-----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, N3lSuh2/0vsDLuuKsaNCNqAxu7MjW1OvA/CnZEvm3V1wTifroIdfsgsDWrt6xLhn 2QLwb5mVADyiGdcRCW2s2w== 0000897101-01-500052.txt : 20010327 0000897101-01-500052.hdr.sgml : 20010327 ACCESSION NUMBER: 0000897101-01-500052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010326 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-K SEC ACT: SEC FILE NUMBER: 001-13471 FILM NUMBER: 1578725 BUSINESS ADDRESS: STREET 1: 5025 CHESHIRE LANE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55446 BUSINESS PHONE: 7633926200 MAIL ADDRESS: STREET 1: 5025 CHESHIRE LANE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55346 10-K 1 insignia010488_10k.txt INSIGNIA SYSTEMS, INC. 10-K YEAR ENDED 12-31-00 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, 2000 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) 5025 Cheshire Lane North Plymouth, MN 55446-3715 ------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (763) 392-6200 - -------------------------------------------------------------------------------- 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 February 28, 2001 was 10,365,356. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 2001 was approximately $88,105,526 based upon the last sale price of the registrant's Common Stock on such date. Documents Incorporated By Reference: Portions of the registrant's proxy statement for the Annual Meeting of Shareholders scheduled for May 17, 2001 are incorporated by reference into Part III of this Form 10-K. 1 BUSINESS REVIEW PART I PART I ITEM 1 BUSINESS GENERAL Insignia Systems, Inc. (the "Company") markets in-store promotional programs and services to retailers and manufacturers. Since its inception in 1990, the Company has marketed point-of-purchase merchandising systems and resources to merchants in over 30 classes of retail trade. The Company started with simple standalone printers, trade-named Impulse(R) and SIGNright!(R), and later developed a fully featured ODBC (Open Database Connectivity) compliant software application, trade-named Stylus(R). This PC-based software is used by retail chains to produce signs, labels and posters, and is currently directly marketed. The Company executed a business strategy to obtain both initial revenue from the sale of these products and recurring revenue from the sale of the sign cards, label supplies and accessories used with them. The Company developed the products into turn-key solutions that allow retailers to quickly and easily produce high quality point-of-purchase signs, labels and large format promotional materials in their stores. The Company continues to make these products available and supports the supply and service needs of domestic clients. The Company actively markets these products internationally through independent distributors. In 1998, Insignia formally launched Insignia Point-Of-Purchase-Services (POPS), an in-store, shelf-edge sign promotion program that was developed by combining the Company's expertise in signage and in-store merchandising with its Stylus software products. Funded by consumer goods manufacturers, the account- and product-specific program combines product selling information and graphics from manufacturers with the retailer's logo and current store price on a sign designed to fit each participating retailer's decor and merchandising theme. For retailers, Insignia POPS(R) is a source of incremental revenue and is the first in-store promotion signing program that delivers a complete call-to-action, on a product- and store-specific basis, with all participating retail stores updated weekly. For consumer goods manufacturers, Insignia POPS provides access to the optimum retail promotion site for their products - the retail shelf edge. In addition, manufacturers are offered lead-times of less than 30 days, no production costs and micro-marketing capabilities such as store-specific messaging and multiple language options. The POPS program is directly marketed. Company management has been investing the Company's primary resources and energies in the development of the Insignia POPS program for the last five years. During this time, management also restructured the organization and redirected the Company's activities to leverage the Company's in-store experience, acquire promotion industry expertise and develop the necessary operational and systems foundation to successfully compete in the in-store promotion industry. INDUSTRY & MARKET BACKGROUND With 70% of buying decisions being made in store, product manufacturers are constantly seeking in-store vehicles to motivate consumers to buy their branded products. Industry studies estimate that manufacturers spend approximately $1 billion annually on in-store promotion efforts. The Company's market studies indicate that the shelf-edge sign represents the final and best opportunity for manufacturers to convince the consumer to buy. In fact, a 1996 study concluded the shelf is second only to end-aisle displays for in-store effectiveness. Many consumers seek product information beyond price in order to make educated buying decisions. The Company's marketing studies indicate the most effective sign contains information supplied by the product manufacturer in combination with the retailer's price and design look. 2 BUSINESS REVIEW PART I COMPANY PRODUCTS INSIGNIA POPS Insignia POPS is an in-store, shelf-edge point-of-purchase promotional signing program that enables manufacturers to deliver account-specific messages quickly and accurately - in designs and formats that have been pre-approved and supported by participating retailers. Utilizing proprietary technology, Insignia combines vital product information, such as product features and benefits, nutritional information, product uses, advertising tag lines and product images from the manufacturer with the retailer's logo, colors and current store price on a sign that is displayed directly in front of the manufacturer's product in the participating retailer's stores. Insignia POPS signs are responsive to each retailer's merchandising look and store decor, while ensuring retailer pricing authority. The Company collects and organizes the data from both manufacturers and retailers, then formats, prints and delivers the signs to retailers for distribution and display. The signs are placed at the shelf by store personnel for two-week display cycles. The Company charges manufacturers, on average, $5.25 per sign/per week/per store. Retailers are paid a flat fee per sign/per store/per display cycle by the Company based upon third-party compliance audits and retailer-supplied product movement data provided to Insignia. STYLUS SOFTWARE In late 1993, the Company introduced Stylus, a PC-based software application used by retailers to produce signs, labels and posters. The Company believes the primary market for the Stylus software is large independent retailers and retail chains, of which the Company estimates there being approximately 350,000 locations in the United States. The Stylus software allows retailers to create store signs, labels and posters by manually entering the information or by importing information from a database. Retailers can create more informative signage by importing barcode and price information from their point-of-sale system, adding graphic images and other selling information such as product features and benefits, nutritional information or lifestyle-type uses for the product. The retail marketplace has a significant portion of chain retailers creating and duplicating signs at their headquarters and then delivering them to their stores in an effort to maintain consistency. The headquarters version of the Stylus software provides significant benefits by allowing chains to create consistent-looking signs and labels centrally and then transmit them to store-level printers. The current retail price of the Stylus software is $3,595 for the single store version and $4,995 for the headquarters version. The Company not only sells the Stylus software, but also sells a variety of sizes, colors and styles of cardstock and labels used with the software. The Company sells these supplies at competitive prices, but is not in a proprietary position. Approximately 6% of 2000 revenues came from the sale of Stylus products and maintenance. The Company expects this percentage to be lower in the future as POPS revenue increases. THE SIGNRIGHT! SIGN SYSTEM In 1996, the Company replaced the Impulse Retail System, a system developed by an independent product design and development firm (the "Developer") with the SIGNright! Sign System. In 1998, the Company ceased the active domestic sales of the SIGNright! Sign System. The Company's business strategy with the Impulse and the SIGNright! was to obtain both initial revenue from their sale, and recurring revenue from the sale of the proprietary cardstock, label supplies and accessories used with them. Cardstock for the two systems are sold by the Company in a variety of sizes and colors that can be customized to include pre-printed custom artwork, such as a retailer's logo. Approximately 26% of 2000 revenues came from the sale of cardstock. The Company expects this percentage to be lower in the future as Insignia POPS revenue increases. 3 BUSINESS REVIEW PART I MARKETING & SALES The Company's marketing strategy is to focus on food manufacturers and food retailers. By utilizing the Insignia POPS program, these manufacturers and retailers can easily accomplish what had previously been either impossible or extremely difficult: tailoring national promotional programs to regional and local needs with minimal effort. In addition to the benefits provided to manufacturers and retailers, Insignia POPS signs provide consumers more information and clearer messages to aid in purchasing decisions. The Company believes Insignia POPS is the most complete in-store sign promotion program available, benefiting consumer, retailer and manufacturer. The Company markets its Stylus software in the United States and internationally primarily through resellers that integrate Stylus as an ODBC design and publishing component into their retail data and information management software applications. Through April 1998, the Company marketed the SIGNright! Sign System through telemarketing by in-house sales personnel and independent sales representatives. In May 1998, the Company discontinued the active sale of the SIGNright! Sign System to U.S. customers, but continues to market it through the Company's international distributors covering 20 countries. During 1998, 1999 and 2000, foreign sales accounted for approximately 16%, 16% and 8% of total sales, respectively. The Company expects sales to foreign distributors will be approximately 5% of total sales in 2001. PATENTS AND TRADEMARKS The barcode which the Company uses on the sign cards for the Impulse and SIGNright! Sign Systems was also developed by the Developer, which has granted the Company an exclusive worldwide license of its rights to the barcode. The license requires the Company to pay a royalty of 1% of the net sales price received by the Company on each cardstock or other supply item that bears the barcode and used by the Impulse Sign Systems. Although a patent has been issued to the Developer which covers the use of the barcode, there is no assurance that the Company will be able to prevent other suppliers of cardstock from copying the barcode used by the Company. However, the Company believes that the number, relatively small size and geographic dispersal of Impulse and SIGNright! users, their relationship with the Company and the Company's retention of its customer list as a trade secret will discourage other sign card suppliers from offering barcoded sign cards for use on the Impulse and SIGNright! machines. The Company has obtained 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. The Company has obtained trademark registration in the United States of the trademark "Stylus" for use on sign and label software. The developer of the DOS version of the Stylus software has granted to the Company an exclusive worldwide license to market and sell the DOS version of the Stylus software. The Company no longer sells and markets the DOS version of the Stylus software and has terminated this license agreement. The Company has developed the Windows version of the Stylus software which it is now marketing and selling. PRODUCT DEVELOPMENT Product development for Insignia POPS has been conducted internally and includes the proprietary data management and operations system, as well as the current offering of point-of-purchase and other promotion products. Ongoing internal systems enhancements, as well as the development of point-of-purchase and other promotion products, will be conducted utilizing both internal and external resources where appropriate. Product development on the SIGNright! Sign System was primarily conducted by the Developer on a contract basis. The Company continues to introduce complementary products such as new cardstock formats, types and colors. 4 BUSINESS REVIEW PART I From 1992 to 1997, the Stylus software was developed on a contract basis. In 1993, the Company hired in-house employees to develop and modify portions of the product. In 1998, 1999 and 2000, Stylus software product development costs were $407,409, $0 and $0, respectively. The Company plans no further development to the product. SUPPLIERS The thermal paper used by the Company in its SIGNright! and Impulse thermal sign cards is purchased exclusively from one supplier. While the Company believes that an alternative supplier would be available if necessary, any disruption in the relationship with or deliveries by the current supplier could have a serious adverse effect on the Company. COMPETITION INSIGNIA POPS Insignia POPS is competing for the marketing expenditures of branded product manufacturers for at-shelf advertising or promotion-related signage. Insignia POPS has two major competitors in its market: News America Marketing In-Store(R)(News America) and FLOORgraphics(TM), Inc. (FLOORgraphics). NEWS AMERICA offers a network for in-store advertising, promotion and sales merchandising services. News America has branded their in-store shelf signage products as SmartSource Shelftalk(TM) and SmartSource Shelfvision(TM). FLOORGRAPHICS offers a network for in-store advertising and promotion programs. FLOORgraphics has branded their advertising shelf signage product IN-STOREplus!(TM). The main strengths of Insignia POPS in relation to its competitors are: - the linking of manufacturers to retailers at a central coordination point - providing a complete call-to-action - supplying account-specific, product-specific and store-specific messages at the retail shelf RESTRUCTURING PROGRAM During April 1998, the Company initiated a restructuring program to redirect the Company's marketing and selling of the SIGNright! machines domestically. As a result of this program, the Company reduced its workforce from 93 full-time employees to 65 full-time employees. The Company took a charge to earnings in 1998 due to this restructuring in the amount of $546,000. The $546,000 charge was comprised of a $196,000 writedown of a prepayment made to its Japanese vendor for SIGNright! machines, a $106,000 charge for the write-off of SIGNright! machines, a $15,000 charge for moving expenses, a $47,000 charge for accrued rental costs associated with a portion of the lease of the facility which in 1998 was permanently idle and separate from the remaining utilized lease space, and severance costs in the amount of $182,000 as a result of the workforce reduction. EMPLOYEES As of February 28, 2001, the Company had 89 full-time employees. The full-time employees included 2 in telemarketing, 21 in other sales and marketing positions, 56 in operations and customer service, 7 in administration and accounting functions and 3 in senior management positions. None of the Company's employees are represented by unions. 5 BUSINESS REVIEW PART I ITEM 2 PROPERTIES The Company is located in approximately 26,000 square feet of office and warehouse space in suburban Minneapolis, Minnesota, which has been leased until March 31, 2004. The Company believes that this facility will meet the Company's current and foreseeable needs. ITEM 3 LEGAL PROCEEDINGS On August 7, 2000, News America Marketing In-Store, Inc., (News America) a major provider of in-store, shelf mounted signs for retail stores, filed a suit against the Company in federal district court in New York, New York. The complaint alleges that News America has exclusive promotional agreements with various major retail chains, and that those agreements prevented retailers from contracting for the Company's POPS program. The complaint accuses the Company of interfering with business relationships, unfair competition and false advertising and seeks an injunction against the Company and actual and punitive damages in an unspecified amount. In response to News America's suit, the Company brought suit against News America in federal district court in Minneapolis, Minnesota. The federal court in New York has recently ruled that the litigation should proceed in New York, not Minnesota. Thus the Company has brought a counter-claim in the New York case alleging that News America is engaged in anti-competitive practices and is attempting to use its dominant position in the market to stifle competition. In particular, the Company alleges that News America is violating the anti-trust laws by attempting to use unenforceable exclusive dealing clauses to dissuade customers from using the Company's POPS program. The Company's counter-claim seeks declaratory and injunctive relief, actual damages in an unspecified amount, treble damages and attorney fees under federal anti-trust law, and an order under Section 7 of the Clayton Act that News America divest its 1997 acquisition of Actmedia. News America has made a motion to dismiss the Company's counter-claim, and the Company expects that the motion will be briefed and heard by the court in the next several months. The Company believes that News America's suit is without merit, and the Company intends to vigorously defend that suit and pursue its counter-claim. In December 1997, Meta-4, Inc. the developer of the DOSversion of the Company's Stylus software product, brought suit against the Company in U.S. District Court in the State of Minnesota. The complaint alleged copyright infringement and breach of contract in connection with the Company's distribution of the Company's Stylus software product. This lawsuit was settled in March 1999. Under the settlement, Meta-4 assigned all its rights to the Stylus software to the Company in consideration of $15,000 in cash and 75,000 shares of the Company's Common Stock. In 1999, the Company recognized $136,875 as expense associated with this settlement. 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 2000. 6 BUSINESS REVIEW PART II ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages and positions of the Company's executive officers are as follows: Name Age Position - ------------------------------------------------------ Scott F. Drill 48 President and Chief Executive Officer Gary L. Vars 60 Chairman, Executive Vice President and General Manager, POPS Division John R. Whisnant 55 Vice President of Finance, Chief Financial Officer and Acting Secretary SCOTT F. DRILL, has been President and Chief Executive Officer of the Company since February 1998. In May 1996 Mr. Drill became 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 1998. From 1983 through March 1996 Mr. Drill was President and Chief Executive Officer of Varitronic Systems, Inc. and Chairman since 1990. Prior to starting Varitronics, Mr. Drill held senior management positions in sales and marketing at Conklin Company and Kroy, Inc. GARY L. VARS has been Chairman since March 2001 and Executive Vice President and General Manager of the POPS Division since September 1998. Prior to joining the Company, Mr. Vars spent 22 years as a marketing and business development consultant to Fortune 500 companies. From 1966 to 1976 Mr. Vars held various management positions at the Pillsbury Co., including Director of Marketing and New Product Development, Grocery Products Division. 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 MARKET INFORMATION 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. 2000 HIGH LOW - --------------------------------------------------------- First Quarter 4 5/8 2 5/8 Second Quarter 7 7/8 3 Third Quarter 8 1/4 4 17/32 Fourth Quarter 8 4 1/2 1999 HIGH LOW - --------------------------------------------------------- First Quarter 2 1/2 1 1/8 Second Quarter 1 7/8 1 1/4 Third Quarter 1 1/2 3/4 Fourth Quarter 4 7/8 APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK As of February 28, 2001, the Company had one class of Common Stock beneficially held by 1,530 persons. DIVIDENDS The Company has never paid cash dividends on its common stock. The Board of Directors presently intends to retain all earnings for use in the Company's business and does not anticipate paying cash dividends in the foreseeable future. 7 BUSINESS REVIEW PART II ITEM 6 SELECTED FINANCIAL DATA (In thousands, except per share amounts.)
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Net sales $ 12,830 $ 9,287 $ 8,704 $ 13,321 $ 14,667 Operating loss (809) (1,394) (3,396) (3,393) (999) Net loss (824) (1,411) (3,416) (3,380) (999) Net loss per share: Basic and diluted $ (.08) $ (.16) $ (.44) $ (.50) $ (.18) Shares used in calculation of net loss per share: Basic and diluted 9,880 8,828 7,714 6,790 5,404 Working capital $ 2,362 $ 1,798 $ 2,232 $ 3,462 $ 3,512 Total assets 5,065 4,043 4,069 5,855 6,426 Long-term debt and lease obligation -- -- 72 186 289 Total stockholders' equity 2,612 2,017 2,430 3,795 4,174
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items in the Company's statements of operations as a percentage of net sales.
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 42.8 44.7 53.7 - -------------------------------------------------------------------------------------------------------------- Gross profit 57.2 55.3 46.3 Operating expenses: Sales and marketing 49.8 52.8 51.3 Product development -- -- 4.7 General and administrative 13.6 17.5 23.1 Restructuring charge -- -- 6.3 - -------------------------------------------------------------------------------------------------------------- Total Operating Expenses 63.5 70.3 85.4 - -------------------------------------------------------------------------------------------------------------- Operating loss (6.3) (15.0) (39.0) Other income (0.1) (0.2) (0.2) - -------------------------------------------------------------------------------------------------------------- Net Loss (6.4)% (15.2)% (39.2)% - --------------------------------------------------------------------------------------------------------------
8 BUSINESS REVIEW PART II FISCAL 2000 COMPARED TO FISCAL 1999 NET SALES: Net sales for the year ended December 31, 2000 increased 38% to $12,830,000 compared to sales of $9,287,000 in 1999. The increase in sales in 2000 resulted primarily from increased POPS program sales. POPS program revenue was $6,481,000 in 2000 compared to $2,211,000 in 1999. Machine and machine related revenue was $691,000 in 2000 compared to $923,000 in 1999. Stylus software revenue and maintenance was $772,000 in 2000 compared to $751,000 in 1999. Thermal sign card revenue was $3,366,000 in 2000 compared to $4,069,000 in 1999. GROSS PROFIT: The Company's gross profit increased 43% in 2000 to $7,334,000 as compared to $5,131,000 in 1999. Gross profit as a percentage of net sales increased to 57.2% for 2000 compared to 55.3% for 1999. The increase in 2000 was due primarily to the overall increase in net sales and change in product mix. The Company's foreign sales were 8% in 2000, 16% in 1999 and 16% in 1998. The Company expects that sales to foreign distributors will be approximately 5% in 2001. OPERATING EXPENSES: Operating expenses increased 25% in 2000. Sales expenses increased 36% in 2000. The increase in 2000 was due primarily to the continued investment in the POPS program. Marketing expenses increased 12% in 2000 as a result of increased promotional expenses for the POPS program. The Company expects that its operating expenses will increase in 2001 as the Company continues to invest in the POPS program. Operating expenses as a percentage of net sales were 63.5% in 2000. The decrease as a percentage of net sales in 2000 was due primarily to an increase in sales of 38% while operating expenses only increased 25% in 2000. The Company expects its operating expenses as a percentage of net sales to decrease as its net sales increase at a faster rate than operating expenses. NET LOSS: The Company had a net loss of $824,000 in 2000 compared to a net loss of $1,411,000 in 1999. The net loss in 2000 resulted primarily from the costs of investing in the POPS program. FISCAL 1999 COMPARED TO FISCAL 1998 NET SALES: Net sales for the year ended December 31, 1999 increased 7% to $9,287,000 compared to sales of $8,704,000 in 1998. The increase in sales in 1999 resulted primarily from increased POPS program sales. POPS program revenue was $2,211,000 in 1999 compared to $359,000 in 1998. Machine and machine related revenue was $923,000 in 1999 compared to $997,000 in 1998. Stylus software and maintenance revenue was $751,000 in 1999 compared to $712,000 in 1998. Thermal sign card revenue was $4,069,000 in 1999 compared to $4,583,000 in 1998. GROSS PROFIT: The Company's gross profit increased 27% in 1999 to $5,131,000 as compared to $4,033,000 in 1998. Gross profit as a percentage of net sales increased to 55.3% for 1999 compared to 46.3% for 1998. The increase in 1999 was due primarily to the overall increase in net sales and change in product mix. The Company's foreign sales were 16% in 1999, 16% in 1998 and 14% in 1997. OPERATING EXPENSES: Operating expenses decreased 12% in 1999. In 1998, the Company recorded a restructuring charge of $546,000. Sales expenses increased 3% in 1999. Marketing expenses increased 44% in 1999 as a result of increased promotion expenses for the POPS program. Product development expenses decreased 100% in 1999 as the Company eliminated any further independent product development of its Stylus software. Operating expenses as a percentage of net sales were 70.3% in 1999. The decrease as a percentage of net sales in 1999 was due primarily to higher sales volume in 1999 along with no product development expenses in 1999. 9 BUSINESS REVIEW PART II NET LOSS: The Company had a net loss of $1,411,000 in 1999 compared to a net loss of $3,416,000 in 1998. The net loss in 1999 resulted primarily from the costs of investing in the sales and marketing of the Insignia POPS program. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations with proceeds from public and private equity placements. At December 31, 2000, working capital was $2,362,000 compared to $1,798,000 at December 31, 1999. During the same period total cash and cash equivalents increased $117,000. Net cash used in operating activities during 2000 was $826,000, primarily due to the net loss and the increase in accounts receivable, offset by an increase in accounts payable, accrued compensation and deferred revenue. Accounts receivable increased $822,000 due to increasing POPS program sales during the last few months of 2000. Accounts payable increased $601,000 as a result of payments due to participating retail stores in the POPS program. Accrued compensation increased $231,000 as a result of commissions and bonuses due to POPS sales representatives. Pre-paid expenses increased $142,000 primarily due to advances made to customers. The Company expects accounts receivable to increase during 2001 as the POPS program continues to grow. The Company also expects inventory levels to remain flat during 2001. Net cash of $105,000 was used in investing activities in 2000. The net cash decrease was due to the purchase of marketable securities in the amount of $160,000 and the purchase of property and equipment of $185,000, offset by the maturity of marketable securities in the amount of $240,000. Net cash of $1,048,000 was provided by financing activities, primarily from the proceeds from the issuance of common stock of $1,334,000, offset by payments to the line of credit in the amount of $204,000 and payments on long term debt of $82,000. The Company anticipates that its working capital needs will remain consistent with prior years. During 1999, the Company amended its line of credit agreement with a commercial financing division of a U.S. bank reducing the overall line of credit to $2.35 million. During 2000, the Company amended its line of credit agreement reducing the overall line of credit to $2 million. As of December 31, 2000 there was an outstanding balance on the line of credit of $603,000 and the borrowing availability was approximately $1,400,000. 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. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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. RESULTS OF INSIGNIA POPS PROGRAM. It will be necessary to achieve lift results from the Insignia POPS program that are comparable to the results to date from the Insignia POPS program in order to obtain additional participating manufacturers and retailers at the rate anticipated by the Company. 10 BUSINESS REVIEW PART II 2. COMPETITION. Insignia POPS is competing for the marketing expenditures of branded product manufacturers for at-shelf advertising or promotion related signage. There is no assurance that Insignia POPS will compete successfully for these expenditures. In addition, the budget levels allocated by branded product manufacturers for these types of marketing expenditures can fluctuate as economic conditions and overall advertising and promotion strategies change. 3. SIGN PRODUCTION. The Company's ability to produce the planned number of signs will depend on a number of factors, including receipt of data and information from both the retailers and manufacturers and conducting the necessary training. 4. BUSINESS CONDITIONS OF THE GENERAL ECONOMY. 5. COST OF THE RAW MATERIAL. The Company's printing gross margin percentage is a sensitive function of the cost of the raw paper materials. 6. SIGN CARD REVENUE. The Company derives a portion of its revenue from the sale of the bar-coded sign cards required by the Impulse and SIGNright! systems, which are no longer being actively marketed domestically by the Company. If a substantial number of existing customers discontinue the use of the sign card there could be a serious adverse effect on the Company's revenue. 7. 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, marketing and operational personnel. 7. A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 11 BUSINESS REVIEW PART II ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS The following Independent Auditors' Report and Financial Statements thereon are included on the pages indicated: Report of Independent Auditors .......................................... F-1 Balance Sheets as of December 31, 2000 and 1999 ......................... F-2 Statements of Operations for the years ended December 31, 2000, 1999 and 1998 ........................................................... F-3 Statement of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 ..................................................... F-4 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 ................................................................ F-5 Notes to Financial Statements ........................................... F-6 12 REPORT OF INDEPENDENT AUDITORS PART II TO THE BOARD OF DIRECTORS AND SHAREHOLDERS INSIGNIA SYSTEMS, INC. We have audited the accompanying balance sheets of Insignia Systems, Inc. as of December 31, 2000 and 1999, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also include the financial statement schedule listed in the index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Insignia Systems, Inc. at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. Ernst & Young LLP /s/ Ernst & Young LLP Minneapolis, Minnesota February 2, 2001 F-1 BALANCE SHEETS PART II
AS OF DECEMBER 31 2000 1999 - ---------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,106,160 $ 989,091 Marketable securities 160,000 240,000 Accounts receivable - net of $106,000 allowance in 2000 and $71,000 in 1999 2,089,786 1,303,087 Inventories 1,242,402 1,217,784 Prepaid expenses 216,792 74,138 - ---------------------------------------------------------------------------------------------- Total Current Assets 4,815,140 3,824,100 PROPERTY AND EQUIPMENT: Production tooling, machinery and equipment 1,713,240 1,743,020 Office furniture and fixtures 201,457 262,767 Computer equipment 399,447 833,440 Leasehold improvements 178,796 105,151 - ---------------------------------------------------------------------------------------------- 2,492,940 2,944,378 Accumulated depreciation and amortization (2,242,887) (2,725,077) - ---------------------------------------------------------------------------------------------- Total Property and Equipment 250,053 219,301 - ---------------------------------------------------------------------------------------------- TOTAL ASSETS $ 5,065,193 $ 4,043,401 - ---------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 602,852 $ 807,020 Accounts payable 988,707 387,396 Accrued compensation and benefits 439,795 209,016 Accrued expenses 160,199 149,800 Deferred revenue 187,367 321,617 Warranty reserve 15,840 15,840 Other 58,201 53,913 Current portion of long-term debt -- 81,967 - ---------------------------------------------------------------------------------------------- Total Current Liabilities $ 2,452,961 $ 2,026,569 STOCKHOLDERS' EQUITY: Common stock, par value $.01: Authorized shares - 20,000,000 issued and outstanding shares - 10,287,371 in 2000 and 9,327,946 in 1999 102,874 93,279 Additional paid-in capital 17,524,200 16,134,002 Unearned compensation (9,588) (28,764) Accumulated deficit (15,005,254) (14,181,685) - ---------------------------------------------------------------------------------------------- Total Stockholders' Equity 2,612,232 2,016,832 - ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,065,193 $ 4,043,401 - ----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES F-2 STATEMENTS OF OPERATIONS PART II
YEAR ENDED DECEMBER 31 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- NET SALES $ 12,830,172 $ 9,286,888 $ 8,703,604 Cost of sales 5,496,131 4,155,391 4,670,419 - ---------------------------------------------------------------------------------------------------- Gross Profit 7,334,041 5,131,497 4,033,185 OPERATING EXPENSES: Sales 5,115,558 3,764,502 3,672,173 Marketing 1,276,440 1,139,229 790,981 Product development -- -- 407,409 General and administrative 1,751,019 1,621,418 2,012,899 Restructuring charge -- -- 545,992 - ---------------------------------------------------------------------------------------------------- Total Operating Expenses 8,143,017 6,525,149 7,429,454 - ---------------------------------------------------------------------------------------------------- Operating Loss (808,976) (1,393,652) (3,396,269) OTHER INCOME (EXPENSE): Interest income 85,607 52,472 56,936 Interest expense (122,053) (89,042) (113,672) Other income (expense) 21,853 18,765 37,426 - ---------------------------------------------------------------------------------------------------- NET LOSS $ (823,569) $ (1,411,457) $ (3,415,579) - ---------------------------------------------------------------------------------------------------- Net loss per share: Basic and diluted $ (.08) $ (.16) $ (.44) - ---------------------------------------------------------------------------------------------------- Shares used in calculation of net loss per share: - ---------------------------------------------------------------------------------------------------- Basic and diluted 9,879,546 8,827,549 7,714,522 - ----------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES F-3 STATEMENT OF SHAREHOLDERS' EQUITY PART II
ADDITIONAL COMMON STOCK PAID-IN UNEARNED ACCUMULATED SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 6,857,721 $ 68,578 $ 13,083,563 $ (2,250) $ (9,354,649) $ 3,795,242 Sale of common stock 1,600,000 16,000 1,961,252 -- -- 1,977,252 Exercise of stock options 40,066 400 55,898 -- -- 56,298 Exercise of stock warrants 2,013 20 4,258 -- -- 4,278 Issuance of stock warrants in lieu of services -- -- 58,100 (47,932) -- 10,168 Amortization of stock grant -- -- -- 2,250 -- 2,250 Net loss -- -- -- -- (3,415,579) (3,415,579) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 8,499,800 84,998 15,163,071 (47,932) (12,770,228) 2,429,909 Employee stock purchase plan 20,030 200 22,234 -- -- 22,434 Exercise of stock options 181,666 1,817 250,474 -- -- 252,291 Exercise of stock warrants 551,450 5,514 577,098 -- -- 582,612 Issuance of common stock under META-4 settlement 75,000 750 121,125 -- -- 121,875 Amortization of unearned compensation -- -- -- 19,168 -- 19,168 Net loss -- -- -- -- (1,411,457) (1,411,457) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 9,327,946 93,279 16,134,002 (28,764) (14,181,685) 2,016,832 Employee stock purchase plan 56,537 566 62,755 -- -- 63,321 Exercise of stock options 135,000 1,350 192,448 -- -- 193,798 Exercise of stock warrants 767,888 7,679 1,068,896 -- -- 1,076,575 Stock option repricing -- -- 66,099 -- -- 66,099 Amortization of unearned compensation -- -- -- 19,176 -- 19,176 Net loss -- -- -- -- (823,569) (823,569) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 10,287,371 $ 102,874 $ 17,524,200 $ (9,588) $(15,005,254) $ 2,612,232 - ----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES F-4 STATEMENTS OF CASH FLOWS PART II
YEAR ENDED DECEMBER 31 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (823,569) $ (1,411,457) $ (3,415,579) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 150,150 220,071 336,613 Provision for bad debt expense 35,000 -- 72,000 Provision for obsolete inventory (11,401) 96,000 69,500 Amortization of unearned compensation 19,176 19,168 2,250 Stock option repricing 66,099 -- -- Loss (gain) on sale of equipment 3,791 -- (2,444) Issuance of stock warrants in lieu of services -- -- 10,168 Issuance of stock for litigation settlement -- 121,875 -- Changes in operating assets and liabilities: Accounts receivable (821,699) (1,133) 1,360,484 Inventories (13,217) (103,284) 337,578 Prepaid expenses (142,654) 113,646 352,244 Accounts payable 601,311 (131,133) 94,168 Accrued compensation and benefits 230,779 32,270 (57,545) Deferred revenue (134,250) (83,112) 42,753 Warranty reserve -- (10,000) (72,590) Accrued expenses and other 14,687 (122,940) 41,102 - ---------------------------------------------------------------------------------------------------------- Net Cash Used in Operating Activities (825,797) (1,260,029) (829,298) INVESTING ACTIVITIES Purchases of property and equipment (184,693) (169,266) (116,279) Proceeds from sale of equipment -- -- 31,680 Purchase of marketable securities (160,000) -- (1,700,967) Maturities of marketable securities 240,000 858,167 1,045,704 - ---------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (104,693) (688,901) (739,862) FINANCING ACTIVITIES Net change in line of credit (204,168) 807,020 (365,447) Proceeds from issuance of Common Stock 1,333,694 857,337 2,037,827 Principal payments on long-term debt (81,967) (104,138) (103,220) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 1,047,559 1,560,219 1,569,160 - ---------------------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 117,069 989,091 -- Cash and Cash Equivalents at Beginning of Year 989,091 -- -- - ---------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 1,106,160 $ 989,091 $ -- - ----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES F-5 NOTES TO FINANCIAL STATEMENTS PART II 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") markets in-store shelf-edge promotional programs and services to retailers and consumer goods manufacturers. The Company's products include the Insignia Point-Of-Purchase Services (POPS) in-store promotion program, thermal sign card supplies for the Company's SIGNright! and Impulse systems, Stylus software and laser printable cardstock and label supplies. CASH EQUIVALENTS. The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost which approximates market value. REVENUE RECOGNITION. The Company recognizes revenue associated with equipment, software and sign card sales at the time the products are shipped to customers. Revenue associated with maintenance agreements is recognized over the life of the contract. Revenue associated with Insignia POPS is recognized over the period of service. 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 machines, SIGNright! machines, sign card 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 is provided using the straightline method over the estimated useful lives of the assets as follows: Machinery and equipment 5 years Office furniture and fixtures 3 years Computer equipment 3 years Leasehold improvements are amortized over the shorter of the term of the lease or life of the asset. PRODUCTION TOOLING COSTS. Expenditures relating to the purchase and installation of production tooling are capitalized and amortized over the anticipated useful life of the product. 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 APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. IMPAIRMENT OF LONG-LIVED ASSETS. The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. USE OF ESTIMATES. The preparation of financial statements in conformity with general accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. NET LOSS PER SHARE. Basic loss per share excludes any dilutive effects of options, warrants and convertible securities. Diluted loss per share for the Company is the same as basic earnings per share because the effect of options and warrants is anti-dilutive. F-6 NOTES TO FINANCIAL STATEMENTS PART II ADVERTISING COSTS. Advertising costs are charged to operations as incurred. Advertising expenses were approximately $762,757, $259,018 and $361,500 in 2000, 1999 and 1998, respectively. RESEARCH AND DEVELOPMENT. Research and development expenditures are charged to operations as incurred. 2. MARKETABLE SECURITIES Marketable securities consist of a certificate of deposit, which is pledged as collateral for the building lease agreement (see Note 8). Investments are classified as available-for-sale and are stated at amortized cost which approximates fair market value. As a result no unrealized gains or losses were recognized at December 31, 2000 and 1999. 3. FINANCING AGREEMENTS AND LONG-TERM DEBT During the year, the Company amended its line of credit agreement with a finance corporation against which $602,852 was outstanding at December 31, 2000. The amendment reduced the overall line of credit from $2.35 million to $2 million. The credit agreement provides that the minimum amount of interest due and payable in any month under the line of credit agreement will be not less than $5,000. The line of credit agreement accrues interest at a rate of 2% over the bank's reference rate (the reference rate was 9.5% at December 31, 2000) per annum and expires on December 31, 2001. 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. In 1995, the Company borrowed $500,000 and pledged certain printing press assets and U.S. Treasury Debt Securities as collateral against this facility. During 1999, the securities were released under terms of the agreement. The loan which accrues interest at a rate of 10.05% per annum expired and was repaid in its entirety in August 2000. Cash paid during the year for interest was $122,053, $89,042 and $113,672 in 2000, 1999 and 1998, respectively. 4. SHAREHOLDERS' EQUITY During 2000, various warrant holders exercised 767,888 warrants to purchase shares of the Company's common stock at prices ranging from $1.25 to $2.125. The Company received proceeds of $1,076,575 as a result of these warrant exercises. In 2000, the Company repriced certain stock options resulting in a compensation expense of $66,099 due to variable plan account. During 1999, various warrant holders exercised 551,450 warrants to purchase shares of the Company's Common Stock at prices ranging from $1.00 to $2.125. The Company received proceeds of $582,612 as a result of these warrant exercises. In June 1998, the Company issued 1,600,000 shares of its Common Stock and warrants to purchase an additional 800,000 shares of Common Stock. The Company received net proceeds of approximately $2,000,000. At December 31, 2000, 166,000 of these warrants remain exercisable at $1.625 per share and expire in June 2001. 5. STOCK OPTIONS AND WARRANTS 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 or ten years after the date of grant and typically vest in one-third increments on the first, second and third anniversaries of the grant date. F-7 NOTES TO FINANCIAL STATEMENTS PART II The following tables summarizes activity under the plan:
Plan Plan Weighted Shares Options Average Exercise Available for Grant Outstanding Price Per Share - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 29,375 638,800 $ 1.98 Reserved 600,000 -- -- Granted (749,000) 749,000 1.25 Exercised -- (40,066) 1.41 Canceled 236,734 (236,734) 2.21 - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 117,109 1,111,000 1.54 Reserved 250,000 -- -- Granted (455,500) 455,500 1.31 Exercised -- (181,666) 1.39 Canceled 100,834 (100,834) 2.61 - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 12,443 1,284,000 1.38 Reserved 200,000 -- -- Granted (261,600) 261,600 4.84 Exercised -- (135,000) 1.44 Canceled 54,350 (54,350) 1.50 - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 5,193 1,356,250 $ 2.04 - --------------------------------------------------------------------------------------------------------------------- The number of options exercisable under the Plan were: December 31, 1998 541,623 December 31, 1999 610,503 December 31, 2000 849,994
The following table summarizes information about the stock options outstanding at December 31, 2000.
Options Outstanding Options Exercisable ------------------------------------------------ ---------------------------------- Weighted Weighted Weighted Ranges of Average Average Number Average Exercise Number Remaining Exercise Price Exercisable at Exercise Price Prices Outstanding Contractual Life Per Share December 31, 2000 Per Share - --------------------------------------------------------------------------------------------------------- $1.38 - $1.88 35,000 Less than 1 year $1.38 35,000 $1.38 1.50 - 3.63 51,000 1 to 2 years 2.82 48,500 2.87 1.06 - 2.38 669,250 2 to 3 years 1.32 523,166 1.23 0.75 - 1.50 340,000 3 to 4 years 1.25 168,328 1.23 4.00 - 8.00 261,000 4 to 9.9 years 4.84 75,000 5.10 - --------------------------------------------------------------------------------------------------------- $0.75 - $8.00 1,356,250 3 years $2.04 849,994 $1.68 - ---------------------------------------------------------------------------------------------------------
Options outstanding under the Plan expire at various dates during the period January 2000 through November 2010. The weighted average fair value of options granted during the years ended December 31, 2000, 1999 and 1998 was $2.58, $0.76 and $0.75, respectively. 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, F-8 NOTES TO FINANCIAL STATEMENTS PART II 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 income and earnings 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 2000, 1999, and 1998: risk-free interest rate of 6.0%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of .766, .917 and .978, respectively, and a weighted average expected life of the option of three years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows: 2000 1999 1998 - -------------------------------------------------------------------------------- Pro forma net loss $(1,323,099) $(1,726,999) $(3,715,870) Pro forma net loss per common share $ (.13) $ (.20) $ (.48) The pro forma effect on the net loss for 2000, 1999 and 1998 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. The warrants were exercised in 2000. In 1998, the Company issued three year warrants to outside consultants to purchase 70,000 shares of Common Stock at $1.625 per share. The Company valued these warrants at $58,100 and is recognizing consulting expense associated with these warrants over the vesting period. The Company recognized expenses of $19,176 and $19,168 in 2000 and 1999, respectively, associated with these warrants. The warrants expire on June 22, 2001. 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 expires on September 26, 2002. During 1994, the Company issued five year warrants to a consultant to purchase a total of 15,000 shares of Common Stock exercisable at a price of $1.50 per share. During 1999, these warrants were extended to November 22, 2004. In May 1999, the Company issued warrants to non-employee Board members to purchase a total of 15,000 shares of Common Stock in recognition for services performed as Board members of the Company. The warrants are exercisable at $2.00 per share and expire on September 28, 2004. F-9 NOTES TO FINANCIAL STATEMENTS PART II 6. EMPLOYEE STOCK PURCHASE PLAN 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 2000, 1999 and 1998, employees purchased 56,537, 20,030 and 0 shares, respectively, under the plan. At December 31, 2000, 274,374 shares are reserved for future employee purchases of Common Stock under the plan. 7. INCOME TAXES At December 31, 2000, the Company had net operating loss carryforwards of approximately $14,500,000 which are available to offset future taxable income. These carryforwards are subject to the limitations of Internal Revenue Code Section 382. This section provides limitations on the availability of net operating losses to offset current taxable income if an ownership change has occurred as defined by Internal Revenue Code Section 382. These carryforwards will begin expiring in 2005. The Company has established a valuation allowance equal to the net deferred tax asset due to uncertainties regarding the realization of deferred tax assets based on the Company's lack of earnings and expected lack of near-term future taxable earnings on which to recover those deferred tax assets. 8. LEASES The Company leases its office space under a five year operating lease. The term of the operating lease is January 1, 1999 through March 31, 2004. The future noncancelable lease payments, exclusive of costs associated with the landlord operating costs, due on the operating lease as of December 31, 2000 are as follows: 2001 $ 209,484 2002 209,484 2003 209,484 2004 52,371 - -------------------------------------------------------------------------------- $ 680,823 - -------------------------------------------------------------------------------- The Company incurred approximately $308,869, $253,000 and $312,567 in rent expense in 2000, 1999 and 1998, respectively. Significant components of the deferred tax assets are as follows:
AS OF DECEMBER 31 2000 1999 - ----------------------------------------------------------------------------------- DEFERRED TAX ASSETS Net operating loss carryforwards $ 5,360,600 $ 4,930,700 Depreciation 83,800 256,200 Accounts receivable allowance 39,300 26,200 Allowance for machine returns -- 5,900 Inventory reserve 41,500 45,800 Other 21,000 -- - ----------------------------------------------------------------------------------- Total deferred tax assets 5,546,200 5,264,800 DEFERRED TAX LIABILITIES Other -- (9,200) - ----------------------------------------------------------------------------------- Net deferred tax assets before valuation allowance 5,546,200 5,255,600 Less valuation allowance (5,546,200) (5,255,600) - ----------------------------------------------------------------------------------- Net deferred tax assets $ -- $ -- - -----------------------------------------------------------------------------------
F-10 NOTES TO FINANCIAL STATEMENTS PART II 9. COMMITMENTS PRODUCT DESIGN AGREEMENT. The Company has an exclusive 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 of the Impulse Retail System. 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, 1998, the Company had a purchase commitment for 1,000 SIGNright! machines in the approximate amount of $350,000. As of December 31, 2000, the Company had paid this commitment in full. In addition, before beginning production, the Company paid for tooling, equipment and development expenditures of approximately $248,000. 10. EMPLOYEE BENEFIT PLANS The Company has a Retirement Profit Sharing and Savings Plan under Section 401(k) of the Internal Revenue Code. The Plan allows employees to defer up to 15% of their income on a pre-tax basis through contributions to the plan. The Company may make matching contributions with respect to salary deferral at a percentage to be determined by the Company each year. In 2000, 1999 and 1998, the Company made no matching contributions. 11. CUSTOMER SALES No single customer represented a significant portion of total sales. Export sales accounted for 8%, 16% and 16% of total sales in 2000, 1999 and 1998, respectively. 12. SOURCE 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. 13. RESTRUCTURING PROGRAM During April 1998, the Company initiated a restructuring program to redirect the Company's marketing and selling of the SIGNright! machines domestically. As a result of this program, the Company reduced its workforce from 93 full-time employees to 65 full-time employees. The Company took a charge to earnings in 1998 due to this restructuring in the amount of $546,000. The $546,000 charge was comprised of a $196,000 writedown of a prepayment made to its Japanese vendor for SIGNright! machines, a $106,000 charge for the write-off of SIGNright! machines, a $15,000 charge for moving expenses, a $47,000 charge for accrued rental costs associated with a portion of the lease of the facility which in 1998 was permanently idle and separate from the remaining utilized lease space, and severance costs in the amount of $182,000 as a result of the workforce reduction. F-11 NOTES TO FINANCIAL STATEMENTS PART II 14. LITIGATION On August 7, 2000, News America Marketing In-Store, Inc., (News America) a major provider of in-store, shelf mounted signs for retail stores, filed a suit against the Company in federal district court in New York, New York. The complaint alleges that News America has exclusive promotional agreements with various major retail chains, and that those agreements prevented retailers from contracting for the Company's POPS program. The complaint accuses the Company of interfering with business relationships, unfair competition and false advertising and seeks an injunction against the Company and actual and punitive damages in an unspecified amount. In response to News America's suit, the Company brought suit against News America in federal district court in Minneapolis, Minnesota. The federal court in New York has recently ruled that the litigation should proceed in New York, not Minnesota. Thus the Company has brought a counter-claim in the New York case alleging that News America is engaged in anti-competitive practices and is attempting to use its dominant position in the market to stifle competition. In particular, the Company alleges that News America is violating the anti-trust laws by attempting to use unenforceable exclusive dealing clauses to dissuade customers from using the Company's POPS program. The Company's counter-claim seeks declaratory and injunctive relief, actual damages in an unspecified amount, treble damages and attorney fees under federal anti-trust law, and an order under Section 7 of the Clayton Act that News America divest its 1997 acquisition of Actmedia. News America has made a motion to dismiss the Company's counter-claim, and the Company expects that the motion will be briefed and heard by the court in the next several months. The Company believes that News America's suit is without merit, and the Company intends to vigorously defend that suit and pursue its counter-claim. In December 1997, Meta-4, Inc. the developer of the DOSversion of the Company's Stylus software product, brought suit against the Company in U.S. District Court in the State of Minnesota. The complaint alleged copyright infringement and breach of contract in connection with the Company's distribution of the Company's Stylus software product. This lawsuit was settled in March 1999. Under the settlement, Meta-4 assigned all its rights to the Stylus software to the Company in consideration of $15,000 in cash and 75,000 shares of the Company's Common Stock. In 1999, the Company recognized $136,875 as expense associated with this settlement. F-12 ITEMS 10 THROUGH 13 PART III 15. QUARTERLY FINANCIAL DATA (Unaudited) Quarterly data for 2000 and 1999 was as follows:
YEAR ENDED DECEMBER 31, 2000 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER - ----------------------------------------------------------------------------------------------------------- Net sales $ 2,878,226 $ 3,047,996 $ 2,863,480 $ 4,040,470 Gross profit 1,573,249 1,634,535 1,691,342 2,434,915 Net loss (253,806) (248,896) (295,331) (25,536) Earnings per share: Basic $ (.03) $ (.03) $ (.03) $ (.00) Diluted $ (.03) $ (.03) $ (.03) $ (.00) YEAR ENDED DECEMBER 31, 1999 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER - ----------------------------------------------------------------------------------------------------------- Net sales $ 2,290,852 $ 2,300,111 $ 2,364,464 $ 2,331,461 Gross profit 1,143,811 1,154,759 1,187,183 1,645,744 Net loss (259,721) (399,164) (389,994) (362,568) Earnings per share: Basic $ (.03) $ (.05) $ (.04) $ (.04) Diluted $ (.03) $ (.05) $ (.04) $ (.04)
ITEM 9 DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning Executive Officers of the Company is included in this Annual Report in Item 4A under the caption "Executive Officers of the Registrant." The information required by Item 10 concerning the directors of the Company is incorporated herein by reference to the Company's proxy statement for its 2001 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 2001 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 2001 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 2001 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. 13 EXHIBITS PART IV PART IV ITEM 14 EXHIBITS, SCHEDULE AND REPORTS ON FORM 8-K (a) Exhibits
EXHIBIT PAGE NUMBER OR INCORPORATION NUMBER DESCRIPTION BY REFERENCE TO - ---------------------------------------------------------------------------------------------------------------- 3.1 Articles of Incorporation of Registrant, Exhibit 3.1 of the Registrant's Registration as amended to date Statement of Form S-18, Reg. No. 33-40765C 3.2 By laws, 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 Exhibit 4.1 of the Registrant's Registration of Registrant Statement of Form S-18, Reg. No. 33-40765C 10.1 License Agreement between Thomas and Exhibit 10.1 of the Registrant's Registration Lawrence McGourty and the Company dated Statement of Form S-18, Reg. No. 33-40765C January 23, 1990, as amended 10.2 Barcode License and Support Agreement Exhibit 10.2 of the Registrant's Registration between Thomas and Lawrence McGourty Statement of Form S-18, Reg. No. 33-40765C and the Company dates January 23, 1990 10.3 The Company's 1990 Stock Plan, as amended 17 10.6 Lease Agreement between Plymouth Partners II, Exhibit 10.6 of the Registrant's Annual and the Company, dated October 5, 1998 Report on Form 10-K for the year ended December 31, 1998. 10.9 Employee Stock Purchase Plan, as amended 18 10.11 Loan Agreement between Republic Acceptance Exhibit 10.16 of the Registrant's Annual Corporation and the Company dated Report on Form 10-K for the year ended December 20, 1997 December 31, 1997 10.12 First Amendment to the Loan Agreement Exhibit 10.12 on the Registrant's Annual between U.S. Bancorp Republic Commercial Report on Form 10-K for the year ended Finance, Inc. and the Company dated December 31, 1998 December 31, 1998 10.13 Second Amendment to the Loan Agreement Exhibit 10.12 on the Registrant's Annual between U.S. Bancorp Republic Commercial Report on Form 10-K for the year ended Finance, Inc. and the Company dated December 31, 1999 June 30, 1999 10.14 Third Amendment to the Loan Agreement between U.S. Bank National Association 19 and the Company dated October 31, 2000 23 Consent of Ernst & Young 25 25 Power of Attorney (See signature page of this Form 10-K) 16
(b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during 2000 14 VALUATION AND QUALIFYING ACCOUNTS PART IV SCHEDULE II VALUATION AND QUALIFYING ACCOUNT
Balance at Charged to Balance Beginning Costs and Deductions at End of Description of Period Expenses Describe Period - --------------------------------------------------------------------------------------------------- Year ended December 31, 2000 Allowance for doubtful accounts $ 70,917 $ 45,000 $ (9,675)(1) 106,242 Provision for normal returns and rebates 15,840 15,840 Provision for obsolete inventory 61,960 91,000 85,751 (4) 67,209 - --------------------------------------------------------------------------------------------------- Year ended December 31, 1999 Allowance for doubtful accounts 96,350 25,433 (1) 70,917 Provision for normal returns and rebates 25,842 10,002 (3) 15,840 Provision for obsolete inventory 89,506 96,000 123,546 (4) 61,960 - --------------------------------------------------------------------------------------------------- Year ended December 31, 1998 Allowance for doubtful accounts 204,382 72,000 180,032 (1) 96,350 Provision for normal returns and rebates 102,925 9,629 86,712 (2) 25,842 Provision for obsolete inventory 127,949 69,500 107,943 89,506 - ---------------------------------------------------------------------------------------------------
(1) Uncollectable accounts written off, net of recoveries. (2) Includes $14,112 for rebates paid to customer buying groups and $72,600 credited to income. (3) Credited to income. (4) Inventory scrapped and disposed of. 15 SIGNATURES PART IV Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. By: /s/ Scott Drill --------------------------------- Scott Drill PRESIDENT AND CEO Dated: March 23, 2001 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/ Gary L. Vars Chairman, Executive Vice President March 23, 2001 - ----------------------- and General Manager, POPS Division GARY L. VARS /s/ Scott Drill President and Chief Executive Officer March 23, 2001 - ----------------------- (PRINCIPAL EXECUTIVE OFFICER) SCOTT DRILL /s/ John R. Whisnant Vice President of Finance, Chief March 23, 2001 - ----------------------- Financial Officer and Acting JOHN R. WHISNANT Secretary (PRINCIPAL FINANCIAL OFFICER) /s/ G. L. Hoffman Director March 23, 2001 - ----------------------- G. L. HOFFMAN /s/ Erwin A. Kelen Director March 23, 2001 - ----------------------- ERWIN A. KELEN /s/ W. Robert Ramsdell Director March 23, 2001 - ----------------------- W. ROBERT RAMSDELL /s/ Don E. Schultz Director March 23, 2001 - ----------------------- DON E. SCHULTZ /s/ Gordon F. Stofer Director March 23, 2001 - ----------------------- GORDON F. STOFER /s/ Frank D. Trestman Director March 23, 2001 - ----------------------- FRANK D. TRESTMAN 16 EX-10 2 insignia010488_ex10-3.txt EXHIBIT 10.3 AMENDED 1990 STOCK PLAN EXHIBIT 10.3 AMENDMENT TO INSIGNIA SYSTEMS, INC. 1990 STOCK PLAN Pursuant to an Amendment to the 1990 Stock Plan, adopted by the Board of Directors and approved by the Company's shareholders on May 17, 2000, Section 3 of the Stock Plan is hereby amended as follows: SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 1,970,000. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned ceased to be subject to Options, or if any shares subject to any Restricted Stock award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding options granted under the Plan, and in the number of share subject to Restricted Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. 17 EX-10 3 insignia010488_ex10-9.txt EXHIBIT 10.9 AMENDED EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.9 AMENDMENT TO INSIGNIA SYSTEMS, INC. EMPLOYEE STOCK PURCHASE PLAN Pursuant to an Amendment to the Employee Stock Purchase Plan, adopted by the Board of Directors and approved by the Company's shareholders on May 17, 2000, paragraph 4.(a) of the Employee Stock Purchase Plan is hereby amended as follows: 4.(a). Duration and Phases of the Plan. The Plan will commence on January 1, 2001 and will terminate December 31, 2003, except that any phase commenced prior to such termination shall, if necessary, be allowed to continue beyond such termination until completion. Notwithstanding the foregoing, this Plan shall be considered of no force and effect and any options granted shall be considered null and void unless the holders of a majority of all the issued and outstanding shares of the common stock of the Company approve the Plan within twelve (12) months after the date of its option by the Board of Directors. 10.(a). Stock Reserved for Options. Six Hundred Thousand (600,000) shares of the Company's common stock are reserved for issuance upon the exercise of options to be granted under the Plan. Shares subject to the unexercised portion of any lapsed or expired option may again be subject to option under the Plan. 18 EX-10 4 insignia010488_ex10-14.txt EXHIBIT 10.14 THIRD AMENDMENT TO FINANCING AGRMT EXHIBIT 10.14 THIRD AMENDMENT TO FINANCING AGREEMENT THIS THIRD AMENDMENT TO FINANCING AGREEMENT (this "Amendment"), made and entered into as of October 31, 2000, is by and between INSIGNIA SYSTEMS, INC., a Minnesota corporation ("Borrower"), and U.S. BANK NATIONAL ASSOCIATION as assignee of U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC., (the "Lender"). RECITALS 1. The Lender and the Borrower entered into a Financing Agreement dated as of December 29, 1997, as amended by that First Amendment to Financing Agreement dated as of September 30, 1998, and as further amended by that Second Amendment to Financing Agreement dated as of June 30, 1999 (as amended, the "Financing Agreement"); 2. The Borrower and the Lender desire to amend certain provisions of the Financing Agreement. AGREEMENT NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby covenant and agree to be bound as follows: SECTION 1. CAPITALIZED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Financing Agreement, unless the context shall otherwise require. SECTION 2. AMENDMENTS. The Financing Agreement is hereby amended in its entirety as follows: 2.1 THE ADVANCES. Section 2.1 of the Financing Agreement is amended in it entirety as follows: 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: 2.1(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 $2,000,000 (the "Accounts Advances"); 19 2.1(b) up to thirty percent (30%) of the 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 $400,000 (the "Inventory Advances"); 2.1(c) Letters of Credit. Until December 31, 2001, the Lender agrees the Borrower may cause to be issued through an Affiliate of the Lender, in the sole and absolute discretion of such Affiliate, standby or documentary letters of credit, provided, however, that the total amount of all unexpired letters of credit and unreimbursed draws under letters of credit (the "LC Obligations") shall not at any time exceed $160,000 and the total amount of the outstanding principal balance of the Advances under clauses 2.1(a) and 2.1(b) plus 125% of the LC Obligations (the "Total Revolving Outstandings") shall not at any time exceed $2,000,000. If issued, all letters of credit shall be subject to a 1% fee payable to the issuer, and the Borrower will execute such applications, security or pledge agreements and other documents required by Lender's Affiliate and shall pay the Lender's and such Affiliate's fees and expenses related to such letters of credit. Each letter of credit shall be for a period not to exceed one year, but may be renewable annually for additional one year periods not to exceed three years in the aggregate. Any draw under a letter of credit may, at the option of the Lender, be repaid through an Advance, which the Lender may make, and which the Borrower is obligated to repay, even though (a) any agreement of the Lender to make Advances in its sole discretion may have expired or terminated, (b) the Borrower is at that time the debtor in any bankruptcy, reorganization or insolvency proceeding, or (c) the Total Revolving Outstandings exceed the availability under the most recent Borrower Base Certificate or $2,000,000. The total amounts advanced under Section 2.1(a), 2.1(b) and 2.1(c) is the Facility Amount. Notwithstanding the previous clauses 2.1(a), 2.1(b)and 2.1(c), the maximum aggregate amount advanced against all Eligible Accounts and all Eligible Inventory from time to time shall not exceed $2,000,000. 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 20 interest, in any order or manner of application and without regard to the method by which the Lender determines to make Advances hereunder. 2.2 INTEREST RATES AND INTEREST PAYMENTS. Section 2.3 of the Financing Agreement is amended in its entirety as follows: 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 2% (the "Applicable Rate") and shall be due and payable monthly in arrears on the last day of each calendar month; provided, however, 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 $5,000. SECTION 2.3 ANNUAL FEE. Section 2.6 of the Financing Agreement is amended in its entirety to provide as follows: Section 2.6 Annual Fee. The Borrower shall pay to the Lender an annual fee in an amount equal to .75 percent of the Facility Amount (the "Annual Fee"). The Annual Fee shall be payable in advance on October 1, 2000 and on each October 1 thereafter. The Annual Fee is earned when due and is non-refundable. SECTION 2.4 INSPECTION. Section 5.5 of the Financing Agreement is amended in its entirety to provide as follows: 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 occurred under the Security Agreement and is continuing, the Borrower shall not be required to pay for more than 3 collateral audits in any calendar year). SECTION 2.5 Termination. Article VII of the Financing Agreement is amended in its entirety to provide as follows: 21 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 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 December 31, 2001, 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 1% of the Facility Amount if the notice of termination occurs prior to December 31, 2001; unless the outstanding amount of Borrower's obligations hereunder are refinanced in full by an affiliate of U.S. Bancorp. SECTION 3. EFFECTIVENESS OF AMENDMENTS. The amendments contained in this Amendment shall become effective upon delivery by the Borrower of, and compliance by the Borrower with, the following: 3.1 This Amendment, duly executed by the Borrower. 3.2 A copy of the resolutions of each of the Borrower authorizing the execution, delivery and performance of this Amendment certified as true and accurate by its Secretary, along with a certification by such Secretary (i) certifying that there has been no amendment to the Articles of Incorporation or Bylaws of the Borrower since true and accurate copies of the same were delivered to the Lender with a certificate of the Secretary of the Borrower dated December 29, 1997, and (ii) identifying each officer of the Borrower authorized to execute this Amendment and any other instrument or agreement executed by the Borrower in connection with this Amendment, and certifying as to specimens of such officer's signature and such officer's incumbency in such offices as such officer holds. SECTION 4. REPRESENTATIONS; ACKNOWLEDGMENTS. The Borrower hereby represents that on and as of the date hereof and after giving effect to this Amendment (a) all of the representations and warranties contained in the Financing Agreement, and in any and all other Loan Documents of the Borrower, are true, correct and complete in all respects as of the date hereof as though made on and as of such date, except for changes permitted by the terms of the Financing Agreement, or which relates to changes in the financial condition of the Borrower that are reflected in the financial statements furnished to Lender or in the nature of prospects in the Borrower's business that have been delivered to Lender, and (b) the Borrower is in compliance with all covenants and agreements of the Borrower as set forth in the Financing Agreement and in any and all other Loan Documents of the Borrower. The Borrower represents and warrants that the Borrower has the power and legal right and authority to enter into this Amendment and has duly authorized as appropriate the execution and delivery of this Amendment and other agreements and documents executed and delivered by the Borrower in connection herewith or therewith by proper corporate action. The 22 Borrower acknowledges and agrees that its obligations to the Lender under the Financing Agreement exist and are owing without offset, defense or counterclaim assertable by the Borrower against the Lender. The Borrower further acknowledges and agrees that its obligations to the Lender under the Financing Agreement, as amended, constitute "Obligations" within the meaning of the Security Agreement and are secured by the Security Agreement, as amended. SECTION 5. AFFIRMATION, FURTHER REFERENCES. Except as expressly modified under this Amendment, all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under the Financing Agreement, the Security Agreement, and any and all other Loan Documents entered into with respect to the obligations under the Financing Agreement are incorporated herein by reference are hereby ratified and affirmed in all respects by the Borrower. All references in the Financing Agreement to "this Agreement," "herein," "hereof," and similar references, and all references in the other Loan Documents to the "Agreement," shall be deemed to refer to the Agreement, as amended by this Amendment. SECTION 6. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto and supersedes and has merged into it all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Amendment, shall control with respect to the specific subjects hereof and thereof. SECTION 7. SEVERABILITY. Whenever possible, each provision of this Amendment and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective, valid and enforceable under the applicable law of any jurisdiction, but, if any provision of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited, invalid or unenforceable under the applicable law, such provision shall be ineffective in such jurisdiction only to the extent of such prohibition, invalidity or unenforceability, without invalidating or rendering unenforceable the remainder of such provision or the remaining provisions of this Amendment or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto in such jurisdiction, or affecting the effectiveness, validity or enforceability of such provision in any other jurisdiction. SECTION 8. SUCCESSORS. This Amendment shall be binding upon the Borrower and the Lender and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Lender and the successors and assigns of the Lender. SECTION 9. LEGAL EXPENSES. The Borrower agrees to reimburse the Lender, upon execution of this Amendment, for all reasonable out-of-pocket expenses (including attorneys' fees and legal expenses of Dorsey & Whitney, counsel for the Lender) incurred in connection with the Financing Agreement, including in connection with the negotiation, preparation and execution of this Amendment and all other documents negotiated, prepared and executed in connection with this Amendment, and in enforcing the obligations of the Borrower under the Financing Agreement, as amended by this Amendment, which obligations of the Borrower shall survive any termination of the Financing Agreement. 23 SECTION 10. HEADINGS. The headings of various sections of this Amendment have been inserted for reference only and shall not be deemed to be a part of this Amendment. SECTION 11. COUNTERPARTS. This Amendment may be executed in several counterparts as deemed necessary or convenient, each of which, when so executed, shall be deemed an original, provided that all such counterparts shall be regarded as one and the same document, and either party to this Amendment may execute any such agreement by executing a counterpart of such agreement. SECTION 12. GOVERNING LAW. The Amendment Documents shall be governed by the internal laws of the State of Minnesota, without giving effect to conflict of law principles thereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date and year first above written. INSIGNIA SYSTEMS, INC. By: /s/ John R. Whisnant --------------------- Its: VP Finance ----------- U.S. BANK NATIONAL ASSOCIATION, Assignee of U.S. BANCORP REPUBLIC COMMERCIAL FINANCE, INC. By: /s/ Leonard H. Ramotar --------------------- Its: Vice President --------------- 24 EX-23 5 insignia010488_ex-23.txt EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-60243 and 333-79915) and Registration Statements (Form S-8 Nos. 33-47003, 33-92376, 333-43781, 333-59709, 333-80261 and 333-41242) pertaining to the 1990 Stock Plan and in Registration Statements (Form S-8 Nos. 33-75372 and 33-92374) pertaining to the Employee Stock Purchase Plan of Insignia Systems, Inc. of our report dated February 2, 2001, with respect to the financial statements and schedule of Insignia Systems, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ Ernst & Young LLP Minneapolis, Minnesota March 23, 2001 25 -----END PRIVACY-ENHANCED MESSAGE-----