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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 0-27012
INSIGNIA SOLUTIONS PLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ENGLAND AND WALES NOT APPLICABLE
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
--------------------------------------
41300 CHRISTY STREET INSIGNIA HOUSE
FREMONT THE MERCURY CENTRE
CALIFORNIA 94538-3115 WYCOMBE LANE, WOOBURN GREEN
UNITED STATES OF AMERICA HIGH WYCOMBE, BUCKS HP10 0HH
(510) 360-3700 UNITED KINGDOM
(44) 1628-539500
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND
PRINCIPAL PLACES OF BUSINESS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF CLASS)
ORDINARY SHARES (L 0.20 NOMINAL VALUE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment of this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $139,400,000 as of March 15, 2000 based upon
the closing sale price on the Nasdaq National Market reported for such date.
Ordinary shares held by each officer and director and by each person who owns
5% or more of the outstanding Ordinary share capital have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive determination for other
purposes.
As of March 15, 2000, there were 14,139,508 Ordinary shares of L 0.20
each nominal value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
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PART I PAGE
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ITEM 1. BUSINESS...................................................................................... 3
ITEM 2. FACILITIES.................................................................................... 13
ITEM 3. LEGAL PROCEEDINGS............................................................................. 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 14
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.......................................................... 14
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................................... 16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 18
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................... 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......... 30
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................ 31
ITEM 11. EXECUTIVE COMPENSATION........................................................................ 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................ 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................ 38
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................... 39
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PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT") REGARDING THE COMPANY AND ITS BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND PROSPECTS. WORDS SUCH AS "EXPECTS," "ANTICIPATES,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES" AND SIMILAR EXPRESSIONS
OR VARIATIONS OF SUCH WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING FORWARD-LOOKING
STATEMENTS IN THIS REPORT. ADDITIONALLY, STATEMENTS CONCERNING FUTURE MATTERS
SUCH AS THE DEVELOPMENT OF NEW PRODUCTS, ENHANCEMENTS OR TECHNOLOGIES,
PARTICULARLY THE ONGOING DEVELOPMENT OF THE JEODE-TM- PRODUCT LINE, THE
TIMING OF THE AVAILABILITY OF ENHANCEMENTS OF THE JEODE PLATFORM, THE JEODE
PRODUCT AND SERVICE OFFERINGS, THE REVENUE MODEL AND MARKET FOR THE JEODE
PLATFORM, THE FEATURES, BENEFITS AND ADVANTAGES OF THE JEODE PLATFORM,
INTERNATIONAL SALES, THE AVAILABILITY OF LICENSES TO THIRD-PARTY PROPRIETARY
RIGHTS, BUSINESS AND SALES STRATEGIES, MATTERS RELATING TO PROPRIETARY
RIGHTS, COMPETITION, FACILITIES NEEDS, EXCHANGE RATE FLUCTUATIONS AND THE
COMPANY'S LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS REGARDING MATTERS
THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS.
ALTHOUGH FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE GOOD
FAITH JUDGMENT OF THE COMPANY'S MANAGEMENT, SUCH STATEMENTS CAN ONLY BE BASED
ON FACTS AND FACTORS CURRENTLY KNOWN BY THE COMPANY. CONSEQUENTLY,
FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES,
AND ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM THE RESULTS AND
OUTCOMES DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES IN RESULTS AND OUTCOMES INCLUDE
WITHOUT LIMITATION THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS REPORT. READERS ARE URGED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS
REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE OR UPDATE ANY
FORWARD-LOOKING STATEMENTS IN ORDER TO REFLECT ANY EVENT OR CIRCUMSTANCE THAT
MAY ARISE AFTER THE DATE OF THIS REPORT. READERS ARE URGED TO REVIEW AND
CONSIDER CAREFULLY THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS
REPORT, WHICH ATTEMPTS TO ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS
THAT MAY AFFECT THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
ITEM 1--BUSINESS
OVERVIEW
Insignia Solutions plc (the "Company"), which commenced operations in
1986, develops, markets and supports virtual machine technology which enables
software applications to be run on various computer platforms.
In January 1998, the Company announced its intention to launch a new
product line called the Jeode-TM- platform, based on the Company's Embedded
Virtual Machine ("EVM"-TM-) technology. This followed a strategic review in
late 1997 of the Company's business. The Company also explored new markets
that would leverage the Company's 12 years of emulation software development
experience. The Jeode platform is the Company's implementation of Sun
Microsystems, Inc.'s ("Sun") Java -Registered Trademark- technology tailored
for Internet appliances and embedded devices. The Jeode platform is enabled
by the Company's EVM and is designed to enable software developers to create
reliable, efficient and predictable Internet appliances and embedded devices.
The product became available for sale in March 1999. The Jeode platform is
now the principal product line of the Company and will be for the foreseeable
future. The Jeode product line revenue model is based on original equipment
manufacturer's ("OEMs") customer transactions. Revenues from the Jeode
product line are generally derived from four main sources: the sale of a
development license, the sale of annual maintenance and support, a commercial
use royalty based on shipments of products that include Jeode technology, and
customer-funded engineering activities.
The Company's principal product line in recent years has been
SoftWindows-TM-. This product enabled Microsoft Windows ("Windows"
- -Registered Trademark-) applications to be run on most Apple Computer Inc.
("Apple" -Registered Trademark-) Macintosh computers and many UNIX
workstations. Revenues from this product line grew until 1995, but declined
significantly after that date, along with margins. This was due to a
declining demand for Apple Macintosh products and increased competition. The
Company also shipped RealPC, a low cost software product that allowed
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consumers to play games and other applications designed for Intel-based PCs
on their Power Macintosh computers. In early 1999 Management took steps to
discontinue these product lines, and on October 18, 1999, the Company signed
an exclusive licensing arrangement with FWB Software, LLC ("FWB"). Under the
arrangement FWB will pay the Company a royalty based on an earn-out of FWB's
future revenues from the product lines and the Company will be paid as those
revenues are achieved. Upon achieving a certain revenue threshold, the
Company will transfer the SoftWindows and RealPC product lines to FWB at no
additional consideration. This arrangement allows the Company to focus
exclusively on its Jeode platform business strategy.
Between December 1995 and May 1998, the Company shipped NTRIGUE -TM-, a
Windows compatibility client/server product that supported multiple
X-terminals, workstation clients, Macintosh computers, PCs, network computers
and Net PCs from a Windows NT-based server. The Company disposed of its
NTRIGUE technology in February 1998.
PRODUCTS AND SUPPORT
SUMMARY
The Company delivered beta versions of its Jeode platform in late 1998.
The product has been available for sale since March 16, 1999. In 1999,
revenue from the Jeode product line was derived from four main sources: the
sale of a development license, the sale of annual maintenance and support, a
commercial use royalty based on shipments of products that include Jeode
technology, and customer-funded engineering activities. The Company expects
future revenues to be derived from the same sources. The Jeode product line
revenue model is based on OEMs customer transactions. Jeode product line
revenues accounted for 23% of total Company revenues in 1999, and 65% of
total Company revenues in the fourth quarter of 1999. The Jeode platform is
now the principal product line of the Company and will be for the foreseeable
future.
In 1999, the Company derived its SoftWindows revenues from the shipment
of products and from offering support services. The majority of revenues were
derived from the shipment of products. SoftWindows revenues accounted for 74%
of total Company revenues in 1999.
On October 18, 1999, the Company signed an exclusive licensing
arrangement of its SoftWindows and RealPC product lines to FWB. The proceeds
the Company will receive from the license arrangement are based on an
earn-out of FWB's future revenues from the product lines and will be paid to
the Company as those revenues are achieved. Upon achieving a certain revenue
threshold, the SoftWindows and RealPC product lines will be transferred to
FWB at no additional consideration.
JEODE PLATFORM
The Company's Jeode platform allows developers to create applications for
Internet appliances and embedded devices using Java technology. The Java
environment was originally designed by Sun and first unveiled in 1995.
Currently, Sun estimates there are over one million Java software developers,
more than 10,000,000 Java enabled computer platforms and more than 200 Java
licensees. The primary use of the Java technology, prior to the beta release
of the Jeode platform in November 1998, was for large corporate or enterprise
applications.
There is a growing demand in the Internet appliance and embedded device
markets for Java technology because the Java language is simple, robust,
object oriented, and multi-threaded--meaning it supports applications that do
more than one thing at a time. Among the Java platform's biggest advantages
are its "write once, run anywhere" architecture and its ability to deliver
virus-free code. In addition, the Java technology platform is interpreted and
dynamically extensible and is easy to connect to the Internet. Internet
appliances and embedded devices, if programmed in Java technology, could be
dynamically downloaded with new functionality over the Internet instead of
requiring consumers to purchase an entire new device or taking the device to
a repair shop.
However, most existing implementations of Java technology are designed
for medium to large computing environments, and do not scale down to meet the
resource constraints of Internet appliances and embedded devices.
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Management believes that there is a significant opportunity for Java
technology that can scale down to work within the constraints of an Internet
appliance or embedded device. With the Company's twelve years of experience
developing virtual machine technology to function under severe systems
resource restrictions, the Company is uniquely suited with its technology to
transition from the PC compatibility market to the Java market. The Company
has leveraged its virtual machine expertise and algorithms and developed its
EVM, which is the Company's brand of a Java virtual machine. This EVM fits
within the constraints of an Internet appliance or embedded device. The
Company believes its EVM incorporates unique technologies, including adaptive
optimizing dynamic compilation and precise, concurrent garbage collection to
achieve optimal performance and robustness in limited memory Internet
appliances and embedded devices. Consequently, the Company believes it is in
a unique position to take advantage of the opportunity and demand that now
exists.
The Company's Jeode platform is comprised of two primary and
complementary components: JeodeRUNTIME and JeodeSUITE. JeodeRUNTIME consists
of a highly configurable Jeode EVM and embedded class libraries called
JeodeCLASS. These two technologies provide the runtime environment for
executing the Java application in the Internet appliance or embedded device.
JeodeSUITE is used during the development of software for Internet appliances
or embedded devices, and consists of JeodeBUILD and JeodeDEBUG. JeodeBUILD
provides build-time tools for editing, compiling and browsing Java
applications. JeodeDEBUG delivers runtime debug utilities and includes
utilities that monitor and analyze memory use and code coverage and also
profile performance.
A vital component of the Company's Jeode platform is the highly
configurable and tunable EVM, which optimizes the performance of embedded
application software in resource constrained Internet appliances and embedded
devices. The Company believes the Jeode platform addresses the specific
requirements of Internet appliance and embedded developers, making Java
technology viable for the Internet appliance and embedded device markets for
the first time.
The Jeode platform is available for x86, MIPS, ARM, Power PC and
Hitachi SH processors, and Windows CE, Windows NT, Linux and VxWorks
operating systems, with additional processor/operating system platforms
planned for introduction in 2000. The Company also offers various services
and will license technology for porting the Jeode platform to other platforms
to help developers migrate their applications to their platforms more easily.
The Company has filed applications with the Patent Office of the
United Kingdom and the United States for international protection of
innovative technologies related to the Jeode platform.
SOFTWINDOWS
On October 18, 1999, the Company signed an exclusive licensing
arrangement of its SoftWindows and RealPC product lines to FWB. The proceeds
the Company will receive from the license arrangement are based on an
earn-out of FWB's future revenues from the product line and will be paid to
the Company as those revenues are achieved. Upon achieving a certain revenue
threshold, the SoftWindows and RealPC product lines will be transferred to
FWB at no additional consideration. FWB has assumed all existing technical
support obligations of the Company for SoftWindows Macintosh customers. The
Company will continue to provide technical support to its existing Unix
customers that had technical support contracts in place on October 18, 1999.
The Company will not renew any of these contracts and as such its obligations
will cease in October 2000.
SoftWindows, the Company's principal product line until late 1999,
was a software-based, Windows and MS-DOS compatibility solution first
introduced by the Company in December 1993. This product line enabled Apple,
Sun, HP and IBM UNIX workstation customers to run Windows applications.
RealPC was a low cost software product that allowed consumers to
play games and other applications designed for Intel-based PCs on their Power
Macintosh computers. This product was first introduced in September 1997.
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SoftWindows was integrated with the host environment and had many
features that made it easy for the user to operate in both the Windows and
the host environment simultaneously on a Macintosh or UNIX platform.
SoftWindows had advanced networking support, supporting multiple
network protocols and topologies. SoftWindows worked cooperatively with the
host operating system such that SoftWindows could share the network card. On
a supported LAN, a Macintosh with SoftWindows appeared like a PC to a server
or to other computers.
NTRIGUE
In December 1995, the Company introduced and began shipping NTRIGUE,
a Windows compatibility client/server product that supports multiple
X-terminals, workstation clients, Macintosh computers, PCs, network computers
and NetPCs from a Windows NT-based server. NTRIGUE was built upon Citrix
Systems Inc.'s ("Citrix") WinFrame product.
In February 1998, the Company sold its NTRIGUE technology to Citrix.
Under the arrangement, Citrix acquired the Company's X-11 technology, Keoke
technology, Macintosh and UNIX ICA clients and all NTRIGUE modifications and
enhancements to WinFrame.
The Company discontinued selling NTRIGUE in May 1998, but provided
technical support to its existing NTRIGUE customers through September 1998.
SUPPORT - JEODE PLATFORM
The Company offers both pre and post sales support to its Jeode
platform customers. Pre sales support is free. Each customer generally
commits to at least one year of annual maintenance which will entitle the
customer to receive standard support, including: web-based support, access to
FAQs, on-line publications and documentation, email assistance, limited
telephone support, and critical bug fixes and product updates (collective bug
fixes and minor enhancements). Annual maintenance is also generally required
during the time that the customer is developing and/or shipping products that
include any of the Jeode technology.
SUPPORT - SOFTWINDOWS
The Company offered each SoftWindows customer 30 days of free first
line technical support through Startek, a third party support organization.
The Company provided second line support to Startek. The Company also
provided free SoftWindows technical support through on-line services such as
America Online and CompuServe, Internet e-mail, a Worldwide Web server, an
electronic bulletin board and a 24-hour facsimile response service. Under the
terms of the Company's exclusive arrangement with FWB, FWB assumed all
existing technical support obligations of the Company for SoftWindows
Macintosh customers. The Company will continue to provide technical support
to SoftWindows UNIX customers that had technical support contracts in place
on October 18, 1999. The Company will not renew any of these contracts as
they expire and as such its obligations will cease in October 2000.
DEPENDENCE ON JEODE PLATFORM REVENUE
The Company's future performance depends upon sales of products
within the Company's new Jeode product line. During the fourth quarter of
1999, sales of products in the Jeode product line totaled $830,000, which
accounted for 65% of the Company's total revenue. The Company incurred an
operating loss of $3.1 million in the fourth quarter of 1999. The Jeode
platform may not achieve or sustain market acceptance or provide the desired
revenue levels. At current overhead levels, the Company requires revenues of
more than $4.5 million per quarter to achieve an operating profit. The Jeode
product line is the Company's sole product line and the Company relies and
will continue to rely upon sales of Jeode products for the Company's revenue
for the foreseeable future.
Potential customers must generally consider a wide range of issues
before committing to license the Company's product. These issues include
product benefits, infrastructure requirements, ability to work with
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existing systems, functionality and reliability. The process of entering into
a development license with a company typically involves lengthy negotiations.
As a result of the Company's sales cycle, it is difficult for the Company to
predict when, or if, a particular prospective licensee might sign a license
agreement. Development license fees may be delayed or reduced as a result of
this process.
The Company's success depends upon the use of the Company's
technology by the Company's licensees in their Internet appliances or
embedded devices. The Company's licensees undertake a lengthy process of
developing products that use the Company's technology. Until a licensee sells
products incorporating the Company's technology, the Company typically does
not receive commercial use royalties from that licensee. The Company expects
that the time between entering into a development license and the time the
Company begins to recognize commercial royalties will be lengthy and will
vary, which makes it difficult for the Company to predict when the Company
will recognize royalties from commercial use licenses.
The market for commercially available embedded operating systems is
fragmented and highly competitive. The Jeode product line is targeted at the
emerging Java-based Internet appliance and embedded device marketplaces,
which are rapidly changing and are characterized by an increasing number of
new entrants whose products compete with the Jeode platform. As the industry
continues to develop, the Company expects competition to increase in the
future from existing competitors and from other companies that may enter the
Company's existing or future markets with similar or substitute solutions
that may be less costly or provide better performance or functionality than
the Company's products. Many of the Company's current competitors, as well as
potential competitors, have substantially greater financial, technical,
marketing and sales resources than the Company does, and the Company might
not be able to compete successfully against these companies. If price
competition increases significantly, competitive pressures could cause the
Company to reduce the prices of the Company's products, which would result in
reduced profit margins and could harm the Company's ability to provide
adequate service to the Company's customers. The Company's pricing model for
the Company's software products is based on a range of mid-priced development
license packages, combined with low-priced per-unit royalty payments for each
Internet appliance or embedded device that incorporates the Company's
technology, and may be subject to significant pricing pressures, including
buy-out arrangements. Also, the market may demand alternative pricing models
in the future. A variety of other potential actions by the Company's
competitors, including increased promotion and accelerated introduction of
new or enhanced products, could also harm the Company's competitive position.
The market for Internet appliances and embedded devices is
fragmented and is characterized by technological change, evolving industry
standards and rapid changes in customer requirements. The Company's existing
products will be rendered less competitive or obsolete if the Company fails
to introduce new products or product enhancements that anticipate the
features and functionality that customers demand. The success of the
Company's new product introductions will depend on the Company's ability to
accurately anticipate industry trends and changes in technology standards,
timely complete and introduce new product designs and features, continue to
enhance existing product lines, offer products across a spectrum of
microprocessor families used in the Internet appliance and embedded device
systems market, and respond promptly to customers' requirements and
preferences. In addition, the introduction of new or enhanced products also
requires that the Company manage the transition from older products to
minimize disruption in customer ordering patterns.
Development delays are commonplace in the software industry. The
Company has experienced delays in the development of new products and the
enhancement of existing products in the past and is likely to experience
delays in the future. The Company may not be successful in developing and
marketing, on a timely basis or at all, competitive products, product
enhancements and new products that respond to technological change, changes
in customer requirements and emerging industry standards.
SALES AND MARKETING
JEODE PRODUCTS
Jeode platform customers are expected to be OEMs of Internet
appliances or embedded devices located primarily in North America, Europe and
Japan. The Company has established a specialized direct sales force to sell
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the Jeode product line in North America, Europe and Japan. The Company has
also established a number of relationships with organizations that will
distribute the Jeode platform, including organizations that will distribute
to their Internet appliance and embedded device customers. The Company is in
the process of increasing the number of such relationships. The Jeode product
line revenue model is based on OEM customer transactions. The timing of such
transactions is difficult to predict and revenues may vary significantly from
quarter to quarter as a result. The failure to conclude a substantial OEM
transaction during a particular quarter can have a material adverse effect on
the Company's revenues and results of operations.
The Jeode platform became available in March 1999 and generated 23%
of the Company's total revenues for 1999 and 65% of the Company's total
revenues for the fourth quarter of 1999. The Jeode platform is the Company's
principal product line for the foreseeable future. In 1999, 99.5% of Jeode
platform revenues were derived from direct sales. The remainder arose on
sales through distributors. Revenues from Quantum Corporation, an OEM
customer, accounted for 97% of Jeode platform revenues, and 23% of total
revenues in the year.
MARKETING. The Company focuses most of its efforts in marketing the
Jeode platform in two primary markets: Internet appliances and embedded
devices. There is overlap between these markets. According to Market research
firm International Data Corporation ("IDC") the number of Internet appliance
devices shipped is estimated to grow from 11 million in 1999 to more than 89
million in 2004. In addition, IDC estimates that total revenue for the
Internet appliance market during this time period will grow from $2.4 billion
in 1999 to $17.8 billion by 2004, and that Internet access devices will
surpass consumer personal computers in shipments by 2002. Many of these
Internet appliances are expected to incorporate Java technology, although IDC
has not estimated a percentage. Market research firm Venture Development
Corporation published a report in September 1999 that predicted that the
number of embedded devices shipping with Java virtual machines will increase
from 298,000 in 1999 to 24.3 million in 2003, with the number of developer
seats growing from 1,459 in 1999 to 8,460 in 2003.
The Company is initially concentrating on selling to markets that it
believes will be early adopters of this technology. These early adopters
include manufacturers of Internet access devices, digital set-top boxes,
personal digital assistants (PDA's), handheld PC's, smart phones, webphones,
mass storage devices and car navigation systems.
MARKET ACCEPTANCE. The Company's performance depends upon sales of
products within the Jeode platform, which is a new product. There can be no
assurance that the Company's Jeode platform will achieve or sustain
acceptance by the marketplace or provide the desired revenue levels. The
failure of the Jeode platform to provide an adequate level of performance and
functionality, or the lack of market acceptance of this product for any
reason, would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company plans to further develop direct sales channels in the
Internet appliance and embedded device markets and to hire and train more
direct sales personnel. Competition for qualified sales personnel is intense
and there can be no assurance that the Company will be able to attract the
personnel needed to market and sell products in the Internet appliance and
embedded device markets. The Company anticipates increased operating expenses
as it introduces the product and develops the organization to market, sell
and support the product, before any revenue is recognized from sales of the
product.
SALES CYCLE. The sales cycle for an Internet appliance or embedded
device design-win typically can range from three months to a year. Customers
make product decisions only after extensive product review and hands-on
evaluation. Because customers in the Internet appliance and embedded device
markets tend to remain with the same vendor over time, the Company believes
that it must devote significant resources to each potential sale. To the
extent potential customers do not design the Company's products into their
products, the resources the Company has devoted to the sales prospect would
be lost.
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INTERNATIONAL SALES. Jeode platform sales to customers outside the
United States, derived from customers in Asia, represented approximately 0.1%
of total revenues in 1999. The Company opened a sales office in Japan during
1999. Revenues from outside the United States are expected to increase
significantly over time. International operations are subject to a number of
risks, including longer payment cycles, unexpected changes in regulatory
requirements, import and export restrictions and tariffs, difficulties in
staffing and managing operations, greater difficulty or delay in accounts
receivable collection, potentially adverse tax consequences, the burdens of
complying with a variety of laws and political and economic instability. In
addition, fluctuations in exchange rates could affect demand for the
Company's products. If for any reason exchange or price controls or other
currency restrictions are imposed, the Company's business, financial
condition and results of operations could be materially adversely affected.
The Company markets its Jeode product line to Internet appliance and embedded
device manufacturers in Japan. Economic conditions in Japan generally, as
well as fluctuations in the value of the Japanese yen against the U.S. dollar
and British pound sterling could have a negative effect on the Company's
revenues and results of operations. As the Company increases its
international sales, its total revenues may also be affected to a greater
extent by seasonal fluctuations resulting from lower sales that typically
occur during the summer months in Europe and other parts of the world.
SOFTWINDOWS
The Company sold SoftWindows through a multiple channel distribution
system that included distributors and resellers. SoftWindows accounted for
74%, 92% and 64% of total company revenues in 1999, 1998 and 1997,
respectively.
On October 18, 1999, the Company signed an exclusive licensing
arrangement of its SoftWindows and RealPC product lines to FWB. The proceeds
the Company will receive from the license arrangement are based on an
earn-out of FWB's future revenues from the product lines and will be paid to
the Company as those revenues are achieved. Upon achieving a certain revenue
threshold, the SoftWindows and RealPC product lines will be transferred to
FWB at no additional consideration.
DISTRIBUTOR AND RETAIL SALES. The Company established a worldwide
two-tier distribution channel for its SoftWindows products. Its distributor
relationships included Sun, Ingram Micro and Merisel in North America, Sun
and HP Germany in Europe and Mitsubishi Corporation ("Mitsubishi") in Japan.
Certain of these distributors, in turn, sold to major retailers such as
CompUSA, Fry's and MicroCenter. In addition, the Company's products were
carried by major national Macintosh catalog channels, such as MacWarehouse
and MacConnection.
During 1998, the Company had a distribution arrangement with Sun,
under which Sun could market and distribute SoftWindows on selected
configurations of its platforms to provide compatibility benefits on these
platforms. This agreement expired on December 31, 1998, and was not renewed.
Sales to distributors represented approximately 64%, 92% and 42% of
the Company's total revenues in 1999, 1998 and 1997, respectively. Sales to
Sun and Ingram Micro U.S. each accounted for 27% of total revenues in 1998.
No other distributor accounted for 10% or more of the Company's total
revenues in 1999, 1998 or 1997. In 1999, the majority of the Company's sales
through the distributor channel were Macintosh products. The Company ceased
making sales to distributors in mid 1999, and concentrated its SoftWindows
marketing efforts on achieving sell through of inventories held by
distributors to end users, via resellers. The Company believes that it has
been successful in these efforts and that at December 31, 1999, only minimal
inventory levels were held at distributors and resellers.
OEM BUNDLING. In prior years the Company participated in numerous
OEM bundling arrangements. In 1999 the Company participated in two such
arrangements and license revenues from OEM's represented 30% of the Company's
total revenues. Quantum Corporation, a Jeode platform OEM customer, accounted
for 23% of total revenues of the Company in the year. In 1998 the Company did
not participate in any OEM arrangements, and consequently did not receive any
revenue from such arrangements. In 1997 license revenues from OEMs
represented 27% of the Company's total revenues. Sales to SGI, a SoftWindows
OEM Customer, represented 19% of the Company's total revenues in 1997.
INTERNATIONAL SALES. Sales to SoftWindows customers outside the
United States were derived mainly from customers in Europe and Asia,
represented approximately 15%, 24% and 27% of total revenues in 1999, 1998
and 1997, respectively.
The Company offered versions of SoftWindows products in English and
Japanese. The Company had an agreement with Mitsubishi under which Mitsubishi
assisted the Company in localizing its products and distributing the Japanese
language version of SoftWindows for Power Macintosh. In prior years, the
Company has offered versions of SoftWindows products in English, Japanese,
French and German.
9
<PAGE>
STRATEGIC ALLIANCES
JEODE PLATFORM
SUN TECHNOLOGY LICENSE AND DISTRIBUTION AGREEMENT. In the first
quarter of 1999, the Company signed a five-year agreement with Sun under
which Sun appointed the Company as a Sun Authorized Virtual Machine provider.
The agreement authorizes access to the Java compatibility test suite and Java
technology source code. The agreement includes technology sharing and
compatibility verification.
Under the agreement, the Company will pay Sun a per unit royalty on
each Jeode-enabled Internet appliance or embedded device shipped by the
Company's customers, plus a royalty on all development licenses put in place
between the Company and its customers.
If the agreement with Sun terminates or expires without renewal, the
Company would not be able to market its Jeode product line. Any disruption in
the Company's relationship with Sun would likely impair its sales of Jeode
and result in a material adverse effect on the Company's business, financial
condition and results of operations.
AI CORPORATION. In September 1999, the Company appointed AI
Corporation for a one year period as its sole agent in Japan, for the
purposes of selling Jeode products. AI Corporation will sell alongside the
Company's direct sales force. As part of the agreement, AI Corporation will
actively market the Jeode product line in Japan and provide first and second
level support to customers of both AI Corporation and the Company.
bSQUARE DISTRIBUTION AGREEMENT. In February 2000, the Company signed
a three year distribution agreement with bSQUARE Corporation ("bSQUARE")
under which bSQUARE will offer the Jeode platform to customers as a component
of its product and service offerings. Under the terms of the agreement, the
Company will not contract with any other distributor specializing in Windows
CE or embedded NT products during the period from March 1, 2000 to November
30, 2000.
SOFTWARE DEVELOPMENT TOOLS. The Company also licenses software
development tool products from other companies to distribute with some of its
products. These third parties may not be able to provide competitive products
with adequate features and high quality on a timely basis or to provide sales
and marketing cooperation. In addition, the Company's products compete with
products produced by some of its licensors. When these licenses terminate or
expire, continued license rights might not be available to the Company on
reasonable terms. In addition, the Company might not be able to obtain
similar products to substitute into its tool suites.
SOFTWINDOWS
FWB SOFTWARE. On October 18, 1999, the Company signed an exclusive
licensing arrangement of its SoftWindows and RealPC product lines to FWB. The
proceeds the Company will receive from the license arrangement are based on
an earn-out of FWB's future revenues from the product line and will be paid
to the Company as those revenues are achieved. Upon achieving a certain
revenue threshold, the SoftWindows and RealPC product lines will be
transferred to FWB at no additional consideration. A key component of the
Company's SoftWindows business involved agreements with Microsoft and major
UNIX system vendors. The Company's Distribution Agreement and Software
Trademark License Agreement both expired on October 31, 1999. The Company has
not attempted to renew these licenses with Microsoft. In order for FWB to
distribute Windows in its products, it will need to enter into a license and
distribution agreement with Microsoft.
MICROSOFT DISTRIBUTION AGREEMENT. Between 1988 and October 1999, the
Company licensed first MS-DOS, and later Windows, from Microsoft ("Microsoft
Distribution Agreement"). Microsoft granted to the Company a non-exclusive,
worldwide license to reproduce, adapt and distribute the then currently
available versions of Windows that were included as a component of the
Company's products. The Company paid Microsoft a per unit royalty for copies
of the Company's products sold that included a version of Windows. The
Microsoft Distribution Agreement expired on October 31, 1999 and there was no
attempt to renew the license by the Company. The Company no longer has any
rights to license or distribute Windows in any of its products.
10
<PAGE>
MICROSOFT SOFTWARE TRADEMARK LICENSE. Microsoft granted the Company
a non-exclusive, non-transferable personal license to use the trademark
"SoftWindows" during the term of the Microsoft Distribution Agreement. This
license expired on October 31, 1999.
COMPETITION
JEODE PRODUCTS
The market for Internet appliances and embedded devices is
fragmented and is characterized by technological change, evolving industry
standards and rapid changes in customer requirements. The Company's existing
products will be rendered less competitive or obsolete if the Company fails
to introduce new products or product enhancements that anticipate the
features and functionality that customers demand. The success of the
Company's new product introductions will depend on the Company's ability to
accurately anticipate industry trends and changes in technology standards,
timely complete and introduce new product designs and features, continue to
enhance the Company's existing product lines, offer the Company's products
across a spectrum of microprocessor families used in the Internet appliance
and embedded device markets, and respond promptly to customers' requirements
and preferences.
The introduction of new or enhanced products also requires that the
Company manage the transition from older products to minimize disruption in
customer ordering patterns. Development delays are commonplace in the
software industry. The Company has experienced delays in the development of
new products and the enhancement of existing products in the past and is
likely to experience delays in the future. The Company may not be successful
in developing and marketing, on a timely basis or at all, competitive
products, product enhancements and new products that respond to technological
change, changes in customer requirements and emerging industry standards.
The market for commercially available Internet appliance and
embedded device operating systems is fragmented and highly competitive. The
Jeode product line is targeted at the emerging Java-based Internet appliance
and embedded device marketplaces, which are rapidly changing and are
characterized by an increasing number of new entrants whose products compete
with the Jeode platform. As the industry continues to develop, the Company
expects competition to increase in the future from existing competitors and
from other companies that may enter the Company's existing or future markets
with similar or substitute solutions that may be less costly or provide
better performance or functionality than the Company's products. Many of the
Company's current competitors, as well as potential competitors, have
substantially greater financial, technical, marketing and sales resources
than the Company does, and the Company might not be able to compete
successfully against these companies. If price competition increases
significantly, competitive pressures could cause the Company to reduce the
prices of the Company's products, which would result in reduced profit
margins and could harm the Company's ability to provide adequate service to
the Company's customers. The Company's pricing model for the Company's
software products is based on a range of mid-priced development license
packages, combined with low-priced per-unit royalty payments for each that
incorporate the Company's technology, may be subject to significant pricing
pressures, including buy-out arrangements. Also, the market may demand
alternative pricing models in the future. A variety of other potential
actions by the Company's competitors, including increased promotion and
accelerated introduction of new or enhanced products, could also harm the
Company's competitive position.
PRODUCT DEVELOPMENT
In January 1998, the Company announced it was developing the Jeode
EVM for the emerging Java-based Internet appliance and embedded device
marketplaces. The Jeode platform is based upon the Company's virtual machine
technology and is geared toward providing current Internet appliance and
embedded device developers with the feature-rich Jeode EVM that is supported
by tools compatible with Internet appliance and embedded device environments,
such as configuration and remote debugging tools. In November 1998, the
Company delivered beta versions of the Jeode platform. The Company released
the Jeode platform in March 1999. The Company developed additional
functionality during 1999 and intends to develop further functionality in
2000, particularly to provide compatibility with additional
processor/operating platforms. Product development is subject to a number of
11
<PAGE>
risks, including development delays, product definition, marketing and
competition. It is possible that development of the enhancements to the
Company's Jeode platform will not be completed in a timely manner and, even
if they are developed, that the product line will not achieve or maintain
customer acceptance. The failure of the Company to commercialize its virtual
machine technology successfully and in a timely manner would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company must continually change and improve its products in
response to changes in operating systems, application software, computer
hardware, networking software, programming tools and computer language
technology. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable.
In 1999, 1998 and 1997, the Company spent approximately $6.0
million, $6.2 million and $9.1 million, respectively, on Company-sponsored
research and development. At December 31, 1999, the Company had 62 full-time
employees engaged in research and development, all of whom were located at
the Company's facility in the United Kingdom. The geographic distance between
the Company's engineering personnel in the United Kingdom and the Company's
principal offices in California and its primary markets in the United States
and Japan has in the past led and could in the future lead to logistical and
communication difficulties. There can be no assurance that the geographic and
cultural differences between the Company's United States, Japanese and United
Kingdom personnel and operations will not result in problems that materially
adversely affect the Company's business, financial condition and results of
operations. Further, because the Company's research and development
operations are located in the United Kingdom, its operations and expenses are
directly affected by economic and political conditions in the United Kingdom.
Software products as complex as those offered by the Company may
contain undetected errors or failures when first introduced or when new
versions are released. There can be no assurance that, despite testing by the
Company and testing and use by current and potential customers, errors will
not be found in the Company's products after commencement of commercial
shipments. The occurrence of such errors could result in loss of or delay in
market acceptance of the Company's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ENGLISH CORPORATION
The Company is incorporated under English law. Two of the Company's
executive officers and one of its directors reside in England. A second
director resides in France. All or a substantial portion of the assets of
such persons, and a significant portion of the assets of the Company, are
located outside of the United States. As a result, it may not be possible for
investors to effect service of process within the United States upon such
persons or to enforce against them or against the Company, in United States
courts, judgments obtained in United States courts predicated upon the civil
liability provisions of the federal securities laws of the United States.
There is doubt as to the enforceability in England, in original actions or in
actions for enforcement of judgments of United States courts, of civil
liabilities predicated solely upon United States securities laws. In
addition, the rights of holders of Ordinary Shares and, therefore, certain of
the rights of ADS holders, are governed by English law, including the
Companies Act 1985, and by the Company's Memorandum and Articles of
Association. These rights differ in certain respects from the rights of
shareholders in typical United States corporations.
EMPLOYEES
As of December 31, 1999, the Company employed 99 regular full-time
persons, comprising 16 in sales, marketing and related staff activities, 62
in research and development and 21 in management, administration and finance.
Of these, all research and development employees, 5 sales and marketing
employees and 9 administration and finance employees are located in the
United Kingdom. None of the Company's employees are represented by a labor
union, and the Company has experienced no work stoppages. The Company
believes that its employee relations are good.
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<PAGE>
The Company's success depends to a significant degree upon the
continued contributions of members of the Company's senior management and
other key research and development, sales and marketing personnel. The loss
of any of such persons could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that its future success will depend upon its ability to attract and retain
highly skilled managerial, engineering, sales and marketing personnel, the
competition for whom is intense. In particular, the Company must recruit and
retain marketing and sales personnel with expertise in Internet appliances
and embedded devices. There can be no assurance that the Company will be
successful in attracting and retaining such personnel, and the failure to
attract and retain key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
PROPRIETARY RIGHTS
The Company relies on a combination of copyright, trademark and
trade secret laws and confidentiality procedures to protect its proprietary
rights. The Company has filed in the United Kingdom and the United States
applications for innovative technologies incorporated into its Jeode platform
and holds one United States patent and one European patent on its SoftWindows
technology. As part of its confidentiality procedures, the Company generally
enters into non-disclosure agreements with its employees, consultants,
distributors and corporate partners, and limits access to and distribution of
its software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise to
obtain and use the Company's products or technology without authorization, or
to develop similar technology independently. In addition, effective
protection of intellectual property rights may be unavailable or limited in
certain countries. The Company licenses technology from Sun and various other
third parties.
The Company may, from time to time, receive communications in the
future from third parties asserting that the Company's products infringe, or
may infringe, on their proprietary rights. There can be no assurance that
licenses to disputed third-party technology would be available on reasonable
commercial terms, if at all. In addition, the Company may initiate claims or
litigation against third parties for infringement of the Company's
proprietary rights or to establish the validity of the Company's proprietary
rights. Litigation to determine the validity of any claims could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks, whether or not such
litigation is determined in favor of the Company. In the event of an adverse
ruling in any such litigation, the Company may be required to pay substantial
damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses
to infringing technology. In the event of a successful claim against the
Company and the failure of the Company to develop or license a substitute
technology, the Company's business, financial condition and results of
operations would be adversely affected. As the number of software products in
the industry increases and the functionality of these products further
overlaps, the Company believes that software developers may become
increasingly subject to infringement claims. Any such claims against the
Company, with or without merit, as well as claims initiated by the Company
against third parties, can be time consuming and expensive to defend or
prosecute and to resolve.
ITEM 2--FACILITIES
The Company's headquarters and principal management, sales and
marketing and support facility is located in Fremont, California, and
consists of approximately 18,400 square feet under a lease that will expire
in February 2003. The Company's principal European sales, research and
development and administrative facility is located in High Wycombe, in the
United Kingdom, and consists of approximately 10,700 square feet under a
lease that will expire in August 2013. During 1998, the Company sublet until
March 2002 facilities it formerly occupied in the United Kingdom, on
substantially the same terms as those applicable to the Company. The
Company's lease on the subleased premises expires in September 2017, except
that with seven months' notice the Company may elect to terminate the lease
in September 2002, 2007 and 2012. During 1997, the Company vacated its
Boston, Massachusetts facility. In January 1998, the Company sublet this
facility through August 2001, the month the Company's lease on the facility
expires. The Company also leases sales offices in Issy-les-Moulineaux, France
and Tokyo, Japan. The Company does not anticipate expanding the size of its
facilities in California, the United Kingdom, France or Japan in the
foreseeable future.
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ITEM 3--LEGAL PROCEEDINGS
On January 29, 1999, the Company received an indemnity claim from
Citrix Systems, Inc. ("Citrix") for an amount estimated by Citrix to not
exceed $6.25 million. The claim was made in relation to the Asset Purchase
Agreement between the Company and Citrix under which Citrix purchased the
Company's NITRIGUE product line in February 1998.
Citrix's indemnity claim is based on assertions made by GraphOn
Corporation ("GraphOn") in January of 1998 and a declaratory relief action
that Citrix filed against GraphOn in November 1998 in the United States
District Court, Southern District of Florida. Citrix's action against GraphOn
seeks a declaratory judgement that Citrix does not infringe any GraphOn
proprietary rights and that Citrix has not misappropriated any trade secrets
or breached an agreement to which GraphOn is a party. Citrix filed the action
in response to and to resolve assertions first made by GraphOn, and disclosed
to Citrix in January 1998, that the Company may have used GraphOn's
confidential information to develop certain of the Company's products,
possibly including products the Company sold to Citrix in February 1998. The
Court dismissed the complaint, but Citrix has subsequently filed an appeal.
The Company believes that any misappropriation or similar assertions by
GraphOn are without merit or basis. Accordingly, the Company contests
Citrix's indemnity claim.
On October 4, 1999, the Company filed a suit against Citrix and
GraphOn in the Superior Court of the State of California, County of Santa
Clara, relating to the misappropriation assertions of GraphOn's and Citrix's
refusal to release funds still remaining in escrow and breach of a
Cooperation Agreement between the parties. Subsequent to the filing of the
lawsuit, Citrix agreed to release $1.0 million from the escrow, leaving a
balance of $5.1 million. GraphOn answered the complaint, and claimed it had
not made any claims of misappropriation against Insignia or Cirtix. The case
is pending.
On March 15, 2000, GraphOn announced it had filed a suit against
Citrix and the Company in the Superior Court of the State of California,
County of Santa Clara, alleging trade secret misappropriation and breach of
contract arising out of the same facts and circumstances set forth in the
Company's action against GraphOn. GraphOn has not yet served its compliant.
The Company believes GraphOn's claims are without merit. The case is pending.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 15, 2000 are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard M. Noling............ 51 President, Chief Executive Officer, and Director
Stephen M. Ambler............ 40 Chief Financial Officer, Company Secretary and a Senior Vice President
George Buchan................ 47 Senior Vice President of Engineering and UK General Manager
Jonathan D. Hoskin........... 42 Chief Technology Officer
Mark E. McMillan............. 37 Senior Vice President of Worldwide Sales and Marketing
Ronald C. Workman............ 45 Senior Vice President of Marketing
</TABLE>
Richard M. Noling was named President and Chief Executive Officer
and a director of the Company in March 1997. He also served as Chief
Financial Officer, Senior Vice President of Finance and Operations and
Company Secretary between April 19, 1996 and October 1, 1997 and Chief
Operations Officer between February and March 1997. From August 1995 to
February 1996, Mr. Noling was Vice President and Chief Financial Officer at
Fast Multimedia, Inc., a German-based computer software and hardware
developer. From November 1994 to August 1995, he was Chief Financial Officer
for DocuMagix Inc., a personal paper management software company. From June
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<PAGE>
1991 to October 1994, Mr. Noling served as Senior Vice President and Chief
Financial Officer for Gupta Corporation. He received a Bachelor of Arts
degree in aerospace and mechanical engineering science from the University of
California (San Diego) in 1970. He received an M.A. degree in theology from
the Fuller Theological Seminary in 1972, and an M.S. degree in business
administration in 1979 from the University of California (Irvine).
Stephen M. Ambler is Chief Financial Officer, Company Secretary and
a Senior Vice President of the Company. He joined the Company in April 1994
as Director of Finance and Administration, Europe. In April 1997, he was
appointed Worldwide Corporate Controller and became Chief Financial Officer,
Company Secretary and a Vice President in October 1997. He became a Senior
Vice President in January 1999. Prior to joining the Company Mr. Ambler
served as Financial Controller and Company Secretary at Ampex Great Britain
Limited and before that served as Finance Director at Carlton Cabletime
Limited in Newbury, England between May 1988 and December 1992. Mr. Ambler is
a member of the Institute of Chartered Accountants in England and Wales.
George Buchan is Senior Vice President of Engineering and UK General
Manager for the Company. He joined the Company in September 1991 as
Development Manager, was appointed Vice President of Engineering in July 1992
and was appointed Senior Vice President and UK General Manager in September
1993. Before joining the Company, Mr. Buchan was with Prime Computer UK, a
computer systems company, as Manager of the customer support center from June
1980 to August 1991. Mr. Buchan has been involved in high technology
companies for more than 25 years in general and technical management
positions in the project management and UNIX areas. He graduated from
Aberdeen University, Scotland in 1974 with a Bachelors degree in pure
mathematics.
Jonathan D. Hoskin, D. Phil., joined the Company as Engineering
Director in 1992, and was promoted to Chief Technology Officer in May 1999.
Prior to joining the Company, Dr. Hoskin held positions at several
leading-edge systems software companies in the U.K., including Glossa,
Hipersoft, Unisoft and Oxford Computing Systems. Dr. Hoskin earned a Bachelor
of Arts degree First Class from the University of Warwick, an advanced degree
in mathematics from Churchill College, Cambridge University and a Doctor of
Philosophy degree in mathematics from Oxford University.
Mark E. McMillan is Senior Vice President of Worldwide Sales and
Marketing for the Company. He joined the Company in November 1999. Before
joining the Company Mr. McMillan served as Vice President of Sales, Internet
Division, for Phoenix Technologies Ltd. Prior to that, Mr. McMillan served as
Phoenix's Vice President and General Manager of North American Operations.
Before joining Phoenix, he was founder, CEO and general partner of Vision
Technologies, LLC, a manufacturer of segment-zero personal computers. Prior
to that, Mr. McMillan co-founded and served as President of Softworks
Development Corporation, a regional distributor of PC components that he sold
in 1991.
Ronald C. Workman is Senior Vice President of Marketing for the
Company. He joined the Company in July 1998. Before joining the Company, Mr.
Workman served as Vice President of Marketing from January 1998 to June 1998
at Cygnus Systems, Inc., an embedded systems software tools company. From
June 1989 to December 1997 Mr. Workman was employed at Mentor Graphics Inc.,
an embedded systems software tools and real time operating company, serving
in several roles, including Vice President and Business Unit Manager of their
run time solutions business unit and Vice President VAR/OEM sales. Mr.
Workman has been involved in high technology companies for more than 20 years
in sales, marketing and engineering positions. He graduated from California
Polytechnic State University with a Bachelors degree in Biological Sciences
in 1977.
15
<PAGE>
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF ORDINARY SHARES
The Company's American Depositary Shares ("ADSs"), each ADS
representing one Ordinary Share, have been traded on the Nasdaq National
Market under the symbol INSGY since the Company's initial public offering in
November 1995. The following table sets forth, for the periods indicated, the
high and low sales prices for the Company's ADSs as reported by Nasdaq
National Market:
1998 High Low
---- ---- ---
First Quarter $2.62 $1.00
Second Quarter $2.06 $0.94
Third Quarter $1.31 $0.50
Fourth Quarter $2.00 $0.56
1999 High Low
---- ---- ---
First Quarter $6.75 $1.88
Second Quarter $10.25 $4.63
Third Quarter $8.88 $4.00
Fourth Quarter $6.31 $4.00
The closing sales price of the Company's ADS as reported on the
Nasdaq National Market on March 15, 2000 was $15.875 per share. As of that
date, there were approximately 134 holders of record of the Company's
Ordinary Shares and ADSs, excluding holders of ADSs whose ADSs are held in
nominee or street name by brokers.
DIVIDENDS
The Company has not declared or paid any cash dividends on its
Ordinary Shares. The Company anticipates that it will retain any future
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future. Any payment of dividends would be
subject, under English law, to the Companies Act 1985, and to the Company's
Memorandum of Association, and may only be paid from the retained earnings of
the Company, determined on a pre-consolidated basis. As of December 31, 1999
the Company had a deficit of $15,936,000 on a pre-consolidated basis.
RECENT SALES OF UNREGISTERED SECURITIES
On December 9, 1999, the Company entered into agreements whereby the
Company issued 1,063,515 Ordinary Shares in ADS form at a price of $4.23 per
share to Castle Creek Technology Partners LLC and four other investors of
whom one is a member of the Company's board of directors. The Company also
issued warrants to the purchasers to purchase a total of 310,054 ADSs at the
price of $5.29 per share. The warrants expire on December 9, 2004. The
Company received $4.5 million less offering expenses totaling $0.4 million.
The securities were issued in reliance upon the exemption from registration
provided under Regulation D promulgated under the Securities Act based on the
fact that the common stock was sold by the issuer in a sale not involving a
public offering.
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ITEM 6--SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ----------- ---------- --------
STATEMENT OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Net revenues $ 6,837 $ 14,096 $ 38,869 $ 44,246 $ 55,095
Cost of net revenues 3,800 9,375 17,062 17,415 14,912
----------- ---------- ----------- ---------- --------
Gross profit 3,037 4,721 21,807 26,831 40,183
----------- ---------- ----------- ---------- --------
Operating expenses:
Sales and marketing 5,542 7,946 15,804 21,782 19,118
Research and development 5,972 6,228 9,129 10,613 9,822
General and administrative 3,178 4,213 6,761 6,268 4,615
Restructuring - - 1,995 - -
---------- ---------- ----------- ---------- --------
Total operating expenses 14,692 18,387 33,689 38,663 33,555
---------- ---------- ----------- ---------- --------
Operating income (loss) (11,655) (13,666) (11,882) (11,832) 6,628
Interest and other income (expense), net 380 15,871 504 1,396 882
----------- ---------- ----------- ---------- --------
Income (loss) before income taxes (11,275) 2,205 (11,378) (10,436) 7,510
Provision (benefit) for income taxes (1,316) 1,783 (720) 330 2,253
----------- ---------- ----------- ---------- --------
Net income (loss) $ (9,959) $ 422 $ (10,658) $(10,766) $ 5,257
=========== ========== =========== ========== ========
Net income (loss) per share:
Basic $ (0.77) $ 0.03 $ (0.91) $ (0.95) $ 1.31
=========== ========== =========== ========== ========
Diluted $ (0.77) $ 0.03 $ (0.91) $ (0.95) $ 0.45
=========== ========== =========== ========== ========
Weighted average number of shares and share equivalents:
Basic 12,883 12,159 11,690 11,342 4,010
=========== ========== =========== ========== ========
Diluted 12,883 12,378 11,690 11,342 11,635
=========== ========== =========== ========== ========
BALANCE SHEET DATA AT DECEMBER 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------ ----------- ---------- ----------- ---------- ---------
Cash, cash equivalents, short-term investments and restricted cash $ 11,107 $ 16,334 $ 14,461 $ 21,772 $ 36,999
Working capital (221) 9,712 7,816 15,777 25,673
Total assets 13,284 21,011 25,457 34,571 47,782
Long-term obligations under capital leases - - 111 259 307
Mandatorily redeemable capital 2,619 - - - -
Mandatorily redeemable warrants 1,440 - - - -
Total shareholders' equity 1,980 11,418 10,523 20,215 30,398
</TABLE>
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ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE MATTERS SUCH AS GROSS PROFIT,
GROSS MARGINS, SPENDING LEVELS, INTERNATIONAL OPERATIONS, RESTRUCTURING
BENEFITS AND CAPITAL NEEDS. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS AND OUTCOMES DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES IN RESULTS AND OUTCOMES
INCLUDE WITHOUT LIMITATION THOSE DISCUSSED BELOW AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS REPORT.
OVERVIEW
Insignia Solutions plc (the "Company"), which commenced operations
in 1986, develops, markets and supports virtual machine technology which
enables software applications and operating systems to be run on various
computer platforms.
In January 1998, the Company announced its intention to launch a new
product line called the Jeode-TM- platform, based on the Company's Embedded
Virtual Machine ("EVM"-TM-) technology. This followed a strategic review in
late 1997 of the Company's business. The Company also explored new markets
that would leverage the Company's 12 years of emulation software development
experience. The Jeode platform is the Company's implementation of Sun
Microsystems, Inc.'s ("Sun") Java-Registered Trademark- technology tailored
for Internet appliances and embedded devices. The Jeode platform is enabled
by the Company's EVM and is designed to enable software developers to create
reliable, efficient and predictable Internet appliances and embedded devices.
The product became available for sale in March 1999. The Jeode platform is
now the principal product line of the Company and will be for the foreseeable
future. The Jeode product line revenue model is based on original equipment
manufacturer's ("OEMs") customer transactions. Revenue from the Jeode product
line are generally derived from four main sources: the sale of a development
license, the sale of annual maintenance and support, a commercial use royalty
based on shipments of products that include Jeode technology, and
customer-funded engineering activities.
The Company's principal product line in recent years has been
SoftWindows-TM-. This product enabled Microsoft Windows ("Windows"-Registered
Trademark-) applications to be run on most Apple Computer Inc.
("Apple"-Registered Trademark-) Macintosh computers and many UNIX
workstations. Revenues from this product line grew until 1995, but declined
significantly after that date, along with margins. This was due to a
declining demand for Apple Macintosh products and increased competition. In
early 1999 Management took steps to discontinue the product line, and on
October 18, 1999, the Company signed an exclusive licensing arrangement with
FWB Software, LLC ("FWB"). Under the arrangement FWB will pay the Company a
royalty based on an earn-out of FWB's future revenues from the product line
and the Company will be paid as those revenues are achieved. Upon achieving a
certain revenue threshold, the SoftWindows and RealPC product lines will be
transferred to FWB at no additional consideration. This arrangement allows
the Company to focus exclusively on its Jeode platform business strategy.
Between December 1995 and May 1998, the Company shipped NTRIGUE-TM-,
a Windows compatibility client/server product that supported multiple
X-terminals, workstation clients, Macintosh computers, PCs, network computers
and Net PCs from a Windows NT-based server. The Company disposed of its
NTRIGUE technology in February 1998.
The Company's operations outside of the United States are primarily
in the United Kingdom, where the majority of the Company's research and
development operations and its European sales activities are located. The
Company distributes its Jeode platform through OEM's and distributed its
SoftWindows product through independent distributors. The Company's revenues
from customers outside the United States are derived primarily from Europe
and Asia and are generally affected by the same factors as its revenues from
customers in the United States. The operating expenses of the Company's
operations outside the United States are mostly incurred in Europe and relate
to its research and development and European sales activities. Such expenses
consist primarily of ongoing fixed costs and consequently do not fluctuate in
direct proportion to revenues. The Company's revenues and expenses outside
the United States can fluctuate from period to period based on movements in
currency exchange rates. Historically, movements in currency exchange rates
have not had a material effect on the Company's revenues.
18
<PAGE>
The Company operates with the United States dollar as its functional
currency, with a majority of revenues and operating expenses denominated in
dollars. Although the Company engages in short-term currency option and
forward exchange contracts in order to hedge short-term pound sterling net
cash flows, pound sterling exchange rate fluctuations against the dollar can
cause European revenues and United Kingdom expenses, which are translated
into dollars for financial statement reporting purposes, to vary from
period-to-period.
DISPOSAL OF NTRIGUE TECHNOLOGY
On February 5, 1998 the Company completed the disposal of its
NTRIGUE technology to Citrix Systems Inc. ("Citrix") for $17.7 million. As
part of the disposal, the Company transferred 45 employees to Citrix, of
which 43 were development engineers.
Under the terms of the disposal agreement $9.0 million was paid to
the Company in cash on February 5, 1998, and the remainder was being held in
escrow for the sole purpose of satisfying any obligations to Citrix arising
from or in connection with an event against which the Company would be
required to indemnify Citrix. Of this amount, $2.5 million, $0.9 million and
$1.0 million were released to the Company in February 1999, August 1999 and
February 2000, respectively.
On January 29, 1999, the Company received an indemnity claim from
Citrix Systems, Inc. ("Citrix") for an amount estimated by Citrix to not
exceed $6.25 million. The claim was made in relation to the Asset Purchase
Agreement between the Company and Citrix under which Citrix purchased the
Company's NITRIGUE product line in February 1998.
Citrix's indemnity claim is based on assertions made by GraphOn
Corporation ("GraphOn") in January of 1998 and a declaratory relief action
that Citrix filed against GraphOn in November 1998 in the United States
District Court, Southern District of Florida. Citrix's action against GraphOn
seeks a declaratory judgement that Citrix does not infringe any GraphOn
proprietary rights and that Citrix has not misappropriated any trade secrets
or breached an agreement to which GraphOn is a party. Citrix filed the action
in response to and to resolve assertions first made by GraphOn, and disclosed
to Citrix in January 1998, that the Company may have used GraphOn's
confidential information to develop certain of the Company's products,
possibly including products the Company sold to Citrix in February 1998. The
Court dismissed the complaint, but Citrix has subsequently filed an appeal.
The Company believes that any misappropriation or similar assertions by
GraphOn are without merit or basis. Accordingly, the Company contests
Citrix's indemnity claim.
On October 4, 1999, the Company filed a suit against Citrix and
GraphOn in the Superior Court of the State of California, County of Santa
Clara, relating to the misappropriation assertions of GraphOn's and Citrix's
refusal to release funds still remaining in escrow and breach of a
Cooperation Agreement between the parties. Subsequent to the filing of the
lawsuit, Citrix agreed to release $1.0 million from the escrow, leaving a
balance of $5.1 million. GraphOn answered the complaint, and claimed it had
not made any claims of misappropriation against Insignia or Cirtix. The case
is pending.
On March 15, 2000, GraphOn announced it had filed a suit against
Citrix and the Company in the Superior Court of the State of California,
County of Santa Clara, alleging trade secret misappropriation and breach of
contract arising out of the same facts and circumstances set forth in the
Company's action against GraphOn. GraphOn has not yet served its compliant.
The Company believes GraphOn's claims are without merit. The case is pending.
19
<PAGE>
REVENUES
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
License revenues $ 6,471 $ 12,998 $ 36,744
Service revenues 366 1,098 2,125
---------------------------------------------------------------------
Total revenues $ 6,837 $ 14,096 $ 38,869
=====================================================================
</TABLE>
In 1999, the Company shipped two principal product lines: the Jeode
platform and SoftWindows.
Revenue from the Jeode product line was in 1999 derived from four
main sources: the sale of a development license, the sale of annual
maintenance and support, a commercial use royalty based on shipments of
products that include Jeode technology, and customer-funded engineering
activities. The Company derived its SoftWindows revenues from the sale of
packaged software products and annual maintenance contracts, along with
royalties received from bundling agreements with OEMs and customer-funded
engineering activities under OEM contracts. Revenues from the sale of
development licenses, packaged products and royalties received from OEMs are
classified as license revenue, while revenues from customer-funded
engineering activities, training, and annual maintenance contracts are
classified as service revenue.
In 1999, Jeode platform revenues accounted for 23% of total
revenues. The Jeode platform became available for sale in 1999 and generated
no prior year revenue. The Jeode platform is now the principal product of the
Company and will be the principal source of revenues for the foreseeable
future.
In 1999, total revenues from SoftWindows accounted for 74% of total
Company revenues, but declined 63% compared to 1998 primarily due to reduced
demand for SoftWindows and Management's decision to discontinue the product
line. In 1999, 1998 and 1997, license revenue from the sale of the Company's
products for Macintosh computers accounted for 40%, 52% and 32% of total
revenues, respectively. UNIX total revenues declined 58% in 1999 compared to
1998 as a result of reduced demand and Management's decision to discontinue
the product line. In 1999, 1998 and 1997 total revenues from the Company's
product for UNIX computers accounted for 34%, 40% and 32% of total revenues,
respectively.
On October 18, 1999, the Company signed an exclusive licensing
arrangement of its SoftWindows and RealPC product lines to FWB. The proceeds
the Company will receive from the license arrangement are based on an
earn-out of FWB's future revenues from the product lines and will be paid to
the Company as those revenues are achieved. Upon achieving a certain revenue
threshold, the SoftWindows and RealPC product lines will be transferred to
FWB at no additional consideration.
Service revenues in 1999 declined 67% compared to 1998, primarily
because the Company performed fewer customer-funded engineering activities
than in the previous year. Similarly, in 1998, service revenues declined 48%
compared to 1997.
Total NTRIGUE revenues declined 93% in 1998 compared to 1997 as a
result of the disposal of the product line in 1998. In 1998 and 1997 total
revenues from the Company's NTRIGUE products accounted for 7% and 34% of
total revenues, respectively. The NTRIGUE product line was sold in early 1998
and generated no revenue in 1999.
Overall, total revenues and license revenues declined 51% and 50%,
respectively in 1999 compared to 1998.
The Company distributed its SoftWindows and RealPC packaged products
within the United States and internationally through distributors, resellers
and OEMs. The Company offered certain return privileges to its customers
including product exchange privileges and price protection. The Company
recognized revenues from packaged products upon shipment with provisions for
estimated future returns, exchanges and price protection being recorded as a
reduction of total revenues. A significant portion of the Company's revenue
in 1997 was derived from large OEM customer transactions, particularly in the
UNIX and NT-related product lines.
20
<PAGE>
Sales to distributors and OEM's representing more than 10% of total
revenue in each period accounted for the following percentages of total
revenue.
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Distributors:
Ingram Micro * 27% *
Sun Microsystems * 27% -%
Mitsubishi * 11% *
All Distributors 64% 92% 42%
OEM's:
Quantum Corporation 23% -% -%
Silicon Graphics * * 19%
</TABLE>
*Less than 10%
Sales to customers outside the United States, derived mainly from
customers in Europe and Asia, represented approximately 15%, 24% and 27% of
total revenues in 1999, 1998 and 1997, respectively. The Company markets
Jeode to Internet appliance and embedded device manufacturers in the United
States, Europe and Japan.
Movements in currency exchange rates did not have a material impact
on total revenues in 1999, 1998 or 1997. Economic conditions in Europe and
Japan, as well as fluctuations in the value of the Euro and Japanese yen
against the U.S. dollar and British pound sterling, could impair the
Company's revenues and results of operations. International operations are
subject to a number of other special risks. These risks include foreign
government regulation, reduced protection of intellectual property rights in
some countries where we do business, longer receivable collection periods and
greater difficulty in accounts receivable collection, unexpected changes in,
or imposition of, regulatory requirements, tariffs, import and export
restrictions and other barriers and restrictions, potentially adverse tax
consequences, the burdens of complying with a variety of foreign laws and
staffing and managing foreign operations, general geopolitical risks, such as
political and economic instability, hostilities with neighboring countries
and changes in diplomatic and trade relationships, and possible recessionary
environments in economies outside the United States.
COST OF REVENUES AND GROSS MARGIN
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------
(In thousands, except percentages)
<S> <C> <C> <C>
Cost of license revenues $ 3,296 $ 8,329 $ 15,068
Gross margin: license revenues 49% 36% 59%
----------------------------------------------------------------------
Cost of service revenues $ 504 $ 1,046 $ 1,994
Gross margin: service revenues (38%) 5% 6%
----------------------------------------------------------------------
Total cost of revenues $ 3,800 $ 9,375 $ 17,062
Gross margin: total revenues 44% 33% 56%
----------------------------------------------------------------------
</TABLE>
Cost of license revenue is mainly comprised of royalties to third
parties, along with the costs of documentation, duplication and packaging.
Cost of service revenue includes costs associated with customer-funded
engineering activities and end-user support under maintenance contracts.
21
<PAGE>
The Company believes that the significant factors affecting the
Jeode platform gross margin include pricing of the development license,
pricing of the unit usage and royalties to third parties such as Sun
Microsystems, Inc. ("Sun"). In early 1999, the Company signed a five-year
agreement with Sun under which Sun established the Company as an Authorized
Virtual Machine provider. Under this agreement the Company will pay Sun a per
unit royalty on each Jeode platform-enabled Internet appliance or embedded
device shipped by the Company's customers, plus a royalty on all development
licenses put in place between the Company and its customers.
License gross margins in 1999 increased to 49% from 36% in 1998, due
to the introduction of the Jeode product line which accounted for 23% of
total license revenues in 1999. There were no sales of Jeode in prior years.
The prior year gross margin was lower as a result of SoftWindows pricing
strategies, increased third party royalties for SoftWindows and high returns
on the NTRIGUE product line. License gross margins in 1998 declined to 36%
from 59% in 1997 as a result of lower prices introduced in mid 1997 due to
increased competition in the SoftWindows for the Macintosh market and fewer
high margin OEM customer transactions.
Gross margin for service revenue is impacted by the level of and
pricing terms of customer funded engineering activities, which can vary from
customer to customer, from contract to contract and the level of maintenance
contracts sold. In 1999 and 1998, the Company earned little revenue from
customer-funded engineering activities. UNIX maintenance agreement revenue
declined in 1999 and 1998. The Company discontinued selling SoftWindows
maintenance in late 1999 as a result of the SoftWindows license arrangement
with FWB. The continued support of existing SoftWindows contracts with no
renewal revenue combined with the high cost of providing support under
NTRIGUE maintenance contracts resulted in the Company achieving service
revenue gross margins of (38%), 5% and 6% in 1999, 1998 and 1997,
respectively.
In the event that Jeode licenses increase in future periods, service
revenue gross margins are expected to increase due to customer-funded
engineering activities and the required maintenance, and upgrade contracts
for each Jeode product sale.
OPERATING EXPENSES
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------
(In thousands, except percentages)
<S> <C> <C> <C>
Sales and marketing $ 5,542 $ 7,946 $ 15,804
Percentage of total revenues 81% 56% 41%
--------------------------------------------------------------------
Research and development $ 5,972 $ 6,228 $ 9,129
Percentage of total revenues 87% 44% 23%
--------------------------------------------------------------------
General and administrative $ 3,178 $ 4,213 $ 6,761
Percentage of total revenues 46% 30% 17%
--------------------------------------------------------------------
</TABLE>
Sales and marketing expenses include advertising and promotional
expenses, trade shows, personnel and related overhead costs, and salesperson
commissions. Sales and marketing expenses decreased in 1999 by 30% as a
result of reduced spending on SoftWindows advertising programs and staffing.
In 1998, sales and marketing costs decreased by 50% over 1997 primarily due
to reduced advertising and promotional expenditures, and a reorganization of
the sales force resulting in a reduction in personnel costs. The Company
anticipates sales and marketing expenses to increase in 2000 as the Company
continues to increase its marketing and direct sales organization for its
Jeode product line. The Company has established a direct sales force in the
United States, Europe and Japan.
22
<PAGE>
Research and development expenses consist primarily of personnel
costs, overhead costs relating to occupancy and equipment depreciation.
Research and development expenses decreased in 1999 by 4% over 1998 as a
result of reductions in personnel. During all of 1999 and the last half of
1998, the Company invested the majority of its development expense in its
Jeode technology to accelerate the release of this product. Research and
development costs decreased by 32% in 1998 over 1997 as a result of
reductions in personnel associated with the disposal of the NTRIGUE product
line. In accordance with Statement of Financial Accounting Standards No. 86,
software development costs are expensed as incurred until technological
feasibility is established, after which any additional costs are capitalized.
In 1999, 1998 and 1997, no development expenditures were capitalized.
Development costs are expected to increase in 2000 as the Company further
enhances its Jeode technology.
General and administrative expenses consist primarily of personnel
and related overhead costs for finance, information systems, human resources
and general management. General and administrative expenses decreased by 25%
in 1999 over 1998 as a result of reduced headcount and reduced legal fees.
General and administrative expenses decreased by 38% in 1998 over 1997 as a
result of reduced headcount, reduced legal fees and a reduction in bad debt
provisions. General and administrative costs are not expected to change
significantly in 2000 compared to 1999.
RESTRUCTURING
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------
(In thousands, except percentages)
<S> <C> <C> <C>
Restructuring $ - $ - $ 1,995
Percentage of total revenues - - 5%
----------------------------------------------------------------------------
</TABLE>
In 1997, the Company completed two restructurings. In the first
restructure, the Company reduced headcount by 11 persons and integrated
product development, product marketing and the sales organization into two
business units. In the second restructure, the Company combined two sales
organizations into one unit, reducing headcount by 53 persons, reorganized
the sales force such that direct sales inquiries were referred to
distributors, and reduced the number of facilities it operated from.
Restructuring expenses, which represented 5% of total revenues in 1997,
consisted principally of costs related to terminated employees, including
severance payments and stock option related expenses, and future rents on
facilities no longer used by the Company. As a result of the two
restructurings, the Company saved approximately $3.0 million in 1998.
INTEREST INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------------
(In thousands, except percentages)
<S> <C> <C> <C>
Interest income, net $ 473 $ 984 $ 667
Percentage of total revenues 7% 7% 2%
---------------------------------------------------------------------------
</TABLE>
Interest income, net decreased in 1999 over 1998 due primarily to
reduced interest income earned on the Company's cash, cash equivalents and
amounts held in escrow, which decreased from $16.3 million at December 31,
1998 to $11.1 million at December 31, 1999. Interest income, net increased in
1998 over 1997 due primarily to increased interest income earned on the
Company's cash, cash equivalents, amounts held in escrow, and investments,
which increased from $14.5 million at December 31, 1997 to $16.3 million at
December 31, 1998.
23
<PAGE>
OTHER INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------
(In thousands, except percentages)
<S> <C> <C> <C>
Other income (expense), net $ (93) $ 14,887 $ (163)
Percentage of total revenues (1%) 106% *
--------------------------------------------------------------------------
</TABLE>
*Less than 1%
Other income (expense), net decreased from income of $14.9 million
in 1998 to an expense of $93,000 in 1999. Other income (expense), net
increased from an expense of $163,000 in 1997 to income of $14.9 million in
1998. The 1998 income was a result of the gain on disposal of the NTRIGUE
product line of $14.7 million. This gain comprised gross disposal proceeds of
$17.7 million, less $3.0 million of transaction expenses, employment
terminations and costs and losses related to the property and equipment sold
or written down in value. Other expense is a result of foreign exchange
losses.
Over 85% of the Company's total revenues and approximately 40% of
its operating expenses are denominated in United States dollars. Most of the
remaining revenues and expenses of the Company are pound sterling denominated
and consequently the Company is exposed to fluctuations in pound sterling
exchange rates. To hedge against this currency exposure, the Company enters
into foreign currency options and forward exchange contracts for periods and
amounts consistent with the amounts and timing of its anticipated pound
sterling denominated operating cash flow requirements. Unrealized gains and
losses on foreign currency option contracts are deferred and were not
material at December 31, 1999, 1998 and 1997. There can be no assurance that
such fluctuations will not have a material effect on the Company's results of
operations in the future.
The Company has, at times, an investment portfolio of fixed income
securities that are classified as "available-for-sale-securities". These
securities, like all fixed income instruments, are subject to interest rate
risk and will fall in value if market interest rates increase. The Company
attempts to limit this exposure by investing primarily in short-term
securities.
PROVISION (BENEFIT) FOR INCOME TAXES
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------
(In thousands, except percentages)
<S> <C> <C> <C>
Provision (benefit) for income taxes $ (1,316) $ 1,783 $ (720)
Effective income tax rate (12%) 81% (6%)
----------------------------------------------------------------------------
</TABLE>
The Company's benefit for income taxes for 1999 primarily represents
certain non-U.S. taxes arising from sales to customers in Japan and the
benefit of offsetting net operating losses against provisions arising from
the disposal of the Company's NTRIGUE product line in 1998. The Company
recorded a tax provision in 1998 reflecting certain non-U.S. taxes arising
upon the disposal of the Company's NTRIGUE product line, net of offsetting
operating losses. The Company recorded a tax benefit in 1997 reflecting the
utilization of United Kingdom operating tax losses against prior year taxes
paid.
A more complete analysis of the differences between the federal
statutory rate and the Company's effective income tax rates is presented in
Note 5 to the Consolidated Financial Statements. At December 31, 1999, the
Company has recorded a full valuation allowance against all deferred tax
assets, primarily comprising net operating losses, on the basis that
significant uncertainty exists with respect to their realization.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash, cash equivalents, investments and restricted cash $ 11,107 $ 16,334 $ 14,461
-------------------------------------------------------------------------------------------------------------
Working capital $ (221) $ 9,712 $ 7,816
-------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (10,617) $ (13,687) $ (7,371)
-------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has transitioned its product focus from compatibility
products to its Jeode product line based on the Company's EVM technology.
This change in product focus has resulted in a redirection of available
resources from the Company's historical revenue base towards the development
and marketing efforts associated with the Jeode platform, which was released
for general availability in March 1999. As a result of this change in product
strategy and associated redirection of resources to new product development,
the Company's financial position weakened during 1999. Cash used in operating
activities totaled $10.6 million during 1999.
The Company's cash, cash equivalents and short-term investments,
including restricted cash of $6.1 million held in escrow, were $11.1 million
at December 31, 1999, a decrease of $5.2 million from $16.3 million at
December 31, 1998. Working capital decreased to ($0.2) million at December
31, 1999, from $9.7 million at December 31, 1998. The principal source of
cash funding came from a private placement funding, a convertible promissory
note, receivable collections and NTRIGUE product line sales proceeds released
from escrow. Capital additions totaled $0.2 million, $0.9 million and $0.8
million during the years ended December 31, 1999, 1998 and 1997, respectively.
In February 1998, $8.9 million was received from the disposal of the
NTRIGUE product line. Additionally, $2.5 million, $0.9 million and $1.0
million were released to the Company in February 1999, August 1999 and
February 2000, respectively, and the remaining $5.1 million is being held in
escrow pending resolution of the Citrix indemnity claim.
On October 20, 1999, the Company signed a convertible promissory
note in favor of Quantum Corporation ("Quantum") for $1.0 million. The note
is convertible at Quantum's option to the Company's shares any time during
the lifetime of the note. All unpaid principal with any unpaid interest, at
8% per annum, is due and payable on December 31, 2000.
On March 20, 2000, the Company entered into a binding agreement with
a director whereby he would provide the Company a $5.0 million line of credit.
The interest rate on amounts drawn down is at prime plus 2% until June 30,
2000 and thereafter at prime plus 4% per annum simple interest, payable in
cash at the repayment date. Full repayment of any outstanding loan is due on
March 20, 2001.
The Company believes that with the $5.0 million line of credit,
entered into on March 20, 2000 and expected cash flow from operations, the
Company will have sufficient funds to meet the Company's operating and
capital requirements through the end of fiscal year 2000. However, there can
be no assurance that the Company will be able to obtain additional funding if
needed, on acceptable terms or at all.
The Company's liquidity may be reduced in the future by factors such
as higher interest rates, inability to borrow without collateral, outcome of
pending claims, availability of capital financing and continued operating
losses. Further, significant fluctuations in quarterly operating results has
had and, in the future, may continue to have a negative affect on the
Company's liquidity. Factors such as price reductions, the introduction and
market acceptance of new products and product returns have contributed to
this quarterly variability. Moreover, the Company's expense levels are based
in part on expectations of future sales levels, and a shortfall in expected
sales could therefore result in a disproportionate decrease in results of
operations. As such, the revenues and results of operations in some future
period may be below the expectations of investors, which would likely result
in a significant reduction in the market price of the Company's shares. A
decline in the market price of the Company's shares would have a negative
effect on the Company's ability to raise needed capital on terms and
conditions acceptable to management.
PRIVATE PLACEMENT AND WARRANTS
In December 1999, the Company issued 1,063,515 Ordinary Shares in
ADS form at a price of $4.23 per share through a private placement. The
Company received $4.5 million less offering expenses totaling $0.4 million.
Along with ADSs, the Company also issued to the purchasing shareholders
warrants that entitle the purchasing shareholders to purchase a total of
319,054 ADSs at an exercise price of $5.29 per ADS. As described below, the
exercise price and the number of ADSs issuable under the warrants are subject
to various adjustments. In addition, the Company may issue additional
warrants that entitle the purchasing shareholders to purchase ADSs at par
value on designated adjustment dates in the future.
The purchasing shareholders received warrants to purchase three ADSs
for every 10 ADSs they purchased. The exercise price of the warrants was set
at 125% of the original per ADS purchase price i.e. $5.29.
The warrants contain anti-dilution provisions designed to protect
the purchasing shareholders if the Company sells or is deemed to sell any
shares at below market price during the term of the warrants, which ends on
December 9, 2004.
25
<PAGE>
In addition, under the terms of the warrants, if at least $4.75
million of the $6.1 million in funds held in escrow by Citrix Systems, Inc.
on December 9, 1999 is not released to the Company by July 10, 2000, the
exercise price of the warrants will be adjusted to the market price on that
date, if that market price is lower than $5.29 per share. In February, 2000,
$1.0 million was released from escrow to the Company. As part of the warrant
agreement, the holders of the warrants may be entitled to cash payments upon
the occurrence of certain Major Transactions, as defined, including change of
control provisions. Cash payments are determined in a methodology described
in the agreement. Such methodology is impacted by market prices.
The additional warrants entitle the purchasing shareholders to
purchase ADSs at par value if the average of the closing bid price of the
ADSs over ten days before an adjustment date is less than $4.23. The
adjustment dates are: the effective date of a registration statement for the
shares issued in this private placement, 4 months after the effective date of
the registration statement, and 8 months after the effective date of the
registration statement.
If the Company completes an underwritten public offering with net
proceeds of at least $25 million and a per ADS price of at least $7.02 before
8 months after the effective date of the registration statement, then the
right to the related adjustment date terminates. If the registration
statement is not effective by May 10, 2000, then the first adjustment date
will be May 10, 2000 and there will be an adjustment date each month
thereafter until the registration statement is effective. In addition, if at
least $4.75 million of funds held in escrow by Citrix is not released to the
Company by March 10, 2000, the purchasing shareholders will have an
adjustment date on that date and each month after that, until the earlier of
the date the funds are released from the escrow or December 10, 2000. In
February 2000, $1.0 million was released from escrow to the Company. The
average of the closing bid price of the ADSs over the ten days prior to March
10, 2000 exceeded $4.23 and no additional warrants were issued.
On any adjustment date the purchasing shareholders will be entitled
to purchase additional ADSs at par value. The number of ADSs issuable to the
purchasing shareholders following an adjustment date is determined under a
formula. The following table illustrates the number of ADSs issuable upon
exercise of the additional warrants and the percentage ownership that each
represents, assuming: the average bid price is 100%, 75%, 50%, 29.136% and
25% of the $4.23 price determined when the warrants were issued; the number
of Ordinary shares outstanding is the number outstanding on February 9, 2000,
which was 14,063,206; there was no adjustment of the number of ADSs issuable
upon exercise of the warrants; and the exchange rate remains at $1.60 per UK
pound sterling.
<TABLE>
<CAPTION>
PERCENT OF BID PRICE ADSs ISSUABLE ADSs ISSUED AS A PERCENTAGE OF
-------------------- ------------- TOTAL ORDINARY SHARES IN ISSUE
AFTER ISSUANCE
-------------
<S> <C> <C>
100% ($4.23) 0 0%
75% ($3.1725) 394,274 2.73%
50% ($2.1115) 1,253,111 8.18%
29.136% ($1.232) 3,493,852 19.90%
25% ($1.0575) 4,574,917 24.55%
</TABLE>
The Company obtained a third-party valuation to allocate fair value
to amounts received from the private placement between the Ordinary Shares
and the warrants. The amount allocated to mandatorily redeemable warrants
totaled $1.440 million, of which $0.590 million was allocated to the warrant,
and $0.850 million was allocated to the additional warrant. Of the remaining
net proceeds received, $2.619 million was allocated to mandatorily redeemable
capital, of which $0.340 million will be classified as Ordinary Shares and
$2.279 million will be classified as additional paid-in capital once the
Company completes an effective registration statement and it obtains certain
lockup agreements from its directors and executive officers.
At December 31, 1999, the Company was not in compliance with the
Nasdaq National Markets requirements on net tangible assets. Failure to meet
this criteria may result in the delisting of the Company's ADSs from the
Nasdaq National Markets and quotation of the Company's ADSs on the Nasdaq
SmallCap Market. As a result of such delisting, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the market
value of, the Company's ADSs. If the registration statement had been
effective on December 31, 1999 and the Company had obtained certain lockup
agreements from its directors and executive officers, the amount allocated on
the balance sheet to mandatorily redeemable capital ($2.619 million) would
have been classified in Shareholders' equity and the minimum net tangible
asset requirement would be in compliance. The Company expects the
registration statement to be effective within a short period of filing this
10-K.
26
<PAGE>
YEAR 2000 COMPLIANCE
The Company believes that all of the Company's most current product
releases will not cease to perform nor generate incorrect or ambiguous data
or results solely due to a change in date to or after January 1, 2000, and
will calculate any information dependent on these dates in the same manner,
and with the same functionality, data integrity and performance, as these
products did on or before December 31, 1999. However, all of the Company's
customers may not implement the Year 2000 compliant release of the Company's
products in a timely manner, which could lead to failure of customer systems
and product liability claims against the Company. Even if the Company's
products are Year 2000 compliant, the Company may, in the future, be subject
to claims based on Year 2000 issues in the products of other companies or
issues arising from the integration of multiple products within a system. The
costs of defending and resolving Year 2000-related disputes, and any
liability for Year 2000-related damages, including consequential damages,
could be significant. In addition, Year 2000 failures could have a negative
effect on the Company's competitive position. If any of the Company's
critical suppliers do not successfully and timely achieve Year 2000
compliance, and the Company is unable to replace them with new or alternate
suppliers, our business would be disrupted.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. This statement becomes effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
Statement of Financial Accounting Standard No. 137 "Accounting for Derivative
Instruments - Deferral of the Effect Date of FAS Statement No. 133" ("FAS
137"). FAS 137 defers the effective date of FAS 133 until June 15, 2000. The
Company will adopt FAS 133 in 2001. The Company expects the adoption of FAS
133 will not affect results of operations.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements". SAB 101 provides guidance for revenue recognition
under certain circumstances. The Company does not believe SAB 101 will have a
material impact on the financial statements.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues, margins and operating results are subject to
quarterly and annual fluctuations due to a variety of factors, including
demand for the Company's products, acceptance and demand for Java technology
in the Internet appliance and embedded device markets, the volume and timing
of orders received during the quarter, the mix of and changes in customers to
whom the Company's products are sold, the mix of product and service revenue
received during the quarter, the mix of development license fees and
commercial use royalties received, the timing and acceptance of new products
and product enhancements by the Company or by the Company's competitors,
27
<PAGE>
changes in pricing, buyouts of commercial use licenses, product life cycles,
the level of the Company's sales of third party products, variances in costs
associated with fixed price contracts, purchasing patterns of customers,
competitive conditions in the industry, foreign currency exchange rate
fluctuations, business cycles and economic conditions that affect the markets
for our products; and extraordinary events, such as litigation, including
related charges. Although the Company's primary functional currency is the
United States dollar, a significant portion of the Company's operating
expenses are incurred by its United Kingdom operations and paid in pounds
sterling. The Company enters into short-term currency option and forward
exchange contracts to hedge the short-term impact of exchange rate
fluctuations on pound sterling net operating cash flows, but there can be no
assurance that such fluctuations will not have a material adverse effect on
the Company's business, financial condition or results of operations in the
future. A relatively high percentage of the Company's expenses is fixed over
the short term and, as a result, if anticipated revenues in any quarter do
not occur or are delayed, expenditure levels could be disproportionately high
as a percentage of total revenues and the Company's operating results for
that quarter would be adversely affected. It is difficult for the Company to
predict when, or if, a particular prospect might sign a license agreement.
Development license fees may be delayed or reduced as a result of this
process. The Company's success depends upon the use of the Company's
technology by our licensees in their embedded systems, which makes it
difficult for the Company to predict when the Company will recognize royalty
of revenues from commercial use licenses. An increasing amount of the
Company's sales orders involve products and services that yield revenue over
multiple quarters or upon completion of performance. If license agreements
entered into during a quarter do not meet the Company's revenue recognition
criteria, even if we meet or exceed the Company's forecast of aggregate
licensing and other contracting activity, it is possible that the Company's
revenues would not meet expectations. If sales forecasted from a specific
customer for a particular quarter are not realized in that quarter, the
Company is unlikely to be able to generate revenue from alternate sources in
time to compensate for the shortfall. As a result, and due to the relatively
large size of some orders, a lost or delayed sale could have a material
adverse effect on the Company's quarterly operating results. Moreover, to the
extent that significant sales occur earlier than expected, operating results
for subsequent quarters may be adversely affected. There can be no assurance
that the Company will be able to achieve profitability on a quarterly or
annual basis. The Company intends to make a significant investment in its
marketing, sales, customer support and research and development
infrastructure to support its Jeode product line. The timing of this
expansion and the rate at which the Jeode platform generates revenue could
cause material fluctuations in the Company's results of operations. As a
result, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Although historically the Company's
business has not been subject to seasonal variations, sales of the Company's
products in certain international markets, such as Europe, are typically
slower in the summer months. Due to all of the foregoing factors, it is
possible that in some future quarters the Company's operating results will be
below the expectations of stock market analysts and investors. In such event,
the price of the Company's ADSs would likely be materially adversely affected.
The prices for the Company's ADSs have fluctuated widely in the
past. During the 12 months ended March 15, 2000, the closing price of a share
of the Company's common stock ranged from a high of $27.50 to a low of $4.00.
Under the rules of The Nasdaq Stock Market, the Company's stock price must
remain above $1.00 per share for continued quotation of the Company's shares
on the Nasdaq National Market. Stock price volatility has had a substantial
effect on the market prices of securities issued by the Company and other
high technology companies, often for reasons unrelated to the operating
performance of the specific companies. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has been instituted against the Company. The Company may in
the future be the target of similar litigation. Regardless of the outcome,
securities litigation may result in substantial costs and divert Management's
attention and resources.
FUTURE OPERATING RESULTS
Except for the historical information contained in this 10-K, the
matters discussed herein are forward-looking statements. These
forward-looking statements concern matters which include, but are not limited
to, the revenue model and market for the Jeode product line, the features,
benefits and advantages of the Jeode platform, international sales, gross
margins, the availability of licenses to third-party proprietary rights,
business and sales strategies, matters relating to proprietary rights,
competition, Year 2000 compliance, exchange rate fluctuations and the
Company's liquidity and capital needs and other statements regarding matters
that are not historical are forward-looking statements. These matters involve
risks and uncertainties that could cause actual results to differ materially
28
<PAGE>
from those in the forward looking statements. In addition to the factors
discussed above, among other factors that could cause actual results to
differ materially are the following: the demand for the Jeode platform; the
performance and functionality of Jeode; the Company's ability to deliver on
time, and market acceptance of new products or upgrades of existing products;
the timing of, or delay in, large customer orders; continued availability of
technology and intellectual property license rights; product life cycles;
quality control of products sold; competitive conditions in the industry;
economic conditions generally or in various geographic areas; and the risks
listed from time to time in the reports that the Company files with the U.S.
Securities and Exchange Commission. There can be no assurance that the
Company will experience growth in revenues and net income in any particular
period when compared to prior periods. Any quarterly or annual shortfall in
net revenues and/or net income from the levels expected by securities
analysts and shareholders would result in a substantial decline in the
trading price of the Company's shares.
The Company continues to face significant risks associated with the
successful execution of its new product strategy. These risks include, but
are not limited to continued technology and product development, introduction
and market acceptance of new products, changes in the marketplace, liquidity,
competition from existing and new competitors which may enter the marketplace
and retention of key personnel. Due to the generally longer sales cycles
expected to be associated with the Jeode platform, the Company does not
currently have accurate visibility of future order rates and demand for its
products generally. There can be no assurance that Jeode platform products
will achieve market acceptance.
The Company has experienced operating losses in each quarter since
the second quarter of 1996. To achieve profitability, the Company will have
to increase its revenue significantly. The Company's ability to increase
revenues depends upon the success of our Jeode product line. Jeode is a
relatively new product and it may not achieve market acceptance. If the
Company is unable to generate revenues from Jeode in the form of development
license fees, maintenance and support fees, commercial use royalties and
customer-funded engineering services, the Company's current revenue will be
insufficient to sustain our business.
ITEM 8--CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are set forth at
the pages indicated in Item 14 of Part IV of this Report on Form 10-K.
The following table provides selected quarterly consolidated
financial data (in thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------ ----------- ---------------- --------------
<S> <C> <C> <C> <C>
1999:
Revenues $ 2,308 $ 1,507 $ 1,754 $ 1,268
Gross profit 1,037 555 980 465
Net loss (3,116) (2,711) (2,030) (2,102)
Basic net loss per share (0.25) (0.21) (0.16) (0.16)
Diluted net loss per share (0.25) (0.21) (0.16) (0.16)
1998:
Revenues $ 4,982 $ 2,334 $ 3,620 $ 3,160
Gross profit 2,063 410 1,296 952
Net income (loss) 7,632 (3,677) (667) (2,866)
Basic net income (loss) per share 0.63 (0.30) (0.05) (0.23)
Diluted net income (loss) per share 0.62 (0.30) (0.05) (0.23)
1997:
Revenues $ 9,221 $ 9,659 $ 13,377 $ 6,612
Gross profit 4,815 5,409 8,323 3,260
Net loss (4,689) (2,536) (641) (2,792)
Basic net loss per share (0.41) (0.22) (0.05) (0.23)
Diluted net loss per share (0.41) (0.22) (0.05) (0.23)
</TABLE>
29
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
30
<PAGE>
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS OF THE COMPANY
The names of the directors of the Company, and certain information
about them as of March 15, 2000, are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
---------------- --- -------------------- --------
<S> <C> <C> <C>
Richard M. Noling 51 President and Chief Executive Officer 1997
Nicholas, Viscount Bearsted (1) 50 Chairman of the Board of the Company 1988
- Chief Executive Officer of Airpad Ltd.
Albert E. Sisto (2) 50 President of Phoenix Technologies 1997
Vincent S. Pino (2) 51 President of Alliance Imaging 1998
David G. Frodsham (1) 43 Chief Executive Officer of Argo 1999
Interactive Group
</TABLE>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Richard M. Noling was named President and Chief Executive Officer
and a director of the Company in March 1997. He also served as Chief
Financial Officer, Senior Vice President of Finance and Operations and
Company Secretary between April 19, 1996 and October 1, 1997 and Chief
Operations Officer between February and March 1997. From August 1995 to
February 1996, Mr. Noling was Vice President and Chief Financial Officer at
Fast Multimedia, Inc., a German-based computer software and hardware
developer. From November 1994 to August 1995, he was Chief Financial Officer
for DocuMagix Inc., a personal paper management software company. From June
1991 to October 1994, Mr. Noling served as Senior Vice President and Chief
Financial Officer for Gupta Corporation. He received a Bachelor of Arts
degree in aerospace and mechanical engineering science from the University of
California (San Diego) in 1970. He received an M.A. degree in theology from
the Fuller Theological Seminary in 1972, and an M.S. degree in business
administration in 1979 from the University of California (Irvine).
Nicholas, Viscount Bearsted has served as Chairman of the Board of
Directors of the Company since March 1997 and as a director of the Company
since January 1988. He also served as Chairman of the Board from January 1988
to March 1995, and he was the Company's Chief Executive Officer from
September 1988 until September 1993. He currently serves as Chief Executive
Officer of Airpad Ltd., a company based in the United Kingdom that develops
and manufactures peripheral products for the games console and personal
computer market. From January 1996 to May 1996, he served as Chief Executive
Officer and a director, and from April 1994 to January 1996, as Deputy Chief
Executive Officer and a director, of Hulton Deutsch Collection Ltd., a
photographic content provider. He founded Alliance Imaging Inc. in 1984 and
served as a senior executive until 1987 and as a director until 1988. Since
1980, he has been a corporate and computer consultant. He received a
Bachelors degree in chemistry from Oxford University in 1972. He also serves
as a Director of Mayborn Group plc.
Albert E. Sisto was appointed as a director of the Company in March
1997. He is currently President of Phoenix Technologies, Ltd., a company that
provides system enabling software designed into PC's as well as other
devices. He served as Chief Operating Officer of RSA Data Security, Inc., a
wholly owned subsidiary of Securities Dynamics Technologies, Inc., from
December 1997 to February 1999. He served as the President, Chief Executive
31
<PAGE>
Officer and Chairman of the Board of Directors of DocuMagix Inc. from October
1994 until December 1997. From September 1989 to September 1994, Mr. Sisto
served as President and Chief Executive Officer of PixelCraft, an imaging
software and equipment company. He received a B.E. degree in engineering from
the Stevens Institute of Technologies in 1971.
Vincent S. Pino was appointed a director of the Company in October
1998. He has served as President of Alliance Imaging, Inc. since February
1998. Alliance Imaging is a provider of diagnostic imaging and therapeutic
services. Mr. Pino began his association with Alliance in 1988 as Chief
Financial Officer. From 1991 through 1993 Mr. Pino held the position of
Executive Vice President and Chief Financial Officer. From 1986 to 1988,
Mr. Pino was President of Pacific Capital, where he provided financial
consulting services to corporations and publicly registered real estate
limited partnerships. Prior to joining Pacific Capital, Mr. Pino held
executive staff positions with Petrolane Incorporated, a diversified
services company. Mr. Pino received an MBA and a B.S. degree in finance from
the University of Southern California in 1972 and 1970, respectively.
David G. Frodsham was appointed a director of the Company in August
1999. He currently serves as Chief Executive Officer of Argo Interactive
Group, a provider of wireless internet technology, based in the United
Kingdom. Previously he was Chief Operating Officer with Phoenix Technologies
Ltd. Prior to that he founded and was CEO for Distributed Information
Processing Research Ltd., involving software design for the handheld/palmtop
market. Before that he was International Business Manager with Psion PLC, and
also held technical and marketing positions with SEL and Zeneca. He received
a B. Sc. from Kings College, London and an MBA from INSEAD in France.
(b) EXECUTIVE OFFICERS
The information required by this Item with respect to the executive
officers of the Company is incorporated by reference from "Item 4A--Executive
Officers of the Registrant" in Part I of this Report.
(c) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors
and officers, and persons who own more than 10% of the Company's Ordinary
Shares to file initial reports of ownership and reports of changes in
ownership with the SEC. Such persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms furnished to the
Company and written representations from the executive officers and
directors, the Company believes that all Section 16(a) filing requirements
were met.
32
<PAGE>
ITEM 11--EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to or earned
or paid for services rendered in all capacities to the Company and its
subsidiaries during each of 1999, 1998 and 1997 by the Company's Chief
Executive Officer and each of the Company's other executive officers who were
serving as executive officers at the end of 1999, as well as the Company's
former Senior Vice President of Business Development and Chief Technology
Officer who left the Company during 1999 (the "Named Officers"). This
information includes the dollar values of base salaries and bonus awards, the
number of shares subject to options granted and certain other compensation,
whether paid or deferred.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ ------------
SECURITIES
NAME AND PRINCIPAL POSITIONS OTHER ANNUAL UNDERLYING ALL OTHER
YEAR SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#) COMPENSATION($)(2)
---- --------- ----------- --------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Noling (3)........... 1999 240,611 83,042 -- -- 1,080
President and Chief Executive Officer 1998 217,875 75,171 -- 20,000 1,080
1997 203,947 93,184 -- 415,000 360
Stephen M. Ambler (4) .......... 1999 179,382 57,512 -- 25,000 --
Chief Financial Officer, Company 1998 145,250 40,345 -- 20,000 --
Secretary and Senior Vice President 1997 122,556 8,889 19,777 (5) 88,750 4,338
George Buchan .................. 1999 168,000 48,161 21,120 (6) 40,000 16,800
Senior Vice President of 1998 167,000 54,827 22,044 (6) 20,000 16,700
Engineering and UK General Manager 1997 158,650 51,671 20,265 (6) 55,000 15,865
Jon Hoskin (7) ................. 1999 110,400 18,575 18,240 (6) 45,000 5,520
Chief Technology Officer 1998 79,569 14,712 15,558 (6) 22,000 3,978
1997 64,400 -- 14,304 (6) 9,250 3,219
Marshall Kwait (8) ............. 1999 157,937 40,174 -- 47,500 1,080
Former Vice President of Sales 1998 128,431 81,587 -- 12,000 1,080
1997 115,800 90,306 -- 15,500 1,080
Mark E. McMillan (9) ........... 1999 26,481 19,166 -- 150,000 --
Senior Vice President of Worldwide
Sales and Marketing
Ronald C. Workman (10).......... 1999 174,983 47,746 -- 10,000 1,080
Senior Vice President of Marketing 1998 82,500 22,442 -- 100,000 405
David B. Winterburn (11)........ 1999 37,951 -- 101,415 (12) -- 225
Former Senior Vice President of 1998 59,006 25,734 57,000 (13) 130,000 135
Business Development and Chief
Technology Officer
</TABLE>
(1) Bonuses paid to the executive officers are based on a target bonus set for
each officer each quarter, adjusted by the Company's operating results over
plan and the executive officer's performance against quarterly qualitative
goals. All executive officer bonuses are at the discretion of the
Compensation Committee of the Board.
(2) Represents Company contributions to defined contribution employee benefit
plans.
(3) Mr. Noling joined the Company in April 1996 as Senior Vice President of
Finance and Operations, Chief Financial Officer and Company Secretary. He
was appointed President and Chief Executive Officer of the Company in March
1997.
(4) Mr. Ambler joined the Company in April 1994 as Director of Finance and
Administration, Europe. He was appointed Chief Financial Officer, Company
Secretary and Vice President in October 1997. He became a Senior Vice
President in January 1999.
(5) $8,111 of this sum represents the incremental cost to the Company of the
use of a Company car and $11,666 represents a bonus for relocation to the
Company's United States facility.
(6) Represents the payment of a Company car allowance.
(7) Mr. Hoskin joined the Company in June 1992 as Engineering Director.
He was appointed Chief Technology Officer in May 1999.
33
<PAGE>
(8) Mr. Kwait joined the Company in December 1996 as Channel Sales Director. He
was appointed Vice President of Sales in February 1999 and served in this
position until January 2000.
(9) Mr. McMillan joined the Company in November 1999.
(10) Mr. Workman joined the Company in July 1998.
(11) Mr. Winterburn joined the Company in August 1998. He served as
Senior Vice President of Business Development and Chief Technology
Officer until March 1999. Mr. Winterburn provided consultancy services
to the Company between June 1998 and August 1998.
(12) Comprises $17,500 forgiveness of loan in accordance with the terms of a
promissory note dated July 1998, plus $83,915 payment under severance of
employment, including forgiveness of all remaining principal and interest
on a promissory note dated July 1998.
(13) $15,000 of this sum represents a relocation reimbursement, and $42,000
represents amounts paid for consulting services provided immediately prior
to joining the Company.
The following table sets forth further information regarding
individual grants of rights to purchase Ordinary Shares during 1999 to
each of the Named Officers. In accordance with the rules of the
Securities and Exchange Commission (the "SEC"), the table sets forth the
hypothetical gains or "option spreads" that would exist for the options
at the end of their respective ten-year terms. These gains are based on
assumed rates of annual compounded share price appreciation of 5% and
10% from the dates the options were granted to the end of the respective
option terms. Actual gains, if any, on option exercises depend upon the
future performance of the Ordinary Shares and ADSs. There can be no
assurance that the potential realizable values shown in this table will
be achieved.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL SHARE PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM(1)
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------------
NAME (#) 1999 ($/SH) DATE 5%($) 10%($)
- ---- -------------- ---------------- -------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Noling ... -- -- -- -- -- --
Stephen M. Ambler.... 25,000 (2) 0.4% 2.000 01/03/09 31,444 79,687
George Buchan........ 40,000 (2) 0.7% 2.000 01/03/09 50,311 127,499
Jon Hoskin........... 45,000 (2) 0.8% 6.375 05/04/09 180,414 457,205
Marshall Kwait....... 47,500 (2) 0.8% 3.563 02/23/09 106,436 269,729
Mark E. McMillan..... 150,000 (3) 25.2% 4.594 11/03/09 433,371 1,098,248
Ronald C. Workman.... 10,000 (2) 0.2% 2.000 01/03/09 12,578 31,875
David B. Winterburn.. -- -- -- -- -- --
</TABLE>
(1) The 5% and 10% assumed annual compound rates of share price
appreciation are mandated by rules of the SEC and do not represent the
Company's estimate or projection of future Ordinary Share or ADS prices.
(2) These incentive options were granted pursuant to the Company's
1995 Incentive Stock Option Plan for U.S. employees. These options
vest and become exercisable at the rate of 2.0833% of the shares for
each full month that the optionee renders service to the Company.
The option exercise price is equal to the fair market value of the
Company's Ordinary Shares on the date of grant and the options expire
ten years from the date of grant, subject to earlier termination upon
termination of employment. 25% of options granted will be subject to
accelerated vesting upon termination or constructive termination
following a change of control of the Company.
(3) These incentive options were granted pursuant to the Company's
1995 Incentive Stock Option Plan for U.S. Employees. These options vest
and become exercisable as to 25% of the shares on the first
anniversary of the date of grant and thereafter at the rate of
2.0833% of the shares for each full month that the optionee renders
services to the Company. The option exercise price is equal to
the fair market value of the Company's Ordinary Shares on the date
of grant and the options expire ten years from the date of grant,
subject to earlier termination upon termination of employment. 25%
of options granted will be subject to accelerated vesting upon
termination or constructive termination following a change of
control of the Company.
34
<PAGE>
The following table sets forth certain information concerning
the exercise of options by each of the Named Officers during 1999,
including the aggregate amount of gains on the date of exercise. In
addition, the table includes the number of shares covered by both
exercisable and unexercisable rights to acquire shares as of December
31, 1999. Also reported are values of "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding rights to acquire shares and $4.625 per share, which was the
closing price of the ADSs as reported on the Nasdaq National Market on
December 31, 1999.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1999 AND
YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END (#) AT YEAR-END($)(2)
SHARES ACQUIRED VALUE REALIZED ----------------------- ---------------------------
NAME ON EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Noling..... 10,000 26,394 379,688 130,312 758,801 298,014
Stephen M. Ambler..... 29,000 92,779 41,552 68,698 100,004 190,348
George Buchan......... -- -- 139,896 50,104 407,891 168,451
Jon Hoskin............ -- -- 21,125 56,625 44,268 59,606
Marshall Kwait........ 22,801 60,216 1,564 50,635 2,634 78,890
Mark E. McMillan...... -- -- -- 150,000 -- 4,650
Ronald C. Workman..... 29,998 141,006 7,085 72,917 25,318 258,825
David B. Winterburn... 833 6,819 -- -- -- --
</TABLE>
(1) "Value Realized" represents the fair market value of the shares underlying
the options on the date of exercise less the aggregate exercise price of
the options.
(2) For purposes of the table, all amounts in pounds sterling were
converted to U.S. dollars using $1.60 per pound sterling, the exchange
rate in effect as of December 31, 1999.
EMPLOYMENT AGREEMENTS
Effective March 25, 1997, Mr. Noling entered into an employment
agreement with the Company, which is terminable by either party upon six
month's notice and by the Company for cause at any time. In connection with
such agreement, Mr. Noling was granted options to purchase (i) 100,000
Ordinary Shares at an exercise price of $1.969, such options being 100%
vested and immediately exercisable, (ii) 100,000 Ordinary Shares at an
exercise price of $1.969, such options to vest and become exercisable at the
rate of 2.0833% of the shares on the first day of each month following the
date of grant and (iii) 200,000 Ordinary Shares on the day of the 1997 Annual
General Meeting, such options to vest and become exercisable at the rate of
2.0833% of the shares on the first day of each month following the date of
grant. The Annual General Meeting was held on May 29, 1997 and the options
were granted at an exercise price of $2.375. 100,000 of these options are
subject to accelerated vesting and exercisability should the Company meet
certain earnings per share ("EPS") targets as follows: (a) 25,000 options are
accelerated should the EPS exceed $0.07 for 2 consecutive quarters (b) 37,500
options are accelerated should the EPS exceed $0.14 for 2 consecutive
quarters and (c) 37,500 options are accelerated should the EPS exceed $0.21
for 2 consecutive quarters, with a maximum of one early vesting event per
quarter. These 100,000 options fully vest upon a takeover or merger of the
Company.
The employment agreement continues through May 31, 2001, and is
automatically extended for an additional year at the end of the term unless
either party gives notice six months prior to November 30, 2000 to terminate
effective upon the expiration of the then current term. In the event of any
business combination resulting in a change of control of the Company or in
the event of disposal of a majority of the assets of the Company, and the
termination or constructive termination of Mr. Noling's employment, Mr.
Noling shall receive his then current full salary for a period of twelve
months following such termination. In addition he shall be entitled to
continued vesting and exercisability of his options for a period of twelve
months after termination and shall be entitled to participate in the
Company's employee benefits on the same basis as if he were an employee.
35
<PAGE>
With effect from April 1, 1997, Nicholas, Viscount Bearsted,
Chairman of the Company, entered into a Consulting Agreement with the Company
whereby he acts as consultant to the Company providing advice and assistance
as the Board may from time to time request. Under the agreement, Nicholas,
Viscount Bearsted shall be available to perform such services as requested
during the year and shall receive a fee of $1,000 for each day services are
provided, plus reimbursement of reasonable expenses. Prior to April 1, 1999,
Nicholas, Viscount Bearsted was required to make himself available to perform
such services for at least thirteen days per quarter and received a fee of
$1,000 for each days service, subject to a minimum thirteen days per quarter,
plus reimbursement of reasonable expenses. The agreement is terminable by
either party upon six month's advance written notice and by the Company for
cause at any time. In the event of any business combination resulting in a
change of control of the Company or in the event of disposal of a majority of
the assets of the Company, and termination or constructive termination of his
consultancy, Nicholas, Viscount Bearsted will be entitled to receive an
additional twenty-six week's consultancy fees.
In January 1993, Mr. Buchan entered into an employment agreement
with the Company, which may be terminated by either party upon six months'
notice and by the Company for cause at any time. In the event of any business
combination, change in control or disposal of a majority of the assets of the
Company, Mr. Buchan's employment may be terminated with three months' notice,
and upon such termination Mr. Buchan will be entitled to a payment equivalent
to his current annual salary plus estimated bonus for the year following
termination and all his outstanding share options will become exercisable.
In July 1998, the Company loaned Mr. Winterburn $70,000 to assist in
the purchase of a house. The loan was represented by a promissory note, and
bore interest at the prime rate. Provided Mr. Winterburn remained an employee
of the Company, the Company agreed to forgive 25% of unpaid principal on
January 10, 1999 and 25% each January 10 thereafter up to and including
January 10, 2002. Mr. Winterburn's employment terminated in March 1999, and
the remaining unpaid principal and interest was forgiven as a payment upon
severance of employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board (the "Committee") makes all
decisions involving the compensation of executive officers of the Company.
The Committee consists of the following non-employee directors: Vincent S.
Pino and Albert E. Sisto. Paul L. Borrill served on the Committee until he
resigned as a director in January 1999.
The Company entered into a consulting agreement with Albert Sisto,
dated December 28, 1998, whereby Mr. Sisto provided sales consulting, sales
training, advice and assistance as the Company from time to time requested
over a term of six months commencing December 28, 1998. Mr. Sisto received
fees of $500 for each half-day of service provided, totaling $15,000, along
with 10,000 share options that vested monthly over a six month period
commencing January 4, 1999.
DIRECTOR COMPENSATION
The Company pays each outside director $1,000 for every regular
meeting attended, $2,500 per quarter of service on the Board, $500 per
quarter for service on each committee, plus $500 for each committee meeting
attended, and reimburses outside directors for reasonable expenses in
attending meetings of the Board. The Chairman of the Board receives an
additional $1,500 per quarter. In addition, each new outside director will be
granted an option to purchase 15,000 shares and each outside director will be
granted an option to purchase 5,000 shares annually for so long as he serves
as an outside director. For information concerning the compensation of Mr.
Noling and Nicholas, Viscount Bearsted, see "Employment Agreements."
36
<PAGE>
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 15,
2000, with respect to the beneficial ownership of the Company's Ordinary
Shares by (i) each shareholder known by the Company to be the beneficial
owner of more than 5% of the Company's Ordinary Shares, (ii) each director,
(iii) each Named Officer, and (iv) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
- ------------------------ ----------------------- ----------------
<S> <C> <C>
RIT Capital Partners plc (2).............................. 2,032,897 14.4%
Technology Venture Investors IV (3)....................... 1,438,808 10.2%
Castle Creek Technology Partners LLC (4) ................. 1,075,333 7.6%
Nicholas, Viscount Bearsted (5)........................... 815,904 5.7%
Richard M. Noling (6)..................................... 454,449 3.1%
George Buchan (7)......................................... 185,887 1.3%
Vincent S. Pino (8) ...................................... 114,184 *
Stephen M. Ambler (9) .................................... 53,479 *
Jon Hoskin (10)........................................... 35,553 *
Albert E. Sisto (11) ..................................... 35,000 *
Ronald C. Workman (12).................................... 20,419 *
David G. Frodsham (13) ................................... 6,250 *
Marshall Kwait (14) ...................................... 771 *
Mark E. McMillan (15) .................................... - *
David B. Winterburn (16) ................................. - *
All directors and executive officers
as a group (11 persons)(17)............................... 1,714,874 11.4%
</TABLE>
* Less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares subject to options that are currently exercisable or
exercisable within 60 days of March 15, 2000 are deemed to be outstanding
and to be beneficially owned by the person holding such option for the
purpose of computing the percentage ownership of such person but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(2) The address of RIT Capital Partners plc is 27 St. James's Place,
London SW1A 1NR, United Kingdom.
(3) Represents 1,278,376 shares held by Technology Venture Investors-4,
L.P. ("TVI"), 149,416 shares held by TVI Partners-4, L.P. and 11,016
shares held by TVI Affiliates-4, L.P. The address of TVI is 2480 Sand
Hill Road, Suite 101, Menlo Park, California 94025.
(4) Includes a warrant entitling Castle Creek Technology Partners LLC to
purchase 248,154 shares within 60 days of March 15, 2000. Castle Creek
Technology Partners LLC are located at 77 West Wacker Drive, Ste.
4040, Chicago, Illinois 60601.
(5) Includes 178,958 shares subject to options that were exercisable within
60 days of March 15, 2000. Nicholas, Viscount Bearsted is Chairman of the
Board of the Company. His address is 9 Acacia Road, London, NW8 6AB,
United Kingdom.
(6) Includes 419,792 shares subject to options that were exercisable within
60 days of March 15, 2000. Mr. Noling is the President, Chief Executive
Officer, and a director of the Company.
(7) Includes 150,625 shares subject to options that were exercisable within
60 days of March 15, 2000. Mr. Buchan is Senior Vice President of
Engineering and UK General Manager of the Company.
37
<PAGE>
(8) Includes 14,375 shares subject to options that were exercisable within 60
days of March 15, 2000 and a warrant entitling Mr. Pino to purchase
17,725 shares within 60 days of March 15, 2000. Mr. Pino is a director of
the Company.
(9) Represents shares subject to options that were exercisable within 60 days
of March 15, 2000. Mr. Ambler is Chief Financial Officer, Company
Secretary and a Senior Vice President of the Company.
(10) Includes 30,188 shares subject to options that were exercisable
within 60 days of March 15, 2000. Mr. Hoskin is Chief Technology
Officer.
(11) Represents shares subject to options that were exercisable within
60 days of March 15, 2000. Mr. Sisto is a director of the Company.
(12) Represents shares subject to options that were exercisable within
60 days of March 15, 2000. Mr. Workman is Senior Vice President of
Marketing.
(13) Represents shares subject to options that were exercisable within
60 days of March 15, 2000. Mr. Frodsham is a director of the Company.
(14) Represents shares subject to options that were exercisable within
60 days of March 15, 2000. Mr. Kwait served as Vice President of Sales
from February 1999 to January 2000.
(15) Mr. McMillan is Senior Vice President of Sales and Marketing.
(16) Mr. Winterburn served as Senior Vice President of Business Development
and Chief Technology Officer of the Company from August 1998 to March
1999.
(17) Includes the shares indicated as included in footnotes (5) through (15).
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 20, 2000, the Company entered into a binding agreement with
a director whereby he would provide the Company a $5.0 million line of credit
with a commitment fee of four points based upon the total amount of the line
and drawdown/termination fee of two points for the first drawdown or
termination. The interest rate on amounts drawn down is at prime plus 2%
until June 30, 2000 and thereafter at prime plus 4% per annum simple
interest, payable in cash at the repayment date. Full repayment of any
outstanding loan is due on March 20, 2001.
Since January 1, 1999, there has not been, nor is there currently
proposed, any other transaction or series of transactions to which the
Company or any of its subsidiaries was or is to be a party in which the
amount involved exceeds $60,000 and in which any executive officer, director
or holder of more than 5% of the Company's Ordinary Shares had or will have a
direct or indirect material interest other than (i) normal compensation
arrangements, which are described under Item 11 above, (ii) the transactions
described under "Compensation Committee Interlocks and Insider Participation"
in Item 11 above, and (iii) the transactions described under "Employment
Agreements" in Item 11 above.
38
<PAGE>
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following documents are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
DOCUMENT PAGE
---------- ------
<S> <C>
Consolidated Balance Sheet as of December 31, 1999 and 1998.................. 42
Consolidated Statement of Operations for each of the three years in the
period ended December 31, 1999.......................................... 43
Consolidated Statement of Shareholders' Equity for each of the three years
in the period ended December 31, 1999............................ 44
Consolidated Statement of Cash Flows for each of the three years in the
period ended December 31, 1999.......................................... 45
Notes to Consolidated Financial Statements................................... 46
Report of Independent Accountants............................................ 64
</TABLE>
2. Financial Statement Schedule
The following financial statement schedule is filed as a part of this
Annual Report on Form 10-K and should be read in conjunction with the
Financial Statements:
DOCUMENT PAGE
---------- ------
Schedule II--Valuation and Qualifying Accounts................ 63
All other schedules are omitted because they are not applicable, or
because the required information is included in the financial
statements or notes thereto.
(b) Reports on Form 8-K
The Company filed during the quarter ended December 31, 1999 a Report
on Form 8-K reporting under Item 5 a private placement under a
Securities Purchase Agreement dated December 9, 1999.
39
<PAGE>
(c) Exhibits
The following exhibits are filed as part of this Report:
EXHIBIT
NUMBER EXHIBIT TITLE
- -------------------------------------------------------------------------------
2.01 --Asset Purchase Agreement dated as of January 10, 1998, by and
among Citrix Systems, Inc., Citrix Systems UK Limited and Insignia
Solutions plc. (7)**
2.02 --Amendment No. 1 to Asset Purchase Agreement dated as of February 5,
1998, by and among Citrix Systems, Inc., Citrix Systems UK Limited and
Insignia Solutions plc. (7)**
3.02 --Registrant's Articles of Association. (1)
3.04 --Registrant's Memorandum of Association. (1)
4.01 --Form of Specimen Certificate for Registrant's Ordinary Shares. (1)
4.02 --Registration Rights Agreement, dated as of June 5, 1992, as amended. (1)
4.03 --Deposit Agreement between Registrant and The Bank of New York. (2)
4.04 --Form of American Depositary Receipt (included in Exhibit 4.03). (2)
10.01 --Registrant's 1986 Executive Share Option Scheme, as amended, and
related documents. (1)*
10.02 --Registrant's 1988 U.S. Stock Option Plan, as amended, and related
documents. (1)*
10.03 --Registrant's 1995 Incentive Stock Option Plan for U.S. Employees
and related documents. (6)*
10.05 --Insignia Solutions Inc. 401(k) Plan. (1)*
10.06 --Registrant's Small Self-Administered Pension Plan Definitive Deed
and Rules. (1)*
10.10 --Executive's Employment Agreement dated January 1, 1993 between
Registrant and George Buchan. (1)*
10.14 --Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers. (1)*
10.15 --Lease Agreement between Insignia Solutions Inc. and Shoreline
Investments I dated March 10, 1993. (1)
10.16 --Lease between Registrant and The Standard Life Assurance Company
dated November 3, 1992 and related documents. (1)
10.17 --License Agreement between Insignia Solutions Inc. and Microsoft
Corporation dated January 1, 1991, as amended. (1)**
10.21 --Distribution Agreement between Insignia Solutions Inc. and Micro D,
Inc. dated October 27, 1988, as amended. (1)**
10.22 --Form of Indemnification Agreement entered into between Insignia
Solutions Inc. and each of Registrant's directors and executive
officers. (1)*
10.25 --Authorized International Master Distributor Agreement between
Insignia Solutions Inc. and Mitsubishi Corporation dated May 16, 1995,
as amended. (2)**
10.27 --Microsoft Software Distribution License Agreement for Desktop
Operating Systems dated March 1, 1996, between Microsoft Corporation
and Insignia Solutions Inc. (4)**
10.28 --U.K. Employee Share Option Scheme 1996, as amended. (6)*
10.29 --License and Distribution Agreement effective February 24, 1995,
between Silicon Graphics, Inc. and Insignia Solutions Inc., as amended.
(3)**
10.30 --Amendment Number 1 and Amendment Number 2 to Microsoft OEM
License Agreement for Desktop Operating Systems between the Company and
Microsoft Corporation. (5)**
10.33 --Employment Agreement effective March 25, 1997 between Registrant
and Richard M. Noling. (6)*
10.34 --Consulting Agreement effective April 1, 1997 between Registrant
and Nicholas, Viscount Bearsted. (6)*
10.35 --Volume Purchase Agreement dated as of September 29, 1997 between
Registrant and Silicon Graphics, Inc. (6)
10.36 --Source Code License and Binary Distribution Agreement dated as
of September 29, 1997 between Registrant and Silicon Graphics, Inc. (6)
10.37 --Amendment Number 4 dated March 15, 1998 to Microsoft OEM License
Agreement for Desktop Operating Systems between the Company and
Microsoft Corporation. (8)
10.38 --Lease Agreement between Insignia Solutions, Inc. and
Lincoln-Whitehall Pacific, LLC, dated December 22, 1997. (8)
40
<PAGE>
EXHIBIT
NUMBER EXHIBIT TITLE
- -------------------------------------------------------------------------------
10.39 --Trademark License between Insignia Solutions, Inc. and Microsoft
Corporation dated March 16, 1998. (8)
10.40 --Distribution Agreement between Insignia Solutions, Inc. and Sun
Microsystems, Inc. dated December 24, 1997. (8)**
10.41 --Microsoft License Agreement for Desktop Operating System Products
dated October 1, 1998 between Microsoft Licensing, Inc. and Insignia
Solutions, Inc. (9)**
10.42 --Registrant's 1995 Employee Share Purchase Plan, as amended. (9)*
10.43 --Promissory Note dated July 1, 1998 between Insignia Solutions, Inc.
and David Winterburn. (9)*
10.44 --Lease agreements(s) between Insignia Solutions plc and Comland
Industrial and Commercial Properties Limited dated August 12th, 1998 for
the Apollo House premises and the Saturn House premises. (10)
10.45 --Consulting agreement between Insignia Solutions Inc. and Albert
Sisto dated December 28, 1998. (10)*
10.46 --Technology License and Distribution Agreement between Sun
Microsystems, Inc. and Insignia Solutions plc. dated March 3, 1999. (11)
10.47 --Registrant's 1995 Employee Share Purchase Plan, as amended. (12)*
10.48 --Registrant's U.K. Employee Share Option Scheme 1996, as amended. (13)*
10.49 --Registrant's 1995 Incentive Stock Option Plan for U.S. Employees,
as amended. (14)*
10.50 --License, Distribution, and Asset Purchase Agreement between
Insignia Solutions, Inc., Insignia Solutions plc, and FWB Software,
LLC dated October 6, 1999.
21.01 --List of Registrant's subsidiaries. (2)
27.01 --Financial Data Schedule.
* Management contract or compensatory plan.
** Confidential treatment has been granted with respect to certain portions
of this agreement. Such portions were omitted from this filing and filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the exhibit of the same number from
Registrant's Registration Statement on Form F-1 (File No. 33-98230)
declared effective by the Commission on November 13, 1995.
(2) Incorporated by reference to the exhibit of the same number from
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
(3) Incorporated by reference to the exhibit of the same number from
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996.
(4) Incorporated by reference to Exhibit 10.27 from Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.
(5) Incorporated by reference to Exhibit 10.30 from Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
(6) Incorporated by reference to the exhibit of the same number from
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(7) Incorporated by reference to the exhibit of the same number from
Registrant's Current Report on Form 8-K dated February 5, 1998.
(8) Incorporated by reference to the exhibit of the same number from
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
(9) Incorporated by reference to the exhibit of the same number from
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
(10) Incorporated by reference to the exhibit of the same number from
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
(11) Incorporated by reference to Exhibit 10.46 from Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(12) Incorporated by reference to Exhibit 10.47 from Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(13) Incorporated by reference to Exhibit 10.48 from Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(14) Incorporated by reference to Exhibit 10.49 from Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
41
<PAGE>
INSIGNIA SOLUTIONS PLC
CONSOLIDATED BALANCE SHEET
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,677 $ 6,798
Restricted cash 120 186
Cash and cash equivalents held in escrow 1,000 9,100
Accounts receivable, net 189 1,706
Prepaid and other current assets 1,038 1,515
-------- --------
Total current assets 7,024 19,305
-------- --------
Property and equipment, net 625 1,074
Cash and cash equivalents held in escrow 5,060 -
Restricted cash 250 250
Other noncurrent assets 325 382
-------- --------
$ 13,284 $ 21,011
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 707 $ 1,608
Accrued liabilities 1,604 2,265
Accrued royalties 2,327 4,309
Income taxes payable 188 994
Deferred revenue 1,349 262
Convertible debt 1,013 -
Customer deposits 57 104
Current obligations under capital leases - 51
-------- --------
Total current liabilities 7,245 9,593
-------- --------
Mandatorily redeemable capital 2,619
Mandatorily redeemable warrants 1,440 -
-------- --------
Total mandatorily redeemable lease (Note 10) 4,059 -
-------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred shares, (pound)0.20 par value:
3,000,000 shares authorized; no shares issued - -
Ordinary shares, (pound)0.20 par value: 30,000,000
shares authorized; 14,039,602 shares and 12,590,316
shares issued and outstanding in 1999 and 1998,
respectively 4,304 4,164
Additional paid-in capital 35,106 34,725
Accumulated deficit (36,969) (27,010)
Accumulated other comprehensive loss (461) (461)
-------- --------
Total shareholders' equity 1,980 11,418
-------- --------
$ 13,284 $ 21,011
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
42
<PAGE>
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Net revenues:
License $ 6,471 $12,998 $ 36,744
Service 366 1,098 2,125
--------- -------- ---------
Total net revenues 6,837 14,096 38,869
--------- -------- ---------
Costs of net revenues:
License 3,296 8,329 15,068
Service 504 1,046 1,994
--------- -------- ---------
Total cost of net revenues 3,800 9,375 17,062
--------- -------- ---------
Gross profit 3,037 4,721 21,807
--------- -------- ---------
Operating expenses:
Sales and marketing 5,542 7,946 15,804
Research and development 5,972 6,228 9,129
General and administrative 3,178 4,213 6,761
Restructuring - - 1,995
--------- -------- ---------
Total operating expenses 14,692 18,387 33,689
--------- -------- ---------
Operating loss (11,655) (13,666) (11,882)
Interest income, net 473 984 667
Other income (expense), net (93) 14,887 (163)
--------- -------- ---------
Income (loss) before income taxes (11,275) 2,205 (11,378)
Provision (benefit) for income taxes (1,316) 1,783 (720)
--------- -------- ---------
Net income (loss) $ (9,959) $ 422 $(10,658)
========= ======== =========
Net income (loss) per share:
Basic $ (0.77) $ 0.03 $ (0.91)
========= ======== =========
Diluted $ (0.77) $ 0.03 $ (0.91)
========= ======== =========
Weighted average shares and share equivalents:
Basic 12,883 12,159 11,690
========= ======== =========
Diluted 12,883 12,378 11,690
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
43
<PAGE>
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
ACCUMULATED
ORDINARY SHARES ADDITIONAL OTHER TOTAL
---------------- PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY
----------- ------------------ ------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 11,478,036 $ 3,795 $ 33,655 $ (16,774) $ (461) $ 20,215
Shares issued under employee
stock plans 493,177 159 807 - - 966
Net loss - - - (10,658) - (10,658)
----------- ------- -------- ---------- -------- --------
Balances, December 31, 1997 11,971,213 3,954 34,462 (27,432) (461) 10,523
Shares issued under employee
stock plans 619,103 210 263 - - 473
Net income - - - 422 - 422
----------- ------- -------- ---------- -------- --------
Balances, December 31, 1998 12,590,316 4,164 34,725 (27,010) (461) 11,418
Shares issued under employee
stock plans 385,771 140 381 - - 521
Shares issued under private
Placement 1,063,515 - - - - -
Net loss - - - (9,959) - (9,959)
----------- ------- -------- ---------- -------- --------
Balances, December 31, 1999 14,039,602 4,304 $ 35,106 $ (36,969) $ (461) $ 1,980
=========== ======= ======== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
44
<PAGE>
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (9,959) $ 422 $ (10,658)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 580 767 2,239
Other (58) (14,731) 206
Net changes in assets and liabilities:
Restricted cash 66 (186) (250)
Accounts receivable, net 1,517 5,048 183
Prepaid and other current assets 477 142 (509)
Other noncurrent assets 57 28 501
Accounts payable (901) (75) (474)
Accrued liabilities (648) (420) (1,797)
Accrued royalties (1,982) (4,565) 5,084
Income taxes (806) 994 -
Deferred revenue 1,087 (581) (2,056)
Customer deposits (47) (513) 160
Noncurrent liabilities - (17) -
------------- ------------- ------------
Net cash used in operating activities (10,617) (13,687) (7,371)
------------- ------------- ------------
Cash flows from investing activities:
Proceeds from the sale of property and equipment 140 140 188
Purchases of property and equipment (213) (937) (753)
Sales of short-term investments, net - 3,820 2,411
Proceeds from sale of product line - 15,862 -
Product line sale proceeds held in escrow (320) (9,100) -
Product line sale proceeds released from escrow 3,360 - -
------------- ------------- -------------
Net cash provided by investing activities 2,967 9,785 1,846
------------- ------------- -------------
Cash flows from financing activities:
Payments made under capital leases (51) (164) (385)
Proceeds from convertible debt 1,000 - -
Proceeds from private placement, net of issuance costs 4,059 - -
Proceeds from exercise of stock options 521 473 760
------------- ------------- -------------
Net cash provided by financing activities 5,529 309 375
------------- ------------- -------------
Net decrease in cash and cash equivalents (2,121) (3,593) (5,150)
Cash and cash equivalents at beginning of the year 6,798 10,391 15,541
------------- ------------- -------------
Cash and cash equivalents at the end of the year $ 4,677 $ 6,798 $ 10,391
============= ============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 25 $ 22 $ 55
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
45
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Insignia Solutions plc (the "Company") is a public limited company
incorporated in England and Wales. The Company develops, markets and supports
virtual machine technology which enables software applications to be run on
various computer platforms.
The Jeode platform is the Company's implementation of Sun's Java
technology tailored for Internet appliances and embedded devices intended to
allow software developers to create reliable, efficient and predictable products
that are enabled by the Company's Jeode Embedded Virtual Machine ("EVM"). The
product became available for sale in March 1999. The Jeode platform is now the
principal product line of the Company and will be for the foreseeable future.
The Company's principal product line in recent years has been
SoftWindows-TM-. This product enabled Microsoft Windows ("Windows"-Registered
Trademark-) applications to be run on most Apple Computer Inc.
("Apple"-Registered Trademark-) Macintosh computers and many UNIX workstations.
Revenues from this product line grew until 1995, but declined significantly
after that date, along with margins. This was due to a declining demand for
Apple Macintosh products and increased competition. In early 1999 Company
management took steps to discontinue the product line, and on October 18,
1999, the Company signed an exclusive licensing arrangement with FWB
Software, LLC ("FWB"). Under the arrangement FWB will pay the Company a
royalty based on an earn-out of FWB's future revenues from the product lines
and the Company will be paid as those revenues are achieved. Upon achieving a
certain revenue threshold, the SoftWindows and RealPC product lines will be
transferred to FWB at no additional consideration.
The Company sold its NTRIGUE product line to Citrix Systems Inc.
("Citrix") in February 1998. NTRIGUE was a Windows compatibility client/server
product that supported multiple X-terminals, workstation clients, Macintosh
computers, PCs, network computers and NetPCs from a Windows NT-based server.
The principal markets for the Company's products are North America,
Europe and Asia. The Company distributes its products through multiple
distribution channels, including direct sales, distributors, resellers and
original equipment manufacturers.
BASIS OF PRESENTATION
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of operations. During the past
two years, the Company has incurred an aggregate loss from operations totaling
$25.3 million. At December 31, 1999, the Company's working capital deficit
totaled $0.2 million, of which $1.0 million was restricted and held in escrow,
as compared to working capital of $9.7 million at December 31, 1998.
The Company has transitioned its product focus from Windows emulation
and Windows compatibility products to its Jeode product line based on the
Company's Jeode EVM technology. This change in product focus has resulted in a
redirection of available resources from the Company's historical revenue base
towards the development and marketing efforts associated with the Jeode
platform, which was released for general availability in March 1999. As a result
of this change in product strategy and associated redirection of resources to
new product development, the Company's financial position weakened during 1999.
The Company continues to face significant risks associated with the
successful execution of its new product strategy. These risks include, but are
not limited to continued technology and product development, introduction and
46
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
market acceptance of new products, changes in the marketplace, liquidity,
competition from existing and new competitors which may enter the marketplace
and retention of key personnel. Due to the generally longer sales cycles
expected to be associated with the Jeode platform, the Company does not
currently have accurate visibility of future order rates and demand for its
products generally. There can be no assurance that Jeode platform products will
achieve market acceptance.
The Company believes that with the $5.0 million line of credit,
entered into on March 20, 2000 and expected cash flow from operations, the
Company will have sufficient funds to meet the Company's operating and
capital requirements through the end of fiscal year 2000. However, there can
be no assurance that the Company will be able to obtain additional funding if
needed, on acceptable terms or at all. The failure to raise additional funds,
if needed, on a timely basis and on sufficiently favorable terms could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company's liquidity may also be adversely affected
in the future by factors such as higher interest rates, inability to borrow
without collateral, availability of capital financing and continued operating
losses. Moreover, the Company's expense levels are based in part on
expectations of future sales levels, and a shortfall in expected sales could
therefore result in a disproportionate decrease in results of operations. In
addition, the Company, which is listed on the Nasdaq National Markets, was
not in compliance with Nasdaq's continued listing requirements on net
tangible assets at December 31, 1999.
The Company follows accounting policies that are in accordance with
principles generally accepted in the United States. The Company conducts most of
its business in U.S. dollars. All amounts included in the financial statements
and in the notes herein are in U.S. dollars unless designated "L", in
which case they are in pounds sterling. The exchange rates between the U.S.
dollar and the pound sterling were $1.60, $1.67 and $1.67 (expressed in U.S.
dollars per pound sterling) at December 31, 1999, 1998 and 1997, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions are eliminated in consolidation.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash, cash
equivalents, and restricted cash at December 31, 1999 and 1998 are comprised
of cash, restricted cash and certificates of deposit. Restricted cash,
including $6.1 million of cash and cash equivalents held in escrow at
December 31, 1999, aggregated $6.4 million and $9.5 million at December 31,
1999 and 1998, respectively. Of these amounts $0.4 million at December 31,
1999 and 1998 was restricted due to obligations under service contracts. Of
the $6.1 million of cash and cash equivalents held in escrow at December 31,
1999, $1.0 million was released in February 2000. The release of the balance
is pending resolution of the indemnity claim from Citrix. Certificates of
deposit aggregated $1.0 million and $4.2 million at December 31, 1999 and
1998, respectively.
47
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company has classified all its securities as "available-for-sale."
The fair value of these securities, comprised primarily of certificates of
deposit with commercial banks, approximates cost. These securities mature
within one year.
REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position No. 97-2 ("SOP 97-2"), "Software
Revenue Recognition", which the Company has adopted for transactions entered
into during the fiscal year beginning January 1, 1998. SOP 97-2 provides
guidance for recognizing revenue on software transactions and supersedes
Statement of Position No. 91-1, "Software Revenue Recognition". In March 1998,
the AICPA issued Statement of Position No. 98-4 ("SOP 98-4"), "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition". SOP
98-4 deferred, for one year, the application of certain passages in SOP 97-2
which limit what is considered vendor-specific objective evidence necessary to
recognize revenue for software licenses in multiple-element arrangements when
undelivered elements exist. In December 1998, the AICPA issued Statement of
Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions". SOP 98-9 extends the
effective date of SOP 98-4 and provides additional interpretive guidance. SOP
98-9 is effective for fiscal years beginning after March 15, 1999. The Company
does not expect SOP 98-9 to have a material impact on revenue recognition when
adopted. Adoption of the remaining provisions of SOP 97-2 did not have a
material impact on revenue recognition during 1999 and 1998.
The Company's license revenues are derived from the sale of development
licenses, packaged products licensing fees and royalties received from OEM's.
The Company's service revenues are derived from customer funded engineering
activities, training and annual maintenance contracts.
Development licenses may be deferred or reduced if there are
outstanding deliverables to the customer or if the contract is outside the
standard contractual terms. Product licensing fees are recognized upon shipment
if no significant vendor obligations remain and if collection of the resulting
receivable is deemed probable.
The Company had limited control over the extent to which packaged
products sold to distributors and resellers were sold through to end users.
Accordingly, a portion of the Company's sales have from time to time resulted in
increased inventory at its distributors and resellers. The Company provided
sales returns allowances for distributor and reseller inventories and certain
rights of return and price protection on unsold merchandise held by those
distributors and resellers. These allowances were based on the Company's
estimates of expected sell-through by distributors and resellers of its
products. Actual results have on occasions differed from these estimates.
Minimum guaranteed royalty revenues not subject to significant future
obligations are generally recognized upon shipment of the software. Royalty
revenues that are subject to significant future obligations are recognized when
earned. Royalty revenues that exceed the minimum guarantees are recognized when
reported.
Revenues from OEMs for customer-funded engineering are recognized on a
percentage of completion basis, which is computed using the input measure of
labor cost. Revenues from training are recognized when the training is
performed. Revenues from annual maintenance contracts are recognized ratably
over the term of the contract.
Payments from the sale of development licenses, royalties, customer
funded engineering activities, training and maintenance contracts received in
advance of revenue recognition are recorded as deferred revenue.
48
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
Inventories, principally finished software products, manuals and
related supplies, are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method. Provisions are made in each
period for excess and obsolete inventories.
EQUIPMENT AND DEPRECIATION
Property and equipment is recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives which range from
three to four years or the lease term if shorter.
FOREIGN CURRENCY TRANSLATION
The Company's primary functional currency for its non-U.S.
operations is the U.S. dollar. Non-U.S. dollar denominated monetary assets
and liabilities are remeasured using the exchange rate in effect at the
balance sheet date, while nonmonetary items are remeasured at historical
rates. Revenues and expenses are translated at the average exchange rates in
effect during each period, except for those expenses related to balance sheet
amounts which are translated at historical exchange rates. Remeasurement
adjustments and transaction gains or losses are recognized in the income
statement during the period of occurrence. During its early years of
existence, the Company used the pound sterling as the functional currency for
its non-U.S. operations. Accordingly, translation gains and losses recognized
during such periods have been included in the cumulative currency translation
adjustments account.
FOREIGN CURRENCY FINANCIAL INSTRUMENTS
The Company enters into currency option contracts to hedge against
exchange risks associated with the pound sterling denominated operating
expenses of its U.K. operations. The gains and losses on these contracts are
generally included in the statement of operations when the related operating
expenses are recognized. At December 31, 1999 and 1998, there were no
outstanding currency options. From time to time, the Company also enters into
short-term forward exchange contracts. The Company generally does not use
hedge accounting for the forward exchange contracts. Such contracts are
marked to market at period ends. No forward exchange contracts were
outstanding at December 31, 1999 and 1998.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internal software development costs incurred
after technological feasibility has been demonstrated. The Company defines
establishment of technological feasibility as the completion of a working
model. Such capitalized amounts are amortized commencing with the
introduction of that product at the greater of the straight-line basis
utilizing its estimated economic life, generally six months to one year, or
the ratio of actual revenues achieved to the total anticipated revenues over
the life of the product. At December 31, 1999 and 1998, capitalized software
development costs were fully amortized.
49
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plans and
employee stock purchase plan in accordance with provisions of the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and complies with the disclosure provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") in these notes to consolidated financial
statements. Under APB No. 25, compensation costs is determined based on the
difference, if any, on the grant date between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
INCOME TAXES
The Company accounts for income taxes under an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized
in the Company's financial statements or tax returns. In estimating future
tax consequences, the Company generally considers all expected future events
other than enactments of changes in the tax law or rates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash, cash
equivalents, restricted cash, short-term investments and trade accounts
receivable. The Company places its cash, cash equivalents, restricted cash
and short-term investments primarily in bank accounts and certificates of
deposit with high credit quality financial institutions.
The Company sells its products primarily to original equipment
manufacturers and distributors. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based upon the expected collectibility of
all accounts receivable. At December 31, 1999, three customers accounted for
36%, 18% and 12%, respectively, of gross trade receivables. At December 31,
1998, two customers accounted for 25% and 16%, respectively, of gross trade
receivables.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising
expense totaled $0.6 million, $1.4 million, and $1.1 million for the years
ended December 31, 1999, 1998, and 1997, respectively.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income". SFAS No. 130 established standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted
average number of ordinary shares outstanding during the period. Ordinary
equivalent shares consist of warrants and stock options (using the treasury
stock method). Ordinary equivalent shares are excluded from the computation
if their effect is antidilutive. Diluted net income (loss) per share is
computed using the weighted average number of ordinary shares and ordinary
share equivalents outstanding during the period.
50
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. This statement becomes effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. In June 1999, the FASB issued
Statement of Financial Accounting Standard No. 137 "Accounting for Derivative
Instruments - Deferral of the Effect Date of FAS Statement No. 133" ("FAS
137"). FAS 137 defers the effective date of FAS 133 until June 15, 2000. The
Company will adopt FAS 133 in 2001. The Company expects the adoption of FAS
133 will not affect results of operations.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements". SAB 101 provides guidance for revenue recognition
under certain circumstances. The Company does not believe SAB 101 will have a
material impact on the financial statements.
NOTE 2--BALANCE SHEET DETAIL:
The following table provides details of the major components of the
indicated balance sheet accounts (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Accounts receivables, net:
Trade accounts receivable, gross...................... $ 280 $ 3,155
Less allowance for doubtful accounts.............. (58) (459)
Less allowance for sales returns.................. (33) (990)
------------------ ------------------
$ 189 $ 1,706
================== ==================
Property and equipment, net:
Computers and other equipment......................... $ 2,277 $ 2,700
Leasehold improvements................................ 450 458
Furniture and fixtures................................ 121 108
------------------ ------------------
2,848 3,266
Less accumulated depreciation..................... (2,223) (2,192)
------------------ ------------------
$ 625 $ 1,074
================== ==================
Accrued liabilities:
Accrued legal and professional services............... $ 653 $ 829
Accrued compensation and payroll taxes................ 494 495
Other................................................. 457 941
------------------ ------------------
$ 1,604 $ 2,265
================== ==================
</TABLE>
51
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--STOCK PLANS:
The Company has four stock option plans, which provide for the
issuance of stock options to employees of the Company to purchase Ordinary
shares. At December 31, 1999 and 1998, respectively, approximately 909,853
and 453,011 Ordinary shares were available for future grants of stock
options. Stock options are generally granted at prices of not less than 100%
of the fair market value of the Ordinary shares on the date of grant, as
determined by the Board of Directors.
In March 1995, the Company's shareholders adopted the 1995 Employee
Share Purchase Plan (the "Purchase Plan") with 275,000 Ordinary shares
reserved for issuance thereunder. On July 21, 1998 the number of shares
reserved for issuance was increased to 525,000. On May 27, 1999 the number
was further increased to 900,000. The Purchase Plan enables employees to
purchase Ordinary shares at approximately 85% of the fair market value of the
Ordinary shares at the beginning or end of each six month offering period.
The Purchase Plan qualifies as an "employee stock purchase plan" under
section 423 of the U.S. Internal Revenue Code. During 1999, 1998 and 1997 the
Company issued 171,453, 128,103 and 116,053 shares under the Purchase Plan,
respectively. At December 31, 1999 and 1998 approximately 390,162 and 186,615
ordinary shares were reserved for future Purchase Plan issuances,
respectively.
The following table summarizes activity on stock options:
<TABLE>
<CAPTION>
1986 AND 1996 1988 AND 1995
U.K. U.S. WEIGHTED
SHARE OPTION STOCK OPTION AVERAGE
SCHEMES PLANS TOTAL EXERCISE PRICE
---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996...... 1,106,248 1,242,741 2,348,989 $2.46
Granted............................... 187,000 1,671,925 1,858,925 $2.30
Exercised............................. (74,756) (302,368) (377,124) $1.26
Cancelled/surrendered................. (141,375) (202,736) (344,111) $6.32
Lapsed................................ (50,598) (465,227) (515,825) $2.84
---------------- --------------- -------------- ---------------
Outstanding at December 31, 1997...... 1,026,519 1,944,335 2,970,854 $2.00
Granted............................... 143,250 888,750 1,032,000 $1.11
Exercised............................. (396,000) (95,000) (491,000) $0.81
Lapsed................................ (205,977) (1,033,744) (1,239,721) $2.15
---------------- --------------- -------------- ---------------
Outstanding at December 31, 1998...... 567,792 1,704,341 2,272,133 $1.77
Granted............................... 171,000 425,000 596,000 $4.52
Exercised............................. (69,859) (144,459) (214,318) $1.48
Lapsed................................ (47,470) (255,372) (302,842) $1.57
---------------- --------------- -------------- ---------------
Outstanding at December 31, 1999...... 621,463 1,729,510 2,350,973 $2.52
================ =============== ============== ===============
</TABLE>
Options granted under the Company's option plans generally vest over
a four year period. Options are exercisable until the tenth anniversary of
the date of grant unless they lapse before that date. Options to purchase
1,000,517 and 755,031 shares were exercisable at December 31, 1999 and 1998,
respectively.
52
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--STOCK PLANS: (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding and exercisable at December 31, 1999:
Options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE
- ---------------------------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C>
$0.01 - $2.00.................... 1,253,178 7.0 years $ 1.39
$2.01 - $4.00.................... 529,326 7.5 years $ 2.37
$4.01 - $6.00.................... 438,219 9.0 years $ 4.79
$6.01 - $8.00.................... 130,250 9.5 years $ 6.31
---------------------- ---------------------- --------------------
2,350,973 7.6 years $ 2.52
====================== ====================== ====================
</TABLE>
Options exercisable at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
- ---------------------------------- ---------------------- --------------------
<S> <C> <C>
$0.01 - $2.00.................... 555,079 $ 1.53
$2.01 - $4.00.................... 322,625 $ 2.38
$4.01 - $6.00.................... 107,698 $ 5.54
$6.01 - $8.00.................... 15,115 $ 6.80
---------------------- --------------------
1,000,517 $ 2.32
====================== ====================
</TABLE>
FAIR VALUE DISCLOSURES
Had the compensation cost for the Company's stock option plans and the
Purchase Plan been determined based on the fair value at the grant dates, as
prescribed in FAS 123, the net income (loss) and net income (loss) per share
would have been adjusted to the pro-forma amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
------------------ ---------------------- -------------------
<S> <C> <C> <C>
Net income (loss):
As reported..................... $ (9,959) $ 422 $ (10,658)
Pro forma....................... (11,456) (756) (11,495)
Basic net income (loss) per share:
As reported..................... $ (0.77) $ 0.03 $ (0.91)
Pro forma....................... (0.89) (0.06) (0.98)
Diluted net income (loss) per share:
As reported..................... $ (0.77) $ 0.03 $ (0.91)
Pro forma....................... (0.89) (0.06) (0.98)
</TABLE>
53
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--STOCK PLANS: (CONTINUED)
In accordance with the disclosure provisions of FAS 123, the fair value
of employee stock options granted during fiscal 1999, 1998 and 1997 was
estimated at the date of grant using the Black-Scholes model and the following
weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
----------------- ----------------- ------------------
<S> <C> <C> <C>
Volatility range............................. 113% 171% 64.0% - 66.9%
Risk-free interest rate range................ 4.6% - 6.2% 4.2% - 5.6% 5.7% - 6.7%
Dividend yield............................... 0% 0% 0%
Expected option term......................... 4 yrs 4 yrs 4 yrs
</TABLE>
NOTE 4--RESTRUCTURING:
In 1997, the Company completed two reorganizations. In the first
reorganization the Company reduced headcount by 11 persons and integrated
product development, product marketing and the sales organization into two
business units. In the second reorganization, the Company combined the two sales
organizations into one unit, reducing headcount by 53 persons, reorganized the
sales force such that direct sales inquiries are now referred to distributors,
and reduced the number of facilities it operated from. Restructuring expenses
consist principally of costs related to terminated employees, including
serverance payments and stock option related expenses, and future rents on
facilities no longer used by the Company.
NOTE 5--INCOME TAXES:
The components of income (loss) before income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
United States..................................... $ (3,705) $ (4,241) $ (2,286)
United Kingdom and other countries................ (7,570) 6,446 (9,092)
============ ============ ===========
$ (11,275) $ 2,205 $(11,378)
============ ============ ===========
</TABLE>
The components of the provision (benefit) for income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Current:
U.S. federal................................. $ - $ (76) $ 174
U.S. state and local......................... 18 100 -
United Kingdom and other countries........... (1,334) 1,759 (894)
------------ ------------ -----------
Total current........................... (1,316) 1,783 (720)
------------ ------------ -----------
Total provision (benefit)......................... $ (1,316) $ 1,783 $ (720)
============ ============ ===========
</TABLE>
54
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES: (CONTINUED)
A reconciliation of the Company's effective tax rate to the U.S.
federal statutory rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------- ----------- ------------
<S> <C> <C> <C>
U.S. federal statutory rate........................ (34.0)% (34.0)% (34.0)%
State and local taxes, net of U.S. federal benefit. 0.2 4.5 -
Foreign income taxes at other than U.S. rate....... (11.9) 86.4 (6.3)
Utilization of operating loss carryforwards........ - (10.0) -
Reserve for net deferred tax assets................ 34.0 34.0 34.0
------------- ----------- ------------
Effective tax rate............................ (11.7)% 80.9% (6.3)%
============= =========== ============
</TABLE>
Deferred tax assets were comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Net operating loss carryforwards............................... $ 9,456 $ 6,947 $ 4,342
Tax credit carryforwards....................................... 1,120 1,082 789
Sales return allowance......................................... 13 384 684
Accrued expenses, allowance and other temporary differences.... 261 657 1,584
------------ ------------ ------------
Net deferred tax assets before valuation allowance............. 10,850 9,070 7,399
Deferred tax asset valuation allowance......................... (10,850) (9,070) (7,399)
------------ ------------ ------------
Net deferred taxes............................................. $ - $ - $ -
============ ============ ============
</TABLE>
At December 31, 1999, the Company had net operating loss carryforwards
of approximately $26.0 million, $12.0 million and $3.0 million for U.S. Federal,
State and United Kingdom tax purposes, respectively. If unutilized, these net
operating loss carryforwards will completely expire in 2019, 2004 and unlimited,
respectively. Should the Company incur substantial changes in ownership, the
U.S. federal and state net operating losses may be subject to an annual
utilization limitation.
At December 31, 1999, the Company's deferred tax assets relate
primarily to its United States operations. Management believes that, based on
such factors as recent and potential fluctuations in operating results, it is
more likely than not that the United States operations will not generate
sufficient future taxable income, and thus a full valuation allowance has been
recorded at December 31, 1999. If the Company generates taxable income in future
years, the valuation allowance may be reduced, which correspondingly may reduce
the Company's tax provision.
NOTE 6--EMPLOYEE PENSION PLANS:
The Company has a 401(k) plan covering all of its U.S. employees and a
defined contribution pension plan covering all its United Kingdom employees.
Under both of these plans, employees may contribute a percentage of their
compensation and the Company makes certain matching contributions. Both the
employees' and the Company's contributions are fully vested and nonforfeitable
at all times. The assets of both these plans are held separately from those of
the Company in independently managed and administered funds. The Company's
contributions to these plans aggregated $202,000 in 1999, $182,000 in 1998 and
$315,000 in 1997.
55
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--NET INCOME (LOSS) PER SHARE:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) $ (9,959) $ 422 $ (10,658)
============= ============= =============
CALCULATION OF BASIC NET INCOME (LOSS) PER SHARE:
Weighted average number of shares
outstanding used in computation 12,883 12,159 11,690
============= ============= =============
Basic net income (loss) per share $ (0.77) $ 0.03 $ (0.91)
============= ============= =============
CALCULATION OF DILUTED NET INCOME (LOSS) PER SHARE:
Weighted average number of shares
outstanding used in computation 12,883 12,159 11,690
Net effect of dilutive stock options, warrants
and convertible securities outstanding - 219 -
------------- ------------- -------------
Weighted average number of shares
and share equivalents 12,883 12,378 11,690
============= ============= =============
Diluted net income (loss) per share $ (0.77) $ 0.03 $ (0.91)
============= ============= =============
</TABLE>
NOTE 8--COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company is party to a number of noncancelable operating and capital
lease agreements.
Computer and other equipment under capital leases were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Computer and other equipment, at cost.............. $ - $ 593 $ 769
Less accumulated amortization...................... - (546) (561)
------------ ------------ -----------
Computer and other equipment, net.................. $ - $ 47 $ 208
============ ============ ===========
</TABLE>
56
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Amortization of leased computers and other equipment under capital
leases was $47,000, $50,000 and $252,000 in 1999, 1998 and 1997, respectively.
The following are future minimum payments under operating leases as
of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
------------
<S> <C>
Year ending December 31,
2000................................................................ $ 687
2001................................................................ 629
2002................................................................ 968
2003................................................................ 402
2004................................................................ 361
Thereafter.......................................................... 3,118
-------------
Total minimum lease payments........................................ $ 6,165
=============
</TABLE>
Operating lease commitments above are net of sublease income of
$800,000, $760,000 and $180,000 in 2000, 2001 and 2002, respectively. The
rental expense under all operating leases was $763,000, $791,000 and $921,000
in 1999, 1998 and 1997, respectively. Rental expense was net of sublease
rental income of $800,000 in 1999, $559,000 in 1998 and $407,000 in 1997.
ROYALTY AGREEMENT
In the first quarter of 1999, the Company signed a five-year
agreement with Sun Microsystems, Inc. ("Sun"), under which Sun established
the Company as a Sun Authorized Virtual Machine provider. The agreement also
grants the Company immediate access to the Java compatibility test suite and
the Java technology source code. The agreement includes technology sharing
and compatibility verification. Under the agreement, the Company will pay Sun
a per unit royalty on each Jeode-enabled OEM product shipped by the Company's
customers, plus a royalty on all development licenses between the Company and
its customers. If the agreement with Sun terminates or expires without
renewal, the Company would not be able to market the Company's Jeode product
line.
The Company had a non-exclusive, worldwide license from Microsoft
("Microsoft Distribution Agreement") to reproduce, adapt and distribute the
currently available versions of Windows and MS-DOS that were included as a
component of the Company's SoftWindows products. The Company paid Microsoft a
per unit royalty for copies of the Company's products sold that included a
version of Windows and MS-DOS. The Microsoft Distribution Agreement expired
on October 31, 1999. The Company did not renew the agreement.
EMPLOYMENT AGREEMENTS
The Company has entered into two employment agreements with key
executives which would require the Company to continue to pay salary for up
to one year if any of these employees is terminated under certain
circumstances as specified in the agreements.
57
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SEGMENT REPORTING:
In 1998, the Company adopted Statement of Financial Accounting
Standards 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 supersedes FAS 14, "Financial Reporting for
Segments of a Business Enterprise", replacing the "industry segment" approach
with the "management" approach. The management approach designates the
internal organization that is used by management for making operating
decisions and assessing performance as the source of the Company's reportable
segments. FAS 131 also requires disclosures about products and services,
geographic areas, and major customers. The adoption of FAS 131 did not affect
results of operations but did affect the disclosure of segment information.
The Company operates in a single industry segment providing
virtual machine technology which enables software applications to be run
on various computer platforms. In 1999, Quantum Corporation accounted for
23% of total revenues. In 1998, Ingram Micro U.S. and Sun Microsystems
Inc. each accounted for 27% of total revenues. In 1997, Silicon Graphics,
Inc. accounted for 19% of total revenues. No other customer accounted for
10% or more of the Company's total revenues during 1999, 1998 or 1997.
GEOGRAPHIC INFORMATION
Financial information by geographical region is summarized below (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States........................... $ 6,203 $ 11,960 $ 32,458
International........................... 634 2,136 6,411
------------ ------------ ------------
Consolidated................................. $ 6,837 $ 14,096 $ 38,869
============ ============ ============
Intercompany revenues:
United States........................... $ 406 $ 1,637 $ 4,929
International........................... 880 1,280 3,250
------------ ------------ ------------
Consolidated................................. $ 1,286 $ 2,917 $ 8,179
============ ============ ============
Operating loss:
United States........................... $(3,389) $(4,168) $(2,005)
International........................... (8,266) (9,498) (9,877)
------------ ------------ ------------
Consolidated................................. $(11,655) $(13,666) $(11,882)
============ ============ ============
Identifiable assets:
United States........................... $ 3,321 $ 4,366 $ 13,380
International........................... 24,207 26,077 21,162
Intercompany items and eliminations..... (14,244) (9,432) (9,085)
------------ ------------ ------------
Consolidated................................. $ 13,284 $ 21,011 $ 25,457
============ ============ ============
Long-lived assets:
United States........................... $ 470 $ 794 $ 1,573
International........................... 14,974 10,344 10,347
Intercompany items and eliminations..... (14,244) (9,432) (9,085)
------------ ------------ ------------
Consolidated................................. $ 1,200 $ 1,706 $ 2,835
============ ============ ============
</TABLE>
All of the international revenues and substantially all of the
international identifiable assets relate to the Company's operations in the
United Kingdom. Intercompany sales are accounted for at prices intended to
approximate those that would be charged to unaffiliated customers.
58
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--SEGMENT INFORMATION: (CONTINUED)
Revenues from United States operations included export sales of
$402,000, $1,290,000 and $3,087,000 in 1999, 1998 and 1997, respectively, which
were primarily to customers in Asia and Australia.
Revenue reports based on geographic area were prepared for the first
time in fiscal 1998. Management believes that, given its systems' constraints,
the cost to develop comparative segment information for prior years would be
excessive. Accordingly, comparative information for 1997 will not be presented.
Revenue by geographic area for the year ended December 31, 1999 is as
follows (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. EXPORTS EUROPE TOTAL
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
OEM $ 2,050 $ - $ - $ 2,050
Distributor 3,505 388 506 4,399
End user 210 14 124 348
Other 36 - 4 40
-------------- --------------- -------------- ---------------
Total $ 5,801 $ 402 $ 634 $ 6,837
============== =============== ============== ===============
Percentage of
total revenue 85% 6% 9% 100%
============== =============== ============== ===============
</TABLE>
Revenue by geographic area for the year ended December 31, 1998 is as
follows (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. EXPORTS EUROPE TOTAL
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Distributor $ 9,525 $ 1,306 $ 2,119 $ 12,950
End user 1,033 - 9 1,042
Other 96 - 8 104
-------------- --------------- -------------- ---------------
Total $10,654 $ 1,306 $ 2,136 $ 14,096
============== =============== ============== ===============
Percentage of
total revenue 76% 9% 15% 100%
============== =============== ============== ===============
</TABLE>
There were no European countries that accounted for more than 10% of
total revenue.
NOTE 10--PRIVATE PLACEMENT AND WARRANTS:
In December 1999, the Company issued 1,063,515 Ordinary Shares in
ADS form at a price of $4.23 per share through a private placement. The
Company received $4.5 million less offering expenses totaling $0.4 million.
Along with ADSs, the Company also issued to the purchasing shareholders
warrants that entitle the purchasing shareholders to purchase a total of
319,054 ADSs at an exercise price of $5.29 per ADS. As described below, the
exercise price and the number of ADSs issuable under the warrants are subject
to various adjustments. In addition, the Company may issue additional
warrants that entitle the purchasing shareholders to purchase ADSs at par
value on designated adjustment dates in the future.
59
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10-- PRIVATE PLACEMENT AND WARRANTS: (CONTINUED)
The purchasing shareholders received warrants to purchase three ADSs
for every 10 ADSs they purchased. The exercise price of the warrants was set at
125% of the original per ADS purchase price or $5.29.
The warrants contain anti-dilution provisions designed to protect the
purchasing shareholder if the Company sells or is deemed to sell any shares at
below market price during the term of the warrants, which ends on December 9,
2004.
In addition, under the terms of the warrants, if at least $4.75 million
of the $6.1 million in funds held in escrow by Citrix Systems, Inc. on December
9, 1999 is not released to the Company by July 10, 2000, the exercise price of
the warrants will be adjusted to the market price on that date, if that market
price is lower than $5.29 per share. In February, 2000, $1.0 million was
released from escrow to the Company. As part of the warrant agreement, the
holders of the warrants may be entitled to cash payments upon the occurrence
of certain Major Transactions, as defined, including change of control
provisions. Cash payments are determined in a methodology described in the
agreement. Such methodology is impacted by market prices.
The additional warrants entitle the purchasing shareholders to purchase
ADSs at par value if the average of the closing bid price of the ADSs over ten
days before an adjustment date is less than $4.23. The adjustment dates are: the
effective date of a registration statement for the shares issued in this private
placement, 4 months after the effective date of the registration statement, and
8 months after the effective date of the registration statement.
If the Company completes an underwritten public offering with net
proceeds of at least $25 million and a per ADS price of at least $7.02 before
either 4 months or 8 months after the effective date of the registration
statement, then the right to the related adjustment date terminates. If the
registration statement is not effective by May 10, 2000, then the first
adjustment date will be May 10, 2000 and there will be an adjustment date each
month thereafter until the registration statement is effective. In addition, if
at least $4.75 million of funds held in escrow by Citrix Systems, Inc. is not
released to the Company by March 10, 2000, the purchasing shareholders will have
an adjustment date on that date and each month after that, until the earlier of
the date the funds are released from the escrow or December 10, 2000. In
February 2000, $1.0 million was released from escrow to the Company.
On any adjustment date the purchasing shareholders will be entitled to
purchase additional ADSs at par value. The number of ADSs issuable to the
purchasing shareholders following an adjustment date is determined under a
formula. The following table illustrates the number of ADSs issuable upon
exercise of the additional warrants and the percentage ownership that each
represents, assuming: the average bid price is 100%, 75%, 50%, 29.136% and 25%
of the $4.23 price determined when the warrants were issued; the number of
Ordinary shares outstanding is the number outstanding on February 9, 2000, which
is 14,063,206; there was no adjustment of the number of ADSs issuable upon
exercise of the warrants; and the exchange rate remains at $1.60 per UK pound
sterling.
<TABLE>
<CAPTION>
PERCENT OF BID PRICE ADSS ISSUABLE ADSS ISSUED AS A PERCENTAGE OF
-------------------- ------------- TOTAL ORDINARY SHARES IN ISSUE
AFTER ISSUANCE
--------------
<S> <C> <C>
100% ($4.23) 0 0%
75% ($3.1725) 394,274 2.73%
50% ($2.1115) 1,253,111 8.18%
29.136% ($1.232) 3,493,852 19.90%
25% ($1.0575) 4,574,917 24.55%
</TABLE>
The Company obtained a third-party valuation to allocate fair value to
amounts received from the private placement between the Ordinary Shares and the
warrants. The amount allocated to mandatorily redeemable warrants totaled $1.440
million, of which $0.590 million was allocated to the warrant, and $0.850
60
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--PRIVATE PLACEMENT AND WARRANTS: (CONTINUED)
million was allocated to the additional warrant. Of the remaining net
proceeds received, $2.619 million was allocated to mandatorily redeemable
capital, of which $0.340 million will be classified as Ordinary Shares and
$2.279 million will be classified as additional paid-in capital once the
Company completes an effective registration statement and it obtains certain
lockup agreements from its directors and executive officers. The Company
expects the registration to be effective within a short time of filing this
10-K.
Under the terms of the private placement, the Company is required to
file a registration statement for the shares and warrants issued. If the
registration statement is not effective by April 9, 2000 the Company would be
subject to monetary penalties payable to the purchasing shareholders. These
penalties continue until the registration statement is effective. At December
31, 1999 the registration statement was not effective. Accordingly, as a result
of this redemption feature, the Company has classified net proceeds from the
private placement outside of shareholders' equity at year end.
Amounts classified as warrants will remain outside of shareholders'
equity for the life of the warrant or until they are exercised, whichever occurs
first. This classification reflects certain potential cash payments that may
occur, should the Company complete a major transaction, such as a takeover,
during the life of the warrants.
NOTE 11--CONVERTIBLE PROMISSORY NOTE:
On October 20, 1999, the Company signed a convertible promissory note
in favor of Quantum Corporation ("Quantum") for $1.0 million. The note is
convertible at Quantum's option to the Company's shares any time during the
lifetime of the note. The initial conversion price is $4.28 per share with
adjustment clauses for stock splits, reverse stock splits and certain offerings.
All unpaid principal with any unpaid interest, accrued at 8% per annum,
compounded quarterly, is due and payable on December 31, 2000. The Company has
the option to prepay the note in whole or in part upon 30 days written notice to
Quantum.
NOTE 12--NTRIGUE:
On February 5, 1998 the Company completed the disposal of its NTRIGUE
technology to Citrix Systems Inc. ("Citrix") for $17.7 million. As part of the
disposal, the Company transferred 45 employees to Citrix, of which 43 were
development engineers.
Under the terms of the disposal agreement $9.0 million was paid to the
Company in cash on February 5, 1998, and the remainder is being held in escrow
for the sole purpose of satisfying any obligations to Citrix arising from or in
connection with an event against which the Company would be required to
indemnify Citrix. Of this amount, $2.5 million, $0.9 million and $1.0 million
were released to the Company in February 1999, August 1999 and February 2000.
On January 29, 1999, the Company received an indemnity claim from
Citrix Systems, Inc. ("Citrix") for an amount estimated by Citrix to not
exceed $6.25 million. The claim was made in relation to the Asset Purchase
Agreement between the Company and Citrix under which Citrix purchased the
Company's NITRIGUE product line in February 1998.
Citrix's indemnity claim is based on assertions made by GraphOn
Corporation ("GraphOn") in January of 1998 and a declaratory relief action
that Citrix filed against GraphOn in November 1998 in the United States
District Court, Southern District of Florida. Citrix's action against GraphOn
seeks a declaratory judgement that Citrix does not infringe any GraphOn
proprietary rights and that Citrix has not misappropriated any trade secrets
or breached an agreement to which GraphOn is a party. Citrix filed the
61
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--NTRIGUE: (CONTINUED)
action in response to and to resolve assertions first made by GraphOn, and
disclosed to Citrix in January 1998, that the Company may have used GraphOn's
confidential information to develop certain of the Company's products,
possibly including products the Company sold to Citrix in February 1998. The
Court dismissed the complaint, but Citrix has subsequently filed an appeal.
The Company believes that any misappropriation or similar assertions by
GraphOn are without merit or basis. Accordingly, the Company contests
Citrix's indemnity claim.
On October 4, 1999, the Company filed a suit against Citrix and
GraphOn in the Superior Court of the State of California, County of Santa
Clara, relating to the misappropriation assertions of GraphOn's and Citrix's
refusal to release funds still remaining in escrow and breach of a
Cooperation Agreement between the parties. Subsequent to the filing of the
lawsuit, Citrix agreed to release $1.0 million from the escrow, leaving a
balance of $5.1 million. GraphOn answered the complaint, and claimed it had
not made any claims of misappropriation against Insignia or Cirtix. The case
is pending.
On March 15, 2000, GraphOn announced it had filed a suit against
Citrix and the Company in the Superior Court of the State of California,
County of Santa Clara, alleging trade secret misappropriation and breach of
contract arising out of the same facts and circumstances set forth in the
Company's action against GraphOn. GraphOn has not yet served its complaint.
The Company believes GraphOn's claims are without merit. The case is pending.
NOTE 13--SUBSEQUENT EVENTS:
On March 20, 2000, the Company entered into a binding agreement
with a director whereby he would provide the Company a $5.0 million line of
credit with a commitment fee of four points based upon the total amount of
the line and drawdown/termination fee of two points for the first drawdown or
termination. The interest rate on amounts drawn down is at prime plus 2%
until June 30, 2000 and thereafter at prime plus 4% per annum simple
interest, payable in cash at the repayment date. Full repayment of any
outstanding loan is due on March 20, 2001.
62
<PAGE>
INSIGNIA SOLUTIONS PLC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING DEDUCTIONS BALANCE AT END
OF PERIOD ADDITIONS (WRITE-OFFS) OF PERIOD
----------------- ----------------- ---------------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 459 $ 63 $ (464) $ 58
Year ended December 31, 1998 $ 344 $ 209 $ (94) $ 459
Year ended December 31, 1997 $ 298 $ 94 $ (48) $ 344
</TABLE>
63
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Insignia Solutions plc:
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14 (a) (1) and (2) of this Annual Report on Form
10-K present fairly, in all material respects, the financial position of
Insignia Solutions plc and its subsidiaries (the "Company") at December 31,
1999 and 1998 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
- -----------------------------
San Jose, California
January 20, 2000, except Note 13
which is dated as of March 21, 2000
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 30, 2000.
INSIGNIA SOLUTIONS PLC
By: /s/Richard M. Noling
-----------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/Richard M. Noling President, Chief Executive March 23, 2000
- --------------------------------- Officer, and a Director
Richard M. Noling (Principal Executive Officer,
and Director)
/s/Stephen M. Ambler Chief Financial Officer, March 23, 2000
- --------------------------------- Company Secretary and Senior
Stephen M. Ambler Vice President (Principal
Financial Officer and Principal
Accounting Officer)
ADDITIONAL DIRECTORS:
Director March 23, 2000
- ---------------------------------
Albert E. Sisto
/s/ Vincent S. Pino Director March 23, 2000
- ---------------------------------
Vincent S. Pino
/s/ Nicholas, Viscount Bearsted Director March 23, 2000
- ---------------------------------
Nicholas, Viscount Bearsted
/s/ David G. Frodsham Director March 23, 2000
- ---------------------------------
David G. Frodsham
</TABLE>
65
<PAGE>
INDEX TO EXHIBITS
The following exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
-------------------------------------------------------------------------------------------------------
<S> <C>
2.01 -- Asset Purchase Agreement dated as of January 10, 1998, by and among Citrix Systems, Inc., Citrix Systems UK
Limited and Insignia Solutions plc. (7)**
2.02 -- Amendment No. 1 to Asset Purchase Agreement dated as of February 5, 1998, by and among Citrix Systems, Inc.,
Citrix Systems UK Limited and Insignia Solutions plc. (7)**
3.02 -- Registrant's Articles of Association. (1)
3.04 -- Registrant's Memorandum of Association. (1)
4.01 -- Form of Specimen Certificate for Registrant's Ordinary Shares. (1)
4.02 -- Registration Rights Agreement, dated as of June 5, 1992, as amended. (1)
4.03 -- Deposit Agreement between Registrant and The Bank of New York. (2)
4.04 -- Form of American Depositary Receipt (included in Exhibit 4.03). (2)
10.01 -- Registrant's 1986 Executive Share Option Scheme, as amended, and related documents. (1)*
10.02 -- Registrant's 1988 U.S. Stock Option Plan, as amended, and related documents. (1)*
10.03 -- Registrant's 1995 Incentive Stock Option Plan for U.S. Employees and related documents. (6)*
10.05 -- Insignia Solutions Inc. 401(k) Plan. (1)*
10.06 -- Registrant's Small Self-Administered Pension Plan Definitive Deed and Rules. (1)*
10.10 -- Executive's Employment Agreement dated January 1, 1993 between Registrant and George Buchan. (1)*
10.14 -- Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers. (1)*
10.15 -- Lease Agreement between Insignia Solutions Inc. and Shoreline Investments I dated March 10, 1993. (1)
10.16 -- Lease between Registrant and The Standard Life Assurance Company dated November 3, 1992 and related documents. (1)
10.17 -- License Agreement between Insignia Solutions Inc. and Microsoft Corporation dated January 1, 1991, as amended. (1)**
10.21 -- Distribution Agreement between Insignia Solutions Inc. and Micro D, Inc. dated October 27, 1988, as amended. (1)**
10.22 -- Form of Indemnification Agreement entered into between Insignia Solutions Inc. and each of Registrant's directors
and executive officers. (1)*
10.25 -- Authorized International Master Distributor Agreement between Insignia Solutions Inc. and Mitsubishi Corporation
dated May 16, 1995, as amended. (2)**
10.27 -- Microsoft Software Distribution License Agreement for Desktop Operating Systems dated March 1, 1996, between
Microsoft Corporation and Insignia Solutions Inc. (4)**
10.28 -- U.K. Employee Share Option Scheme 1996, as amended. (6)*
10.29 -- License and Distribution Agreement effective February 24, 1995, between Silicon Graphics, Inc. and Insignia
Solutions Inc., as amended. (3)**
10.30 -- Amendment Number 1 and Amendment Number 2 to Microsoft OEM License Agreement for Desktop Operating Systems between
the Company and Microsoft Corporation. (5)**
10.33 -- Employment Agreement effective March 25, 1997 between Registrant and Richard M. Noling. (6)*
10.34 -- Consulting Agreement effective April 1, 1997 between Registrant and Nicholas, Viscount Bearsted. (6)*
10.35 -- Volume Purchase Agreement dated as of September 29, 1997 between Registrant and Silicon Graphics, Inc. (6)
10.36 -- Source Code License and Binary Distribution Agreement dated as of September 29, 1997 between Registrant and Silicon
Graphics, Inc. (6)
10.37 -- Amendment Number 4 dated March 15, 1998 to Microsoft OEM License Agreement for Desktop Operating Systems between
the Company and Microsoft Corporation. (8)
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
----------------------------------------------------------------------------------------------------------------------
<S> <C>
10.38 -- Lease Agreement between Insignia Solutions, Inc. and Lincoln-Whitehall Pacific, LLC, dated December 22, 1997. (8)
10.39 -- Trademark License between Insignia Solutions, Inc. and Microsoft Corporation dated March 16, 1998. (8)
10.40 -- Distribution Agreement between Insignia Solutions, Inc. and Sun Microsystems, Inc. dated December 24, 1997. (8)**
10.41 -- Microsoft License Agreement for Desktop Operating System Products dated October 1, 1998 between Microsoft Licensing,
Inc. and Insignia Solutions, Inc. (9)**
10.42 -- Registrant's 1995 Employee Share Purchase Plan, as amended. (9)*
10.43 -- Promissory Note dated July 1, 1998 between Insignia Solutions, Inc. and David Winterburn. (9)*
10.44 -- Lease agreements(s) between Insignia Solutions plc and Comland Industrial and Commercial Properties Limited dated
August 12th, 1998 for the Apollo House premises and the Saturn House premises. (10)
10.45 -- Consulting agreement between Insignia Solutions Inc. and Albert Sisto dated December 28, 1998. (10)*
10.46 -- Technology License and Distribution Agreement between Sun Microsystems, Inc. and Insignia Solutions plc. dated
March 3, 1999. (11)
10.47 -- Registrant's 1995 Employee Share Purchase Plan, as amended. (12)*
10.48 -- Registrant's U.K. Employee Share Option Scheme 1996, as amended. (13)*
10.49 -- Registrant's 1995 Incentive Stock Option Plan for U.S. Employees, as amended. (14)*
10.50 -- License, Distribution, and Asset Purchase Agreement between Insignia Solutions, Inc., Insignia Solutions plc, and
FWB Software, LLC dated October 6, 1999.
21.01 -- List of Registrant's subsidiaries. (2)
27.01 -- Financial Data Schedule.
</TABLE>
* Management contract or compensatory plan.
** Confidential treatment has been granted with respect to certain
portions of this agreement. Such portions were omitted from this filing
and filed separately with the Securities and Exchange Commission.
<TABLE>
<S> <C>
(1) Incorporated by reference to the exhibit of the same number from Registrant's Registration Statement on Form F-1 (File
No. 33-98230) declared effective by the Commission on November 13, 1995.
(2) Incorporated by reference to the exhibit of the same number from Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
(3) Incorporated by reference to the exhibit of the same number from Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
(4) Incorporated by reference to Exhibit 10.27 from Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
(5) Incorporated by reference to Exhibit 10.30 from Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
(6) Incorporated by reference to the exhibit of the same number from Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
(7) Incorporated by reference to the exhibit of the same number from Registrant's Current Report on Form 8-K dated
February 5, 1998.
(8) Incorporated by reference to the exhibit of the same number from Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
(9) Incorporated by reference to the exhibit of the same number from Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
(10) Incorporated by reference to the exhibit of the same number from Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998.
(11) Incorporated by reference to Exhibit 10.46 from Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
(12) Incorporated by reference to Exhibit 10.47 from Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
(13) Incorporated by reference to Exhibit 10.48 from Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
(14) Incorporated by reference to Exhibit 10.49 from Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.
</TABLE>
67
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LICENSE, DISTRIBUTION, AND ASSET PURCHASE AGREEMENT
This License, Distribution, and Asset Purchase Agreement (the "Agreement") is
made this 6 day of October, 1999 (the "Effective Date"), by and among FWB
SOFTWARE, LLC, a California limited liability corporation with its principal
offices located at 18103 Sky Park South, Suite E-2, Irvine, California 92614
("FWB"), INSIGNIA SOLUTIONS, INC., a Delaware corporation with its principal
offices located at 41300 Christy Street, Fremont, California 94538 ("Insignia
US"), and INSIGNIA SOLUTIONS, PLC, an English public company with its principal
offices located at 41300 Christy Street, Fremont, California 94538 ("Insignia
UK"; together, Insignia US and Insignia UK are the "Insignia Group").
R E C I T A L S:
A. Insignia US, as licensee of Insignia UK, holds the rights to certain
Intellectual Property and proprietary rights used in connection with the
computer software programs designed and marketed by Insignia US under the
tradenames/trademarks "SoftWindows" and "RealPC", including all logos,
trademarks, trade secrets, source code, object code, executable programs, end
user documentation, patents, copyrights, tradenames, service marks, and internet
domain names, whether issued or pending, registered or unregistered. The
preceding SPECIFICALLY EXCLUDES any proprietary rights in the tradename
"SoftWindows," and the source code and object code of Windows and DOS, both of
which Insignia US presently employs pursuant to licenses from Microsoft and IBM,
respectively.
B. Insignia US desires to grant to FWB a license to all of Insignia US's right,
title and interest in SoftWindows, and FWB desires to accept such license, upon
the terms and conditions set forth below.
C. Insignia US wishes to appoint FWB as its sub-contracting manufacturer and
distributor of RealPC, and FWB wishes to serve as Insignia US's manufacturer and
distributor of RealPC, on the terms and conditions set forth herein.
D. The parties intend that Insignia UK will transfer all of its right, title,
and interest in the Intellectual Property to FWB, on the terms and conditions
set forth herein if and when certain conditions are fulfilled by FWB.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. DEFINITIONS
1.1. "DOS License" means the currently effective license between IBM
and Insignia US granting the latter certain manufacturing and
distribution rights relating to DOS.
1.2. "Embedded Market" means the range of consumer, industrial and
commercial applications whereby computer functionality -- from the
most basic to complex -- is incorporated within hardware and
software devices that are not traditional desktop or laptop
computers.
1.3. "Emulation Market" means consumer and commercial purchasers of
technology through which the functionality of a computer processor
is mimicked by software so that PC-based software applications may
be run on non-PC machines, such as the Mac or UNIX product lines.
1.4. "FWB Products and Services" means the software products and
services that are reasonably related to or derived from the
Intellectual Property.
1.5. "Gross Profit" means, for each applicable period relating to the
Payments, an amount equal to the net sales and services related to
and derived from the Intellectual Property, determined in
accordance with Generally Accepted Accounting Principles, and net
of (i) all royalties due by FWB to third parties; (ii) direct
product costs such as freight, packaging, product manuals; and
(iii) all returns, allowances, and discounts relating to the
Intellectual Property. Indirect costs and expenses relating to
general administration, sales, marketing, and support are
expressly excluded from the calculation of Gross Profit.
1.6. "Intellectual Property" means the all Intellectual Property Rights
held respectively by Insignia UK and Insignia US in RealPC and
SoftWindows, and any derivative works thereof.
1.7. "Intellectual Property Rights" means all worldwide statutory and
common law rights associated solely with (i) patents and patent
applications; (ii) works of authorship including copyrights,
copyright applications, copyright registrations, trademarks,
Internet domain names and "moral rights"; (iii) the protection of
trade and industrial secrets and confidential information; and
(iv) divisions,
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continuations, renewals, and re-issuances of the foregoing now
existing, acquired or devised in the future.
1.8. "JEODE" means the current tradename associated with the
proprietary implementation of virtual machine technology, related
software development tools and services owned by Insignia UK and
developed for the Embedded Market.
1.9. "Microsoft License" means the currently effective license between
Microsoft and Insignia US granting the latter certain
manufacturing and distribution rights relating to the Windows
product line and the SoftWindows tradename.
1.10. "RealPC" means the software application for the Emulation Market
whereby DOS-based applications may be run on non-PC machines. The
RealPC product contains components developed and owned by Insignia
and from IBM per the DOS license.
1.11. "SGI" means the company Silicon Graphics, Inc., its successors and
assigns.
1.12. "SoftWindows" means the software application for the Emulation
Market whereby Windows-based applications may be run on non-PC
machines. The SoftWindows product contains components developed
and owned by Insignia and from Microsoft per the Microsoft
License. Only the Insignia component is intended in any references
to the SoftWindows product. SoftWindows is also a trademark of
Microsoft Corporation.
2. LICENSE RIGHTS FOR SOFTWINDOWS
2.1. Grant of License. Subject to the terms and conditions of this
Agreement and to the extent of Insignia US's Intellectual Property
Rights, Insignia US hereby grants to FWB, a perpetual,
non-transferable, exclusive, worldwide license to modify, use,
publicly display, reproduce, distribute through its normal
distribution channels, and sublicense SoftWindows and derivative
works solely within the Emulation Market.
2.2. SGI Exception. The scope of the preceding license grant expressly
excludes the platform of Silicon Graphics work stations, which
distribution rights have been previously exclusively granted by
Insignia US to SGI.
2.3. No Source Code Transfers to Third Parties. FWB shall at no time
during the term of the license grant in Section 2.1 distribute,
sublicense or otherwise transfer or disclose to any third party
SoftWindows, any component, or derivative work thereof in source
code form.
2.4. License Term. The SoftWindows license grant in this Section 2
shall commence on the Effective Date and shall continue in
perpetuity unless terminated automatically upon consummation of
the purchase and transfer of the Intellectual Property on the
terms and conditions set forth in Section 8.
3. INTERIM MANUFACTURING AND DISTRIBUTION RIGHTS FOR REALPC
3.1. Manufacturing Rights. Insignia US, to the extent of its
Intellectual Property Rights in RealPC and pursuant to the DOS
License, hereby appoints FWB as its exclusive manufacturer for
RealPC and shall provide FWB with a Gold Master CD of RealPC for
use within the scope of this Agreement.
3.2. Distribution Rights. Subject to the terms and conditions of this
Agreement and during the term of FWB's manufacturing rights under
Section 3.1, Insignia US hereby appoints FWB as its exclusive,
worldwide distributor of RealPC with respect to all potential
customers whether at the retail or wholesale level, such rights
being non-transferable.
3.3. Term and Manufacturing Limit. The term of the preceding grant
shall commence on the Effective Date and shall continue until the
licenses acquired by Insignia US pursuant to the DOS License and
remaining as of the Effective Date have all been manufactured. The
number of remaining licenses, as of the Effective Date, is
indicated at Schedule 3.1 and represents the maximum number of
copies of RealPC that FWB may manufacture pursuant to this Section
3.1.
4. LICENSE RIGHTS FOR REALPC
4.1. Grant of License. Subject to the terms and conditions of this
Agreement and to the extent of Insignia US's Intellectual Property
Rights, Insignia US hereby grants to FWB, a perpetual,
non-transferable, exclusive, worldwide license to modify, use,
publicly display, reproduce, distribute through its normal
distribution channels, and sublicense RealPC and derivative works
solely within the Emulation Market.
4.2. No Source Code Transfers to Third Parties. FWB shall at no time
during the term of the license grant in Section 4.1 distribute,
sublicense or otherwise transfer or disclose to any third party
RealPC, any component, or derivative work thereof in source code
form.
License Term. The RealPC license grant in this Section 4 shall commence
automatically upon termination of the manufacturing and distribution rights of
Section 3, and shall continue in perpetuity unless terminated automatically
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<PAGE>
upon consummation of the purchase and transfer of the Intellectual Property on
the terms and conditions set forth in Section 8.
5. TRADEMARK LICENSE
5.1. Grant of Trademark License. Subject to the terms and conditions
of this Agreement and to the extent of its Intellectual Property
Rights, Insignia US hereby grants to FWB a worldwide,
nonexclusive, non-transferable, royalty-free, license (the
"Trademark License") during the term indicated in Section 5.4, to
use the Licensed Trademarks (defined below) solely in connection
with FWB's marketing, sale and promotion of the FWB Products and
Services.
5.2. Use of Licensed Trademarks. Whenever FWB displays a trademark
owned by Insignia US and identified on Schedule 5.2 (the "Licensed
Trademarks"), FWB shall display it in a size and style less
prominent than, and separate from, FWB's own name, marks or logos,
and accompanied by a -TM- symbol. FWB shall, if commercially
reasonable, legibly display the following trademark legend, which
may be presented in "mouseprint" but must be large enough to be
legible, on all media in or on which FWB displays the Licensed
Trademark(s): "Insignia, RealPC, and all associated trademarks and
logos are trademarks or registered trademarks of Insignia
Solutions, Inc. in the U.S. and other countries."
5.3. Quality Control. FWB shall maintain the quality of the
products and services with which FWB uses the Licensed
Trademarks and the Intellectual Property at a level that meets
or exceeds the quality standards of the industry with
respect to similar products. During the term of the Trademark
License, FWB agrees to provide Insignia US with a
royalty-free copy of any and all products produced by FWB
bearing any Licensed Trademark(s) or using the Intellectual
Property within thirty (30) days prior to first customer
shipment of such product. If within fifteen (15) business days
of receipt of such FWB Product, Insignia US has not informed
FWB that the quality of such product fails to meet Insignia US's
standards, FWB may reasonably assume that the FWB Product is
suitable for distribution pursuant to the terms of this
Agreement. If the FWB Product does not meet or exceed Insignia
US's standards, and Insignia US so notifies FWB in writing
within fifteen (15) business days of receipt, FWB shall use
commercially reasonable efforts to modify such product so
that such standards are met and shall not distribute such FWB
Product with any Licensed Trademark until such standards are met.
5.4. The Trademark License shall commence as of the Effective Date, and
shall terminate concurrently with the termination of the license
or distribution rights granted in Sections 2, 3, and 4, or as
otherwise agreed upon in writing by the parties hereto.
6. PAYMENT OBLIGATIONS
6.1. Initial Fee. In consideration for the grants in Sections 2, 3, 4
and 8, FWB shall deliver to Insignia US upon execution of this
Agreement the non-refundable sum of Twenty-Five Thousand Dollars
($25,000) in immediately available funds, via wire transfer to an
account specified by Insignia US (the "Initial Fee").
6.2. Quarterly Payments.
6.2.1. During the term of any grant under Section 2, 3 or 4, and as
additional consideration for the grants in Sections 2, 3, and
4, FWB shall make non-refundable quarterly payments
("Quarterly Payments") to Insignia US in accordance with
Section 6.2.4 and based upon the annual, cumulative Gross
Profit derived from the FWB Products and Services for the
relevant period.
6.2.2. The Quarterly Payments shall be computed as follows:
6.2.2.1. Ten Percent (10%) of the amount by which annual Gross
Profits for the applicable period exceed $0 but are less
than, or equal to, $500,000; plus
6.2.2.2. Twenty Percent (20%) of the amount by which annual Gross
Profits for the applicable period exceed $500,000 but are
less than, or equal to, $1,000,000; plus
6.2.2.3. Thirty Percent (30%) of the amount by which annual Gross
Profits for the applicable period exceed $1,000,000.
6.2.3. Quarterly Payments shall be calculated on a cumulative,
calendar basis and shall be paid on a quarterly basis. Thus,
for purposes of demonstrating the calculation, if Gross
Profits for the first quarter of a calendar year equal
$1,200,000, then the Quarterly Payment for that quarter
will equal ten percent of the first $500,000 (or $50,000)
plus twenty percent of the next $500,000 (or $100,000),
plus thirty percent of the remainder ($60,000) for a total
Quarterly Payment of $210,000 for that period. If Gross
Profits for the second quarter amounted to $1,000,000, then
the cumulative Gross Profits would equal $2,200,000 and the
Quarterly Payment would be payments owed on $2,200,000
(e.g., $50,000 plus $100,000 plus $400,000 equals $550,000)
minus previous Quarterly Payments during the calendar
year. Following any periodic determination of cumulative
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<PAGE>
Gross Profits, any excess Quarterly Payments shall be credited
against future Quarterly Payments only.
6.2.4. Quarterly Payments due to Insignia US pursuant to this Section
6 shall be made in immediately available funds, and shall be
paid to Insignia US on an quarterly basis concurrent with
delivery of the Quarterly Schedule pursuant to Section 6.3.
The first Quarterly Payment shall be calculated based upon
Gross Profits derived from the FWB Products and Services
during the period from the Effective Date through March 31,
2000, only (the "Initial Period").
6.3. Preparation of Schedule. Beginning in March 2000, FWB shall
prepare and deliver to Insignia US within thirty (30) days of the
end of each calendar quarter (March, June, September and December)
a schedule setting forth a reasonably detailed calculation of
Gross Profits by FWB Product and Service with respect to the
calendar quarter just ended. The schedule delivered in April 2000
shall set forth a calculation of Gross Profits with respect to the
Initial Period.
6.4. Audit Rights. Insignia US may, no more frequently than once per
year, retain at its own expense an independent accounting firm
to audit FWB's relevant books and records for any previously
unaudited period(s) with respect to calculating Gross Profits. If
the determination of the accounting firm differs from that of FWB,
the parties shall negotiate in good faith for a period of ten (10)
business days to resolve any differences. Any resolution agreed to
in writing shall be final, conclusive and binding on FWB and
Insignia US with respect to the determination of Gross Profits for
such period. If the parties have agreed that there was a shortfall
in FWB's calculation of Gross Profits for any period, FWB shall
promptly pay to Insignia US the full amount of any underpayment.
If the calculation of Gross Profits by the accounting firm reveals
that the Gross Profits calculation by FWB for any quarter was
understated by five percent (5%) or more, FWB shall reimburse
Insignia US for all reasonable costs associated with the audit.
7. CUSTOMER SUPPORT
7.1. Commencing thirty (30) days after the Effective Date ("Customer
Support Assumption Date"), FWB shall assume responsibility for all
then-existing and future support obligations relating to the Mac
platform for the Intellectual Property (the "Support
Obligations"). UNIX support shall commence on an individual basis,
as each individual customer support agreement comes up for
renewal, such renewal to be forwarded by the Insignia Group to
FWB.
7.2. The Insignia Group shall promptly credit to FWB's Quarterly
Payments a pro-rata portion of any pre-paid fees received in
connection with services rendered, or to be rendered, by FWB
pursuant to the Support Obligations from and after the Effective
Date.
7.3. Between the Effective Date and the Customer Support Assumption
Date, the Insignia Group shall ensure that all existing support
obligations are assigned to FWB effective on the Customer Support
Assumption Date.
8. RIGHT TO PURCHASE INTELLECTUAL PROPERTY
8.1. Vesting of Right to Purchase. If and when the sum of the
Quarterly Payments made by FWB to Insignia US pursuant to
Section 6.2 equals Five Hundred and Fifty Thousand Dollars
($550,000) (the "Vesting Date"), FWB will have a vested interest
in acquiring all right, title and interest to all interests in the
Intellectual Property (without trademark rights to the Insignia
name and logo) held by Insignia UK, and Insignia UK will transfer
the same to FWB upon request. FWB may, at its sole discretion,
deliver such funds to Insignia US so that such funds plus any
previous Quarterly Payments equal Five Hundred and Fifty Thousand
Dollars ($550,000) thus accelerating the arrival of the Vesting
Date.
8.2. Purchase of Intellectual Property; Assumption of Liabilities. Upon
passage of the Vesting Date and upon request by FWB, Insignia UK
shall sell, transfer, assign and deliver unto FWB and its
successors and assigns forever, the Intellectual Property (without
trademark rights to the Insignia name and logo), and all
additional existing Support Obligations (the "Assumed
Liabilities"), and FWB will assume the Assumed Liabilities, and
purchase the Intellectual Property. There shall be no additional
consideration required for the transfer of the Intellectual
Property.
8.3. Taxes. FWB will pay all sales and use taxes and transfer taxes,
if any, applicable to the transfer of the Intellectual Property
provided for by this Section 8.
8.4. Transfer of Intellectual Property. Delivery of the source code and
object code comprising part of the Intellectual Property (the
"Code") shall be completed by transferring the Code via remote
telecommunications from Insignia UK's place of business to or
through FWB's computer system.
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8.5. Conditions to Obligations of FWB. The obligation of FWB to
consummate the purchase of the Intellectual Property and to assume
the Assumed Liabilities pursuant to this Agreement is subject to
the satisfaction of the following conditions, any of which may be
waived by FWB:
8.5.1. Representations and Warranties; Performance of Obligations.
The representations and warranties of each of Insignia UK
and Insignia US set forth in Section 11 hereof and in all
agreements, documents and instruments executed and delivered
pursuant hereto or in connection with the transfer of the
Intellectual Property and Assumed Liabilities to FWB (i) shall
have been and be true and correct in all material respects as
of the Effective Date and, except where the context otherwise
requires, (ii) as of the Vesting Date as though made on and as
of the Vesting Date. Each of Insignia US and Insignia UK shall
have performed in all material respects the agreements and
obligations necessary to be performed by it under this
Agreement prior to the Closing Date.
8.5.2. Certificates and Instruments of Transfer. The Insignia Group
shall have delivered to FWB the following:
8.5.2.1. possession of all documentation comprising part of, or
evidencing title to, the Intellectual Property,
provided that in no event shall FWB receive possession of
any tangible personal property, such as storage media, in
connection with the Code;
8.5.2.2. a Bill of Sale and Assignment and Assumption, executed by
Insignia UK;
8.5.2.3. a Trademark Assignment relating to RealPC, executed by
Insignia US; and
8.5.2.4. other documents required to be delivered by the Insignia
Group in order to effect the transactions contemplated
hereby, in form and substance reasonably satisfactory to
FWB and its counsel.
8.5.3. Microsoft License. FWB shall have entered into a license
agreement with Microsoft with respect to the Microsoft
component of SoftWindows.
8.5.4. DOS License. FWB shall have entered into a license agreement
with IBM with respect to the DOS component of RealPC.
8.5.5. Consents. The Insignia Group shall have obtained all necessary
consents required in connection with the transfer to FWB of
the Intellectual Property and Assumed Liabilities, and shall
have delivered to FWB evidence of all such consents.
8.6. Conditions of Obligations of the Insignia Group. The obligations
of each of Insignia UK and Insignia US to consummate the sale and
purchase contemplated by this Agreement are subject to the
satisfaction of the following conditions, any of which may be
waived by either Insignia US or Insignia UK:
8.6.1. Representations and Warranties; Performance of Obligations.
The representations and warranties of FWB set forth in Section
12 and in all agreements, documents and instruments executed
and delivered pursuant hereto or in connection with this
Agreement and the transfer of the Intellectual Property and
Assumed Liabilities shall have been and be true and correct in
all material respects as of (i) the Effective Date and (ii) as
of the Vesting Date as though made on and as of the Vesting
Date. FWB shall have performed in all material respects the
agreements and obligations necessary to be performed by it
under this Agreement prior to the Vesting Date.
8.6.2. Deliveries by FWB. FWB shall have delivered to Insignia US the
following:
8.6.2.1. the Initial Fee and all Quarterly Payments required
hereunder; and
8.6.2.2. the Bill of Sale and Assignment and Assumption, executed
by FWB.
9. CLOSING DATE AND TERMINATION OF AGREEMENT
9.1. Closing Date. The closing for the consummation of the purchase and
sale of the Intellectual Property contemplated by this Agreement
(the "Closing") shall, unless another date or place is agreed to
in writing by the parties, take place on or about the Vesting Date
(the "Closing Date") at a place to be determined by the parties.
9.2. Termination of Agreement. This Agreement may be terminated and
abandoned at any time prior to the Closing Date by mutual consent
of the parties, or by either party for material breach by the
other party.
9.3. Effect of Termination. In the event of termination of this
Agreement as provided in Section 9.2, notice thereof shall be
promptly given by the terminating party to the other parties and
thereafter this Agreement shall forthwith become void, and there
shall be no liability or obligation on the part of Insignia US or
FWB or any of their respective affiliates except that nothing
herein will relieve any party from liability for any breach of any
representation, warranty, agreement or covenant herein or damages
resulting therefrom.
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9.4. Survival. Notwithstanding the termination of this Agreement,
the provisions of Sections 11 and 12 shall continue in effect
for a period of one (1) year.
10. INDEMNIFICATION
10.1. FWB's Indemnity Obligation. FWB hereby agrees to defend and fully
indemnify the Insignia Group against any legal proceeding brought
against it to the extent such claim arises from (i) a breach by
FWB of any of the covenants, representations and warranties
contained herein, or (ii) FWB's use of the Intellectual Property
in connection with the marketing or distribution of FWB Products
and Services, other than a claim described in Section 10.2 below.
FWB will pay all damages, costs and fees awarded by a court of
competent jurisdiction, or such settlement amount negotiated by
FWB, attributable to such claim.
10.2. Insignia's Indemnity Obligation. The Insignia Group will defend
and fully indemnify FWB against any legal proceeding brought
against FWB, to the extent such claim (i) arises from a breach by
the Insignia Group of any of the covenants, representations and
warranties contained herein, or (ii) is based on a claim that
FWB's authorized use of the Intellectual Property is an
infringement of a third party Intellectual Property Right, and
will pay all damages costs and fees awarded by a court of
competent jurisdiction, or such settlement amount negotiated by
the Insignia Group attributable to such claim. The foregoing
shall not apply to any claims of intellectual property
infringement based upon the combination of the Intellectual
Property with code, technology or documentation from other
sources.
10.3. Prerequisites. Under Sections 10.2 above, FWB must, and under
Section 10.1 above, the Insignia Group must: (i) provide notice of
the claim promptly to the party providing an indemnity; (ii) give
the indemnifying party sole control of the defense and settlement
of the claim; (iii) provide the indemnifying party, at
indemnifying party's expense, all available information,
assistance and authority to defend; and (iv) not have compromised
or settled such claim or proceeding without the indemnifying
party's prior written consent.
10.4. Additional Remedies. Should the Intellectual Property become, or
in the opinion of the Insignia Group be likely to become, the
subject of a claim of infringement for which indemnity is provided
above pursuant to Section 10.2, the Insignia Group may, at its
sole option, attempt to procure on reasonable terms the rights
necessary for FWB to exercise its license rights under this
Agreement with respect to the infringing items, or to modify the
infringing items so that they are no longer infringing without
substantially impairing their function or performance. If the
Insignia Group is unable to do the foregoing after reasonable
efforts, then the Insignia Group may send a notice of such
inability to FWB together with a refund of any Quarterly Payments
received from FWB for the infringing items and terminate this
Agreement.
10.5. Indemnification Exclusive. Absent common law fraud or intentional
misrepresentation, the indemnification provisions of this Section
10 shall be the exclusive remedy for breach of any representation
or warranty contained in this Agreement.
11. REPRESENTATIONS AND WARRANTIES OF THE INSIGNIA GROUP
The Insignia Group hereby represents and warrants to FWB, as of the Effective
Date or as otherwise set forth in such representation or schedule hereto, as
follows:
11.1. Organization. Insignia US is duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and
has the requisite power and authority to conduct its business as
it is presently being conducted and to own and lease its
properties and assets. Insignia UK is duly incorporated, validly
existing and in good standing under the laws of the England and
has the requisite power and authority to conduct its business as
it is presently being conducted and to own and lease its
properties and assets
11.2. Authorization. The execution and delivery of this Agreement by
each of Insignia US and Insignia UK and the performance of each
of their obligations hereunder have been duly authorized by all
requisite action on the part of each, and no other action or
approval is necessary for the execution, delivery or performance
of this Agreement by the Insignia Group. The Insignia Group has
full right, power, authority and capacity to execute, deliver and
perform this Agreement and such other agreements and instruments
as are contemplated hereby. This Agreement has been duly executed
and delivered by Insignia and is a valid and binding obligation of
the Insignia Group, enforceable in accordance with its terms,
except as such enforceability may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or other similar laws, now
or hereafter in effect, relating to or limiting creditors' rights
generally and (b) general principles of equity (whether considered
in an action in equity or at law).
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11.3. No Contingent Obligations. The Insignia Group has no legal
obligation, absolute or contingent, to any other person to sell or
license any of the Intellectual Property (other than as
contemplated in the ordinary course of business), and has not
taken any steps to enter into any agreement or arrangement, whether
written or verbal, with respect thereto.
11.4. Title to Intellectual Property. Except as described in connection
with the Microsoft License and DOS License, Insignia UK and/or its
affiliated companies has good and marketable title to all of the
Intellectual Property free and clear of all Encumbrances of any
nature whatsoever. To the knowledge of Insignia UK, no right of
Insignia UK in the Intellectual Property (i) conflicts with,
infringes upon or otherwise violates any rights of others, (ii) is
subject to any pending or overtly threatened litigation or other
adverse claims or infringement by any other party, or (iii) is
based upon proprietary information of others that has been
illegally obtained. There has been no written, or to the knowledge
of Insignia UK, other claim of infringement by Insignia UK of any
domestic or foreign patents, trademarks, service marks, copyrights,
or any other intellectual property of any other party.
11.5. Title to Licensed Trademarks. Insignia US and/or its affiliated
companies has good and marketable title to all of the Licensed
Trademarks free and clear of all Encumbrances of any nature
whatsoever. To the knowledge of Insignia US, no right of Insignia
US in the Licensed Trademarks (i) conflicts with, infringes upon
or otherwise violates any rights of others, (ii) is subject to any
pending or overtly threatened litigation or other adverse claims or
infringement by any other party, or (iii) is based upon proprietary
information of others that has been illegally obtained. There has
been no written, or to the knowledge of the Insignia Group, other
claim of infringement by Insignia US of any domestic or foreign
patents, trademarks, service marks, copyrights, or any other
intellectual property of any other party.
11.6. Intellectual Property Warranty. The Insignia Group hereby warrants
that, to the extent of the Insignia Group's Intellectual Property
Rights, the Intellectual Property that is the subject of this
Agreement, as delivered to FWB, shall operate substantially in
accordance with the end user documentation accompanying SoftWindows
and RealPC, respectively. The Insignia Group hereby expressly
disclaims to the full extent allowed by law all terms, warranties,
and conditions, including, without limitation, that the
Intellectual Property is free of defects, merchantable,
satisfactory, or fit for a particular purpose. Insignia does not
warrant that the Intellectual Property will meet FWB's requirements
or that its use will be uninterrupted or error free. This
disclaimer of warranty constitutes an essential part of this
Agreement, and no use of the Intellectual Property is authorized
except subject to this disclaimer.
11.7. Proceedings; No Violations; Permits. To the knowledge of the
Insignia Group, there is no suit, action, or proceeding threatened
against or affecting either company that is likely to prevent or
materially delay the consummation of the transactions contemplated
by this Agreement. To the knowledge of the Insignia Group, it is in
violation of any applicable law, statute, order, rule, or
regulation promulgated, or judgment entered against either Insignia
UK or Insignia US, in a manner which is reasonably likely to
materially adversely affect the business or operations of either,
or delay the consummation of the transactions contemplated by this
Agreement. The Insignia Group holds all consents, licenses,
permits, grants or other authorizations required to permit
operation of its assets and conduct of its business as it is
presently being conducted.
11.8. No Conflict. Neither the execution and delivery of this Agreement
by the Insignia Group nor the consummation of the transactions
contemplated hereunder nor the fulfillment by the Insignia Group
of any of its terms will:
11.8.1. conflict with or result in a breach by either Insignia US or
Insignia UK of, or constitute a default under, or create an
event that, with the giving of notice or the lapse of time, or
both, would be a default under or breach of, or give a right
to terminate or cancel under, any of the terms, conditions or
provisions of (i) any indenture, mortgage, lease, deed of
trust, pledge, loan or credit agreement involving $50,000 or
more, or any other material contract, arrangement or agreement
to which either Insignia US or Insignia UK is a party or to
which any material portion of the assets of Insignia US or
Insignia UK is subject, (ii) the Certificate of Incorporation
or By-Laws of Insignia US, or (iii) any judgment, order, writ,
injunction, decree or demand of any governmental entity which
materially affects either Insignia US or Insignia UK, or is
likely to adversely affect the ability of either Insignia US
or Insignia UK to conduct its business (as conducted prior to
the Closing) or own or convey its assets;
Page 7 of 14
<PAGE>
11.8.2. result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any material assets
of Insignia US or which materially affects Insignia US's
ability to conduct its business as conducted prior to the date
of this Agreement; or
11.8.3. cause a loss or adverse modification of any permit, license,
or other authorization granted by a governmental entity to or
otherwise held by either Insignia US or Insignia UK, except
for any such loss or adverse modification which would not,
individually or in the aggregate, result in a material adverse
effect.
11.9. No Consents. No consent, approval or authorization of, or
declaration, filing or registration with, any governmental entity
or any other party is required to be made or obtained by the
Insignia Group in connection with the execution, delivery and
performance by the Insignia Group of this Agreement and the
consummation of the transactions contemplated hereby, including the
transfer to FWB of the Intellectual Property.
11.10. Customer Support Receipts. From the Effective Date, the Insignia
Group shall forward to FWB any and all sums received for Customer
Support relating to the Intellectual Property to be provided by
FWB after the Effective Date.
12. REPRESENTATIONS AND WARRANTIES OF FWB
FWB hereby represents and warrants to the Insignia Group as follows:
12.1. Organization. FWB is a duly organized limited liability company,
validly existing and in good standing under the laws of the State
of California and has the requisite power and authority to conduct
its business as it is presently being conducted and to own and
lease its properties and assets.
12.2. Authorization. The execution and delivery of this Agreement by FWB
and the performance of its obligations hereunder have been duly
authorized by all requisite action on the part of FWB and its
members, and no other action by FWB is necessary for the execution,
delivery or performance of this Agreement by FWB. This Agreement
has been duly executed and delivered by FWB, and is a valid and is
a valid and binding obligation of FWB, enforceable against it in
accordance with its terms, except as such enforceability may be
limited by (a) bankruptcy, insolvency, reorganization, moratorium
or other similar laws, now or hereafter in effect, relating to or
limiting creditors' rights generally, and (b) general principles
of equity (whether considered in an action in equity or at law).
12.3. No Conflict. Neither the execution and delivery of this Agreement
by FWB nor the consummation of the transactions contemplated
hereunder nor the fulfillment by FWB of any of its terms will
violate, conflict with or result in a breach by FWB of, or
constitute a default by it under, or create an event that, with
the giving of notice or the lapse of time, or both, would be a
default under or breach of, any of the terms, conditions or
provisions of (i) any indenture, mortgage, lease, deed of trust,
pledge, loan or credit agreement or any other material contract,
arrangement or agreement to which FWB is a party or to which a
material portion of the assets of FWB is subject, (ii) the articles
of organization or operating agreement of FWB, (iii) any law or
regulation applicable to FWB, or (iv) any judgment, order, writ,
injunction, decree or demand of any governmental entity which
materially affects FWB or which materially affects the ability of
FWB to conduct its business.
13. COVENANTS
13.1. Further Assurances. Each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action, and
to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions
contemplated by this Agreement.
13.2. Termination of Microsoft License. Insignia US shall terminate the
Microsoft License on or prior to October 31, 1999.
13.3. Sublicense of the Intellectual Property. Following any sale and
transfer of the Intellectual Property to FWB pursuant to this
Agreement, the Insignia Group shall have a perpetual, transferable,
royalty-free license to use, modify, create derivative works,
reproduce, distribute, license, sublicense, and publicly display
all code comprising the Intellectual Property solely within the
Embedded Market. Furthermore, FWB affirms that neither FWB nor
any party to whom FWB might license or transfer FWB's rights in
the Intellectual Property will ever make, directly or indirectly,
any claim or assertion of any infringement or misappropriation with
respect to the Intellectual Property and any product or service
that Insignia, any Insignia licensee, or subsequent transferee of
any Intellectual Property Right Insignia may hold in its
then-current technology.
13.4. Non-Competition.
13.4.1. Non-Competition by the Insignia Group. During the term of
this Agreement and for a period of five (5) years following,
neither Insignia US nor Insignia UK nor any of their
respective
Page 8 of 14
<PAGE>
transferees shall directly compete with FWB in the Emulation
Market. This covenant shall not apply to the ownership by
Insignia US or Insignia UK of five percent (5%) or less of
the outstanding voting securities of any corporation or other
entity which has its securities listed on a national
securities exchange or on the Nasdaq Stock Market, and shall
not be interpreted to prevent Insignia US or Insignia UK from
entering into any license, merger, joint venture or other
agreements with any other party who directly competes with
FWB in the Emulation Market, provided that any competing
product created as a result of such license, merger, or joint
venture does not incorporate the Intellectual Property, or any
improvements thereto.
13.4.2. Non-Competition by FWB. During the term of this Agreement and
for a period of five (5) years following, neither FWB nor any
transferee shall use, or allow any third party to use, the
Intellectual Property in order to develop and market new
products or services that directly compete with any products
or services in the Embedded Market. This covenant shall not
apply to the ownership by FWB of five percent (5%) or less of
the outstanding voting securities of any corporation or other
entity which has its securities listed on a national
securities exchange or on the Nasdaq Stock Market, and shall
not be interpreted to prevent FWB from entering into any
license, merger, joint venture or other agreements with any
other party who directly competes with Insignia US or Insignia
UK in the Embedded Market, provided that any competing product
created as a result of such license, merger, or joint venture
does not incorporate any of the Intellectual Property, or any
improvements thereto.
13.4.3. Scope of Non-Compete. The covenants contained in this
Section 13 shall apply to the entire world. The parties have
agreed that it is reasonable to have the provisions of this
Section 13 apply to the entire world for various reasons,
including, without limitation, that (i) the Insignia Group
currently sells and distributes their products and related
services to parties in numerous countries and after the
closing of the transactions contemplated by this Agreement,
the Insignia Group shall continue to sell and distribute their
products throughout all of the world, and (ii) FWB intends to
sell and distribute the FWB Products and Services, and any
product based upon or derived from the Intellectual Property,
throughout all of the world.
14. MISCELLANEOUS
14.1. Expenses. Each of FWB and Insignia US shall bear their own
respective expenses incurred in connection with the
preparation and negotiation of this Agreement and all related
ancillary documents, and in connection with the consummation
of the transactions contemplated by this Agreement.
14.2. Entire Agreement. This Agreement, including the Schedules and
Exhibits hereto and the other documents, agreements and
instruments executed and delivered pursuant to this Agreement,
contains the entire agreement between the parties with respect
to the matters provided therein, and supersedes any previous
agreements and understandings between the parties with respect
to those matters.
14.3. Governing Law. This agreement shall be governed by and construed
in accordance with the laws of the State of California applicable
to such agreements. Any action, suit or other proceeding initiated
by Insignia US, Insignia UK or FWB against any other party under
or in connection with this Agreement may be brought in any Federal
or state court in the State of California, as the party bringing
such action, suit or proceeding shall elect, having jurisdiction
over the subject matter thereof. The parties hereby submit
themselves to the jurisdiction of any such court and agree that
service of process on them in any such action, suit or proceeding
may be effected by the means by which notices are to be given to
it under this Agreement.
14.4. Headings. The Section headings of this Agreement are for reference
purposes only and are to be given no effect in the construction or
interpretation of this agreement.
14.5. Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if (a)
delivered personally or (b) sent by registered or certified mail,
postage prepaid, or (c) sent by overnight courier with a nationally
recognized courier, or (d) via facsimile confirmed in writing in
any of the foregoing manners, as follows:
If to Insignia: Insignia Solutions, Inc.
41300 Christy Street
Fremont, California 94538
Attention: President
Facsimile: (510) 360-3702
Page 9 of 14
<PAGE>
with a copy to: Insignia Solutions, Inc.
41300 Christy Street
Fremont, California 94538
Attention: Legal Department
Facsimile: (510) 360-3701
If to FWB: FWB Software, LLC
18103 Sky Park South
Suite E2
Irvine, CA 92614
Attention: James R. Hale
Facsimile: (949) 863-3136
with a copy to: Paul, Hastings, Janofsky & Walker LLP
695 Town Center Drive, 17th Floor
Costa Mesa, California 92626
Attention: Douglas A. Schaaf, Esq.
Facsimile: (714) 979-1921
If sent by mail, notice shall be considered delivered five (5) business days
after the date of mailing, and if sent by any other means set forth above,
notice shall be considered delivered upon receipt thereof. Any party may by
notice to the other parties change the address to which notice or other
communications to it are to be delivered or mailed.
14.6. Assignability. This Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective successors
and permitted assigns. Notwithstanding the foregoing, this
Agreement shall not be assignable by any party without the written
consent of the other parties, which consent shall not be
unreasonably withheld, and any such purported assignment by any
party without such consent shall be void.
14.7. Waivers and Amendments. Any waiver of any term or condition of
this Agreement, or any amendment or supplementation of this
Agreement, shall be effective only if in writing and signed by the
parties hereto. A waiver of any breach or failure to enforce any
of the terms or conditions of this Agreement shall not in any way
affect, limit or waive a party's rights hereunder at any time to
enforce strict compliance thereafter with every term or condition
of this Agreement.
14.8. Public Announcements. The parties agree that they shall issue a
mutual announcement relating to this transaction no later than one
(1) business day prior to Insignia's earnings release, presently
scheduled for October 20, 1999.
14.9. Severability. If any term or provision of this Agreement shall, in
any jurisdiction, be invalid or unenforceable, such term or
provision shall be ineffective as to such jurisdiction to the
extent of such invalidity or unenforceability without invalidating
or rendering unenforceable such term or provision in any other
jurisdiction, or affecting any other provision of this Agreement.
14.10. Arbitration. With the exception of any matter involving a request
for injunctive relief, any dispute regarding the validity, the
terms or any aspect of this Agreement, or any act which allegedly
has or would violate any provision of this Agreement, will be
submitted to binding arbitration and shall be administered by the
JAMS/Endispute, Inc. ("JAMS") or the American Arbitration
Association ("AAA"), which shall be the exclusive remedy for such
claim or dispute. The selection of JAMS or AAA will be at the
option of the claimant, and the matter shall be conducted in
accordance with the rules for commercial arbitration then in
effect for the tribunal selected. The arbitrator shall be appointed
by the arbitration body and shall be a retired judge or attorney
licensed to practice law in California having more than five years
of substantial experience in litigation of similar disputes. Unless
the parties otherwise agree, the arbitrator shall apply the
California Evidence Code to proceedings and the substantive
California and federal law applicable to the claim asserted, as
though the matter were heard in the courts of those jurisdictions
located in the State of California. The arbitrator shall not have
the power to commit errors of law or legal reasoning, and the award
may be vacated pursuant to California Code of Civil Procedure
Sections 1286.2 or 1286.6 for any such error. The arbitration shall
be conducted in Orange County, California, at a site to be
determined by the arbitrator. Unless specifically awarded by the
arbitrator, each party shall bear the cost of its own attorneys'
fees and expenses.
Page 10 of 14
<PAGE>
14.11. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to
be an original instrument, but all such counterparts together
shall constitute but one agreement. Facsimile signatures shall be
treated as if they were originals.
[SIGNATURES ON FOLLOWING PAGE]
Page 11 of 14
<PAGE>
IN WITNESS WHEREOF, authorized officers of the parties hereto have
duly executed this License, Distribution, and Asset Purchase Agreement as of
the Effective Date.
On behalf of:
Insignia Solutions, Inc.
By: BY: /s/ RICHARD M. NOLING
-------------------------------------------
Name: Richard M. Noling
-------------------------------------------
Title: President & CEO
-------------------------------------------
Date: October 6, 1999
-------------------------------------------
Insignia Solutions, Plc.
By: BY: /s/ RICHARD M. NOLING
-------------------------------------------
Name: Richard M. Noling
-------------------------------------------
Title: President & CEO
-------------------------------------------
Date: October 6, 1999
-------------------------------------------
FWB Software, LLC
By: BY: /s/ JAMES R. HALE
-------------------------------------------
Name: James R. Hale
-------------------------------------------
Manager of Parallax Capital Partners, LLC,
Title: Manager of FWB Software, LLC
-------------------------------------------
Date: October 6, 1999
-------------------------------------------
Page 12 of 14
<PAGE>
SCHEDULE 3.1
DOS LICENSES REMAINING AS OF EFFECTIVE DATE
As of the Effective Date, the number of DOS licenses remaining under the DOS
License is twenty four thousand, five hundred twenty-nine (24,529).
Page 13 of 14
<PAGE>
SCHEDULE 5.1
LICENSED TRADEMARKS
[LOGO]
RealPC-Registered Trademark-
Insignia-TM-
Insignia Solutions-TM-
Page 14 of 14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,797
<SECURITIES> 0
<RECEIVABLES> 280
<ALLOWANCES> 91
<INVENTORY> 4
<CURRENT-ASSETS> 7,024
<PP&E> 2,848
<DEPRECIATION> (2,223)
<TOTAL-ASSETS> 13,284
<CURRENT-LIABILITIES> 7,245
<BONDS> 0
4,059
0
<COMMON> 4,304
<OTHER-SE> (2,324)
<TOTAL-LIABILITY-AND-EQUITY> 13,284
<SALES> 6,471
<TOTAL-REVENUES> 6,837
<CGS> 3,296
<TOTAL-COSTS> 18,492
<OTHER-EXPENSES> (380)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,275)
<INCOME-TAX> (1,316)
<INCOME-CONTINUING> (9,959)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,959)
<EPS-BASIC> (0.77)
<EPS-DILUTED> (0.77)
</TABLE>
