-----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, WqodHunoHXibvXUAYs9piQkxnvW38nAhmVA8wLGYhVB4oQmXF/ccu28xFd+8LnSG UM1J5ozm3AzfwSsHIjpG1w== 0000897101-03-000852.txt : 20030728 0000897101-03-000852.hdr.sgml : 20030728 20030728154551 ACCESSION NUMBER: 0000897101-03-000852 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSIGNIA SYSTEMS INC/MN CENTRAL INDEX KEY: 0000875355 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 411656308 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13471 FILM NUMBER: 03806143 BUSINESS ADDRESS: STREET 1: 6470 SYCAMORE COURT NORTH CITY: MAPLE GROVE STATE: MN ZIP: 55369 BUSINESS PHONE: 7633926200 MAIL ADDRESS: STREET 1: 6470 SYCAMORE COURT NORTH CITY: MAPLE GROVE STATE: MN ZIP: 55369 10-Q 1 insignia033167_10q.txt INSIGNIA SYSTEM FORM 10-Q JUNE 30, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________________ TO _________________ Commission File Number: 1-13471 INSIGNIA SYSTEMS, INC. (Exact name of registrant as specified in its charter) Minnesota 41-1656308 --------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6470 Sycamore Court North, Maple Grove, MN 55369 ------------------------------------------------ (Address of principal executive offices) (763) 392-6200 ------------------------------------------------ (Registrant's telephone number, including area code) Not applicable. ------------------------------------------------ (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2). [ ] Yes [ X ] No Number of shares outstanding of Common Stock, $.01 par value, as of July 24, 2003, was 12,344,019. Page 1 of 19 INSIGNIA SYSTEMS, INC. INDEX PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Balance Sheets - June 30, 2003 and December 31, 2002 (unaudited) Statements of Operations -- Three and six months ended June 30, 2003 and 2002 (unaudited) Statements of Cash Flows - Six months ended June 30, 2003 and 2002 (unaudited) Notes to Financial Statements - June 30, 2003 (unaudited) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 4. CONTROLS AND PROCEDURES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 3. DEFAULTS UPON SENIOR SECURITIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES EXHIBITS Page 2 of 19 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INSIGNIA SYSTEMS, INC. BALANCE SHEETS
June 30, December 31, 2003 2002 ASSETS (Unaudited) - -------------------------------------------- ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 4,632,722 $ 6,471,581 Accounts receivable, net 4,584,027 5,263,701 Inventories 779,899 975,876 Prepaid expenses and other 467,152 77,248 ------------ ------------ TOTAL CURRENT ASSETS 10,463,800 12,788,406 PROPERTY AND EQUIPMENT: Production tooling, machinery and equipment 1,750,169 2,046,208 Office furniture and fixtures 257,547 257,547 Computer equipment 677,373 645,742 Leasehold improvements 258,767 174,143 Construction-in-progress -- 50,936 ------------ ------------ 2,943,856 3,174,576 Accumulated depreciation and amortization (2,123,993) (2,281,838) ------------ ------------ TOTAL PROPERTY AND EQUIPMENT 819,863 892,738 OTHER ASSETS: Goodwill 3,090,579 3,041,186 Other 500,000 -- ------------ ------------ TOTAL OTHER ASSETS 3,590,579 3,041,186 ------------ ------------ TOTAL ASSETS $ 14,874,242 $ 16,722,330 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 2,602,740 $ 3,465,746 Accrued liabilities: Commissions 264,374 269,323 Employee stock purchase plan 136,568 246,120 Other 693,644 406,061 Deferred revenue 274,026 1,077,002 ------------ ------------ TOTAL CURRENT LIABILITIES 3,971,352 5,464,252 SHAREHOLDERS' EQUITY: Common stock, par value $.01; authorized - 20,000,000 shares; issued and outstanding June 30, 2003 - 12,344,019 shares; December 31, 2002 - 11,767,255 shares 123,440 117,673 Additional paid-in capital 26,425,238 25,692,131 Accumulated deficit (15,645,788) (14,551,726) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 10,902,890 11,258,078 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,874,242 $ 16,722,330 ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 3 of 19 INSIGNIA SYSTEMS, INC. STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ---------------------------- ---------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Services revenues $ 6,242,576 $ 4,536,590 $ 11,633,613 $ 9,347,749 Products sold 1,018,382 1,286,292 2,088,848 2,490,250 ------------ ------------ ------------ ------------ TOTAL NET SALES 7,260,958 5,822,882 13,722,461 11,837,999 Cost of services 3,357,956 2,160,018 6,695,856 4,643,388 Cost of sales 629,228 630,570 1,179,079 1,221,373 ------------ ------------ ------------ ------------ TOTAL COST OF SALES 3,987,184 2,790,588 7,874,935 5,864,761 ------------ ------------ ------------ ------------ Gross Profit 3,273,774 3,032,294 5,847,526 5,973,238 OPERATING EXPENSES: Selling 2,157,885 1,662,845 4,470,078 3,351,409 Marketing 354,302 411,645 740,367 722,136 General and administrative 755,993 662,451 1,765,941 1,277,290 ------------ ------------ ------------ ------------ Total operating expenses 3,268,180 2,736,941 6,976,386 5,350,835 ------------ ------------ ------------ ------------ Operating Income (Loss) 5,594 295,353 (1,128,860) 622,403 OTHER INCOME (EXPENSE): Interest income 18,825 12,645 42,639 23,087 Interest expense (1,696) (14,829) (1,696) (28,698) Other income (expense) 1,095 (91,456) (6,145) (95,174) ------------ ------------ ------------ ------------ 18,224 (93,640) 34,798 (100,785) ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 23,818 $ 201,713 $ (1,094,062) $ 521,618 ============ ============ ============ ============ Net income (loss) per share: Basic $ 0.00 $ 0.02 $ (0.09) $ 0 .05 ============ ============ ============ ============ Diluted $ 0.00 $ 0.02 $ (0.09) $ 0 .04 ============ ============ ============ ============ Shares used in calculation of net income (loss) per share: Basic 12,272,876 10,801,128 12,141,950 10,750,692 ============ ============ ============ ============ Diluted 12,605,750 11,744,213 12,141,950 11,670,733 ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 4 of 19 INSIGNIA SYSTEMS, INC. STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30 -------------------------- 2003 2002 ----------- ----------- OPERATING ACTIVITIES: Net income (loss) $(1,094,062) $ 521,618 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 146,716 74,736 Provision for bad debt expense 10,000 42,000 Changes in operating assets and liabilities: Accounts receivable 669,674 (518,322) Inventories 195,977 14,646 Prepaid expenses and other (889,904) (74,271) Accounts payable (863,006) (574,398) Accrued liabilities 173,082 595,129 Deferred revenue (802,976) 55,702 ----------- ----------- Net cash provided by (used in) operating activities (2,454,499) 136,840 INVESTING ACTIVITIES: Purchases of property and equipment (73,841) (93,050) Maturities of marketable securities -- 80,000 Other (49,393) -- ----------- ----------- Net cash used in investing activities (123,234) (13,050) FINANCING ACTIVITIES: Net change in line of credit -- (194,309) Proceeds from issuance of common stock, net 738,874 522,194 ----------- ----------- Net cash provided by financing activities 738,874 327,885 ----------- ----------- Increase (decrease) in cash and cash equivalents (1,838,859) 451,675 Cash and cash equivalents at beginning of period 6,471,581 2,209,448 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,632,722 $ 2,661,123 =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 5 of 19 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. DESCRIPTION OF BUSINESS. ------------------------ Insignia Systems, Inc. (the "Company") markets in-store promotional products, programs and services to retailers and consumer packaged goods manufacturers. The Company's products include the Insignia Point-of-Purchase Services (POPS(R)) in-store promotion program, which includes both Insignia POPSign and VALUStix(R) programs; thermal sign card supplies for the Company's SIGNright and Impulse systems; Stylus software; and laser printable cardstock and label supplies. BASIS OF PRESENTATION. ---------------------- Financial statements for the interim periods included herein are unaudited; however, they contain all adjustments, including normal recurring accruals, which in the opinion of management, are necessary to present fairly the financial position of the Company at June 30, 2003, and its results of operations and cash flows for the three and six months ended June 30, 2003 and 2002. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The financial statements do not include certain footnote disclosures and financial information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2002. The Company has included in its financial statements the assets and liabilities recorded in connection with the acquisition of the assets comprising the VALUStix business. The results of operations related to VALUStix since December 23, 2002, the effective date, have been included in the Company's Statement of Operations. The Summary of Significant Accounting Policies in the Company's 2002 Annual Report on Form 10-K/A describes the Company's accounting policies. INVENTORIES. ------------ Inventories are primarily comprised of Impulse machines, SIGNright machines, sign cards, and accessories. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method and consist of the following: June 30, December 31, 2003 2002 -------------- ---------------- Raw materials $ 211,431 $ 328,713 Work-in-process 10,914 -- Finished goods 557,554 647,163 ------- ------- $ 779,899 $ 975,876 ======= ======= Page 6 of 19 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) PREPAID EXPENSES. ----------------- During the six months ended June 30, 2003 the Company made a pre-payment of approximately $1,000,000 to a retailer, in connection with a three-year contract. The pre-payment is being amortized ratably over the three-year contract using the straight-line method. At June 30, 2003 the balance of the prepaid expense related to this retailer payment was approximately $833,000, of which approximately $500,000 was classified as long-term. NET INCOME (LOSS) PER SHARE. ---------------------------- Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share gives effect to all diluted potential common shares outstanding during the year. Options and warrants to purchase approximately 1,309,000 shares of common stock with a weighted average exercise price of $8.91 were outstanding at June 30, 2003 and were not included in the computation of common stock equivalents for the three months ended June 30, 2003 because their exercise prices were higher than the average fair market value of the common shares during the reporting period. Options and warrants to purchase approximately 1,043,000 shares of common stock with a weighted average exercise price of $9.70 were outstanding at June 30, 2003 and were not included in the computation of common stock equivalents for the six months ended June 30, 2003 because their exercise prices were higher than the average fair market value of the common shares during the reporting period. Options and warrants to purchase approximately 196,000 shares of common stock with a weighted average exercise price of $9.29 were outstanding at June 30, 2002 and were not included in the computation of common stock equivalents for the three and six months ended June 30, 2002 because their exercise prices were higher than the average fair market value of the common shares during the reporting periods. For the six months ended June 30, 2003, the effect of options and warrants was anti-dilutive due to the net loss incurred during the period. Had net income been achieved, approximately 181,000 of common stock equivalents would have been included in the computation of diluted net income per share for the six months ended June 30, 2003.
Three Months Ended June 30 Six Months Ended June 30 -------------------------- ------------------------- 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------------ Denominator for basic net income (loss) per share - weighted averages shares 12,272,876 10,801,128 12,141,950 10,750,692 Effect of dilutive securities: Stock options and warrants 332,874 943,085 -- 920,041 - ------------------------------------------------------------------------------------------------------------------------ Denominator for diluted net income (loss) per share - adjusted weighted average shares 12,605,750 11,744,213 12,141,950 11,670,733
RECLASSIFICATIONS. ------------------ Certain 2002 amounts have been reclassified to conform to the presentation in the 2003 financial statements. Page 7 of 19 INSIGNIA SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 2. STOCK OPTIONS. The Company has elected to follow APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its stock-based compensation. In addition, the Company provides pro forma disclosure of stock-based compensation, as measured under the fair value requirements of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. These pro forma disclosures are provided as required under SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE. The following table summarizes the relevant information as if the fair value recognition provisions of SFAS 123 had been applied to all stock-based awards:
Six Months Ended June 30 ------------------------ 2003 2002 - ----------------------------------------------------------------------------------------------------- Net income (loss) As reported $ (1,094,062) $ 521,618 Deduct stock-based employee compensation expense determined under fair value method 802,389 518,024 - ----------------------------------------------------------------------------------------------------- Pro forma net income (loss) $ (1,896,451) $ 3,594 Basic net income (loss) per share: As reported $ (0.09) $ 0.05 Pro forma $ (0.16) $ 0.00 Diluted net income (loss) per share: As reported $ (0.09) $ 0.04 Pro forma $ (0.16) $ 0.00
3. COMMITMENTS. RETAILER AGREEMENTS. -------------------- The Company has contracts in the normal course of business with various retailers, some of which provide for minimum annual program levels. If those minimum levels are not met, the Company is obligated to pay the contractual difference to the retailers. During the six months ended June 30, 2003 and 2002 the Company incurred approximately $420,000 and $101,000 of costs related to these minimums, which were recorded in Cost of Services in the Statements of Operations. 4. CONCENTRATIONS. During the six months ended June 30, 2003 one customer accounted for 23% of the Company's total net sales. At June 30, 2003 this customer represented 15% of the Company's total accounts receivable. During the six months ended June 30, 2002 two other customers each accounted for 13% of the Company's total net sales. Although there are a number of customers that the Company sells to, the loss of a major customer could cause a delay in and possible loss of sales, which would adversely affect operating results. Page 8 of 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items in the Company's Statements of Operations as a percentage of total net sales.
Three Months ended June 30 Six Months ended June 30 -------------------------- ------------------------ 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 54.9 47.9 57.4 49.5 - ---------------------------------------------------------------------------------------------------------- Gross profit 45.1 52.1 42.6 50.5 Operating expenses: Selling 29.7 28.5 32.5 28.3 Marketing 4.9 7.1 5.4 6.1 General and administrative 10.4 11.4 12.9 10.8 - ---------------------------------------------------------------------------------------------------------- Total operating expenses 45.0 47.0 50.8 45.2 - ---------------------------------------------------------------------------------------------------------- Operating income (loss) 0.1 5.1 (8.2) 5.3 Other income (expense) 0.2 (1.6) 0.2 (0.9) - ---------------------------------------------------------------------------------------------------------- Net income (loss) 0.3% 3.5% (8.0)% 4.4% - ----------------------------------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The significant accounting policies are discussed in Note 1 of the Company's financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A for the year ended December 31, 2002. These critical accounting policies are subject to judgements and uncertainties, which affect the application of these policies. The Company bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances. On an on-going basis, the Company evaluates its estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. THREE AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2002 NET SALES. Net sales for the three months ended June 30, 2003 increased 25% to $7,260,958 compared to $5,822,882 for the three months ended June 30, 2002. Net sales for the six months ended June 30, 2003 increased 16% to $13,722,461 compared to $11,837,999 for the six months ended June 30, 2002. Service revenues from our POPSign programs for the three months ended June 30, 2003 increased 38% to $6,242,576 compared to $4,536,590 for the three months ended June 30, 2002. Service revenues for the six months ended June 30, 2003 increased 24% to $11,633,613 compared to $9,347,749 for the six months ended June 30, 2002. The increases were primarily due to an increase in the number of retail stores on line. We expect our POPSign revenues to continue to increase compared to the prior year, both Page 9 of 19 in amount and as a percentage of our total net sales. Additionally, we expect to begin generating revenues related to our recent VALUStix acquisition during the second half of the fiscal year. Product sales for the three months ended June 30, 2003 decreased 21% to $1,018,382 compared to $1,286,292 for the three months ended June 30, 2002. Product sales for the six months ended June 30, 2003 decreased 16% to $2,088,848 compared to $2,490,250 for the six months ended June 30, 2002. The decreases were primarily due to decreasing sales of our other product categories based on decreased demand for those products from our customers. We expect the sales of our other product categories to continue to decline, both in dollar amount and as a percentage of our total net sales. GROSS PROFIT. Gross profit for the three months ended June 30, 2003 increased 8% to $3,273,774 compared to $3,032,294 for the three months ended June 30, 2002. Gross profit for the six months ended June 30, 2003 decreased 2% to $5,847,526 compared to $5,973,238 for the six months ended June 30, 2002. Gross profit as a percentage of total net sales decreased to 45.1% for the three months ended June 30, 2003, compared to 52.1% for the three months ended June 30, 2002. Gross profit as a percentage of total net sales decreased to 42.6% for the six months ended June 30, 2003, compared to 50.5% for the six months ended June 30, 2002. Gross profit from our POPSign program revenues for the three months ended June 30, 2003 increased 21% to $2,884,620 compared to $2,376,572 for the three months ended June 30, 2002 due to the increase in POPSign revenues, partially offset by increased payments to retailers, increased occupancy costs, and additional equipment costs. Gross profit from our POPSign program revenues for the six months ended June 30, 2003 increased 5% to $4,937,757 compared to $4,704,361 for the six months ended June 30, 2002 due to the increase in POPSign revenues, largely offset by changes in product mix, increased payments to retailers, increased occupancy costs and increased cost due to additional equipment added late in 2002. Gross profit as a percentage of POPSign program revenues decreased to 46.2% for the three months ended June 30, 2003, compared to 52.4% for the three months ended June 30, 2002. Gross profit as a percentage of POPSign program revenues decreased to 42.4% for the six months ended June 30, 2003, compared to 50.3% for the six months ended June 30, 2002. The decreases were due to the factors discussed above. We expect the amount of gross profit from our POPSign revenues to continue to increase compared to the prior year due to an expected increase in our POPSign revenues compared to the prior year, but to be lower as a percentage of POPSign revenue compared to the prior year, due to the factors discussed above. Gross profit from our product sales for the three months ended June 30, 2003 decreased 41% to $389,154 compared to $655,722 for the three months ended June 30, 2002. Gross profit from our product sales for the six months ended June 30, 2003 decreased 28% to $909,769 compared to $1,268,877 for the six months ended June 20, 2002. Gross profit as a percentage of other sales decreased to 38.2% for the three months ended June 30, 2003 compared to 51.0% for the three months ended June 30, 2002, primarily due to adjustments related to obsolescence and lower-of cost or market and changes in product mix. Gross profit as a percentage of other sales decreased to 43.6% for the six months ended June 30, 2003 compared to 51.0% for the six months ended June 30, 2002. The decreases were primarily due to decreased sales from our other product categories based on decreased demand for those products from our customers in addition to the other factors discussed above. Page 10 of 19 We expect the gross profit from the sales of our other product categories to continue to decline as a percentage of our total gross profit. OPERATING EXPENSES. - ------------------- SELLING. Selling expenses for the three months ended June 30, 2003 increased 30% to $2,157,885 compared to $1,662,845 for the three months ended June 30, 2002, primarily due to increased commissions expense related to higher total net sales, an increase in the number of sales related employees, the addition of VALUStix employees and severance expense. Selling expenses as a percentage of total net sales increased to 29.7% for the three months ended June 30, 2003 compared to 28.5% for the three months ended June 30, 2002, primarily due to the factors discussed above, partially offset by the effect of higher net sales during the quarter. Selling expenses for the six months ended June 30, 2003 increased 33% to $4,470,078 compared to $3,351,409 for the six months ended June 30, 2002. Selling expenses as a percentage of total net sales increased to 32.5% for the six months ended June 30, 2003 compared to 28.3% for the six months ended June 30, 2002, primarily due to the factors discussed above, partially offset by the effect of higher net sales during the six months. We expect selling expenses, exclusive of commissions, to remain at their current level and to decline somewhat as a percentage of net sales due to an expected increase in total net sales, as compared to the prior year. MARKETING. Marketing expenses for the three months ended June 30, 2003 decreased 14% to $354,302 compared to $411,645 for the three months ended June 30, 2002, primarily due to planned reductions in discretionary expenses, partially offset by increased salaries to support the POPS programs. Marketing expenses as a percentage of total net sales decreased to 4.9% for the three months ended June 30, 2003 compared to 7.1% for the three months ended June 30, 2002, primarily due to the effect of higher net sales during the quarter, partially offset by the factors discussed above. Marketing expenses for the six months ended June 30, 2003 increased 3% to $740,367 compared to $722,136 for the six months ended June 30, 2002. Marketing expenses as a percentage of total net sales decreased to 5.4% for the six months ended June 30, 2003 compared to 6.1% for the six months ended June 30, 2002, primarily due to the effect of higher net sales during the six months. We expect marketing expenses to remain at their current level and to decline somewhat as a percentage of net sales due to an expected increase in total net sales, as compared to the prior year. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three months ended June 30, 2003 increased 14% to $755,993 compared to $662,451 for the three months ended June 30, 2002, primarily due to additions to our management team, the increased cost of our new facilities and severance expense. General and administrative expenses as a percentage of total net sales decreased to 10.4% for the three months ended June 30, 2003 compared to 11.4% for the three months ended June 30, 2002, due to the effect of higher net sales during the quarter, partially offset by the factors discussed above. General and administrative expenses for the six months ended June 30, 2003 increased 38% to $1,765,941 compared to $1,277,290 for the six months ended June 30, 2002. General and administrative expenses as a percentage of total net sales increased to 12.9% for the six months ended June 30, 2003 Page 11 of 19 compared to 10.8% for the six months ended June 30, 2002, primarily due to the factors discussed above and higher legal fees, partially offset by the effect of higher net sales during the six months. We expect general and administrative expenses to remain at their current level and decline somewhat as a percentage of net sales due to an expected increase in total net sales, as compared to the prior year. OTHER INCOME (EXPENSE). Other income for the three months ended June 30, 2003 was $18,224 compared to other expense of $(93,640) for the three months ended June 30, 2002. Other income for the six months ended June 30, 2003 was $34,798 compared to other expense of $(100,785) for the six months ended June 30, 2002. The differences were primarily due to an increase in interest income as a result of the funds received from the private placement financing in December 2002, minimal interest expense as the line of credit was fully repaid during December 2002 and a one-time fee during 2002 to move to the NASDAQ National Market. NET INCOME (LOSS). Net income for the three months ended June 30, 2003 was $23,818 compared to net income of $201,713 for the three months ended June 30, 2002. Our net loss for the six months ended June 30, 2003 was $(1,094,062) compared to net income of $521,618 for the six months ended June 30, 2002. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations with proceeds from public and private equity placements. At June 30, 2003, working capital was $6,492,448 compared to $7,324,154 at December 31, 2002. During the six months ended June 30, 2003, cash and cash equivalents decreased $1,838,859. Net cash used in operating activities during the six months ended June 30, 2003 was $2,454,499, primarily due to the net loss and an increase in prepaid expenses due to a $1,000,000 pre-payment made to a retailer during 2003. Accounts receivable decreased $669,674 during the six months ended June 30, 2003 due to collections related to the high levels of POPSign revenues during the fourth quarter of 2002. Accounts payable decreased $863,006 during the six months ended June 30, 2003 due to the payments made to retailers, relating to the high levels of POPSign revenues during the fourth quarter of 2002. Deferred revenue decreased $802,976 primarily due to the timing of the POPSign program cycles at quarter-end. Net cash of $123,234 was used in investing activities during the six months ended June 30, 2003, primarily due to the purchase of property and equipment of $73,841. Net cash of $738,874 was provided by financing activities during the six months ended June 30, 2003 from the issuance of common stock related to the exercise of stock options and the issuance of shares related to the employee stock purchase plan, net of expenses. The Company anticipates that its working capital needs will remain consistent with prior years. The Company's $2 million line of credit with a finance institution was paid in full during 2002 and the related agreement expired on December 31, 2002. The Company believes that it has sufficient cash resources to fund its current business operations and anticipated growth for the foreseeable future. Page 12 of 19 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION Statements made in this quarterly report on Form 10-Q, in the Company's other SEC filings, in press releases and in oral statements to shareholders and securities analysts, which are not statements of historical or current facts are "forward looking statements." Such forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward looking statements. The words "believes," "expects," "anticipates," "seeks" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date the statement was made. These statements are subject to the risks and uncertainties that could cause actual results to differ materially and adversely from the forward looking statements. These risks and uncertainties include, but are not limited to: we historically have not achieved significant earnings; our results of operations may be subject to significant fluctuations; we face significant competition from other providers of at-shelf advertising or promotional signage; reductions in advertising and promotional expenditures by branded product manufacturers due to changes in economic conditions would adversely affect us; we are dependent on the number of retailer partners; we are dependent on the success of the Insignia POPS program and expansion of the program to the retail drug industry; we may not be able to manage growth effectively; we are dependent on our manufacturer partners achieving sales lift; we recently made our first business acquisition and may acquire other businesses; we are dependent on members of our management team; we have a significant amount of options and warrants outstanding that could affect the market price of our common stock; the market price of our common stock has been volatile and other factors detailed from time to time in our SEC reports. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 4. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including the Company's Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report (the "Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in timely alerting them to the material information relating to us required to be included in our periodic SEC filings. (b) Changes in Internal Controls. There were no significant changes made in our internal controls or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation. Page 13 of 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Shareholders on May 20, 2003. The shareholders present in person or by proxy voted for an amendment to the Company's Articles of Incorporation, which provides that the Board shall be divided into three classes and each class will serve for a period of three years with 4,792,073 shares in favor, 476,852 shares against, and 1,590 shares abstaining. This proposal did not receive enough votes and thus, did not pass. As a result, the election of the directors will be for a one year period and until their successors are elected. The shareholders present in person or by proxy voted to elect Scott F. Drill, Erwin A. Kelen, Donald J. Kramer, W. Robert Ramsdell, Gordon F. Stofer, Frank D. Trestman and Gary L. Vars as directors with each director receiving the following votes: FOR WITHHOLD AUTHORITY --- ------------------ Scott F. Drill 10,666,197 98,898 Erwin A. Kelen 10,584,150 180,945 Donald J. Kramer 10,666,450 98,645 Gordon F. Stofer 10,584,150 180,945 W. Robert Ramsdell 10,584,050 181,045 Frank D. Trestman 10,584,150 180,945 Gary L. Vars 10,666,197 98,898 The shareholders present in person or by proxy voted to approve the 2003 Incentive Stock Option Plan and reserve 350,000 shares for the grant of options under the Plan with 10,257,134 shares in favor, 477,616 shares against, and 30,345 shares abstaining. ITEM 5. OTHER INFORMATION None Page 14 of 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein: 31.1 Certification of CEO 31.2 Certification of CFO 32 Section 1350 Certification of CEO and CFO (b) Reports on Form 8-K April 1, 2003 Press release dated April 1, 2003. April 7, 2003 The Company filed a report on Form 8-K/A on April 7, 2003 under Item 7 to update the pro forma information for the Company's acquisition of the assets comprising the VALUStix business, as described in Form 8-K filed December 31, 2002. April 17, 2003 Press release dated April 17, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: July 28, 2003 Insignia Systems, Inc. -------------------------------------------- (Registrant) /s/ Scott F. Drill ------------------------------------- Scott F. Drill President and Chief Executive Officer /s/ Denni J. Lester ------------------------------------- Denni J. Lester Vice President, Finance and Chief Financial Officer Page 15 of 19 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION 31.1 Certification of CEO 31.2 Certification of CFO 32 Section 1350 Certification of CEO and CFO Page 16 of 19 EX-31.1 3 insignia033167_ex31-1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION OF CEO I, Scott F. Drill, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Insignia Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within the Registrant, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: July 28, 2003 /s/ Scott F. Drill ---------------------------------- Scott F. Drill President and Chief Executive Officer EX-31.2 4 insignia033167_ex31-2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION OF CFO I, Denni J. Lester, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Insignia Systems, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within the Registrant, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: July 28, 2003 /s/ Denni J. Lester --------------------------------- Denni J. Lester Vice President, Finance and Chief Financial Officer EX-32 5 insignia033167_ex32.txt CERTIFICATION EXHIBIT 32 SECTION 1350 CERTIFICATION The undersigned certify that: (1) The accompanying Quarterly Report on Form 10-Q for the period ended June 30, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the accompanying Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 28, 2003 /s/ Scott F. Drill ---------------------------------- Scott F. Drill President and Chief Executive Officer Date: July 28, 2003 /s/ Denni J. Lester ---------------------------------- Denni J. Lester Vice President, Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----