<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR,
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FROM 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 identification
incorporation or organization) number)
----------------------
41300 CHRISTY STREET THE MERCURY CENTRE, WYCOMBE LANE
FREMONT WOOBURN GREEN
CALIFORNIA 94538 HIGH WYCOMBE, BUCKS HP10 0HH
UNITED STATES OF AMERICA UNITED KINGDOM
(510) 360-3700 (44) 1628-539500
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
AND PRINCIPAL PLACES OF BUSINESS)
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 [ ]
As of November 10, 2000, there were 14,283,050 Ordinary shares of L0.20
each nominal value, outstanding.
<PAGE>
INSIGNIA SOLUTIONS PLC
PART 1 - FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet at September 30, 2000
and December 31, 1999 (Unaudited).................................................................3
Condensed Consolidated Statement of Operations for the three months
and nine months ended September 30, 2000 and 1999 (Unaudited).....................................4
Condensed Consolidated Statement of Cash Flows for the nine months
ended September 30, 2000 and 1999 (Unaudited).....................................................5
Notes to Unaudited Condensed Consolidated Financial Statements....................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................24
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................25
SIGNATURES .................................................................................................26
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSIGNIA SOLUTIONS PLC
CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------- -------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 723 $ 4,677
Restricted cash 120 120
Cash and cash equivalents held in escrow - 1,000
Accounts receivable, net of allowances
of $42 and $131, respectively 2,938 189
Prepaid and other current assets 927 1,038
-------------------- -------------------
Total current assets 4,708 7,024
Property and equipment, net 520 625
Cash and cash equivalents held in escrow 4,975 5,060
Restricted cash 250 250
Other noncurrent assets - 325
-------------------- -------------------
$ 10,453 $ 13,284
==================== ===================
LIABILITIES,
MANDATORY REDEEMABLE
AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 609 $ 707
Accrued liabilities 1,724 1,674
Accrued royalties 2,618 2,327
Income taxes payable 769 188
Deferred revenue 830 1,349
Convertible debt 1,000 1,000
Line of credit-related party 2,063 -
-------------------- -------------------
Total current liabilities 9,613 7,245
-------------------- -------------------
Contingencies (Note 6)
Mandatorily redeemable capital - 2,619
Mandatorily redeemable warrants 1,440 1,440
-------------------- -------------------
Total mandatorily redeemable 1,440 4,059
-------------------- -------------------
Shareholders' equity (deficit):
Preferred shares - -
Ordinary shares 4,719 4,304
Additional paid-in capital 38,181 35,106
Accumulated deficit (43,039) (36,969)
Cumulative currency translation adjustment (461) (461)
-------------------- -------------------
Total shareholders' equity (deficit) (600) 1,980
-------------------- -------------------
$ 10,453 $ 13,284
==================== ===================
</TABLE>
See accompanying notes.
Page 3
<PAGE>
INSIGNIA SOLUTIONS PLC
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenues:
License $ 2,349 $ 1,672 $ 6,166 $ 5,270
Service 541 82 1,286 299
---------------- --------------- ---------------- ----------------
Total net revenues 2,890 1,754 7,452 5,569
---------------- --------------- ---------------- ----------------
Cost of net revenues:
License 1,245 658 2,470 2,573
Service 83 116 352 424
---------------- --------------- ---------------- ----------------
Total cost of net revenues 1,328 774 2,822 2,997
---------------- --------------- ---------------- ----------------
Gross margin 1,562 980 4,630 2,572
---------------- --------------- ---------------- ----------------
Operating expenses:
Sales and marketing 1,379 1,292 3,839 4,352
Research and development 1,495 1,459 4,503 4,477
General and administrative 891 822 2,760 2,325
---------------- --------------- ---------------- ----------------
Total operating expenses 3,765 3,573 11,102 11,154
---------------- --------------- ---------------- ----------------
Operating loss (2,203) (2,593) (6,472) (8,582)
Interest income (expense), net 20 101 (86) 357
Other income (expense), net 20 (3) 44 (53)
---------------- --------------- ---------------- ----------------
Loss before income taxes (2,163) (2,495) (6,514) (8,278)
Provision (benefit) for income taxes 147 (465) (444) (421)
---------------- --------------- ---------------- ----------------
Net loss $(2,310) $(2,030) $(6,070) $(7,857)
================ =============== ================ ================
Net loss per share:
Basic $(0.16) $ (0.16) $ (0.43) $ (0.62)
================ =============== ================ ================
Diluted $(0.16) $ (0.16) $ (0.43) $ (0.62)
================ =============== ================ ================
Weighted average equivalent shares:
Basic 14,251 12,853 14,180 12,775
================ =============== ================ ================
Diluted 14,251 12,853 14,180 12,775
================ =============== ================ ================
</TABLE>
See accompanying notes.
Page 4
<PAGE>
INSIGNIA SOLUTIONS PLC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,070) $ (7,857)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 320 463
Other (63) (63)
Net changes in assets and liabilities:
Restricted cash - 66
Accounts receivable, net (2,749) 1,392
Prepaid and other current assets 111 288
Other noncurrent assets 325 57
Accounts payable (98) (1,026)
Accrued liabilities 113 (703)
Accrued royalties 291 (2,269)
Deferred revenue (519) 2,022
Income taxes 581 (516)
--------------- --------------
Net cash used in operating activities (7,758) (8,146)
--------------- --------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 3 137
Purchases of property and equipment (218) (179)
Product line sale proceeds held in escrow (215) (250)
Product line sale proceeds released from escrow 1,300 3,360
--------------- --------------
Net cash provided by investing activities 870 3,068
--------------- --------------
Cash flows from financing activities:
Payments made under capital leases - (51)
Proceeds from line of credit 2,000 -
Proceeds from issuance of shares, net 934 447
--------------- --------------
Net cash provided by financing activities 2,934 396
--------------- --------------
Net decrease in cash and cash equivalents (3,954) (4,682)
Cash and cash equivalents at beginning of the period 4,677 6,798
--------------- --------------
Cash and cash equivalents at end of the period $ 723 $ 2,116
=============== ==============
</TABLE>
See accompanying notes.
Page 5
<PAGE>
INSIGNIA SOLUTIONS PLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements are unaudited. However, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary for a fair presentation of the financial
position and results for the interim period have been included. These unaudited
condensed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December 31, 1999
included in Insignia Solutions plc's ("Insignia") 1999 Annual Report and Form
10-K.
Insignia's condensed 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 prior
eight quarters, Insignia has incurred an aggregate loss from operations totaling
$21.4 million. At September 30, 2000, Insignia's working capital deficit totaled
$4.9 million, compared to working capital of $2.7 million at September 30, 1999.
Insignia 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 associated with the
Jeode platform, Insignia 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.
Insignia believes that with $3.0 million available under a line of credit,
entered into on March 20, 2000 and expected cash flow from operations, Insignia
will have sufficient funds to meet Insignia's operating and capital requirements
through the end of fiscal year 2000. However, if additional funds are needed
there can be no assurance that Insignia will be able to obtain additional
funding 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 Insignia's business, operating results and financial
condition. Insignia'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,
Insignia'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.
Insignia, which is listed on the Nasdaq National Markets, was not in compliance
with Nasdaq's continued listing requirements on net tangible assets at September
30, 2000.
The results of operations for the three months and nine months ended September
30, 2000 are not necessarily indicative of the results to be expected for the
entire fiscal year, which ends on December 31, 2000.
Page 6
<PAGE>
NOTE 2. INCOME TAXES
Insignia's benefit for income taxes for the nine months ended September 30,
2000 primarily represents a tax refund from the U.K. government on taxes paid
in the years 1995-1997. Insignia's provision for income taxes for the three
months ending September 30, 2000 and three and nine months ended September
30, 1999 primarily represents certain non-U.S. taxes arising from sales to
Japan. Insignia 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 Insignia's financial statements or tax returns. In estimating future tax
consequences, Insignia generally considers all expected future events other
than enactments of changes in the tax law or rates.
NOTE 3. 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. Diluted net income (loss) per
share is computed using the weighted average number of ordinary shares and
ordinary share equivalents 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.
Statement regarding computation of loss per share (in thousands except per share
data, unaudited):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss $ (2,310) $ (2,030) $ (6,070) $ (7,857)
=============== =============== =============== ===============
CALCULATION OF BASIC LOSS PER SHARE:
Weighted average number of ordinary shares
outstanding used in computation 14,251 12,853 14,180 12,775
=============== =============== =============== ===============
Basic loss per share $ (0.16) $ (0.16) $ (0.43) $ (0.62)
=============== =============== =============== ===============
CALCULATION OF DILUTED LOSS PER SHARE:
Weighted average number of ordinary shares
outstanding used in computation 14,251 12,853 14,180 12,775
Net effect of dilutive stock options outstanding - - - -
--------------- --------------- --------------- ---------------
14,251 12,853 14,180 12,775
=============== =============== =============== ===============
Diluted loss per share $ (0.16) $ (0.16) $ (0.43) $ (0.62)
=============== =============== =============== ===============
</TABLE>
NOTE 4. COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"), requires that all items recognized under accounting
standards as components of comprehensive earnings be reported in an annual
statement that is displayed with the same
Page 7
<PAGE>
prominence as other annual financial statements. FAS 130 also requires that an
entity classify items of other comprehensive earnings by their nature in an
annual financial statement. The accumulated other comprehensive loss at December
31, 1998 related to cumulative currency translation adjustments.
Total comprehensive loss was not different from the net loss reported for the
nine months ended September 30, 2000 and September 30, 1999.
NOTE 5. NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 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 SFAS Statement No. 133" ("SFAS
137"). SFAS 137 defers the effective date of SFAS 133 until June 15, 2000.
Insignia will adopt SFAS 133 in 2001. Insignia expects the adoption of SFAS
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.
Insignia does not believe SAB 101 will have a material impact on the financial
statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25." This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation did not have a material impact on the financial
statements.
NOTE 6. CONTINGENCIES
On February 5, 1998 Insignia completed the disposal of its NTRIGUE technology to
Citrix Systems Inc. ("Citrix") for $17.7 million. As part of the disposal,
Insignia transferred 45 employees to Citrix, of which 43 were development
engineers.
Under the terms of the disposal agreement $9.0 million was paid to Insignia 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 Insignia would be required to indemnify
Citrix. Of this amount, $2.5 million, $0.9 million, $1.0 million and $0.3
million were released to Insignia in February 1999, August 1999, February 2000
and September 2000, respectively.
On January 29, 1999, Insignia received an indemnity claim from 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 Insignia and Citrix under which
Citrix purchased Insignia's NTRIGUE product line in February 1998.
Page 8
<PAGE>
Citrix's indemnity claim is based on assertions made by GraphOn Corporation
("GraphOn") in January of 1998 and 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
judgment 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
Insignia may have used GraphOn's confidential information to develop certain of
Insignia's products, possibly including products Insignia sold to Citrix in
February 1998. The Court dismissed the complaint, but Citrix has subsequently
filed an appeal. Insignia believes that any misappropriation or similar
assertions by GraphOn are without merit or basis. Accordingly, Insignia contests
Citrix's indemnity claim.
On October 4, 1999, Insignia 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
$1.3 million from the escrow. GraphOn answered the complaint, and claimed it had
not made any claims of misappropriation against Insignia or Citrix. The case is
pending.
On March 15, 2000, GraphOn announced it had filed a suit against Citrix and
Insignia 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 Insignia's action against
GraphOn. Insignia believes GraphOn's claims are without merit. The case is
pending.
NOTE 7. SEGMENT INFORMATION
Statement of Financial Accounting Standards 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"), provides for segment
reporting based upon 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 Insignia's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers
Insignia operates in a single industry segment providing virtual machine
technology which enables software applications and operating systems to be run
on various computer platforms. In the third quarter of 2000, Victor Data Systems
Company, Ltd. ("VDS"), Ravisent Technologies Internet Appliance Group, Inc.
("Ravisent"), and Bsquare Corporation ("Bsquare") accounted for 38%, 24% and 19%
of total revenues, respectively. In the third quarter of 1999, Quantum
Corporation and Silicon Graphics Inc. accounted for 43% and 28% of total
revenues, respectively. No other customer accounted for 10% or more of
Insignia's total revenues during the third quarter of 2000 and 1999.
Page 9
<PAGE>
GEOGRAPHIC INFORMATION
Financial information by geographical region is summarized below (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers:
United States $ 2,890 $ 1,598 $ 7,421 $ 4,952
International - 156 31 617
------------- ------------ ------------ -------------
Consolidated $ 2,890 $ 1,754 $ 7,452 $ 5,569
============= ============ ============ =============
Intercompany revenues:
United States $ - $ 76 $ - $ 411
International 1,128 61 2,789 224
------------- ------------ ------------ -------------
Consolidated $ 1,128 $ 137 $ 2,789 $ 635
============= ============ ============ =============
Operating loss:
United States $ (946) $ (377) $ (1,931) $ (2,171)
International (1,257) (2,216) (4,541) (6,411)
------------- ------------ ------------ -------------
Consolidated $ (2,203) $ (2,593) $ (6,472) $ (8,582)
============= ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
September 30,
-------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Identifiable assets:
United States $ 4,175 $ 2,526
International 24,106 20,043
Intercompany items and eliminations (17,828) (11,511)
------------ -------------
Consolidated $ 10,453 $ 11,058
============ =============
</TABLE>
All of the international revenues and substantially all of the international
identifiable assets relate to Insignia's operations in the United Kingdom.
Intercompany sales are accounted for at prices intended to approximate those
that would be charged to unaffiliated customers.
Revenue by geographic area for the quarter ended September 30, 2000 is as
follows (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. Exports Europe Total
-------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
OEM $ 1,070 $ 111 $ - $ 1,181
Distributor 601 1,088 - 1,689
End User 20 - - 20
-------------- ---------------- ------------- --------------
Total $ 1,691 $ 1,199 $ - $ 2,890
============== ================ ============= ==============
Percentage of total
revenue 59% 41% 0% 100%
============== ================ ============= ==============
</TABLE>
Page 10
<PAGE>
Revenue by geographic area for the quarter ended September 30, 1999 is as
follows (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. Exports Europe Total
-------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C>
OEM $ 1,250 $ - $ - $ 1,250
Distributor 328 8 70 406
End User 12 - 86 98
-------------- ---------------- ------------- --------------
Total $ 1,590 $ 8 $ 156 $ 1,754
============== ================ ============= ==============
Percentage of total
revenue 91% -% 9% 100%
============== ================ ============= ==============
</TABLE>
There were no European countries that accounted for more than 10% of total
revenue.
NOTE 8. PRIVATE PLACEMENT AND WARRANTS
In December 1999, Insignia issued 1,063,515 Ordinary Shares in ADS form at a
price of $4.23 per share through a private placement. Insignia received $4.5
million less offering expenses totaling $0.4 million. Along with ADSs, Insignia
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, Insignia 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
shareholder if Insignia 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 on December 9, 1999 was not
released to Insignia by July 10, 2000, the exercise price of the warrants could
have been adjusted to the market price on that date, if that market price was
lower than $5.29 per share. The market price on July 10, 2000 exceeded $5.29 per
share and consequently no adjustment was required.
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 in
the warrant agreement, 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
Page 11
<PAGE>
issued in the private placement which was March 28, 2000, 4 months after the
effective date of the registration statement, and 8 months after the effective
date of the registration statement.
If Insignia 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. In addition, if at least $4.75
million of funds held in escrow by Citrix is not released to Insignia 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 March 28, 2001. In February 2000 and September 2000, $1.0
million and $0.3 million, respectively, was released from escrow to Insignia.
Through the date of the filing of this 10-Q, there have been eleven adjustment
dates. However, as calculated, the average share price of Insignia on those
adjustment dates has exceeded the adjustment price of $4.23 per share and
consequently no adjustment has occurred.
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%, 28.5165% and 25% of the $4.23 price
determined when the warrants were issued; the number of ordinary shares
outstanding is the number outstanding on November 10, 2000, which is 14,283,050;
there was no adjustment of the number of ADSs issuable upon exercise of the
warrants; and the exchange rate remains at $1.50 per British 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) 391,529 2.67%
50% ($2.115) 1,239,303 7.98%
28.51650% ($1.206248) 3,548,483 19.90%
25% ($1.0575) 4,454,127 23.77%
</TABLE>
Insignia 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 was reclassified as ordinary shares and $2.279 million was
reclassified as additional paid-in capital upon the registration statement
becoming effective on March 28, 2000.
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 to
the purchasing shareholders, should Insignia complete a major transaction, such
as a takeover, during the life of the warrants.
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<PAGE>
NOTE 9. CONVERTIBLE PROMISSORY NOTE
On October 20, 1999, Insignia signed a convertible promissory note in favor of
Quantum Corporation ("Quantum") for $1.0 million. The note is convertible at
Quantum's option to Insignia'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. Insignia has the option to prepay the note in
whole or in part upon 30 days written notice to Quantum.
NOTE 10. LINE OF CREDIT
On March 20, 2000, Insignia entered into an agreement with a director on
Insignia's Board of Directors whereby he would provide Insignia 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 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 per annum at the repayment date. As of September 30, 2000, $2.0 million
has been drawn against the line of credit. Full repayment of any outstanding
loan is due on the earlier of March 20, 2001 or completion of a debt or equity
financing.
NOTE 11. RELATED PARTY TRANSACTION
During the three months ended September 30, 2000 and the nine months ended
September 30, 2000, Insignia recognized revenue of $25,000 and $280,000,
respectively, from Phoenix Technologies Ltd. A director on Insignia's Board of
Directors is also the CEO of Phoenix Technologies Ltd.
Page 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
in Part I - Item 1 of this Form 10-Q and the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" set forth in
Insignia's Form 10-K for the year ended December 31, 1999 (the "Form 10-K").
FUTURE OPERATING RESULTS
This Form 10-Q contains 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, exchange rate
fluctuations and Insignia'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 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; Insignia's ability to deliver products
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 Insignia files with the U.S.
Securities and Exchange Commission. There can be no assurance that Insignia 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
Insignia's shares.
Insignia continues to face significant risks associated with the successful
execution of its Jeode 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 associated with the
Jeode platform, Insignia 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.
Insignia has experienced operating losses in each quarter since the second
quarter of 1996. To achieve profitability, Insignia will have to continue to
increase its revenue. Insignia's ability to increase revenues depends upon the
success of its Jeode product line. Jeode is a relatively new product and it may
not achieve market acceptance. If Insignia 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, Insignia's
current revenue will be insufficient to sustain its business.
Page 14
<PAGE>
The following table sets forth the unaudited condensed consolidated results of
operations as a percentage of total revenues for the three and nine month
periods ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------------- ------------------------------------
2000 1999 2000 1999
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net revenues:
License 81.3% 95.3% 82.7% 94.6%
Service 18.7% 4.7% 17.3% 5.4%
----------------- ----------------- ---------------- -----------------
Total net revenues 100.0% 100.0% 100.0% 100.0%
----------------- ----------------- ---------------- -----------------
Cost of net revenues:
License 43.1% 37.5% 33.2% 46.2%
Service 2.9% 6.6% 4.7% 7.6%
----------------- ----------------- ---------------- -----------------
Total cost of net revenues 46.0% 44.1% 37.9% 53.8%
----------------- ----------------- ---------------- -----------------
Gross margin 54.0% 55.9% 62.1% 46.2%
----------------- ----------------- ---------------- -----------------
Operating expenses:
Sales and marketing 47.7% 73.6% 51.5% 78.2%
Research and development 51.7% 83.2% 60.5% 80.4%
General and administrative 30.8% 46.9% 37.0% 41.7%
----------------- ----------------- ---------------- -----------------
Total operating expenses 130.2% 203.7% 149.0% 200.3%
----------------- ----------------- ---------------- -----------------
Operating loss (76.2%) (147.8%) (86.9%) (154.1%)
Interest income (expense), net 0.7% 5.8% (1.1%) 6.4%
Other income (expense), net 0.7% (0.2%) 0.6% (0.9%)
----------------- ----------------- ---------------- -----------------
Loss before income taxes (74.8%) (142.2%) (87.4%) (148.6%)
Provision (benefit) for income taxes 5.1% (26.5%) (6.0%) (7.5%)
----------------- ----------------- ---------------- -----------------
Net loss (79.9%) (115.7%) (81.4%) (141.1%)
================= ================= ================ =================
</TABLE>
Page 15
<PAGE>
OVERVIEW
Insignia, 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, after a strategic review of Insignia and based upon 12 years
of emulation software development experience, Insignia announced its
intention to launch a new product line called the Jeode-TM- platform, based
on Insignia's Embedded Virtual Machine ("EVM"-TM-) technology. The Jeode
platform is Insignia'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 Insignia'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 Insignia 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.
Insignia's principal product line in recent years was 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. Insignia also shipped RealPC, a
low cost software product that allowed 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, Insignia signed an exclusive licensing arrangement with
FWB Software, LLC ("FWB"). Under the arrangement FWB will pay Insignia a
royalty based on an earn-out of FWB's future revenues from the product lines
and Insignia will be paid as those revenues are achieved. Upon achieving a
certain revenue threshold, Insignia will transfer the SoftWindows and RealPC
product lines to FWB at no additional consideration. This arrangement allows
Insignia to focus exclusively on its Jeode platform business strategy.
REVENUES
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- -------------------------------
2000 1999 2000 1999
-------------- --------------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
License revenue $ 2,349 $ 1,672 $ 6,166 $ 5,270
Service revenue 541 82 1,286 299
-------------- --------------- ------------- ------------
Total net revenue $ 2,890 $ 1,754 $ 7,452 $ 5,569
============== =============== ============= ============
</TABLE>
The Jeode product line was the primary business of Insignia for the third
quarter of 2000. In 1999, Insignia shipped two principal product lines: the
Jeode platform and SoftWindows.
Page 16
<PAGE>
Revenue from the Jeode product line is 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. Insignia 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 the third quarter of 2000, total revenues increased by 65% compared to total
revenues for the third quarter of 1999. In the nine months ended September 30,
2000, total revenues increased by 34% compared to total revenues for the first
nine months of 1999. The increase is primarily due to the ramp up of the Jeode
platform product line. The Jeode platform is now the principal product of
Insignia accounting for 99% of the third quarter total revenue and 98% of the
total revenue for the nine months ended September 30, 2000. The Jeode platform
accounted for 43% of total revenue for the three months ended September 30, 1999
and 14% of total revenues for the nine months ended September 30, 1999. Insignia
expects to see continued acceleration in the adoption of the Jeode platform.
However, due to revenue recognition factors, not all this growth will
necessarily translate into revenue at the time of sale.
License revenue and service revenue accounted for 81% and 19%, respectively, of
total revenues for the three months and nine months ended September 30, 2000.
For the nine months ended September 30, 2000, license revenue and service
revenue accounted for 83% and 17%, respectively, of total revenues. For both the
three months and nine months ended September 30, 1999, license revenue and
service revenue accounted for 95% and 5%, respectively.
License revenue increased 40% in the third quarter of 2000 compared to license
revenues in the third quarter of 1999. For the nine months ended September 30,
2000, license revenue increased 17% compared to the same period in 1999. Jeode
license revenues for the three months and nine months ended September 30, 2000
accounted for 100% and 99%, respectively, of total license revenues. Jeode
license revenues for the three months and nine months ended September 30, 1999
accounted for 45% and 14%, respectively. SoftWindows license revenues for the
three months and nine months ended September 30, 2000 accounted for 0% and 1% of
total license revenues, respectively. SoftWindows license revenues accounted for
55% and 86%, respectively, of the license revenues for the three months and nine
months ended September 30, 1999.
Service revenue in the third quarter of 2000 was 560% higher than service
revenue in the third quarter of 1999. Service revenue for the nine months ended
September 30, 2000 was 331% higher than service revenue for the same period in
1999. The increase is primarily due to increased Jeode engineering and Jeode
support contracts. Jeode service revenues for the three months and nine months
ended September 30, 2000 accounted for 96% and 93%, respectively, of total
service revenues. Jeode service revenues for the three months and nine months
ended September 30, 1999 accounted for 0% and 2% of total service revenues,
respectively. SoftWindows service revenues for the three months and nine months
ended September 30, 2000 accounted for 4% and 7% of total service revenues,
respectively. SoftWindows service revenues accounted for 100% and 98%,
respectively, of the service revenue for the three months and nine months ended
September 30, 1999.
Page 17
<PAGE>
Revenue from Insignia's SoftWindows products accounted for 1% and 2% of total
revenue in the three months and nine months ended September 30, 2000 compared to
57% and 86% of total revenues for the same periods ended September 30, 1999. The
decline is a result of discontinuing the SoftWindows product line and launching
the Jeode platform product line. The SoftWindows revenue in the third quarter of
2000 is primarily from UNIX-based maintenance contracts that Insignia is under
contract to service through the third quarter of 2000.
Insignia distributed its SoftWindows packaged products within the United States
and internationally through multiple distributors and resellers. Insignia
offered certain return privileges to its customers including product exchange
privileges and price protection. Insignia 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.
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>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
OEM's:
Quantum * 43% 20% 13%
Gemstar * - 24% -
Silicon Graphics - 28% - *
Ravisent 24% - 9% -
All OEM's: 41% 72% 63% 23%
Distributors:
VDS 38% - 19% -
Bsquare 19% - 9% -
All Distributors: 58% 6% 34% 46%
</TABLE>
* Less than 10%
Sales to customers outside the United States, derived mainly from customers in
Europe and Asia, represented approximately 41% of total revenues in the three
months ended September 30, 2000, 9% of total revenues in the three months ended
September 30, 1999, 22% of total revenues in the nine months ended September 30,
2000 and 18% of total revenues in the nine months ended September 30, 1999.
Insignia markets Jeode to Internet appliance and embedded device manufacturers
in the United States, Europe and Japan. Insignia distributes its Jeode product
line through direct sales, multiple distributors and strategic partners.
Fluctuations in currency exchange rates did not have a material impact on total
revenues in the three or nine months ended September 30, 2000 or September 30,
1999. However, fluctuations in currency exchange rates could affect Insignia's
future revenues and results of operations.
Page 18
<PAGE>
COST OF REVENUES AND GROSS MARGIN
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Cost of license revenue $ 1,245 $ 658 $ 2,470 $ 2,573
Gross margin: license revenue 47% 61% 60% 51%
Cost of service revenue 83 116 352 424
Gross margin: service revenue 85% (41%) 73% (42%)
Total cost of revenues $ 1,328 $ 774 $ 2,822 $ 2,997
Gross margins: total revenues 54% 56% 62% 46%
</TABLE>
Cost of license revenue comprises mostly 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.
Insignia believes that the significant factors affecting the Jeode gross margin
will continue to include pricing of the development license, pricing of the unit
usage and royalties to third parties such as Sun. In early 1999, Insignia signed
a five-year agreement with Sun under which Sun established Insignia as an
authorized Virtual Machine provider. Under this agreement Insignia will pay Sun
a per unit royalty on each Jeode-enabled embedded product shipped by Insignia's
customers, plus a royalty on all development licenses put in place between
Insignia and its customers. License revenue gross margins in the quarter ended
September 30, 2000 were 47%, compared to 61% for the same period in 1999. The
decrease in the third quarter 2000 license gross margin is due to the completion
of an incremental, one-time, sales opportunity that had a low margin and also by
costs associated with Insignia's legacy business. For the nine months ended
September 30, 2000, license revenue gross margins were 60% compared to 51% for
the same period in 1999.
Gross margin for service revenue increased in the third quarter of 2000 to 85%
from (41%) in the same period of 1999. For the nine months ended September 30,
2000, service revenue gross margins were 73% compared to (42%) for the same
period in 1999. The increase is a result of Jeode engineering and maintenance
revenue and the wind down of the SoftWindows UNIX maintenance contract. Service
revenue gross margins are generally lower than license revenue gross margins
because many initial customers require non-recurring engineering services, which
generate lower gross margin than license revenues.
Page 19
<PAGE>
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Sales and marketing $ 1,379 $ 1,292 $ 3,839 $ 4,352
Percentage of total revenues 48% 74% 52% 78%
Research and development $ 1,495 $ 1,459 $ 4,503 $ 4,477
Percentage of total revenues 52% 83% 60% 80%
General and administrative $ 891 $ 822 $ 2,760 $ 2,325
Percentage of total revenues 31% 47% 37% 42%
</TABLE>
Sales and marketing expenses include advertising and promotional expenses, trade
shows, personnel and related overhead costs, and salesperson commissions. Sales
and marketing expenses increased by 7% in the quarter ended September 30, 2000
from the quarter ended September 30, 1999, and decreased by 12% for the nine
months ended September 30, 2000 from the same period of 1999. The nine month
decrease is due to eliminating expenditures on SoftWindows advertising programs
and staffing. The three month increase is due to staffing new hires. Insignia
anticipates a moderate increase in sales and marketing expenses in the next few
quarters as Insignia continues to increase its marketing and direct sales
organization for its Jeode product line. Insignia has established a direct sales
force in the United States, Europe and Japan. Insignia has also developed
relationships with strategic partners to leverage the Jeode technology.
Research and development expenses consist primarily of personnel costs, overhead
costs relating to occupancy and equipment depreciation. Research and development
expenses rose by 2% in the three months ended September 30, 2000 over the same
period in 1999. Research and development expenses increased by less than 1% in
the nine months ended September 30, 2000 over the nine months ended September
30, 1999. Research and development expenses are expected to increase moderately
over the next several quarters. 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 2000 and 1999, no development expenditures were capitalized,
as there were no amounts that qualified for capitalization.
General and administrative expenses consist primarily of personnel and related
overhead costs for finance, legal, information systems, human resources and
general management. General and administrative expenses increased by 8% in the
three months ended September 30, 2000 over the same period of 1999, and by 19%
for the nine months ended September 30, 2000 from the same period of 1999. The
increase for the three months ended September 30, 2000 is due to increased legal
expenses. The nine months ended September 30, 1999 included a large reduction in
expense as a result of adjusting a debt reserve for a debt that was collected.
Excluding the impact of the bad debt reserve adjustment, general and
administrative expenses decreased by 1% for the nine months ended September 30,
2000 over the same period of 1999. The decline is due to reduced headcount and
reduced legal fees. General and administrative expenses are expected to increase
moderately over the next several quarters.
Page 20
<PAGE>
INTEREST INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Interest income (expense), net $ 20 $ 101 $ (86) $ 357
Percentage of total revenues 1% 6% (1%) 6%
</TABLE>
Interest income (expense), net decreased from $101,000 in the three months
ended September 30, 1999 to $20,000 in the three months ended September 30,
2000 due primarily to decreased interest income earned on Insignia's cash and
cash equivalents and interest expense on debt. For the nine months ended
September 30, 2000, interest income (expense), net decreased from income of
$357,000 to expense of $86,000. The decrease is due to reduced interest
income as a result of lower cash and cash equivalent balances, debt and a one
time commitment fee expense of $300,000 for the $5 million credit line
secured in the first quarter of 2000.
OTHER INCOME (EXPENSE), NET
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Other income (expense), net $ 20 $ (3) $ 44 $ (53)
Percentage of total revenues 1% -% 1% (1%)
</TABLE>
Other income (expense), net increased from an expense of $3,000 in the three
months ended September 30, 1999 to income of $20,000 in the three months ended
September 30, 2000, and primarily comprised foreign exchange gains (losses) in
both periods. In the nine months ended September 30, 2000, other income
(expense), net increased from an expense of $53,000, for the same period last
year, to income of $44,000.
Approximately 99% of Insignia's total revenues and over 35% of its operating
expenses are denominated in United States dollars. Most of the remaining
revenues and expenses of Insignia are British pound sterling denominated and
consequently Insignia is exposed to fluctuations in British pound sterling
exchange rates. To hedge against this currency exposure, Insignia 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
September 30, 2000 and December 31, 1999. However, currency fluctuations could
harm Insignia's results of operations in the future.
Insignia 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. Insignia attempts to limit this
exposure by investing primarily in short-term securities.
Page 21
<PAGE>
PROVISION (BENEFIT) FOR INCOME TAXES
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Provision (benefit) for income $ 147 $ (465) $ (444) $ (421)
taxes
</TABLE>
Insignia's benefit for income taxes for the nine months ended September 30,
2000 primarily represents a tax refund from the U.K. government on taxes paid
in the years 1995-1997. Insignia's provision for income taxes for the three
months ending September 30, 2000 and three and nine months ended September
30, 1999 primarily represents certain non-U.S. taxes arising from sales to
Japan. Insignia 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 realization of these tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
--------------- ------------------
(in thousands)
<S> <C> <C>
Cash, cash equivalents and $ 1,093 $ 2,486
restricted cash
Cash and cash equivalents $ 4,975 $ 5,990
held in escrow
Working capital (deficit) $ (4,905) $ 2,717
Net cash used in operating $ (7,758) $ (8,146)
activities for the nine month period
Line of credit available $ 3,000 -
</TABLE>
Insignia has transitioned its product focus from compatibility products to its
Jeode product line based on Insignia's EVM technology. This change in product
focus has resulted in a redirection of available resources from Insignia'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, Insignia's financial position has
weakened. Cash used in operating activities in the third quarter of 2000 totaled
$1.6 million compared to $2.1 million in the second quarter of 2000. For the
nine months ended September 30, 2000, cash used in operating activities totaled
$7.8 million compared to $8.1 million for the same period in 1999.
Insignia's cash, cash equivalents, restricted cash, and funds held in escrow,
were $6.1 million at September 30, 2000, a decrease of $2.1 million from $8.5
million at September 30, 1999. Working capital decreased to $(4.9) million at
September 30, 2000, from $2.7 million at September 30, 1999. The principal
source of working capital came from a private placement funding, a
convertible promissory note, sale of investment, receivable collections, line
of credit and monies released from escrow.
Page 22
<PAGE>
Insignia sold its investment in Bristol Technology Inc. for $325,000 in cash on
July 10, 2000. This amount equals the historical cost and carrying value on
Insignia's consolidated balance sheet and as a result, Insignia did not record
any gain or loss for this transaction.
On October 20, 1999, Insignia signed a convertible promissory note in favor of
Quantum Corporation ("Quantum") for $1.0 million. The note is convertible at
Quantum's option to Insignia'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, Insignia entered into an agreement with a director on
Insignia's Board of Directors whereby he would provide Insignia a $5.0 million
line of credit. The interest rate on amounts drawn down is at prime plus 2% per
annum 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. As of September 30, 2000, $2.0
million had been drawn against the line of credit.
Insignia believes that with $3.0 million available under the line of credit, and
expected cash flow from operations Insignia will have sufficient funds to meet
Insignia's operating and capital requirements through the end of fiscal year
2000. However, if additional funding is required, there can be no assurance that
Insignia will be able to obtain additional funding on acceptable terms or at
all. To the extent Insignia is not able to obtain sufficient funding, it will be
required to substantially modify its business plan and curtail its operations.
Insignia has engaged the services of an investment banking company to review
funding options beyond the end of 2000.
Insignia'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 Insignia's liquidity.
Factors such as price reductions, the introduction and market acceptance of new
products and product returns have and may contribute to this quarterly
variability. Moreover, Insignia's expense levels are based in part on
expectations of future sales levels, and a shortfall in expected sales could
thererfore 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 Insignia's shares. A decline in the market
price of Insignia's shares would have a negative effect on Insignia's ability to
raise needed capital on terms and conditions acceptable to management.
YEAR 2000 COMPLIANCE
All of Insignia's most current product releases did not cease to perform nor
generate incorrect or ambiguous data or results solely due to a change in date
on or after January 1, 2000, and calculated 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. Since January
1, 2000, we have experienced no disruptions in our business operations as a
result of Year 2000 compliance problems or otherwise, and have received no
reports of any Year 2000 compliance problems with our products or services.
Nonetheless, some problems related to Year 2000 may not appear for some time
after January 1, 2000. Year 2000 issues could include implementation of
Insignia's Year 2000 compliant products in a timely manner and claims based on
the products of other companies or issues arising from the integration of
multiple products within a system. Any problems that are not identified and
corrected successfully and completely could adversely affect our business.
Page 23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Insignia enters into derivative financial instruments such as currency option
contracts to hedge certain anticipated, but not yet committed, transactions
expected to be denominated in foreign currencies. Insignia does not use
derivative financial instruments for trading or speculative purposes. Insignia's
downside risk with respect to currency option contracts (British pound sterling)
is limited to the premium paid for the right to exercise the option. Premiums
paid for options outstanding as of September 30, 2000 were not material.
Page 24
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibit is filed as part of this Report:
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
Page 25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSIGNIA SOLUTIONS PLC
(Registrant)
Date: November 14, 2000
/s/ STEPHEN M. AMBLER
---------------------
STEPHEN M. AMBLER
Chief Financial Officer
Page 26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
----------------------------------------------------------------------
<S> <C>
Exhibit 27.1 Financial Data Schedule
</TABLE>
Page 27
