-----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, HmDKKKzhvpagaycAJQDCcmwqmUDQDa+0rXiH6uTvNRwLoXg6sNwfLDPp9Fz75l0a sZ18GjM3g/Kk1wEv3IOTAA== 0000897101-98-000366.txt : 19980401 0000897101-98-000366.hdr.sgml : 19980401 ACCESSION NUMBER: 0000897101-98-000366 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-13471 FILM NUMBER: 98581942 BUSINESS ADDRESS: STREET 1: 10801 RED CIRCLE DR CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6129308200 MAIL ADDRESS: STREET 1: 10801 RED CIRCLE DRIVE 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, 1997 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 13, 1998 was 6,857,720. 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 13, 1998 was approximately $10,715,187 based upon the last sale price of the registrant's Common Stock on such date. Documents Incorporated By Reference: Portions of registrant's 1997 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 21, 1998 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. In November, 1996 the Company replaced the Impulse Retail System with the SIGNright(R) system, which performs essentially the same functions as the Impulse. In January 1998, the Company eliminated the direct sale of the SIGNright system by in-house telemarketers, but will continue to market the SIGNright system through its independent sales representatives. Thus, the Company anticipates machine sales in 1998 to be approximately one-half of machine sales in 1997. 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's third product, Insignia POPS,(TM) combines the Company's expertise in signage and in-store merchandising with its Stylus software products to provide for a unique sign to be ordered by a brand manufacturer and placed in a participating supermarket. The Company markets its Stylus software and the Insignia POPS through a direct marketing process, its sign systems through in-direct distribution channels and through independent distributors in foreign markets and its accessories and supplies principally through telemarketers. INDUSTRY AND MARKET BACKGROUND Product manufacturers are constantly seeking in-store ways to motivate consumers to buy that particular manufacturer's product. Industry studies have proven that the shelf edge sign represents the final and best opportunity for the manufacturer to convince the consumer to buy. The Company estimates that manufacturers now spend approximately $1 billion annually on in-store efforts. The Company's market studies indicate that in-store signs are the most effective means of inducing a purchase, second only to personal demonstrations and sampling. The Company's marketing studies also indicate that the most effective sign contains information that can be best supplied by the product manufacturer in combination with the retailer's price and design look. 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 that there is a shrinking but still 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. POPS (POINT OF PURCHASE SERVICES) The Insignia POPS program is a first-of-its-kind partnership between retailers and manufacturers which enables coordination and customization of in-store point-of-purchase promotional programs from a national to local store level. By utilizing proprietary technology, the Insignia POPS program creates in-store point-of-purchase media to significantly increase sales while providing new product message and pricing flexibility for manufacturers at the most critical consumer decision-making point. The Insignia POPS program links manufacturers and retailers by providing a central coordination point, ensuring that in-store media programs reflect the goals and objectives of both, while helping customers make buying decisions. The retailers will contract with Insignia POPS to organize and deliver product messages from the food manufacturer to the retailer's own computer. The sign, including the retailer's logo, design, color and price in combination with the manufacturer's selling messages and images, will be created by the Company, printed by the retailer and placed at the shelf by store personnel. The Company collects, organizes, formats, and then delivers the sign electronically directly to the retailer's computer where the retailer-controlled information is added. The Company will charge the manufacturer on average, $4.75 per sign/per week/per store. The retailer will then receive a percentage of the revenue paid by the manufacturer to the Company based upon audits and product movement data provided to Insignia. 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. 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 now sells to customers in nineteen different retail market segments. In January 1998, the Company ceased marketing the SIGNright system through direct telemarketing channels, but will continue to market and sell the SIGNright machine through in-direct channels. 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 $60 each. Additional cartridges, priced at $60 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 $795 ($1,195 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 41% of 1997 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. MARKETING AND SALES The Company's marketing strategy is to focus on food manufacturers and food retailers. By utilizing the Insignia POPS program, food manufacturers and food retailers can easily accomplish what had previously been either impossible or extremely difficult: tailoring national promotional programs to retaional and local needs with minimal effort. In addition to the benefits provided to manufacturers and retailers, POPS media allows for more information to be provided to consumers to aid in purchasing decisions, and because the POPS media is consistent in format and design, consumer messages are clearer. In essence, POPS is the most complete in-store media promotion program available, benefiting consumer, retailer, and manufacturer. The Company markets its 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 than proceeds to a visit by a direct sales representative to sell the Stylus software. 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. Through December 1997, the Company marketed the SIGNright system through telemarketing by in-house sales personnel or a visit by an independent sales representative. In January 1998, the Company eliminated the direct sale of the SIGNright system by in-house telemarketers, but will continue to market the SIGNright system through its independent sales representatives. 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 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 1995, 1996 and 1997 foreign sales accounted for approximately 16%, 16% and 14% of total sales, respectively. The Company expects that sales to foreign distributors will be approximately 15% of total sales in 1998. 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 manufacture 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 has obtained 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. The Company is seeking trademark registration in the United States of the trademark "Insignia POPS" for use on in-store point-of-purchase media. The Company is not obligated to pay any royalty related to this trademark. 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 through 1997. 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; $448,008 for 1996; and $493,686 for 1997 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 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, and in-store samples. 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. 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 versions 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: 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. RESTRUCTURING PROGRAM During January 1998, the Company implemented a restructuring program (Program) to achieve a more focused marketing strategy regarding the selling of SIGNright machines. This marketing strategy eliminates the marketing and selling of SIGNright machines through direct channels. This resulted in the Company streamlining and downsizing its operations by reducing its workforce and consolidating certain employee groups. As a result of this Program, the Company reduced its workforce from 130 full time employees to 93 full time employees. The Company took a charge to earnings in December 1997 due to this restructuring in the amount of $315,000. This $315,000 charge is comprised of a $141,000 charge associated with the writing off of capitalized production tooling costs of the SIGNright machine, resulting in twelve months of unamortized costs, and $174,000 of accrued rental costs associated with a portion of the leased facility which in 1998 will be permanently idle and separate from the remaining utilized lease space. The Company incurred severance costs in the amount of $80,000 in January 1998 as a result of this workforce reduction. EMPLOYEES As of March 13, 1998, the Company had 93 full-time employees. The full-time employees included 7 in telemarketing, 32 in other sales and marketing positions, 43 in operations and customer service, 7 in administration and accounting functions and 4 in senior management positions. None of the Company's employees are represented by unions. Item 2. Properties The Company is located in approximately 60,000 square feet of office and warehouse space in suburban Minneapolis, Minnesota, which has been leased until December 1998. As a result of the Company's restructuring program in January 1998, this facility is more than adequate to meet the Company's current needs and the Company is exploring the opportunity to move into a smaller facility. 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 1997. 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 48 Chairman and Secretary Scott F. Drill 45 President and Chief Executive Officer (Effective February 24, 1998) Paul A. Moquist 56 Executive Vice President, Sales and Marketing John R. Whisnant 52 Vice President, Finance and Chief Financial Officer G. L. Hoffman, a co-founder of the Company, has been the Chairman and Secretary of the Company since it was incorporated in January 1990. Prior to February 24, 1998, Mr. Hoffman also held the positions of President and Chief Executive Officer. 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. Scott F. Drill, has been President and Chief Executive Officer of the Company since February 24, 1998. Since May 1996 Mr. Drill was a partner in Minnesota Management Partners (MMP), a venture capital firm located in Minneapolis, Minnesota. He remains a partner in MMP, which completed investment of its capital in January of this year. From 1983 through March 1996 Mr. Drill was President and Chief Executive Officer of Varitronic Systems and Chairman since 1990. Prior to starting Varitronics, Mr. Drill held senior management positions in sales and marketing at Conklin Company and Kroy, Inc. 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 1997 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 1997 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 1997 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 * YEAR 2000 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 1997 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 1998 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 1998 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 1998 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, 1997 and 1996................................................* Statements of Operations for the years ended December 31, 1997, 1996, and 1995.................* Statement of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995...........................................................................* Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995.................* Notes to Financial Statements..................................................................*
- -------------------------------------------- * Incorporated by reference to the registrant's Annual Report to Shareholders for the year ended December 31, 1997. See Exhibit 13. 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. (2) 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 1997. SCHEDULE II. Valuation and Qualifying Accounts
Col. A Col. B Col. C Col. D Col. E - -------------------------------------- ------------ ---------------------------------------- ----------- ------------- Additions ---------------------------------------- (1) (2) Balance at Charged to Other Beginning of Charged to Costs Accounts Deductions Balance at End Description Period and Expenses Describe Describe of Period - -------------------------------------- ------------ ----------------- ------------------ ----------- -------------- Year ended December 31, 1997 Allowance for doubtful accounts $135,475 $185,000 -- $116,093(1) $204,382 Provision for normal returns and rebates 54,485 $65,556 (2) 17,116(3) 102,925 Provision for obsolete inventory 120,162 71,500 63,713(4) 127,949 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
- -------------------------------------------------- (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 Chairman Dated: March 30, 1998 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 and Secretary March 30, 1998 G. L. Hoffman /s/ Scott F. Drill President and Chief Executive Officer March 30, 1998 Scott F. Drill (principal executive officer) /s/ John R. Whisnant Vice President of Finance and Chief Financial March 30, 1998 John R. Whisnant Officer (principal financial officer) /s/ Erwin A. Kelen Director March 30, 1998 Erwin A. Kelen /s/ Don E. Schultz Director March 30, 1998 Don E. Schultz /s/ Gordon F. Stofer Director March 30, 1998 Gordon F. Stofer /s/ Frank D. Trestman Director March 30, 1998 Frank D. Trestman
EXHIBIT INDEX TO FORM 10-K For the year ended December 31, 1997 Commission File No: 0-19380
Exhibit Page Number or Incorporation Number Description By Reference To - --------- --------------------------------------------------------- ----------------------------------------------------------- 3.1 Articles of Incorporation of Registrant, as amended to Exhibit 3.1 of the Registrant's Registration Statement of date 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 Registrant Exhibit 4.1 of the Registrant's Registration Statement of Form S-18, Reg. No. 33-40765C 10.1 License Agreement between Thomas and Lawrence McGourty Exhibit 10.1 of the Registrant's Registration Statement of and the Company dated January 23, 1990, as amended Form S-18, Reg. No. 33-40765C 10.2 Barcode License and Support Agreement between Thomas and Exhibit 10.2 of the Registrant's Registration Statement of Lawrence McGourty and the Company dated January 23, 1990 Form S-18, Reg. No. 33-40765C Exhibit 10.3 of the Registrant's Annual Report on Form 10-K 10.3 The Company's 1990 Stock Plan, as amended for the year ended December 31, 1995 10.4 Sign Printer Sales Agreement between the Company and Exhibit 10.4 of the Registrant's Registration Statement of Creative Machineries International, Inc. dated January Form S-18, Reg. No. 33-40765C 29, 1990, as amended 10.6 Lease Agreement between R. L. Johnson Investment Company, Exhibit 10.6 of the Registrant's Annual Report on Form 10-K Inc. and the Company, dated October 22, 1992 for the year ended December 31, 1992 10.7 Common Stock Warrant dated September 28, 1990 issued to Exhibit 10.7 of the Registrant's Registration Statement of Erwin Kelen Form S-18, Reg. No. 33-40765C 10.8 Non competition and Consulting Agreement between Exhibit 10.12 of the Registrant's Registration Statement of Varitronics and G. L. Hoffman dated January 12, 1990 Form S-18, Reg. No. 33-40765C 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 Business Finance Exhibit 10.15 of the Registrant's Annual Report on Form Corporation and the Company dated July 31, 1995 10-K for the year ended December 31, 1995 10.11 Loan Agreement between Republic Acceptance Corporation Exhibit 10.16 of the Registrant's Annual Report on Form and the Company dated December 20, 1997 10-K for the year ended December 31, 1997 13 Registrant's Annual Report to Shareholders for 1997 17 23 Consent of Ernst & Young LLP 39 25 Power of Attorney (See signature page of this Form 10-K) 14 27 Financial Data Schedule 40
EX-10.11 2 LOAN AGREEMENT FINANCING AGREEMENT THIS FINANCING AGREEMENT, dated as of December 29, 1997 is by and between INSIGNIA SYSTEMS, INC. a Minnesota corporation (the "Borrower"), and REPUBLIC ACCEPTANCE CORPORATION, a Minnesota corporation (the "Lender"). ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.1 Defined Terms. As used in this Agreement the following terms shall have the following respective meanings: "Accounts": Each and every right to payment of Borrower, whether such right to payment arises out of a sale or lease of goods by Borrower, or other disposition of goods or other property of Borrower, out of a rendering of services by Borrower, out of a loan by Borrower, out of damage to or loss of goods in the possession of a railroad or other carrier or any other bailee, out of overpayment of taxes or other liabilities of Borrower, or which otherwise arises under any contract or agreement, or from any other cause, whether such right to payment now exists or hereafter arises and whether such right to payment is or is not yet earned by performance and howsoever such right to payment may be evidenced, together with all other rights and interest (including all liens and security interests) which Borrower may at any time have by law or agreement against any account debtor (as defined in the Uniform Commercial Code in effect in the State of Minnesota) or other obligor obligated to make any such payment or against any of the property of such account debtor or other obligor; specifically (but without limitation), the term includes all present and future instruments, documents, chattel papers, accounts and contract rights of Borrower. "Accounts Advance": As defined in Section 2.1(a). "Advance": An Accounts Advance and/or an Inventory Advance, as the context may require. "Affiliate": When used with reference to any Person, (a) each Person that, directly or indirectly, controls, is controlled by or is under common control with, the Person referred to, (b) each Person which beneficially owns or holds, directly or indirectly, five percent or more of any class of voting stock of the Person referred to (or if the Person referred to is not a corporation, five percent or more of the equity interest), (c) each Person, five percent or more of the voting stock (or if such Person is not a corporation, five percent or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Person referred to, and (d) each of such Person's officers, directors, joint venturers and partners. The term control (including the terms "controlled by" and "under common control with") means the possession, directly, of the power to direct or cause the direction of the management and policies of the Person in question. "Borrowing Base Certificate": As defined in Section 2.2. "Business Day": Any day (other than a Saturday, Sunday or legal holiday in the State of where the Lender is located). "Change in Control": The occurrence, after the Closing Date, of any one entity owning, directly or indirectly, securities of the Borrower representing 25% of the securities of the Borrower entitled to vote in the election of directors. "Closing Date" The date of this Agreement; provided that all the conditions precedent to the making of the initial Advance, as set forth in Article III, have been, or, on such Closing Date, will be, satisfied. The Borrower shall give the Lender not less than one Business Day's prior notice of the day selected as the Closing Date. "Eligible Accounts": Accounts owned by the Borrower which the Lender, in its sole and absolute discretion, deems eligible for Advances, but which, at a minimum, are subject to a first priority perfected security interest in favor of the Lender and not subject to any assignment, claim or Lien other than the Lien in favor of the Lender and other Liens consented to by the Lender in writing, but specifically excluding (a) Accounts which are not earned; (b) Accounts which are unpaid more than ninety (90) days after the original invoice date, except dated Accounts with payment terms beyond sixty (60) days are ineligible thirty-one (31) days past the due date; (c) Accounts owed by debtors 10% or more of whose Accounts owed are otherwise ineligible; (d) Accounts representing progress billings, or retainages, or for work covered by any payment or performance bond; (e) Accounts owed by any of the Borrower' s Affiliates; (f) Accounts owed by debtors not located in the United States, unless supported by (i) a letter of credit issued by a U.S. bank in favor of the Borrower which has been delivered to the Lender, or (ii) or credit insurance acceptable to Lender in its sole discretion; (g) Accounts as to which any warranty or representation contained in any security agreement or other agreement of the Borrower with or given to the Lender with respect to any such Receivable is untrue in any material respect; (h) Accounts as to which the account debtor has disputed liability, or made any claim with respect to any other Receivable due from such account debtor to the Borrower; (i) Accounts subject to setoff; Ci) Accounts as to which the account debtor has filed a petition for bankruptcy or any other petition for relief under the Bankruptcy Code, assigned any assets for the benefit of creditors, or if any petition or other application for relief under the Bankruptcy Code has been filed against the account debtor, or if the account debtor has failed, suspended business, become insolvent, or has had or suffered a receiver or a trustee to be appointed for all or a significant portion of its assets or affairs; (k) Accounts owed by any government or government agency; (1) Accounts evidenced by a promissory note or other instrument; and (m) Accounts as to which the Lender believes that collection of any such Receivable is insecure or that any such Receivable may not be paid by reason of the account debtor's financial inability to pay. "Eligible Inventory": Inventory of the Borrower which the Lender, in its sole and absolute discretion, deems eligible for Advances, but which meets the following minimum requirements: (a) it is owned by the Borrower, is subject to a first priority perfected security interest in favor of the Lender, and is not subject to any assignment, claim or Lien other than (i) a Lien in favor of the Lender and (ii) Liens consented to by the Lender in writing; (b) it consists of raw materials or finished product (not including work in process and supplies); (c) if held for sale or lease or furnishing under contracts of service, it is (except as the Lender may otherwise consent in writing) new and unused; (d) except as the Lender may otherwise consent, it is not stored with a bailee, warehouseman or similar party; if so stored with the Lender's consent, such bailee, warehouseman or similar party has issued and delivered to the Lender, in form and substance acceptable to the Lender, such documents and agreements as the Lender may require, including, without limitation, warehouse receipts therefor in the Lender's name; (e) the Lender has determined, in its sole and absolute discretion, that it is not unacceptable due to age, type, category, quality and/or quantity; (f) it is not held by the Borrower on consignment and is not subject to any other repurchase or return agreement; (g) it is not held by a customer of the Borrower or any other Person on consignment; (h) it complies with all standards imposed by any governmental agency having regulatory authority over such goods and/or their use, manufacture or sale; and (i) the warranties, representations and covenants contained in any security agreement or other agreement of the Borrower with or given to the Lender relating directly or indirectly to the Borrower's Inventory are applicable to it without exception. "GAAP": Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination. "Inventory": Any and all of the Borrower's goods, including, without limitation, goods in transit, wherever located which are or may at any time be leased by the Borrower to a lessee, held for sale or lease, furnished under any contract of service or held as raw materials, work in process, or supplies or materials used or consumed in the Borrower's business, or which are held for use in connection with the manufacture, packing, shipping, advertising, selling or finishing of such goods, and all goods, the sale or other disposition of which has given rise to a Receivable, which are returned to and/or repossessed and/or stopped in transit by the Borrower or the Lender, or at any time hereafter in the possession or under the control of the Borrower or the Lender, or any agent or bailee of either thereof, and all documents of title or other documents representing the same. "Inventory Advance": As defined in Section 2.l(b). "Landlord's Waiver": That Waiver to be executed by Duke Realty Investments in form and substance satisfactory to the Lender. "Loan Documents": This Agreement, the Security Agreement, and any documents described in Section 3.l(a). "Lien": With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any capitalized lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law. "Person": Any natural person, corporation, partnership, limited partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "Reference Rate": The rate of interest from time to time publicly announced by First Bank NationalAssociation as its "reference rate"; First Bank National Association may lend to its customers at rates that are at, above or below the Reference Rate. For purposes of determining any interest rate hereunder which is based on the Reference Rate, such interest rate shall change as and when the Reference Rate changes. "Security Agreement": That Security Agreement to be executed by the Borrower in form and substance satisfactory to the Lender. Section 1.2 Accounting Terms and Calculations. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. Section 1.3 Other Definitional Terms Terms of Construction. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, Schedules and the like references are to Sections, Exhibits, Schedules and the like of this Agreement unless otherwise expressly provided. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or". All incorporations by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and include all necessary definitions and related provisions from such other agreements. All covenants, terms, definitions and other provisions from other agreements incorporated into this Agreement by reference shall survive any termination of such other agreements until the obligations of the Borrower under this Agreement are irrevocably paid in full. ARTICLE II TERMS OF LENDING Section 2.1 The Advances. On the terms and subject to the conditions hereof, at the Borrower's request, the Lender, in its absolute and sole discretion and without any commitment to do so, may make the following Advances available to the Borrower: 2.l(a) up to seventy-five percent (75%) of the net amount of Eligible Accounts which are listed in the Borrower's most current Borrowing Base Certificate and which are deemed eligible for advances by the Lender, or such greater or lesser percentage at the Lender's sole and absolute discretion, not to exceed a maximum amount of $3,000,000 (the "Accounts Advances"); 2.1(b) up to thirty percent (30%) of Ihe net amount of Eligible Inventory which is listed in the Borrower's most current Borrowing Base Certificate and which is deemed eligible for advances by the Lender, or such greater or lesser percentage at the Lender's sole and absolute discretion, not to exceed a maximum amount of $500,000 (the "Inventory Advances"); Notwithstanding the previous clauses 2.l(a) and 2.l(b), the maximum aggregate amount advanced against all Eligible Accounts and all Eligible Inventory from time to time shall not exceed $3,000,000. Loans for additional sums requested by the Borrower may be made at the Lender's sole discretion based upon the Lender's valuation of the Borrower's collateral or other factors. The Borrower acknowledges and agrees that the Lender may from time to time, for the Lender's convenience, segregate or apportion the Borrower's collateral for purposes of determining the amounts and maximum amounts of Advances which may be made hereunder. Nevertheless, the Lender's security interest in all such collateral, and any other collateral rights, interests and properties which may now or hereafter be available to the Lender, shall secure and may be applied to the payment of any and all Advances and other indebtedness secured by the Lender's security interest, in any order or manner of application and without regard to the method by which the Lender determines to make Advances hereunder. Section 2.2 Procedure for Advances; Wire Transfer Fees. Any request by the Borrower for an Advance shall be in writing and must be given so as to be received by the Lender not later than 10:30 a.m. Central time on the requested Advance date, or such later time as may be acceptable to the Lender in its sole discretion. Each request for an Advance shall be irrevocable and shall be deemed a representation by the Borrower that on the requested Advance date and after giving effect to such Advance the applicable conditions specified in Article III have been and will continue to be satisfied and the representations and warranties set forth in Article IV will continue to be true. Each request for an Advance shall specify the requested Advance date (which must be a Business Day) and the amount of such Advance. Each request for an Advance shall be accompanied by a Borrowing Base Certificate signed by a duly authorized officer of the Borrower in form and substance satisfactory to the Lender (the "Borrowing Base Certificate"). If the Lender deterrnines, in its absolute and sole discretion, to make the requested Advance, the Lender will wire transfer to the Borrower's Account on the requested Advance date the amount of the requested Advance. The Borrower will pay to the Lender a wire transfer fee of $15 per wire transfer. Section 2.3 Interest Rates and Interest Payments. Interest shall accrue on the unpaid balance of the Advances at a floating rate per annum equal to the sum of the Reference Rate plus 3% provided, however, that in the event that Borrower's retained earnings for fiscal year end December 31, 1998 (as reported in the Borrower's audited financial statements for fiscal year end December 31, 1998 as required by and prepared in accordance with, Section 5.1 (a)), exceeds $500,000, then Interest shall accrue on the Advances at a floating rate per annum equal to the sum of the Reference Rate plus 2% from and after the first day of the first calendar month following the date of Lender' s receipt of the December 31, 1998 audited financial statements (the "Applicable Rate") and shall be due and payable monthly in arrears on the last day of each calendar month; provided, further, that upon the occurrence and during the continuance of any failure by the Borrower to comply with any agreement or covenant of the Borrower under any Loan Document, the unpaid balance of the Advances shall thereafter bear interest at a floating rate equal to the sum of (a) the Applicable Rate, plus (b) 2% and shall be due and payable on demand; and provided further that the minimum amount of interest due and payable in any month shall not be less than $7,500. Section 2.4 RePayment and PrePayment. ALL ADVANCES SHALL BE DUE AND PAYABLE ON DEMAND. NOTHING SET FORTH IN THIS AGREEMENT, THE SECURITY AGREEMENT OR ANY OTHER AGREEMENT BETWEEN THE BORROWER AND THE LENDER SHALL IN ANY WAY LIMIT THE LENDER'S RIGHT TO DEMAND PAYMENT OF THE ADVANCES IN WHOLE OR IN PART. Section 2.5 Computation. Interest on the Advances shall be computed on the basis of actual days elapsed and a year of 360 days. Section 2.6 Annual Fee. The Borrower shall pay to the Lender an annual fee in an amount equal to .75 percent of the maximum aggregate amount of the Advances (the "Annual Fee"). The Annual Fee shall be payable in advance on the Closing Date and on each anniversary of the date of this Agreement. ARTICLE III CONDITIONS PRECEDENT Section 3.1 Conditions Precedent. No Advances shall be made hereunder except upon the prior or simultaneous fulfillment of each of the following conditions: 3.l(a) Documents. The Lender shall have received the following: (i) This Agreement executed by a duly authorized officer (or officers) of the Borrower and dated the Closing Date. (ii) A copy of the corporate resolutions of the Borrower authorizing the execution, delivery and performance of this Agreement and containing an incumbency certificate showing the names and titles, and bearing the signatures of, the officers of the Borrower authorized to execute this Agreement, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower. (iii) A copy of the Articles of Incorporation of the Borrower with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of its incorporation as of a recent date acceptable to Lender and its counsel. (iv) A certificate of good standing for the Borrower in the jurisdiction of its incorporation, certified by the appropriate governmental officials as of a recent date acceptable to Lender and its counsel. (v) A copy of the bylaws of the Borrower, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower. (vi) The Security Agreement, duly executed by the Borrower. (vii) An initial Borrowing Base Certificate. (viii) Evidence of insurance required to be maintained under Section 5.3, naming the Lender as loss payee in form and substance satisfactory to the Lender. (ix) The opinion of counsel to the Borrower covering such matters as the Lender may request. (x) The Landlord's Waiver, duly executed by Duke Realty Investments. 3.1(b) Other Matters. All organizational and legal proceedings relating to the Borrower and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be satisfactory in scope, form and substance to the Lender and its counsel, and the Lender shall have received all information and copies of all documents, including records of corporate proceedings, which it may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper Borrower or governmental authorities. 3.1(c) Fees and Expenses. The Lender shall have received all fees and other amounts due and payable by the Borrower on or prior to the Closing Date, including the reasonable fees and expenses of counsel to the Lender payable pursuant to Section 8.2. 3.l(d) Perfection. The Security Agreement and/or any and all financing statements with respect thereto shall have been appropriately filed to the satisfaction of the Lender; the Lender shall have received UCC searches and/or other Lien searches satisfactory to the Lender; and the priority and perfection of the Lien created thereby shall have been established to the satisfaction of the Lender. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender: Section 4.1 Organization; Standing; Etc. The Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder and thereunder. This Agreement has been duly authorized by all necessary corporate action and when executed and delivered will be the legal and binding obligations of the Borrower. The execution and delivery of this Agreement will not violate the Borrower's Articles of Incorporation or bylaws or any law applicable to the Borrower. No governmental consent or exemption is required in connection with the Borrower's execution and delivery of this Agreement. Section 4.2 Financial Statements and No Material Adverse Change. The Borrower's audited financial statements as at December 31, 1996 and its unaudited financial statements as at October 31, 1997, as heretofore furnished to the Lender, have been prepared in accordance with GAAP. The Borrower has no material obligation or liability not disclosed in such financial statements, and there has been no material adverse change in the condition of the Borrower since the dates of such financial statements. Section 4.3 Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower which, if determined adversely to the Borrower, would have, a material adverse effect on the condition of the Borrower. The Borrower is not in violation of any law or regulation (including environmental laws and regulations and laws relating to employee benefit plans) where such violation could reasonably be expected to impose a material liability on the Borrower. Section 4.4 Taxes. The Borrower has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). Section 4.5 Subsidiaries. The Borrower has no subsidiaries. ARTICLE V AFFIRMATIVE COVENANTS Until this Agreement shall have expired or been terminated and all of the Borrower's other obligations to the Lender under this Agreement shall have been paid in full, unless the Lender shall otherwise consent in writing: Section 5.1 Financial Statements and Reports. The Borrower will furnish to the Lender: 5.1(a) As soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, financial statements of the Borrower consisting of at least statements of income, cash flow and changes in stockholders' equity, and a balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous annual audit, certified without qualification by independent certified public accountants selected by the Borrower and acceptable to the Lender. 5.1(b) As soon as available and in any event within 30 days after the end of each fiscal month, unaudited financial statements for the Borrower for such month and for the period from the beginning of such fiscal year to the end of such month, substantially similar to the annual audited statements. 5.1(c) Concurrently with each request for an Advance, and in any event not less than weekly, a Borrowing Base Certificate. 5.l(d) As soon as practicable and in any event within fifteen days of the end of each month, (i) a listing of all accounts, together with an aging of all accounts and a reconciliation of such accounts against the listing submitted pursuant hereto for the immediately preceding month, (ii) a list of all inventory, setting forth the fair market value and cost of such inventory and all sales, returns and allowances and miscellaneous charges, and (iii) a listing of all accounts payable, together with an aging of all accounts payable all in form and substance satisfactory to the Lender. 5.l(e) Within five days after the due date, proof of payment or deposit, when due, of all withholding and F.I.C.A. taxes owing by the Borrower from time to time, in form and substance satisfactory to the Lender by a payroll service satisfactory to the Lender and whose services the Borrower shall at all times retain. 5.l(f) From time to time, such other information regarding the business, operation and financial condition of the Borrower as the Lender may reasonably request. Section 5.2 Corporate Existence. The Borrower will maintain its corporate existence in good standing under the laws of its jurisdiction of incorporation and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude the Borrower from enforcing its rights with respect to any material asset or would expose the Borrower to any material liability. Section 5.3 Insurance. The Borrower will maintain with financially sound and reputable insurance companies such insurance as may be required by law and such other insurance in such amounts and against such hazards as is customary in the case of reputable corporations engaged in the same or similar business and similarly situated, including without limitation such insurance as may be required under the Security Agreement. Section 5.4 Payment of Taxes and Claims. The Borrower will file all tax returns and reports which are required by law to be filed by it and will pay before they become delinquent, all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including those of suppliers, mechanics, carriers, warehousemen, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its property. Section 5.5 Inspection. The Borrower will permit any Person designated by the Lender to visit and inspect any of the properties, books and financial records of the Borrower, to examine and to make copies of the books of accounts and other financial records of the Borrower, and to discuss the affairs, finances and accounts of the Borrower with its officers at such reasonable times and intervals as the Lender may designate. The Borrower shall also allow the Lender and its agents to conduct periodic collateral audits of the Borrower' s assets at such intervals as the Lender may choose, and the Borrower shall pay to Lender a fee in the amount of $750 per day per collateral audit, plus out-of-pocket costs and expenses incurred in connection with such collateral audits, (provided that so long as no Event of Default (as that term is defined in the Security Agreement) has occurredunder the Security Agreement and is continuing, the Borrower shall not be require to pay for more than 4 collateral audits in any calendar year). Section 5.6 Maintenance of Properties. The Borrower will maintain its properties in good condition, repair and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto, all as may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times. Section 5.7 Books and Records. The Borrower will keep adequate and proper records and books of account in which full and correct entries will be made of its dealings, business and affairs. Section 5.8 Compliance. The Borrower will comply in all material respects with all laws, rules and regulations to which it may be subject. Section 5.9 Notice of Litigation. The Borrower will give prompt written notice to the Lender of the commencement of any action, suit or proceeding affecting the Borrower. Section 5.10 Plans. The Borrower will maintain any employee benefit plans in compliance with all material requirements of applicable laws and regulations. Section 5.11 Special Agreements Regarding Accounts. 5.11(a) Collection of Accounts and all other amounts due to the Borrower shall be subject to the provisions of paragraphs 5 and 6 of the Security Agreement concerning the Lockbox and Collateral Account (as those terms are defined in the Security Agreement). The Borrower shall provide to the Lender a daily collection report of all Accounts collected. All collections received in the Collateral Account and reported to Republic before 8:00 a.m. (Central time) on any Business Day that is a Monday through Thurdday, or before 2:00 p.m. (Central time) on any Business Day that is a Friday, shall be applied to the payment of the Advances (in such order of application as the Lender may determine) on the day so received, or otherwise on the next business day; provided however, that for purposes of determining the interest due and payable on the unpaid balance of the Advances under Section 2.3, all collections received in the Collateral Account shall be applied to the unpaid balance of the Advances when such collections become finally collected funds after allowing not less than two (2) Business Days for collection. At Lender's request, the Borrower will deliver all customer billing statements to the Lender for examination and for mailing in the Borrower's stamped and addressed envelopes. 5.1l(b) Subject to the rights granted to the Lender in paragraph 5 of the Security Agreement, all ledger sheets or cards, invoices, shipping records, correspondence, and other writings relating to accounts shall, until delivered to the Lender or removed by the Lender from the Borrower's premises, be kept on the Borrower's premises without cost to the Lender in appropriate containers in safe places. 5.11(c) Upon the Lender's demand for payment, the Lender may remove from the Borrower's premises all books and records, correspondence, documents and files relating to accounts; and the Lender may without cost or expense to the Lender use such of the Borrower's personnel, supplies, space and equipment at the Borrower's place of business as the Lender may desire for the handling of collections. The Borrower will pay any and all out of pocket expenses and cost of collection (including reasonable attorney fees) incurred by the Lender in the Lender's handling of or effort to enforce collections. 5.11(d) The Borrower warrants that, except as may be disclosed in the lists of Accounts furnished to the Lender: each customer billing statement correctly states the subject matter and terms of sale; the merchandise conforms thereto and is in all respects acceptable to the customer; the date of the billing statement is not prior to the date of shipment; the Account is not subject to any dispute, defense, offset or counterclaim; the account debtor is not a subsidiary or affiliated company; and the Borrower has no reason to believe the Account will not be paid in the regular course of business. The Borrower will notify the Lender promptly of any event, circumstance or communication with respect to any Account that is inconsistent with the foregoing representation. ARTICLE VI NEGATIVE COVENANTS Until this Agreement shall have expired or been terminated and all of the Borrower's other obligations to the Lender under this Agreement shall have been paid in full, unless the Lender shall otherwise consent in writing: Section 6.1 Merger. The Borrower will not merge or consolidate or enter into any analogous reorganization or transaction with any Person or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution). Section 6.2 Sale of Assets. The Borrower will not sell, transfer, lease or otherwise convey all or any substantial part of its assets except for sales and leases of inventory in the ordinary course of business. Section 6.3 Dividends. The Borrower will not pay any dividends or otherwise make any distributions on, or redemptions of, any of its outstanding stock; provided, however, that if the Borrower shall be eligible and shall have elected "S" Corporation status in accordance with Sections 1361 et seq. of the Internal Revenue Code of 1986, as amended, for any fiscal year, the Borrower may pay dividends in its capital stock to enable its shareholders to pay income taxes on income of the Borrower for such fiscal year that it is taxable to the shareholders]. Section 6.4 Investments. The Borrower will not make any loans, advances or extensions of credit to any other Person (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms) or purchase or acquire any stock or other debt or equity securities of or any interest in any other Person or any integral part of any business or the assets comprising such business or part thereof, except for: 6.4(a) Investments in readily marketable direct obligations issued or unconditionally guaranteed by the United States government or any agency thereof and supported by the full faith and credit of the United States. 6.4(b) Certificates of deposit or bankers' acceptances issued by any commercial Bank organized under the laws of the United States or any State thereof which has (i) combined capital and surplus of at least $100,000,000, and (ii) a credit rating with respect to its unsecured indebtedness from a nationally recognized rating service that is satisfactory to the Lender. 6.4(c) Commercial paper given the highest rating by a nationally recognized rating service. 6.4(d) Repurchase agreements relating to securities of the kind described in Section 6.4 (a). 6.4(e) Other readily marketable investments in debt securities which are reasonably acceptable to the Lender. 6.4(f) Travel advances to officers and employees in the ordinary course of business. Any investments under clauses (a),(b),(c) or (d) above must mature within one year of the acquisition thereof by the Borrower. Section 6.5 Indebtedness. The Borrower will not borrow any money or issue any bonds, debentures or other debt securities or otherwise become obligated on any interest-bearing indebtedness except for the Advances under this Agreement and except for existing indebtedness as disclosed on the most recent financial statement of the Borrower referred to in Section 4.1. Section 6.6 Liens. The Borrower will not create, incur, assume or suffer to exist any Lien, or enter into any arrangement for the acquisition of any property through conditional sale, lease-purchase or other title retention agreements except: 6.6(a) Liens granted to the Lender. 6.6(b) Liens existing on the date of this Agreement and disclosed in those UCC or other Lien searches referred to in Section 3.l(d). 6.6(c) Deposits or pledges to secure payment of workers' compensation, unemployment insurance, old age pensions or other social security obligations arising in the ordinary course of business of the Borrower. 6.6(d) Liens for taxes, fees, assessments and governmental charges not delinquent. 6.6(e) Liens of carriers, warehousemen, mechanics and materialmen, and other like Liens arising in the ordinary course of business, for sums not due. 6.6(f) Liens incurred or deposits or pledges made or given in connection with, or to secure payment of, indemnity, performance or other similar bonds. 6.6(g) Encumbrances in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property and landlord's Liens under leases on the premises rented, which do not materially detract from the value of such property or impair the use thereof in the business of the Borrower. Section 6.7 Contingent Obligations. The Borrower will not guarantee or otherwise become liable on the indebtedness of any other Person. Section 6.8 Change in Control. The Borrower will not allow a Change in Control to occur. ARTICLE VII TERMINATION BY BORROWER This agreement shall continue in effect until terminated upon not less than 30 days prior written notice delivered by the Borrower certified mail to Lender by certified mail.Termination shall not impair or affect the Lender' s rights existing as of the time notice of Termination is given. Borrowers obligations with respect to payment of any Termination fee shall be fixed and owing as of date such notice is given and not when such notice becomes effective. In the event that the Borrower gives notice to the Lender of the termination of this Agreement under Section VII hereof at any time prior to the second anniversary of the date of this Agreement, the Borrower will pay to the Lender a prepayment charge, as additional compensation for the Lender's costs of entering into this Agreement, in the amount of (i) 3% of the maximum aggregate amount of the Advances if the notice of termination occurs prior to the first anniversary of the date of this Agreement; and (ii) 2% of the maximum aggregate amount of the Advances if the notice of termination occurs after the first anniversary, but before the second anniversary, of the date of this Agreement, unless the outstanding amount of Borrower's obligations hereunder are refinanced in full by an affiliate of U.S. Bancorp after the first anniversary of the date of this Agreement. ARTICLE VIII MISCELLANEOUS Section 8.1 Modifications. Notwithstanding any provisions to the contrary herein, any term of this Agreement may be amended with the written consent of the Borrower; provided that no amendment, modification or waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such amendment, modifications, waiver or consent shall be effective only in the specific instance and for the purpose for which given. Section 8.2 Costs and Expenses. Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to reimburse the Lender upon demand for all reasonable out-of-pocket expenses paid or incurred by the Lender (including filing and recording costs and fees and expenses of Dorsey & Whitney LLP, counsel to the Lender) in connection with the negotiation, preparation, approval, review, execution, delivery, amendment, modification, interpretation, collection and enforcement of this Agreement including all fees due Lender incurred pursuant to this Agreement. The obligations of the Borrower under this Section shall survive any termination of this Agreement. In the event such costs, fees or expenses are not promptly paid by Borrower on demand Lender may set off the amount of any such costs, fees or expenses from funds available to Borrower. If the Borrower elects, the Borrower may treat the amount of any such costs, fees or expenses as an Advance hereunder. Section 8.3 Waivers, etc. No failure on the part of the Lender to exercise and no delay in exercising any power or right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The rights and remedies of the Lender hereunder are cumulative and not exclusive of any right or remedy the Lender otherwise has. Section 8.4 Notices. Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Lender under Article II hereof shall be deemed to have been given only when received by the Lender. Section 8.5 Successors and Assigns: Disposition of Loans. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign its rights or delegate its obligations hereunder without the prior written consent of the Lender. The Lender may at any time sell, assign, transfer, grant participations in, or otherwise dispose of any portion of the Advances to banks or other financial institutions. The Lender may disclose any information regarding the Borrower in the Lender's possession to any prospective buyer or participant. Section 8.6 Offset. The Borrower hereby irrevocably authorizes the Lender to set off all sums owing by the Borrower to the Lender against all deposits and credits of the Borrower with, and any and all claims of the Borrower against, the Lender. The Borrower further agrees that any bank participating with the Lender in Advances hereunder may exercise any and all rights of setoff with respect to such participation as fully as if such participant had lent directly to the Borrower the amount of such participation. SECTION 8.7 GOVERNING LAW AND CONSTRUCTION, THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, SECTION 8.8 CONSENT TO JURISDICTION. AT THE OPTION OF THE LENDER, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT, IN THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE LENDER AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE, SECTION 8.9 WAIVER OF JURY TRIAL, EACH OF THE BORROWER AND THE LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE ADVANCES AND ANY OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, Section 8.10 Indemnification. The Borrower hereby agrees to defend, protect, indemnify and hold harmless the Lender and its affiliates and the directors, officers, employees, attorneys and agents of the Lender and its affiliates (each of the foregoing being an "Indemnitee" and all of the foregoing being collectively the "Indemnitees") from and against any and all claims, actions, damages, liabilities, judgments, costs and expenses (including all reasonable fees and disbursements of counsel which may be incurred in the investigation or defense of any matter) imposed upon, incurred by or asserted against any Indemnitee, whether direct, indirect or consequential and whether based on any federal, state, local or foreign laws or regulations (including securities laws, environmental laws, commercial laws and regulations), under common law or on equitable cause, or on contract or otherwise: (a) by reason of, relating to or in connection with the execution, delivery, performance or enforcement of any Loan Document, any commitments relating thereto, or any transaction contemplated by any Loan Document; or (b) by reason of, relating to or in connection with any credit extended or used under the Loan Documents or any act done or omitted by any Person, or the exercise of any rights or remedies thereunder, including the acquisition of any collateral by the Lender by way of foreclosure of the Lien thereon, deed or bill of sale in lieu of such foreclosure or otherwise; provided, however, that the Borrower shall not be liable to any Indemnitee for any portion of such claims, damages, liabilities and expenses resulting from such Indemnitee's negligence or willful misconduct. In the event this indemnity is unenforceable as a matter of law as to a particular matter or consequence referred to herein, it shall be enforceable to the full extent permitted by law. Section 8.11 Captions. The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement. Section 8.12 Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Borrower and the Lender with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Section 8.13 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and either of the parties hereto may execute this Agreement by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. INSIGNIA SYSTEMS, INC. By: ILLEGIBLE Its President Borrower's Address: 10801 Red Circle Drive Minnetonka, MN 55343 REPUBLIC ACCEPTANCE CORPORATION By: Scott Sousek Its Relationship Manager Lender's Address: 2338 Central Avenue NE, Suite 200 Minneapolis, MN 55418 Fax: (612) 782-1801 EX-13 3 ANNUAL REPORT 1997 EXHIBIT 13 [LOGO] INSIGNIA SYSTEMS, INC. ANNUAL REPORT 1997 - -------------------------------------------------------------------------------- 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 Insignia POPS(TM) - the Company's newest in-store marketing program, SIGNright,(R) 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 revenue from the sale of signage, 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 through indirect distribution channels, its accessories and supplies principally through telemarketers and Insignia POPS through a direct marketing process. Insignia POPS, introduced in July 1997, combines the Company's expertise in signage and in-store merchandising with its Stylus software products to provide for a unique sign to be ordered by a brand manufacturer and placed in a participating super-market. The Company uses independent distributors in Brazil, Germany, Italy, Singapore 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 1 FINANCIAL HIGHLIGHTS (In thousands, except per share amounts)
For the Years Ended December 31 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------- Net sales $ 13,321 $ 14,667 $ 15,547 $ 16,304 $ 14,249 Operating income (loss) (3,393) (999) (1,470) (947) 232 Net income (loss) (3,380) (999) (1,451) (909) 366 Net income (loss) per share: Basic and diluted $ (.50) $ (.18) $ (.27) $ (.17) $ .07 Shares used in calculation of net loss per share: Basic and diluted 6,790 5,404 5,360 5,203 5,254 Working capital $ 3,462 $ 3,512 $ 4,351 $ 4,952 $ 6,094 Total assets 5,754 6,426 6,832 8,107 8,094 Long-term debt and lease obligation 186 289 383 -- 13 Total stockholders' equity 3,795 4,174 5,118 6,413 7,156
2 TO OUR SHAREHOLDERS 3 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(R) system, which performs essentially the same functions. The SIGNright system was being sold primarily by in-house telemarketers and independent sales representatives in the United States and through foreign distributors. As of December 31, 1997, the Company discontinued direct marketing of the SIGNright machine, but continues to market the product through indirect channels. 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 1997 1996 1995 - ---------------------------------------------------------------- Net Sales 100.0% 100.0% 100.0% Cost of Sales 51.3 48.2 47.2 - ---------------------------------------------------------------- Gross Profit 48.7 51.8 52.8 Operating Expenses: Sales and Marketing 53.0 42.5 45.1 Product Development 15.1 12.8 14.0 General and Administrative 3.7 3.3 3.1 Restructuring Charge 2.4 -- -- - ---------------------------------------------------------------- Total Operating Expenses 74.2 58.6 62.2 - ---------------------------------------------------------------- Operating Loss (25.5) (6.8) (9.4) Other Income 0.1 -- 0.1 - ---------------------------------------------------------------- Net Loss (25.4)% (6.8)% (9.3)% - ---------------------------------------------------------------- RESULTS OF OPERATIONS: NET SALES. Net sales for the year ended December 31, 1997 decreased 9% to $13,321,000 compared to sales of $14,667,000 in 1996. Net sales for 1996 decreased 6% compared to sales of $15,547,000 in 1995. The decrease in sales in 1997 resulted primarily from a decrease in demand for the SIGNright machine in 1997 compared to the demand for the Impulse machine in 1996. This decrease in demand resulted in machine revenue of $3,808,000 in 1996 compared to machine revenue of $2,334,000 in 1997. The decrease in sales in 1996 resulted primarily from a decreased demand for the Impulse machine compared to 1995. GROSS PROFIT. The Company's gross profit decreased 15% in 1997 to $6,489,000 as compared to 1996. The gross profit decreased 7% in 1996 as compared to 1995. Gross profit as a percentage of net sales decreased to 48.7% for 1997 compared to 51.8% for 1996 and 52.8% for 1995. The decrease in 1996 and 1997 was due primarily to the overall decrease in net sales. Also, the Company's fixed costs did not decrease in the same proportion as net sales decreased in 1996 and 1997. The Company's foreign sales were 14% in 1997 and 16% in 1995 and 1996. The Company expects that sales to foreign distributors will be approximately 15% in 1998. 4 FINANCIAL REVIEW OPERATING EXPENSES. Operating expenses increased 15% in 1997 and decreased 11% in 1996. In 1997 the Company recorded a restructuring charge of $315,000 and also introduced its Insignia POPS program and incurred $1,007,000 of sales expenses which accounted for the 15% increase in 1997. Sales expenses increased 27% in 1997 and decreased 8% in 1996. The increase in 1997 was due to the introduction of the Insignia POPS program and the decrease in 1996 reflected lower commissions due to decreased sales. Marketing expenses decreased 19% in both 1997 and 1996 as a result of an expense reduction effort. General and administrative expenses increased 7% in 1997 and decreased 14% in 1996. The decrease in general and administrative expenses in 1996 was primarily due to the expense reduction effort. The increase in 1997 was due primarily to an increase in rent and bad debt expense. Product development expenses decreased 1% in 1997 and increased 5% in 1996. The Company expects that its operating expenses will decrease significantly as the Company initiated a restructuring plan in January 1998 and eliminated the direct marketing expenses of the SIGNright machine. The Company incurred severance costs in the amount of $80,000 resulting from workforce reductions in 1998. Operating expenses as a percentage of net sales were 74% in 1997 compared to 59% in 1996 and 62% in 1995. The increase as a percentage of net sales in 1997 was due primarily to the low sales volume of the SIGNright machine and Stylus software. The Company expects its operating expenses as a percentage of net sales to decrease and its net sales to increase at a faster rate than operating expenses as the Company is able to leverage its fixed expenses. NET LOSS. The Company had a net loss of $3,380,000 in 1997 compared to a net loss of $999,000 in 1996 and a net loss of $1,451,000 in 1995. The loss in 1997 was due to a decrease in margins due to a high proportion of fixed expense allocated to lower sales, a restructuring charge in the amount of $315,000 and the costs of introducing the Insignia POPS program. 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, 1997, working capital was $3,462,000 compared to $3,512,000 at December 31, 1996. Cash, cash equivalents and marketable securities decreased $133,000 to $465,000 at December 31, 1997. Net cash used in operating activities increased $2,497,000, primarily due to the net loss, the decrease in accounts payable, the increase in prepaid expenses and accounts receivable. Accounts payable decreased $157,000 during 1997 primarily due to the differences in timing of the Company's inventory purchasing schedule. Prepaid expenses increased $325,000 during 1997 primarily due to the purchasing schedule for the SIGNright system. Accounts receivable increased $253,000 during 1997 due to some extended terms for SIGNright and Stylus sales during the last half of 1997. The Company expects accounts receivable to remain relatively flat during 1998. The Company also expects inventory levels to remain flat during 1998. 5 FINANCIAL REVIEW Net cash of $546,000 was used in investing activities. The net cash decrease was due to the purchase of marketable securities in the amount of $1,812,000 offset by the maturity of marketable securities in the amount of $1,497,000 and the purchase of property and equipment of $231,000. Net cash of $2,595,000 was provided by financing activities, primarily due to proceeds from the issuance of common stock of $2,996,000 offset by principal payments on long term debt of $93,000 and payments to the line of credit in the amount of $308,000. The Company anticipates that its working capital needs will continue to increase due to the expected growth in the Insignia POPS program. In December of 1997, the Company entered into a loan agreement with a commercial financing division of a U.S. Bank. The bank issued the Company a line of credit in the amount of $3,000,000 of which $2,635,000 was available at December 31, 1997. The Company believes that with this line of credit, it will have sufficient capital resources to fund its current business operations and anticipated growth for the foreseeable future. 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 FINANCIAL REVIEW 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 and SIGNright systems have been obtained 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. 11. YEAR 2000. The year 2000 is not expected to have a material impact on the Company. Future developments will be required to be year 2000 compliant and should not have a material adverse effect on the Company. 7 BALANCE SHEETS
As of December 31 1997 1996 - ------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 0 $ 448,668 Marketable securities 464,837 149,427 Accounts receivable - net of $204,000 allowance in 1997 and $135,000 in 1996 2,712,505 2,644,851 Inventories 1,617,578 2,015,963 Prepaid expenses 540,028 215,562 - ------------------------------------------------------------------------------------------------- Total Current Assets 5,334,948 5,474,471 PROPERTY AND EQUIPMENT: Production tooling, machinery and equipment 1,902,704 1,862,311 Office furniture and fixtures 356,099 364,119 Computer equipment 978,952 780,675 Leasehold improvements 312,420 312,420 - ------------------------------------------------------------------------------------------------- 3,550,175 3,319,525 Accumulated depreciation and amortization (3,030,500) (2,368,221) - ------------------------------------------------------------------------------------------------- Total Property and Equipment 519,675 951,304 - ------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 5,854,623 $ 6,425,775 - ------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 424,361 $ 682,161 Accrued compensation and benefits 234,291 229,019 Accrued expenses 245,028 93,534 Deferred revenue 361,976 93,924 Warranty reserve 98,430 42,840 Other 40,523 54,313 Line of credit 365,447 673,281 Current portion of long-term debt 103,221 93,391 - ------------------------------------------------------------------------------------------------- Total Current Liabilities 1,873,277 1,962,463 LONG-TERM DEBT 186,104 289,326 COMMITMENTS (SEE NOTES 4 & 8) STOCKHOLDERS' EQUITY: Common stock, par value $.01: Authorized shares - 20,000,000 Issued and outstanding shares - 6,857,721 in 1997 and 5,403,858 in 1996 68,578 54,039 Additional paid-in capital 13,083,563 10,102,397 Unearned compensation (2,250) (7,313) Accumulated deficit (9,354,649) (5,975,137) - ------------------------------------------------------------------------------------------------- Total Stockholders' Equity 3,795,242 4,173,986 - ------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,854,623 $ 6,425,775 - -------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES 8 STATEMENTS OF OPERATIONS
Year Ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- NET SALES $ 13,321,124 $ 14,667,382 $ 15,546,723 Cost of Sales 6,832,609 7,063,836 7,339,659 - ---------------------------------------------------------------------------------------------------- Gross Profit 6,488,515 7,603,546 8,207,064 OPERATING EXPENSES: Sales 5,557,557 4,381,247 4,738,794 Marketing 1,501,242 1,845,730 2,280,458 Product development 493,686 498,160 476,549 General and administrative 2,014,322 1,877,411 2,181,165 Restructuring Charge 314,568 -- -- - ---------------------------------------------------------------------------------------------------- Total Operating Expenses 9,881,375 8,602,548 9,676,966 - ---------------------------------------------------------------------------------------------------- Operating Loss (3,392,860) (999,002) (1,469,902) OTHER INCOME (EXPENSE): Interest income 84,667 46,751 62,551 Interest expense (56,717) (64,911) (23,828) Other income (expense) (14,602) 17,936 (20,223) - ---------------------------------------------------------------------------------------------------- NET LOSS $ (3,379,512) $ (999,226) $ (1,451,402) - ---------------------------------------------------------------------------------------------------- Net loss per share: Basic and diluted $ (.50) $ (.18) $ (.27) - ---------------------------------------------------------------------------------------------------- Shares used in calculation of net loss per share: Basic and diluted 6,790,484 5,403,741 5,359,918 - ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES 9 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock Additional ------------------------ Paid-In Unearned Accumulated Shares Amount Capital Compensation Deficit Total - ------------------------------------------------------------------------------------------------------------------------- BALANCE AT JAN. 1, 1995 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 Sale of common stock 1,373,660 13,737 2,890,471 -- -- 2,904,208 Exercise of stock options 13,768 138 13,630 -- -- 13,768 Employee stock purchase plan 66,435 664 77,065 -- -- 77,729 Amortization of stock grant -- -- -- 5,063 -- 5,063 Net loss -- -- -- -- (3,379,512) (3,379,512) - ------------------------------------------------------------------------------------------------------------------------- BALANCE AT DEC. 31, 1997 6,857,721 $ 68,578 $13,083,563 $ (2,250) $(9,354,649) $ 3,795,242 - -------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES 10 STATEMENTS OF CASH FLOWS
Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net loss $(3,379,512) $ (999,226) $(1,451,402) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 662,279 540,192 647,667 Provision for bad debt expense 185,000 70,000 80,500 Provision for obsolete inventory 71,500 47,500 79,616 Amortization of unearned compensation 5,063 8,812 20,063 Changes in operating assets and liabilities: Accounts receivable (252,654) (479,477) 5,784 Inventories 326,885 (35,897) (181,208) Prepaid expenses (324,466) 116,056 102,014 Accounts payable (156,872) (101,890) (347,182) Accrued compensation and benefits 5,272 6,317 (79,358) Deferred revenue 268,052 73,047 20,877 Warranty reserve 55,590 (31,160) (10,000) Accrued expenses and other 137,705 2,789 (31,878) - ------------------------------------------------------------------------------------------------------------ Net Cash Used in Operating Activities (2,497,086) (782,937) (1,144,507) INVESTING ACTIVITIES: Purchases of property and equipment (230,651) (341,980) (335,595) Purchase of marketable securities (1,812,307) (1,114,271) (510,154) Maturity/sale of marketable securities 1,496,897 1,468,750 1,036,923 - ------------------------------------------------------------------------------------------------------------ Net Cash (Used In) Provided By Investing Activities (546,061) 12,499 191,174 FINANCING ACTIVITIES: Net change in line of credit (307,834) 673,281 -- Proceeds from issuance of long-term debt -- -- 500,000 Proceeds from issuance of Common Stock 2,995,704 46,709 135,877 Principal payments on long-term debt (93,391) (84,497) (32,786) - ------------------------------------------------------------------------------------------------------------ Net Cash Provided by Financing Activities 2,594,479 635,493 603,091 - ------------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (448,668) (134,945) (350,242) Cash and Cash Equivalents at Beginning of Year 448,668 583,613 933,855 - ------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 0 $ 448,668 $ 583,613 - ------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES 11 NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") develops and markets signage and related products to retail markets. The SIGNright(R) system, is an easy-to-use, affordable sign making system. The system produces high quality signs on sign cards provided by the Company. Through December, 1997 the product was sold primarily by telephone sales representatives and independent sales representatives. As of December, 1997 the Company discontinued direct marketing of the SIGNright machine, but will continue to market the product through indirect channels. 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. Both the SIGNright system and Stylus are sold through foreign distributors. The Company's third major product, Insignia POPS(TM) combines the Company's store merchandising expertise with the Stylus software to provide for a unique sign to be placed in a participating supermarket. Insignia POPS is sold primarily through direct sales. 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 associated with equipment and sign card sales at the time the products are shipped to customers. Revenue associated with software sales and maintenance agreements are recognized over the life of the contract. 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 over the anticipated useful life of the product. INCOME TAXES. Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between financial reporting and tax 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. 12 NOTES TO FINANCIAL STATEMENTS 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 COMMON SHARE. In 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE (Statement 128). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to fully diluted earnings per share under the previous rules. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the Statement 128 requirements. Diluted earnings per share is not presented as the effect of outstanding options and warrants is antidilutive. ADVERTISING COSTS. Advertising costs are charged to operations as incurred. Advertising expenses were approximately $677,195, $768,786, and $989,520 in 1997, 1996 and 1995, 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. RESTRUCTURING PROGRAM. During January 1998, the Company implemented a restructuring program (Program) to achieve a more focused marketing strategy regarding the selling of SIGNright machines. This marketing strategy eliminated the marketing and selling of SIGNright machines through direct channels. This resulted in the Company streamlining and downsizing its operations by reducing its workforce and consolidating certain employee groups. As a result of this Program, the Company reduced its workforce from 130 full time employees to 93 full time employees. The Company took a charge to earnings in December 1997 due to this restructuring in the amount of $315,000. This $315,000 charge is comprised of a $141,000 charge associated with the writing off of capitalized production tooling costs of the SIGNright machine, resulting in twelve months of unamortized costs, and $174,000 of accrued rental costs associated with a portion of the leased facility which in 1998 will be permanently idle and separate from the remaining utilized lease space. The Company incurred severance costs in the amount of $80,000 in January 1998 as a result of this workforce reduction. 13 NOTES TO FINANCIAL STATEMENTS 4. MARKETABLE SECURITIES. Marketable securities consist of U.S. Treasury Debt Securities which mature in October, 1998. 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. 5. 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 machinepurchased 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. As of December 31, 1997, the Company had a purchase commitment for 2,000 SIGNright machines in the approximate amount of $700,000. As of December 31, 1997, the Company had paid $350,000 of this commitment. 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. 6. INCOME TAXES. At December 31, 1997, the Company had net operating loss carryforwards of approximately $7,832,000 which are available to offset future taxable income through 2012. 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. 14 NOTES TO FINANCIAL STATEMENTS Significant components of the deferred tax assets are as follows: As of December 31 1997 1996 - ------------------------------------------------------------------------ DEFERRED TAX ASSETS: Net operating loss carryforwards $ 2,897,600 $ 1,919,100 Depreciation and amortization 106,900 119,200 Accounts receivable allowance 75,600 50,100 Allowance for machine returns 36,400 15,900 Inventory reserve 134,400 66,700 Restructuring reserve 110,500 -- Other 50,000 51,500 - ------------------------------------------------------------------------ Total deferred tax asset 3,411,400 2,222,500 Valuation allowance (3,411,400) (2,222,500) - ------------------------------------------------------------------------ Net deferred tax assets $ -- $ -- 7. 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, 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 Granted (199,000) 199,000 2.84 Cancelled 5,632 (5,632) 2.86 Exercised -- (13,768) 2.59 Balance at December 31, 1997 29,375 638,800 1.98 The number of options exercisable under the plan were: December 31, 1995 218,805 December 31, 1996 267,262 December 31, 1997 342,523 15 NOTES TO FINANCIAL STATEMENTS The following table summarizes information about the stock options outstanding at December 31, 1997:
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, 1997 Per Share - -------------------------------------------------------------------------------------------------------------------- $ 1.50 - $ 3.63 217,000 5 Years $ 2.54 33,000 $ 3.48 1.44 - 1.63 215,200 4 Years 1.37 135,065 1.37 1.00 - 1.88 128,300 3 Years 1.46 97,126 1.46 2.13 - 3.38 16,300 2 Years 3.15 16,300 3.15 1.63 - 3.25 62,000 1 Year 2.67 61,966 2.67 - -------------------------------------------------------------------------------------------------------------------- $ 1.00 - $ 3.63 638,800 3 Years $ 1.98 342,523 $ 1.93
Options outstanding under the plan expire at various dates during the period February 1998 through December 2002. 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 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; and for 1997: risk-free interest rate of 6.0%; volatility factor of the expected market price of the Company's common stock of .882, 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: 1997 1996 1995 - ---------------------------------------------------------------------------- Pro forma net loss $(3,508,528) $(1,111,522) $(1,482,027) Pro forma net loss per common share $ (.52) $ (.21) $ (.28) 16 NOTES TO FINANCIAL STATEMENTS The pro forma effect on the net loss for 1995, 1996 and 1997 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, the Company issued five year warrants to an outside consultant to purchase 1,000 shares of Common Stock at $1.50 per share. Prior to 1995, the Company issued five year warrants to consultants 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 August 1998 to November 1999. 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. During 1997, a non-employee Board member providing strategic planning and advisory assistance to the Company was granted a warrant to purchase 25,000 shares of common stock at $2.31 per share. The warrant will expire in five years. 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. 8. FINANCING AGREEMENTS AND LONG-TERM DEBT. The Company entered into a $3 million line of credit agreement with a finance corporation against which $365,000 was outstanding at December 31, 1997. The minimum amount of interest due and payable in any month under the line of credit agreement will not be less than $7,500. The line of credit agreement accrues interest at a rate of 2 percent over the bank's reference rate per annum and expires on December 29, 1999. The Company pledged as security all inventory, accounts receivable, equipment and general intangibles. The carrying amount of the Company's debt instruments approximates fair value. The Company also has a long-term loan agreement with a finance corporation which accrues interest at a rate of 10.05 percent per annum and expires on August 1, 2000. In 1995 the Company borrowed $500,000 and pledged certain printing press assets and U. S. Treasury Debt Securities as collateral against this facility. Long-term debt as of December 31, 1997 is as follows: Obligations under long-term debt $ 289,325 Less current portion 103,221 - ---------------------------------------------------------------- $ 186,104 - ---------------------------------------------------------------- Maturities of long-term debt as of December 31, 1997 are as follows: 1998 $ 103,221 1999 114,087 2000 72,017 - ---------------------------------------------------------------- $ 289,325 - ---------------------------------------------------------------- 17 NOTES TO FINANCIAL STATEMENTS Cash paid during the year for interest was $56,166, $51,285, and $20,393 in 1997, 1996, and 1995, respectively. 9. LEASES. The Company leases its office space under a five year operating lease. The term of the operating lease is January 1, 1994 through December 31, 1998. The future noncancelable lease payments due on the operating lease as of December 31, 1997 is $555,120. The Company incurred approximately $506,000, $429,000, and $412,000 in rent expense in 1997, 1996, and 1995, respectively. 10. CUSTOMER SALES. No single customer represented a significant portion of total sales. Export sales accounted for 14%, 16%, and 16% of total sales in 1997, 1996, and 1995, respectively. 11. 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 1997, 1996, and 1995, 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 1997, 1996, and 1995, 66,435, 42,852, and 90,493 shares, respectively, were purchased by employees under the plan. At December 31, 1997, 150,941shares are reserved for future employee purchases of Common Stock under the plan. 12. SOURCES OF SUPPLY. The Company currently buys the components of its products from sole suppliers. Although there are a limited number of manufacturers capable of manufacturing its products, management believes that other manufacturers could adapt to provide the products on comparable terms. The time required to locate and qualify other manufacturers, however, could cause a delay in manufacturing that may be financially disruptive to the Company. 18 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota February 6, 1998 19 OFFICERS G. L. HOFFMAN Chairman and Secretary SCOTT F. DRILL (Effective February 24, 1998) 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 and Secretary Insignia Systems, Inc. Scott F. Drill (Effective February 24, 1998) President and Chief Executive Officer Insignia Systems, Inc. ERWIN A. KELEN (1, 2) President Kelen Ventures DON E. SCHULTZ (1, 2) President Agora, Inc. 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 21, 1998, 9:00 a.m. Insignia Systems, Inc. Headquarters 10801 Red Circle Drive, Minnetonka, MN 5534 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, 1997, 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. 1997 High Low - ----------------------------------------------------------------- First Quarter 4 5/8 1 13/16 Second Quarter 4 2 5/16 Third Quarter 3 3/8 2 1/2 Fourth Quarter 2 5/8 1 1/32 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 As of March 17, 1998, the Company had 145 shareholders of record and approximately 1,050 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. 20 [LOGO] INSIGNIA SYSTEMS, INC. 10801 Red Circle Drive, Minnetonka, MN 55343 Phone: (612) 930-8200 Fax: (612) 930-8222 E-mail: insignia@insigniasystems.com Web: www.insigniasystems.com (C) 1998 Insignia Systems, Inc. All rights reserved. Insignia, Impulse, SIGNright and Stylus are registered trademarks of Insignia Systems, Inc. Insignia POPS is a trademark of Insignia Systems, Inc. All other brand names are trademarks of their respective owners. #2806 3/98 EX-23 4 CONSENT OF INDEPENDENT AUDITORS 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 February 6, 1998, included in the 1997 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 February 6, 1998, with respect to the financial statements incorporated 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 27, 1998 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 DEC-31-1997 0 464,837 2,916,505 (204,000) 1,617,518 5,334,948 3,550,175 (3,030,500) 5,854,623 1,873,277 0 0 0 13,152,141 0 5,854,623 13,321,124 13,408,791 6,832,609 4,881,375 14,602 0 56,717 (3,379,512) 0 0 0 0 0 (3,379,512) (.50) (.50)
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