their stores to communicate prices, specials, product features, benefits and other information. In the United States the signage systems used by retailers generally fall into two main categories: (i) manual systems, primarily handwriting, or to a limited extent press-on letters or clip-on lettering signs; and (ii) automated systems, such as large computer systems and personal computers with sign making software and laser printers. Small independent retailers are more likely to use manual systems, and at the other end of the spectrum, large retail chains are more likely to use centralized computer systems. The Company estimates that of the approximately 1.1 million retail stores in the United States, about 100,000 are independent retailers that are too small to be good prospects for the SIGNright system and about 350,000 are too large or are affiliated with a large chain which uses centralized computer equipment. The Company considers its primary U.S. market for the SIGNright system to be the approximately 650,000 medium and large independent retailers and small retail chains that lie between the two extremes. The Company believes there is a significant market among such stores for an easy-to-use, low cost, standalone, on-site system that can quickly produce a wide variety of professional quality signs. The Company considers its primary U.S. market for the Stylus software to be the approximately 350,000 large independent retailers and chain retailers. THE SIGNRIGHT SYSTEM The Impulse Retail System was developed by an independent product design and development firm (the "Developer"). In November 1996, the Company replaced the Impulse Retail System with the SIGNright system. The Company believes that the primary market for the SIGNright system is medium and large independent retailers and small retail chains. The Company estimates that there are approximately 650,000 such retail locations in the United States. Within this market, the Company initially focused on hardware and do-it-yourself stores and food and grocery stores because of their number and propensity to use signs. The Company has continued to expand its marketing efforts and now sells to customers in nineteen different retail market segments. The principal component of the SIGNright system is the sign production unit (the "SIGNright machine"), which is about the size of an office typewriter. It contains a custom keyboard, a small display screen, specially developed hardware and software, and a thermal printhead similar to that of a facsimile machine. The thermal technology eliminates the need for ink or toner and enables a retailer to produce a sign that is dry and ready to display immediately. The SIGNright machine weighs approximately 12 pounds and operates on standard sign sizes (ranging from 2-1/3" x 3-2/3" to 11" x 14" for the U.S. market) which are programmed into the SIGNright machine. To make a sign the retailer selects from a portfolio one of many pre-designed sign formats, enters the format number and the sign contents via the keyboard, and inserts a sign card that bears a specially developed barcode. The SIGNright machine then determines from the barcode whether the size of the sign card and the sign format selected are compatible, determines the approximate thermal energy setting on the printhead and prints the sign. The SIGNright machine has one built-in type font and additional fonts are available on cartridges for $150 each. Additional cartridges, priced at $200 each, provide portfolios of sign formats designed specifically for the various retail market segments. The SIGNright machine has a built-in internal memory and an available external memory cartridge so that frequently used or customized sign formats can be easily stored for later use. The current retail price of the SIGNright system is $995 ($1,395 if an average number of type fonts and sign format cartridges are included). The SIGNright cartridges are copyrighted and each cartridge is marked accordingly. Sign cards are sold by the Company in a variety of sizes, colors and combinations and can be customized to include pre-printed custom artwork (such as the retailer's logo) as required by the customer. Approximately 38% of 1996 revenues came from the sale of sign cards and the Company expects that this percentage will be slightly lower in the future as the Company broadens its product mix. STYLUS SOFTWARE In late 1993, the Company introduced its second major product, tradenamed Stylus, which is a PC-based software product used by retailers to produce signs, labels, and posters. The Company believes that the primary market for the Stylus software is large independent retailers and retail chains. The Company estimates that there are approximately 350,000 such retail locations in the U.S. The Stylus software allows retailers to create signs, labels, and posters by manually entering the information for the sign or by importing information from a computer database. Retailers can import barcode and price information from their point-of-sale system and can add a graphic image of the product from a CD-ROM containing branded clip-art. They can also create a database of selling information such as product features and benefits, nutritional information, or lifestyle-type uses for the product which can be added to create a more informative sign or label. A significant portion of the retail marketplace is made up of chain retailers who require that signs be consistent and controlled from headquarters. Most still create their signs at their headquarters, duplicate them and then deliver them to their stores. The headquarters version of the Company's Stylus software allows chains to create signs and labels centrally to maintain consistency in appearance, and then transmit to store-level printers. The Company believes the Stylus software product has significant benefits for chain retailers. The current retail price of the Stylus software is $2,495 for the single store version and $4,990 for the headquarters version. The Company also sells the sign cards and labels used with the Stylus software in a variety of sizes, colors, and styles. The Company sells these supplies at competitive prices, but is not in a proprietary position. MARKETING AND SALES The Company's marketing strategy is to focus on specific vertical market segments. The first two segments pursued were hardware and do-it-yourself and food and grocery stores, which the Company selected because of the large number of prospects in those segments and their propensity to use signs. The Company has continued to expand its marketing efforts and now sells to customers in nineteen different retail market segments. The Company believes, based on its market research and sales to date, that retailers who buy the SIGNright system do so primarily for three reasons. The first and most important reason is their belief that high-quality signs will increase sales. Second, many retailers want to improve their merchandising image by having consistent, professional looking signs. Third, retailers are interested in simplifying the sign making process as much as possible. While the Company believes that cost is not as important as the other factors just mentioned, the SIGNright system will, in many cases, be less expensive than a retailer's existing method of sign production. The Company believes that retailers who buy the Stylus software do so for the same reasons listed above that retailers buy the SIGNright system. In addition, they want the ability to create shelf labels, import information from an existing database, and add graphic images of the product to their signs and labels. Chain retailers also want the ability to create signs and labels centrally to maintain consistency in appearance and content. The Company markets the SIGNright system and the Stylus software in the United States through an integrated marketing program that begins with targeted direct mailings, advertising, participation in trade shows and developing industry relationships. The marketing program then proceeds to telemarketing by in-house sales personnel or a visit by an independent sales representative, or a visit by a direct sales representative to sell the Stylus software to larger chains. The Company currently has 39 telephone sales representatives who are full-time, 30 of which are on-site employees and nine of which are located at an off-site location. The Company uses a network of personal computers and specialized software to monitor and facilitate the sales process. The Company stresses the ongoing training of its sales representatives and the use of a structured multiple call sales process. Prospects are generated from publicly available industry publications and purchased mailing lists. After mailing promotional literature describing the product, the sales representative contacts the prospect, qualifies them, answers questions and offers to send additional information. On follow-up calls the process of making a sign is explained to the prospect in detail, and an actual sign is sent to the prospect. Further calls sell the potential benefits of the product and seek to close the sale. Where appropriate, the Company offers to send the prospect a SIGNright system for a five day trial or refers the prospect to one of the Company's independent representatives. The Company has also established a separate inside Customer Marketing function dedicated to selling sign cards and other supplies to existing customers. The Company has approximately 50 independent representatives located throughout the continental United States that sell the SIGNright system and related supplies, but do not sell the Stylus software. Most of these representatives have received training at the Company's headquarters and all have purchased a SIGNright system. The independent representatives both develop their own prospects and handle referrals from the Company's inside sales representatives. The Company compensates the independent representatives solely through commissions and manages their efforts through a separate sales management group. The Company has also developed a direct sales force of five sales representatives who attend trade shows and sell the Stylus software to larger chains. The SIGNright system is designed to operate in a variety of different languages with minimal modifications. In foreign markets, the Company uses independent distributors, who are currently covering 20 countries. During 1994, 1995 and 1996 foreign sales accounted for approximately 12%, 16% and 16% of total sales, respectively. The Company expects that sales to foreign distributors will be approximately 20% of total sales in 1997. PATENTS AND TRADEMARKS All intellectual property rights related to the Impulse Retail System belong to the Developer. The Company's patent counsel has filed on behalf of the Developer applications for United States and certain foreign patents covering aspects of the Impulse Retail System, including the use of identifiers such as barcodes on the sign cards for communicating information to a printer. The United States Patent and Trademark Office has issued a patent covering the Impulse Retail System, including the use of sign cards which are encoded for use with the system. However, competitors may still attempt to market similar machines using non-infringing technology. The Developer had granted to the Company an exclusive, worldwide license to market and sell (but not manufacture) the Impulse Retail System. However, the Company is no longer marketing and selling the Impulse Retail System pursuant to this worldwide license agreement. Therefore, the Developer could grant the same marketing rights for the Impulse Retail System to another party. However, the Developer has stated it does not presently intend to grant similar marketing rights to any other party. The Developer has entered into a joint venture agreement with a Japanese firm (the "Supplier") to manufacturer and supply the SIGNright system. The Supplier has entered into an exclusive supplier agreement whereby the Company will have the exclusive distribution rights of the SIGNright system. The manufacturing agreement requires the Company to purchase 24,000 units by October 31, 1998. The Developer could grant the same manufacturing rights for the SIGNright system to another party. However, the Developer has stated it does not presently intend to grant similar manufacturing rights to any other party. The Company is not presently aware of any patents of third parties which the SIGNright system would infringe. There can be no assurance, however, that such conflicting rights do not exist, in which event the Company would be unable to sell its product without obtaining a license from others. There is no assurance the Company would be able to obtain any such license on satisfactory terms, or at all. The barcode which the Company uses on the sign cards for the Impulse and SIGNright systems was also developed by the Developer, which has granted the Company an exclusive worldwide license of its rights to the barcode. The license requires the Company to pay a royalty of 1% of the net sales price received by the Company on each sign card or other supply item that bears the barcode and used by the Impulse Retail Systems. Although a patent has been issued to the Developer which covers the use of the barcode, there is no assurance that the Company will be able to prevent other suppliers of sign cards from copying the barcode used by the Company. However, the Company believes that the number, relatively small size and geographic dispersal of Impulse and SIGNright users, their relationship with the Company, and the Company's retention of its customer list as a trade secret will discourage other sign card suppliers from offering barcoded sign cards for use on the Impulse machine. The Company has obtained trademark registration in the United States of the trademark "Impulse" for use on sign production machines. The Company is not obligated to pay any royalty related to this trademark. The Company is seeking trademark registration in the United States of the trademark "SIGNright" for use on sign production machines. The Company is not obligated to pay any royalty related to this trademark. The Company has obtained trademark registration in the United States of the trademark "Stylus" for use on sign and label software. The developer of the DOS version of the Stylus software has granted to the Company an exclusive worldwide license to market and sell the DOS version of the Stylus software. The Company no longer sells and markets the DOS version of the Stylus software and has terminated this license agreement. The Company has developed the Windows version of the Stylus software which it is now marketing and selling. PRODUCT DEVELOPMENT The Company's product development activities on the SIGNright system were primarily conducted by the Developer on a contract basis. The Company continues to introduce various additional complementary products such as new fonts and format cartridges, new sign card formats, new colors and new types of sign cards. The Stylus software product was initially developed on a contract basis beginning in 1992 and continuing in 1993, 1994, 1995 and 1996. Beginning in 1993, the Company hired in-house employees to develop and modify portions of the Stylus software product. The Company plans to continue to develop enhancements to the Stylus software product using in-house employees and external software developers. Product development costs of $471,346 for 1993; $473,477 for 1994; $476,549 for 1995; and $448,008 for 1996 were primarily related to development of the Stylus software product. SUPPLIERS The Company has no plans to develop an in-house manufacturing capability for the SIGNright machine and is obligated to purchase the SIGNright machine from the Supplier. The Company has entered into a supply agreement with the Supplier and agreed with the Supplier to make its best efforts to purchase 24,000 units from the Supplier by December 31, 1998. Prices under the supply agreement are fixed in Japanese yen. The Company owns certain tooling for the SIGNright machine which is used by the Supplier. The Company believes there are other manufacturers capable of manufacturing and providing the SIGNright machine on comparable terms. However, the time required to locate and qualify another supplier could cause a delay in the manufacturing process that might have a serious adverse effect on the Company. The thermal paper used by the Company in its sign cards is purchased exclusively from one supplier. While the Company believes that an alternative supplier would be available if necessary, any disruption in the relationship with or deliveries by the current supplier could have a serious adverse effect on the Company. COMPETITION The competition for the SIGNright system falls into two main categories: (i) manual systems, primarily handwriting, or to a limited extent press-on letters or clip-on lettering signs; and (ii) automated systems, such as large computer system and personal computers with sign making software and laser printers. Most of the prospects in the Company's target market for the SIGNright system have generally been making signs by hand. The Company believes that most of its prospects do not use personal computers for sign making because of the time and training required and the inability of most personal computer printers to handle the weight and thickness of normal sign card stock. However, because use of the Company's product involves a change in the customer's current sign making methods, there is no assurance that the SIGNright system will achieve significant market acceptance. The Company's patent covers the SIGNright system and the use of sign card encoded with a complementary barcode. The Company could face competition from suppliers of sign cards who duplicate the barcode used by the Company. However, the Company intends to vigorously defend its patent rights. Management believes that the number, relatively small size, and geographic dispersal of its customers, their relationship with the Company, and the Company's retention of its customer list as a trade secret will discourage such competition. However, there is no assurance that such competition will not develop. The Stylus Sign and Label Works family of software products has three major competitors in its' market: Access, Inc. (Access), Electronic Label Technology, Inc. (ELT), and Retail Technologies, Inc. (RTI). Access offers a product called dSIGN, which by its very nature of requiring individual customization is focused more toward large retail chains. ELT sells numerous version of LabelMaster. RTI markets Design-R-Labels. The Company believes that its complete line of Stylus products compares favorably on features, benefits, cost, performance, and ease of use and implementation to that of its main competitors. The Company has several products and can provide solutions to operate in the following environments: UNIX/AIX, AS/400, MD-DOS, Windows 3.1/95/NT, OBDC, or with stand -alone printers. The Company's main strengths, in relation to its competition are: a large telemarketing organization, merchandising, large format printing, high speed printing, image handling, ease of use, and rapid implementation for their products, services and offerings. Unlike the SIGNright system, the Stylus product does not offer the Company the benefit of proprietary sign card stock. While this leaves customers free to buy stock from alternate suppliers, the Company believes that it will capture a significant portion of sign card and label sales due to the wide array of pre-printed and perforated sign and label stock offered by the Company at competitive prices. EMPLOYEES As of March 14, 1997, the Company had 129 full-time employees. The full-time employees included 40 in telemarketing, 35 in other sales and marketing positions, 39 in operations and customer service, 12 in administration and accounting functions and 3 in senior management positions. None of the Company's employees are represented by unions. Item 2. Properties The Company is located in approximately 51,000 square feet of office and warehouse space in suburban Minneapolis, Minnesota, which has been leased until December 1997. This facility is adequate and suitable for the Company's current needs and additional space is expected to be available as needed at competitive rates. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1996. EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of the Company's executive officers are as follows:
Name Age Position G. L. Hoffman 47 Chairman, President, Chief Executive Officer and Secretary Paul A. Moquist 55 Executive Vice President, Sales and Marketing John R. Whisnant 51 Vice President, Finance and Chief Financial Officer
G. L. Hoffman, a co-founder of the Company, has been the Chairman, President, Chief Executive Officer and Secretary of the Company since it was incorporated in January 1990. Prior to that time he was a co-founder of Varitronic Systems, Inc., which develops, manufactures and markets business graphic products. Mr. Hoffman was employed as Chairman, Executive Vice President and Secretary of Varitronics from 1983 until January 1990. Mr. Hoffman also had primary responsibility for developing Varitronics' international marketing and private label distribution systems. Paul A. Moquist has been Executive Vice President, Sales and Marketing of the Company since January 1991. Mr. Moquist joined the Company as Director of Sales in March 1990. From September 1989 to March 1990 he served as Vice President of Sales for Raster Devices Direct, Inc., a subsidiary of Laser Master Technologies, Inc. which distributes a series of integrated publishing systems. From November 1987 to September 1989 Mr. Moquist was a co-owner of Print Galley, Inc., a printing business located in Hopkins, Minnesota. John R. Whisnant joined the Company as Vice President of Finance and Chief Financial Officer of the Company in October 1995. From June 1994 to September 1995 he was self employed as a franchise consultant. From June 1992 to June 1994 he served as President of AmericInn, Inc. a motel franchising company. PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information required by Item 5 is incorporated herein by reference to the section labeled "Stockholder Information" which appears in the registrant's 1996 Annual Report to Shareholders. Item 6. Selected Financial Data The information required by Item 6 is incorporated herein by reference to the section entitled "Financial Highlights" which appears in the registrant's 1996 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by Item 7 is incorporated herein by reference to the section entitled "Financial Review" which appears in the registrant's 1996 Annual Report to Shareholders. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 FORWARD LOOKING STATEMENTS IN THIS 10-K REPORT AND IN THE ANNUAL REPORT TO SHAREHOLDERS WHICH IS INCORPORATED HEREIN BY REFERENCE REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE IDENTIFIED BELOW, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD LOOKING STATEMENTS. READERS ARE REQUESTED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENT, WHICH SPEAK ONLY AS OF THEIR DATES. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. THE FOLLOWING FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED: * CHANGES IN THE EXCHANGE RATE FOR JAPANESE YEN * COST OF THE RAW MATERIAL * RESULTS OF THE INSIGNIA POPS PROGRAM * BUSINESS CONDITIONS OF THE GENERAL ECONOMY * INSTALLATION OF SOFTWARE AND AVAILABILITY OF HARDWARE * RELIANCE ON LICENSED PROPRIETARY RIGHTS * SINGLE SOURCE SUPPLIER OF SIGNright MACHINES * SIGN CARD REVENUE * COMPETITION * DEPENDENCE ON KEY EMPLOYEES Item 8. Financial Statements and Supplementary Data The information required by Item 8 is incorporated herein by reference to the Financial Statements, Notes thereto and Auditors' Report which appear in the registrant's 1996 Annual Report to Shareholders. See Item 14(a)(1) for an index of the related financial statements and schedules. Item 9. Disagreements with Accountants on Accounting and Financial Disclosures None. PART III. Item 10. Directors and Executive Officers of the Registrant The information required by Item 10 concerning the executive officers of the Company is submitted in a separate section of Part I of this Report. The information required by Item 10 concerning the directors of the Company is incorporated herein by reference to the Company's proxy statement for its 1997 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 11. Executive Compensation The information required by Item 11 is incorporated herein by reference to the Company's proxy statement for its 1997 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Item 12 is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. Item 13. Certain Relationships and Related Transactions The information required by Item 13 is incorporated by reference to the Company's proxy statement for its 1997 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed. PART IV. Item 14. Exhibits, Financial Statements, Schedule and Reports on Form 8-K (a) Documents filed as part of this report. (1) Financial Statements Pages Report of Independent Auditors............................................................................................* Balance Sheets as of December 31, 1996 and 1995...........................................................................* Statements of Operations for the years ended December 31, 1996, 1995, and 1994............................................* Statement of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995, and 1994.......................................................................................................* Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994............................................* Notes to Financial Statements.............................................................................................*
* Incorporated by reference to the registrant's Annual Report to Shareholders for the year ended December 31, 1996. See Exhibit 13. (2) Financial Statement Schedule
Pages in this Form 10-K Schedule II: Valuation and Qualifying Accounts..........................................................................13
All other schedules are omitted because they are not required or are not applicable or the information is otherwise shown in the consolidated financial statements or notes thereto. (3) Exhibits. See "Exhibits Index" on page following signatures. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during 1996. SCHEDULE II. Valuation and Qualifying Accounts
Col. A Col. B Col. C Col. D Col. E - -------------------------------------- ------------- ------------------------------- --------------- ----------- Additions ------------------------------- (1) (2) Charged Balance at Charged to to Other Balance at Beginning Costs and Accounts Deductions End of Description of Period Expenses Describe Describe Period - -------------------------------------- ------------- -------------- ------------- -------------- ------------ Year ended December 31, 1996 Allowance for doubtful accounts $ 88,587 $ 70,000 $ -- $ 23,112 (1) $135,475 Provision for normal returns and rebates 99,166 5,069 (2) 49,750 (3) 54,485 Provision for obsolete inventory 108,000 47,500 35,338 (4) 120,162 Year ended December 31, 1995 Allowance for doubtful accounts 68,418 80,500 -- 60,330 (1) 88,587 Provision for normal returns and rebates 118,681 84,431 (2) 103,946 (3) 99,166 Provision for obsolete inventory 98,394 79,616 70,010 (4) 108,000 Year ended December 31, 1994 Allowance for doubtful accounts 81,107 40,000 -- 52,689 (1) 68,418 Provision for normal returns and rebates 162,509 53,425 (2) 97,253 (3) 118,681 Provision for obsolete inventory 113,689 10,000 25,295 (4) 98,394
- --------------------------------------------- (1) Uncollectable accounts written off, net of recoveries. (2) Charged against sales. (3) Rebates paid to customer buying groups. (4) Inventory scrapped and disposed of. SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: /s/ G. L. Hoffman G. L. Hoffman Chief Executive Officer Dated: March 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. Power of Attorney Each person whose signature appears below constitutes and appoints John R. Whisnant his true and lawful attorney-in-fact and agent, acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person hereby ratifying and confirming all said attorney-in-fact and agent, acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Title Date /s/ G. L. Hoffman Chairman, President, Chief Executive Officer and March 26, 1997 G. L. Hoffman Secretary (principal executive officer) /s/ John R. Whisnant Vice President of Finance and Chief Financial March 26, 1997 John R. Whisnant Officer (principal financial officer) /s/ Erwin A. Kelen Director March 26, 1997 Erwin A. Kelen /s/ Gordon F. Stofer Director March 26, 1997 Gordon F. Stofer /s/ Frank D. Trestman Director March 26, 1997 Frank D. Trestman
EXHIBIT INDEX TO FORM 10-K For the year ended December 31, 1996 Commission File No: 0-19380 Exhibit Page Number or Incorporation Number Description By Reference To - ------------------- ------------------------------------------- -------------------------------------------------------- 3.1 Articles of Incorporation of Registrant, Exhibit 3.1 of the Registrant's Registration Statement as amended to date of Form S-18, Reg. No. 33-40765C 3.2 Bylaws, as amended to date Exhibit 3.2 of the Registrant's Registration Statement of Form S-18, Reg. No. 33-40765C 4.1 Specimen Common Stock Certificate of Exhibit 4.1 of the Registrant's Registration Statement Registrant of Form S-18, Reg. No. 33-40765C 10.1 License Agreement between Thomas and Exhibit 10.1 of the Registrant's Registration Lawrence McGourty and the Company dated Statement of Form S-18, Reg. No. 33-40765C January 23, 1990, as amended 10.2 Barcode License and Support Agreement Exhibit 10.2 of the Registrant's Registration between Thomas and Lawrence McGourty and Statement of Form S-18, Reg. No. 33-40765C the Company dated January 23, 1990 10.3 The Company's 1990 Stock Plan, as amended Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 10.4 Sign Printer Sales Agreement between the Exhibit 10.4 of the Registrant's Registration Company and Creative Machineries Statement of Form S-18, Reg. No. 33-40765C International, Inc. dated January 29, 1990, as amended 10.6 Lease Agreement between R. L. Johnson Exhibit 10.6 of the Registrant's Annual Report on Form Investment Company, Inc. and the Company, 10-K for the year ended dated October 22, 1992 December 31, 1992 10.7 Common Stock Warrant dated September 28, Exhibit 10.7 of the Registrant's Registration 1990 issued to Erwin Kelen Statement of Form S-18, Reg. No. 33-40765C 10.8 Non competition and Consulting Agreement Exhibit 10.12 of the Registrant's Registration between Varitronics and G. L. Hoffman Statement of Form S-18, Reg. No. 33-40765C dated January 12, 1990 10.9 Employee Stock Purchase Plan Exhibit 10.14 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 10.10 Loan and Security Agreement between FBS Exhibit 10.15 of the Registrant's Annual Report on Business Finance Corporation and the Form 10-K for the year ended December 31, 1995 Company dated July 31, 1995 10.11 Loan Agreement between Riverside Bank and Exhibit 10.16 of the Registrant's Annual Report on the Company dated October 9, 1995 Form 10-K for the year ended December 31, 1995 11 Computation of Net Loss 17 per Share 13 Registrant's Annual Report to 18 Shareholders for 1996 23 Consent of Ernst & Young LLP 40 25 Power of Attorney (See signature page of 14 this Form 10-K) 27 Financial Data Schedule 41
EX-11 2 EXHIBIT 11 INSIGNIA SYSTEMS, INC. COMPUTATION OF NET LOSS PER SHARE
Year Ended December 31 -------------------------------------------------------------- 1996 1995 1994 ------------------ ------------------ ----------------- Primary: Average shares outstanding 5,403,341 5,359,918 5,202,646 Net effect of dilutive stock options--based on treasury stock method using average market price -- -- -- ================== ================== ================== TOTAL 5,403,741 5,359,918 5,202,646 ================== ================== ================== Net Loss $ (999,226) $(1,451,402) $ (908,677) ================== ================== ================== Net Loss Per Share $(.18) $(.27) $ (.17) ================== ================== ================== Fully Diluted: Average shares outstanding 5,304,741 5,359,918 5,202,646 Net effect of dilutive stock options--based on treasury stock method using ending market price, if higher than average market price -- -- -- ------------------ ------------------ ------------------ TOTAL 5,403,741 5,359,918 5,202,646 ================== ================== ================== Net Loss $ (999,226) $(1,451,402) $ (908,677) ================== ================== ================== Net Loss Per Share $(.18) $(.27) $ (.17) ================== ================== ==================
EX-13 3 ANNUAL REPORT '96 BUSINESS DESCRIPTION Insignia Systems, Inc. (the "Company") is the leading marketer of printing equipment, software and related print media products used by retailers to produce their promotional and point-of-sale display materials in-store. Today, Insignia has over 25,000 customers worldwide using SIGNright(TM), the Impulse(R) Retail System or Stylus(R) Sign & Label Works software to easily create and print professional point-of-sale signs, labels, posters and flyers. The Company's mission is to help retailers compete more effectively by providing easy-to-use systems and high quality print media supplies. The Company obtains initial revenue from the sale of sign production equipment and software, and recurring revenue from the sale of sign and label supplies and accessories used with them. The Company markets its sign systems, accessories and supplies in the United States principally through an innovative telesales and direct marketing process. The in-house telesales professionals are a developing strategic asset and are supported by an integrated direct marketing program which includes direct mail, advertising and attendance at numerous trade shows. The Company uses independent distributors in the United Kingdom, Canada, Spain, Australia and over twenty other foreign markets. TABLE OF CONTENTS Financial Highlights............................................. 2 Letter to Shareholders........................................... 3 Financial Review................................................. 4 Balance Sheets................................................... 8 Statements of Operations......................................... 9 Statement of Changes in Stockholders' Equity.................... 10 Statements of Cash Flows........................................ 11 Notes to Financial Statements................................... 12 Report of Independent Auditors.................................. 19 Stockholder Information......................................... 20
Financial Highlights (In thousands, except per share amounts) For the Years Ended December 31 1996 1995 1994 1993 1992 Net sales $ 14,667 $ 15,547 $ 16,304 $ 14,249 $ 11,200 Operating income (loss) (999) (1,470) (947) 232 356 Net income (loss) (999) (1,451) (909) 366 517 Net income (loss) per share $ (.18) $ (.27) $ (.17) $ .07 $ .10 Weighted average shares and share equivalents outstanding 5,404 5,360 5,203 5,254 5,321 Working capital $ 3,512 $ 4,351 $ 4,952 $ 6,094 $ 6,140 Total assets 6,426 6,832 8,107 8,094 7,997 Long-term debt and lease obligation 289 383 - 13 27 Total stockholders' equity 4,174 5,118 6,413 7,156 6,769
TO OUR SHAREHOLDERS In fiscal 1996, net sales were slightly lower than 1995 and we had a net loss of approximately $1,000,000 or $.18 per share. On the surface our net sales history over the last three years would indicate a very "flat" business. However, a closer look would indicate that we have continued to build value within each one of the Company's existing products. Part of the flat sales resulted from the $2,000+ price point on our Impulse(R) Retail System. Unfortunately, the Company could not lower its prices on the Impulse Retail System because equipment costs were increasing as the yen strengthened against the dollar. In 1995, the technology to develop a replacement sign making machine at lower costs became available to the Company, and by late 1996, the Company had developed and launched SIGNright(TM), with packages starting as low as $995. The SIGNright system totally replaced the Impulse Retail System. As is frequently the case, when a new product is introduced which totally replaces the old product, there is a short term falloff in sales volume until the transition is completed. We feel that this transition has been completed and expect the placements of SIGNright systems to increase during the remaining quarters. During all of this time, the Company continues to sell more sign making machines. Each machine generates about $300 in sales of Insignia's proprietary and patented sign cards. We expect the revenue from the sale of sign cards to increase each year. The Company expects to sell many more SIGNright systems annually which will continue to drive additional sales of the proprietary sign card. With a projected 30,000 machines in the field by 1998, the Company should have annual revenues of $7-$9 million from its "razor blade" business. At 30,000 machines, Insignia would still own less than 5% of the domestic market. The Company's Stylus(R) Sign & Label Works net sales tripled between 1995 and 1996 and the national roll-out of the Stylus product has been very successful. Stylus installations at chain retail customers include Toys `R' Us(R), Computer City(R), Sportmart(R), Dillard's(R), Kroger(R) and many others. In addition, the Company is beginning to obtain sign and label business from many of the Stylus customers. As a result of the development of our Stylus software, the Company believes it is in the best position to apply this technology and its merchandising expertise to the increased need on behalf of major consumer product manufacturers to increase their in-store marketing efforts. By leveraging the Company's knowledge and experience with the power of its software, the Company has created a new opportunity for retailers and manufacturers, called Insignia POPS. Insignia POPS `software services will be offered to brand manufacturers who can use the Company's signage and database systems to deliver their own merchandising messages directly to the retailer's sign. This program will be funded out of the manufacturers' direct-to-consumer promotional budget. The Insignia POPS program has successfully completed an in-market test with Kroger, General Mills(R), Oscar Mayer(R) and ConAgra(R). The test was arranged and analyzed by Ernst & Young LLP, and showed positive results for both brandedmanufacturers and retailers. Based upon these tests, the Company initiated the development of the Insignia POPS program. The Company expects the Insignia POPS program to become a preferred signage choice by both branded product manufacturers and retailers and to have national presence as quickly as possible, perhaps as early as the first quarter of 1998. We are confident that the "value building" within the Company that we have accomplished over the last few years will result in a very successful 1997. Thank you for your support. /s/ G.L. Hoffman G.L. Hoffman Chairman, President and Chief Executive Officer FINANCIAL REVIEW The Company was incorporated in January 1990 and from September 1990 until November 1996 sold its Impulse(R) Retail System. In November 1996, the Company replaced the Impulse Retail System with the SIGNright(TM) system, which performs essentially the same functions. The SIGNright system is being sold primarily by in-house telemarketers and independent sales representatives in the United States and through foreign distributors. During 1993 the Company began selling Stylus(R), a PC-based sign and label software system. The following table sets forth, for the periods indicated, certain items in the Company's statements of operations as a percentage of net sales. Year Ended December 31 1996 1995 1994 Net Sales 100.0% 100.0% 100.0% Cost of Sales 48.2 47.2 42.1 Gross Profit 51.8 52.8 57.9 Operating Expenses: Sales and Marketing 42.5 45.1 47.1 General and Administrative 3.3 3.1 2.9 Product Development 12.8 14.0 13.7 Total Operating Expenses 58.6 62.2 63.7 Operating Loss (6.8) (9.4) (5.8) Other Income - 0.1 0.3 Net Loss (6.8)% (9.3)% (5.5)% RESULTS OF OPERATIONS: NET SALES. Net sales for the year ended December 31, 1996 decreased 6% to $14,667,000 compared to sales of $15,547,000 in 1995. Net sales for 1995 decreased 5% compared to sales of $16,304,000 in 1994. The decrease in sales in 1996 resulted primarily from a flat demand for the Impulse due to winding down of the sales of the Impulse machine and a steady, but slowly increasing demand for SIGNright during the introductory period. The decrease in sales in 1995 resulted from a reduction in the Company's sales and marketing personnel along with a flat demand for the Impulse. GROSS PROFIT. The Company's gross profit decreased 7% in 1996 to $7,604,000 as compared to 1995. The gross profit decreased 13% in 1995 as compared to 1994. Gross profit as a percentage of net sales decreased to 51.8% for 1996 compared to 52.8% for 1995 and 57.9% in 1994. The decrease in 1995 and 1996 was due to a higher proportion of sales of lower margin products and the overall decrease in net sales. The Company's foreign sales were 16% in 1995 and 1996 compared to 12% in 1994. The Company expects that sales to foreign distributors will be approximately 20% in 1997. FINANCIAL REVIEW OPERATING EXPENSES. Operating expenses decreased 11% in 1996 and 7% in 1995. The Company initiated a downsizing and expense reduction effort during the third quarter of 1995 which continued to reduce the overall operating expense levels during 1996. Sales expenses decreased 8% in 1995 and 8% in 1996, which reflected lower commissions due to decreased sales. Marketing expenses decreased 10% in 1995 and 19% in 1996, due to the expense reduction effort. General and administrative expenses decreased 2% in 1995 and 14% in 1996. The decrease in general and administrative expenses was primarily due to the downsizing and expense reduction initiated in the third quarter of 1995. Product development expenses increased 5% in 1996 and 1% in 1995 as the Company continued to reduce its development activities. The Company expects that its operating expenses will remain flat as the Company continues to closely monitor its operating expenses. Operating expenses as a percentage of net sales were 59% in 1996 compared to 62% in 1995 and 64% in 1994. The decrease as a percentage of net sales in 1996 was due primarily to the continued expense reduction effort. The Company expects its operating expenses as a percentage of net sales to further decrease as sales increase faster than expenses and the Company is able to leverage its fixed expenses. The Company expects its net sales to increase at a faster rate than operating expenses as the Company's telemarketing personnel continue to sell machines to new customers and the demand for sign card from current customers continues to increase as more machines are sold. NET LOSS. The Company had a net loss of $999,000 in 1996 compared to a net loss of $1,451,000 in 1995 and a net loss of $909,000 in 1994. The loss in 1996 was due to a decrease in margins due to a high proportion of sales of lower margin products and decreased net sales. LIQUIDITY AND CAPITAL RESOURCES: The Company has financed its operations with proceeds from public and private equity placements and funds from operations. At December 31, 1996, working capital was $3,512,000 compared to $4,351,000 at December 31, 1995. Cash, cash equivalents and marketable securities decreased $489,000 to $598,000 at December 31, 1996. Net cash decreased $783,000 due to operating activities, primarily due to the net loss, the decrease in accounts payable and the increase in accounts receivable. Accounts payable decreased $102,000 during 1996 primarily due to the difference in the purchasing schedule for the SIGNright systems. Accounts receivable increased $479,000 during 1996 due to some very large Stylus sales during the later part of 1996. The Company expects accounts receivable to remain relatively flat during 1997. The Company expects inventory levels to grow as sales volume increases. Net cash of $12,000 was provided by investing activities. The net cash increase was due to the maturity of marketable securities in the amount of $1,469,000 offset by the purchase of marketable securities in the amount of $1,114,000 and the purchase of property and equipment of $342,000. Net cash of $635,000 was provided by financial activities, primarily due to proceeds from the line of credit of $673,000 and proceeds from the issuance of common stock of $47,000 offset by principal payments on long-term debt of $84,000. The Company anticipates that its working capital needs will continue to increase due to the expected growth in the business. In January 1997, the Company received an additional $2,900,000 of proceeds from the sale of common stock. The Company believes that, with the proceeds from this additional equity placement, it will have sufficient capital resources to fund its current business operations and anticipated growth for the foreseeable future. FORWARD LOOKING STATEMENTS: Certain statements contained herein and in the following section and like statements elsewhere in this report are forward looking statements. Actual results could differ materially from those anticipated as a result of various factors. Set forth below are the principal factors and risks considered most likely to cause actual results to differ materially from management's expectations. Significant risk factors, while not all inclusive, are: 1. IMPACT OF COSTS OF CONVERTING U.S. DOLLARS TO JAPANESE YEN. The SIGNright is purchased by the Company from a Japanese manufacturer and the purchase price is stated in yen. Currency exchange rates could therefore affect the cost of the SIGNright system to the Company. 2. COST OF THE RAW MATERIAL. The Company's printing gross margin percentage is a sensitive function of the cost of the raw paper materials. 3. RESULTS OF INSIGNIA POPS PROGRAM. It will be necessary to achieve results from the Insignia POPS program that are comparable to the initial Insingia POPS test program in order to achieve revenues for the Insingia POPS program at the rate anticipated by the Company. 4. BUSINESS CONDITIONS OF THE GENERAL ECONOMY. 5. INSTALLATION OF SOFTWARE AND AVAILABILITY OF HARDWARE. The Company's ability to contract with the planned number of retailers will depend on a number of factors, including timely installation of software, locating retailers with adequate hardware, and conducting the necessary training. 6. RELIANCE ON LICENSED PROPRIETARY RIGHTS. All patents on or other proprietary rights to the Impulse and SIGNright systems, and the associated bar-codes on the sign cards, are held by a third-party developer (the "Developer"), which is independent of the Company. The Company has a non-exclusive license to market and sell (but not manufacture) the Impulse and SIGNright systems. A patent covering certain aspects of the Impulse system has been obtained in the Developer's name by the Company and a patent application covering certain aspects of the SIGNright product has been applied for in the Developer's name by the Company. There is no assurance that any such patents would offer the Company a meaningful competitive advantage, since competitors might employ non-infringing technology, and such patents may be subject to challenge by third parties. Any disruption in the Company's relationship with the Developer or termination of the Company's license with the Developer could have a serious adverse effect on the Company. 7. SINGLE SOURCE SUPPLIER OF SIGNright MACHINES. The Company does not have, and has no plans to develop, any in-house manufacturing capability. The Company obtains the SIGNright machine from a Japanese supplier (the "Supplier") which was designated by the Developer. Any significant disruption in the Company's relationship with the Supplier, or failure by the Supplier to make timely deliveries of quality product, could have a serious adverse effect on the Company. 8. SIGN CARD REVENUE. The Company derives a significant portion of its revenue from the sale of the bar-coded sign cards required by the Impulse and SIGNright systems. If a substantial number of customers discontinue the use of the sign card there could be a serious adverse effect on the Company's revenue. 9. COMPETITION. The Company's SIGNright product faces competition from numerous sources, including handmade signs, large computer systems using customized software, and personal computers with sign-making software and laser printers. For the Stylus product, the Company's two major competitors are dSIGN, Inc. (a privately-held company based in Seattle, WA) and Electronic Label Technology, Inc. (a privately-held company based in Oklahoma City, OK). Insignia POPS will be competing for the marketing expenditures of branded product manufacturers, who use various forms of point-of-purchase marketing methods, such as displays, coupons, in-store samples, etc. There is no assurance that Insignia POPS will compete successfully with these traditional marketing methods. 10. DEPENDENCE ON KEY EMPLOYEES. The Company is highly dependent upon the services of its present officers, and the loss of any of them could have a material adverse effect on the Company. None of the Company's officers are bound by employment or non-competition agreements with the Company. The success of the Company will also depend on its ability to attract and retain capable sales and marketing personnel.
BALANCE SHEETS As of December 31 1996 1995 ASSETS Current Assets: Cash and cash equivalents $ 448,668 $ 583,613 Marketable securities 149,427 503,906 Accounts receivable - net of $135,000 allowance in 1996 and $89,000 in 1995 2,644,851 2,235,374 Inventories 2,015,963 2,027,566 Prepaid expenses 215,562 331,618 Total Current Assets 5,474,471 5,682,077 PROPERTY AND EQUIPMENT: Production tooling, machinery and equipment 1,862,311 2,107,719 Office furniture and fixtures 364,119 363,075 Computer equipment 780,675 710,573 Leasehold improvements 312,420 312,420 3,319,525 3,493,787 Accumulated depreciation and amortization (2,368,221) (2,344,271) Total Property and Equipment 951,304 1,149,516 TOTAL ASSETS $ 6,425,775 $ 6,831,593 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 682,161 $ 784,051 Accrued compensation and benefits 229,019 222,702 Accrued expenses 93,534 114,562 Other 191,077 125,373 Line of credit 673,281 - Current portion of long-term debt 93,391 84,497 Total Current Liabilities 1,962,463 1,331,185 LONG-TERM DEBT 289,326 382,717 COMMITMENTS (SEE NOTES 4 & 8) STOCKHOLDERS' EQUITY: Common stock, par value $.01: Authorized shares - 20,000,000 Issued and outstanding shares - 5,403,858 in 1996 and 5,361,006 in 1995 54,039 53,610 Additional paid-in capital 10,102,397 10,056,117 Unearned compensation (7,313) (16,125) Accumulated deficit (5,975,137) (4,975,911) Total Stockholders' Equity 4,173,986 5,117,691 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,425,775 $ 6,831,593
SEE ACCOMPANYING NOTES
STATEMENTS OF OPERATIONS Year Ended December 31 1996 1995 1994 NET SALES $ 14,667,382 $ 15,546,723 $ 16,303,543 Cost of Sales 7,063,836 7,339,659 6,863,681 Gross Profit 7,603,546 8,207,064 9,439,862 OPERATING EXPENSES: Sales 4,381,247 4,738,794 5,146,208 Marketing 1,845,730 2,280,458 2,537,884 Product development 498,160 476,549 473,477 General and administrative 1,877,411 2,181,165 2,229,395 Total Operating Expenses 8,602,548 9,676,966 10,386,964 Operating Loss (999,002) (1,469,902) (947,102) OTHER INCOME (EXPENSE): Interest income 46,751 62,551 104,597 Interest expense (64,911) (23,828) (2,799) Other income (expense) 17,936 (20,223) (63,373) NET LOSS $ (999,226) $ (1,451,402) $ (908,677) Net loss per share $ (.18) $ (.27) $ (.17) Weighted average shares and share equivalents outstanding 5,403,741 5,359,918 5,202,646
SEE ACCOMPANYING NOTES 8
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Additional Common Stock Paid-In Unearned Accumulated Shares Amount Capital Compensation Deficit Total BALANCE AT JAN. 1, 1994 5,058,510 $ 50,585 $ 9,777,142 $ (56,250) $(2,615,832) $ 7,155,645 Exercise of stock options 108,647 1,086 50,914 - - 52,000 Employee stock purchase plan 49,279 493 93,630 - - 94,123 Amortization of stock grant - - - 20,062 - 20,062 Net loss - - - - (908,677) (908,677) BALANCE AT DEC. 31, 1994 5,216,436 52,164 9,921,686 (36,188) (3,524,509) 6,413,153 Exercise of stock options 54,077 541 29,459 - - 30,000 Employee stock purchase plan 90,493 905 104,972 - - 105,877 Amortization of stock grant - - - 20,063 - 20,063 Net loss - - - - (1,451,402) (1,451,402) BALANCE AT DEC. 31, 1995 5,361,006 53,610 10,056,117 (16,125) (4,975,911) 5,117,691 Employee stock purchase plan 42,852 429 46,280 - - 46,709 Amortization of stock grant - - - 8,812 - 8,812 Net loss - - - - (999,226) (999,226) BALANCE AT DEC. 31, 1996 5,403,858 $ 54,039 $10,102,397 $ (7,313) $(5,975,137) $ 4,173,986
SEE ACCOMPANYING NOTES
STATEMENTS OF CASH FLOWS Year Ended December 31 1996 1995 1994 OPERATING ACTIVITIES: Net loss $ (999,226) $(1,451,402) $ (908,677) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 540,192 647,667 584,720 Provision for bad debt expense 70,000 80,500 40,000 Provision for obsolete inventory 47,500 79,616 10,000 Amortization of unearned compensation 8,812 20,063 20,062 Changes in operating assets and liabilities: Accounts receivable (479,477) 5,784 (345,409) Inventories (35,897) (181,208) (532,298) Prepaid expenses 116,056 102,014 (82,938) Accounts payable (101,890) (347,182) 718,070 Accrued compensation and benefits 6,317 (79,358) 106,051 Accrued expenses and other 44,676 (21,001) (41,044) Net Cash Used in Operating Activities (782,937) (1,144,507) (431,463) INVESTING ACTIVITIES: Purchases of property and equipment (341,980) (335,595) (971,756) Purchase of marketable securities (1,114,271) (510,154) (72,266) Maturity/sale of marketable securities 1,468,750 1,036,923 1,563,118 Net Cash Provided By Investing Activities 12,499 191,174 519,096 FINANCING ACTIVITIES: Net change in line of credit 673,281 - - Proceeds from issuance of long-term debt - 500,000 - Proceeds from issuance of Common Stock 46,709 135,877 146,123 Payments on capital lease obligations - - (26,815) Principal payments on long-term debt (84,497) (32,786) - Net Cash Provided by Financing Activities 635,493 603,091 119,308 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (134,945) (350,242) 206,941 Cash and Cash Equivalents at Beginning of Year 583,613 933,855 726,914 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 448,668 $ 583,613 $ 933,855 SEE ACCOMPANYING NOTES
NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") develops and markets signage and related products to retail markets. Its current product, the SIGNright(TM) system, is an easy-to-use, affordable sign making system. The system produces high quality signs on sign cards provided by the Company. The product is being sold primarily by telephone sales representatives and independent sales representatives. The Company also sells through foreign distributors. The Company's second major product, tradenamed Stylus(R), is a PC-based sign and label software system. It is sold through direct sales as well as by telephone sales representatives. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. CASH EQUIVALENTS. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. REVENUE RECOGNITION. The Company recognizes revenue at the time the products are shipped to customers. MARKETABLE SECURITIES. Marketable securities are composed of debt securities and are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in other income. INVENTORIES. Inventories are primarily comprised of Impulse(R) machines, SIGNright machines, sign cards, and accessories. Inventory is valued at lower of cost or market using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost. Depreciation and amortization is provided on a straight line basis over three to five years. Leasehold improvements are amortized over the shorter of the term of the lease or life of the asset. PRODUCTION TOOLING COSTS. Expenditures relating to the purchase and installation of production tooling are capitalized and amortized on a purchased units basis. INCOME TAXES. Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities. STOCK-BASED COMPENSATION. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," but applies Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations in accounting for its plans. Under APB25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. IMPAIRMENT OF LONG-LIVED ASSETS. The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. USE OF ESTIMATES. The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. NET LOSS PER SHARE. Net loss per share is computed by dividing the net loss by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during the period. ADVERTISING COSTS. Advertising costs are charged to operations as incurred. Advertising expenses were approximately $768,786, $989,520 and $864,128 in 1996, 1995 and 1994, respectively. RESEARCH AND DEVELOPMENT. Research and development expenditures are charges to operations as incurred. Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. All research and development costs have been expensed. 3. MARKETABLE SECURITIES. Marketable securities consist of U.S. Treasury Debt Securities which mature in October, 1997. Approximately $140,000 of these notes are pledged as collateral for the loan agreement (see Note 7). Investments are classified as available-for-sale and are stated at amortized cost which approximates fair market value. During 1994, realized losses on sales of investments totalled $84,000. 4. COMMITMENTS. PRODUCT DESIGN AGREEMENTS. The Company entered into an exclusive agreement with the developer of the Impulse machine whereby in exchange for all rights to market the product, the Company would pay royalties of $21 per machine purchased by the Company and was to make all reasonable efforts to purchase 20,000 units by December 31, 1994. Since the Company did not purchase the required number of units by December 31, 1994, the Company no longer has a guarantee of exclusivity. However, the developer does not intend to grant similar rights to another company. The Company could regain the guarantee of exclusive rights by prepaying royalties on any remaining units. The Company has ceased selling the Impulse machine as of December 31, 1996. The Company has an exclusive licensing agreement for a bar-code used with the Impulse Retail System and SIGNright system. The Company has agreed to pay royalties totaling 1% of net sales on all paper and supplies using the bar-code technology. The Company has the rights to use and distribute certain fontware technology developed for its Impulse Retail System. The agreement required a one time payment of $25,000 for source code rights and $1,500 for each fontware outline licensed. In addition, the Company has agreed to pay royalties of $3.75 per fontware outline sold. HARDWARE PURCHASE AGREEMENT. The Company has a purchase agreement with a Japanese company that holds the rights to supply its SIGNright machine. In addition, before beginning production, the Company paid for tooling, equipment and development expenditures of approximately $248,000. The purchase price for the SIGNright machine is payable in Japanese yen and therefore the dollar value of such payments may fluctuate with exchange rates. 5. INCOME TAXES. At December 31, 1996, the Company had net operating loss carryforwards of approximately $5,200,000 which are available to offset future taxable income through 2011. These carryforwards are subject to the limitations of Internal Revenue Code Section 382. This section provides limitations on the availability of net operating losses to offset current taxable income if significant ownership changes have occurred for federal tax purposes. Significant components of the deferred tax assets are as follows: As of December 31 1996 1995 DEFERRED TAX ASSETS: Net operating loss carryforwards $ 1,919,100 $ 1,655,300 Depreciation and amortization 119,200 49,700 Accounts receivable allowance 50,100 32,800 Allowance for machine returns 15,900 27,400 Inventory reserve 44,500 39,900 Other 51,500 39,700 Total deferred tax asset 2,200,300 1,844,800 Valuation allowance (2,200,300) (1,844,800) Net deferred tax assets $ - $ - 6. STOCK OPTIONS, WARRANTS AND AWARDS. STOCK OPTION PLAN. The Company has a stock option plan for its employees and directors. Under the terms of the plan, the Company grants incentive stock options to employees at an exercise price at or above 100% of fair market value on the date of grant. The plan also allows the Company to grant non-qualified options at an exercise price of less than 100% of fair market value at the date of grant. The stock options expire five years after the date of grant and typically vest in one-third increments on the first, second and third anniversaries of the grant date. The following table summarizes activity under the plan:
Plan Plan Weighted Shares Options Average Exercise Available For Grant Outstanding Price Per Share Balance at December 31, 1993 11,267 433,400 $ 1.73 Shares reserved 100,000 - Granted (64,900) 64,900 2.59 Cancelled 9,753 (9,753) 2.26 Exercised - (108,647) 0.51 Balance at December 31, 1994 56,120 379,900 2.10 Granted (126,500) 126,500 1.42 Cancelled 117,223 (117,223) 1.99 Exercised - (54,077) 0.53 Balance at December 31, 1995 46,843 335,100 2.16 Shares reserved 300,000 - - Granted (223,400) 223,400 1.92 Cancelled 99,300 (99,300) 2.25 Exercised - - - Balance at December 31, 1996 222,743 459,200 $ 1.79 The number of options exercisable under the plan were: December 31, 1994 288,313 December 31, 1995 218,805 December 31, 1996 267,262
The following table summarizes information about the stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable Weighted Weighted Weighted Range Of Average Average Number Average Exercise Number Remaining Exercise Price Exercisable at Exercise Price Prices Outstanding Contractual Life Per Share Dec. 31, 1996 Per Share $ 1.00 - $ 1.5 346,300 4 Years $ 1.40 157,030 $ 1.41 1.56 - 2.2 1,400 3 Years 1.73 528 1.77 2.31 - 3.38 93,500 2 Years 2.78 91,704 2.77 3.88 - 4.13 18,000 1 Year 4.08 18,000 4.08 $ 1.00 - $ 4.13 459,200 2.5 Years $ 1.79 267,262 $ 2.06 Options outstanding under the plan expire at various dates during the period May 1997 through November 2000.
The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123"), requires use of option valuation models that were not developed for use valuing employee stock options. Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996: risk-free interest rate of 6.0%; volatility factor of the expected market price of the Company's common stock of .532, and a weighted-average life of the option of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: 1996 1995 Pro forma net loss $ (1,111,522) $ (1,482,027) Pro forma net loss per common share $ (.21) $ (.28) The pro forma effect on the net loss for 1995 and 1996 is not representative of the pro forma effect on net loss in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. WARRANTS. During 1995 and 1994, the Company issued five year warrants to outside consultants to purchase 1,000 shares of Common Stock at $1.50 per share. Prior to 1994, the Company issued five year warrants to a consultant to purchase a total of 17,500 shares of Common Stock exercisable at various prices between $2.56 per share and $4.00 per share. The warrants expire on various dates from July 1997 to August 1998. In connection with the initial public offering of Common Stock in 1991, the Company issued a five year warrant to the underwriter for the purchase of 140,000 shares of Common Stock at $4.35 per share. This warrant expired in 1996. During 1990, two non-employee board members provided strategic planning, financial and general advisory assistance to the Company. In exchange for their services, the Company granted to each individual a warrant to purchase 75,000 shares of Common Stock at $2.00 per share for a five year period. During 1994, these warrants were extended to September 9, 1999. In 1990, the Company granted a warrant valued at $1,000 for the purchase of 2,500 shares of Common Stock at $2.00 per share to an equipment leasing company in exchange for lower interest payments on a lease. This warrant expired in 1995. STOCK AWARD. In December 1993, the Company granted 25,000 shares of restricted stock at no cost to an officer of the Company. The restriction on the shares is removed as the individual completes employment periods with the Company through various dates from 1995 through 1998. 7. LONG-TERM DEBT. The Company entered into a long-term loan agreement with a finance corporation during 1995. The Company borrowed $500,000 and pledged certain printing press assets and U. S. Treasury Debt Securities as collateral. The Company also entered into a $1 million line of credit agreement with a bank against which $673,000 was outstanding at December 31, 1996. Interest on the outstanding balance is computed at the bank's prime rate plus 1.25% and was 9.5% at December 31, 1996. The line of credit agreement expires on April 9, 1997. The Company pledged as security all inventory, accounts receivable, equipment and general intangibles. In addition, the bank issued a letter of credit in the amount of $196,000 on behalf of the Company to a Japanese company to secure the production and manufacture of several signmaking machines. This letter of credit is secured by the line of credit. The carrying amount of the Company's debt instruments approximates fair value. Long-term debt as of December 31, 1996 is as follows: Obligations under long-term debt $ 382,717 Less current portion 93,391 $ 289,326 Maturities of long-term debt as of December 31, 1996 are as follows: 1997 $ 93,391 1998 103,221 1999 114,087 2000 72,018 $ 382,717 Cash paid during the year for interest was $51,285, $20,393 and $2,799 in 1996, 1995, and 1994, respectively. 8. LEASES. The Company leases its office space under a five year operating lease. The future noncancelable lease payments due on the operating lease as of December 31, 1996 is $491,000. The Company incurred approximately $429,000, $412,000 and $389,000 in rent expense in 1996, 1995, and 1994, respectively. 9. CUSTOMER SALES. No single customer represented a significant portion of total sales. Export sales accounted for 16%, 16%, and 12% of total sales in 1996, 1995, and 1994, respectively. 10. EMPLOYEE BENEFIT PLANS. The Company has a Retirement Profit Sharing and Savings Plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to defer up to 10% of their income on a pre-tax basis through contributions to the plan. The Company may make matching contributions with respect to salary deferral at a percentage to be determined by the Company each year. In 1996, 1995, and 1994, the Company made no matching contributions. The Company adopted an Employee Stock Purchase Plan effective January 1, 1993. The plan enables employees to contribute up to 10% of their compensation toward the purchase of the Company's Common Stock at 85% of market value. In 1996, 1995, and 1994, 42,852, 90,493 and 49,279 shares, respectively, were purchased by employees under the plan. At December 31, 1996, 222,743 shares are reserved for future employee purchases of Common Stock under the plan. 11. SOURCES OF SUPPLY. The Company currently buys its components of its products from sole suppliers. Although there are a limited number of manufacturers capable of manufacturing its products, management believes that other manufacturers could adapt to provide the products on comparable terms. The time required to locate and qualify other manufacturers, however, could cause a delay in manufacturing that may be financially disruptive to the Company. 12. SUBSEQUENT EVENT. On January 17, 1997, the Company issued 1,376,000 units consisting of 1,376,000 shares of its Common Stock and warrants to purchase an additional 688,000 shares of Common Stock. The Company received net proceeds of approximately $2,900,000, which is available for general corporate purposes. The warrants are exercisable at $2.125 per share and expire in January 2000. REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors Insignia Systems, Inc. We have audited the accompanying balance sheets of Insignia Systems, Inc. as of December 31, 1996 and 1995, and the related statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Insignia Systems, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Minneapolis, Minnesota January 24, 1997 OFFICERS G. L. HOFFMAN Chairman, Secretary, President and Chief Executive Officer PAUL A. MOQUIST Executive Vice President, Sales and Operations JOHN R. WHISNANT Vice President, Finance BOARD OF DIRECTORS G. L. HOFFMAN Chairman, Secretary, President and Chief Executive Officer Insignia Systems, Inc. ERWIN A. KELEN (1, 2) President Kelen Ventures GORDON F. STOFER (1, 2) Managing General Partner Cherry Tree Ventures FRANK D. TRESTMAN (1, 2) President Trestman Enterprises (1) Audit Committee (2) Compensation Committee STOCKHOLDER INFORMATION CORPORATE OFFICE: Insignia Systems, Inc. 10801 Red Circle Drive, Minnetonka, MN 55343 Phone: (612) 930-8200; (800) 874-4648 Fax: (612) 930-8222; (800) 347-9216 ANNUAL MEETING: Thursday, May 8, 1997, 3:30 p.m. Holiday Inn Express 10985 Red Circle Drive Minnetonka, MN 55343 TRANSFER AGENT AND REGISTRAR: Norwest Bank Minnesota, N.A. P.O. Box 64854, St. Paul, MN 55164-0854 (612) 450-4064; (800) 468-9716 LEGAL COUNSEL: Lindquist & Vennum 4200 IDS Center, Minneapolis, MN 55402 INDEPENDENT AUDITORS: Ernst & Young LLP 1400 Pillsbury Center, Minneapolis, MN 55402 INVESTOR INQUIRIES: Inquiries should be directed to: Vice President of Finance, Insignia Systems, Inc. 10801 Red Circle Drive, Minnetonka, MN 55343 FORM 10-K: Shareholders who wish to obtain a copy of the Company's annual report on Form 10-K, filed with the Securities and Exchange Commission for the year ended December 31, 1996, may do so without charge by writing to the Company. STOCK LISTING: The Company's common stock trades on The Nasdaq Small-Cap Market System under the symbol ISIG. The following table sets forth the range of high and low bid prices reported on the Nasdaq System. These quotations represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions. 1996 High Low First Quarter 1 5/8 1 3/8 Second Quarter 1 3/4 1 5/16 Third Quarter 2 7/16 1 5/16 Fourth Quarter 2 3/16 1 3/4 1995 High Low First Quarter 1 3/4 1 1/4 Second Quarter 1 3/4 1 1/4 Third Quarter 2 1 1/4 Fourth Quarter 1 5/8 15/16 As of February 28, 1997, the Company had 186 shareholders of record and approximately 1,000 beneficial owners. Dividend Policy: The Company has never paid cash dividends on its common stock. The Board of Directors presently intends to retain all earnings for use in the Company's business and does not anticipate paying cash dividends in the foreseeable future. (Back Cover of the Annual Report) [LOGO] INSIGNIA(R) SYSTEMS, INC. 10801 Red Circle Drive, Minnetonka, MN 55343 Phone: (612) 930-8200 Fax: (612) 930-8222 E-mail: insignia@insignia-sys.com Web: http://www.insignia-sys.com (C) 1997 Insignia Systems, Inc. All rights reserved. Insignia, Impulse, SIGNright and Stylus are registered trademarks of Insignia Systems, Inc. All other brand names are trademarks of their respective owners. #2160 EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Insignia Systems, Inc. of our report dated January 24, 1997, included in the 1996 Annual Report to Stockholders of Insignia Systems, Inc. Our audits also included the financial statement schedule of Insignia Systems, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-47003 and Form S-8 No. 33-92376) pertaining to the 1990 Stock Plan and in the Registration Statements (Form S-8 No. 33-75372 and Form S-8 No. 33-92374) pertaining to the Employee Stock Purchase Plan of Insignia Systems, Inc. of our report dated January 24, 1997, with respect to the financial statements incorporate herein by reference and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Insignia Systems, Inc. /s/Ernst & Young LLP Minneapolis, Minnesota March 25, 1997 EX-27 5
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 448,668 149,427 2,779,851 (135,000) 2,015,963 5,474,471 3,319,525 (2,368,221) 6,425,775 1,962,463 0 0 0 10,156,436 0 6,425,775 14,667,382 14,667,382 7,063,836 8,602,548 0 0 64,911 (999,226) 0 0 0 0 0 (999,226) (.18) (.18)
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