UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1997 Commission File Number 0-19380
INSIGNIA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1656308
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10801 Red Circle Drive
Minnetonka, MN 55343
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 930-8200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Number of shares of outstanding Common Stock, $.01 par value, as of March
13, 1998 was 6,857,720.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 13, 1998 was approximately $10,715,187 based upon
the last sale price of the registrant's Common Stock on such date.
Documents Incorporated By Reference:
Portions of registrant's 1997 Annual Report to Shareholders are
incorporated by reference in Part II; portions of the registrant's proxy
statement for the Annual Meeting of Shareholders scheduled for May 21, 1998 are
incorporated by reference into Part III.
<PAGE>
PART I.
Item 1. Business
GENERAL
Insignia Systems, Inc. (the "Company") markets sign and label
production software and equipment primarily to retailers. The Company's first
product, the Impulse(R) Retail System, was sold to retail merchants between 1990
and November 1996 to quickly and easily produce high quality signs in their
stores. In November, 1996 the Company replaced the Impulse Retail System with
the SIGNright(R) system, which performs essentially the same functions as the
Impulse. In January 1998, the Company eliminated the direct sale of the
SIGNright system by in-house telemarketers, but will continue to market the
SIGNright system through its independent sales representatives. Thus, the
Company anticipates machine sales in 1998 to be approximately one-half of
machine sales in 1997. The Company's business strategy with the Impulse system,
and now with the SIGNright system, is to obtain both initial revenue from the
sale of electronic sign production equipment and software, and recurring revenue
from the sale of the sign cards, label supplies, and accessories used with them.
The Company's second product, a PC-based software product tradenamed Stylus(R),
is used by retail chains to produce signs, labels, and posters. The Company's
third product, Insignia POPS,(TM) combines the Company's expertise in signage
and in-store merchandising with its Stylus software products to provide for a
unique sign to be ordered by a brand manufacturer and placed in a participating
supermarket. The Company markets its Stylus software and the Insignia POPS
through a direct marketing process, its sign systems through in-direct
distribution channels and through independent distributors in foreign markets
and its accessories and supplies principally through telemarketers.
INDUSTRY AND MARKET BACKGROUND
Product manufacturers are constantly seeking in-store ways to
motivate consumers to buy that particular manufacturer's product. Industry
studies have proven that the shelf edge sign represents the final and best
opportunity for the manufacturer to convince the consumer to buy. The Company
estimates that manufacturers now spend approximately $1 billion annually on
in-store efforts. The Company's market studies indicate that in-store signs are
the most effective means of inducing a purchase, second only to personal
demonstrations and sampling. The Company's marketing studies also indicate that
the most effective sign contains information that can be best supplied by the
product manufacturer in combination with the retailer's price and design look.
The Company estimates that of the approximately 1.1 million retail
stores in the United States, about 100,000 are independent retailers that are
too small to be good prospects for the SIGNright system and about 350,000 are
too large or are affiliated with a large chain which uses centralized computer
equipment. The Company considers its primary U.S. market for the SIGNright
system to be the approximately 650,000 medium and large independent retailers
and small retail chains that lie between the two extremes. The Company believes
that there is a shrinking but still significant market among such stores for an
easy-to-use, low cost, standalone, on-site system that can quickly produce a
wide variety of professional quality signs. The Company considers its primary
U.S. market for the Stylus software to be the approximately 350,000 large
independent retailers and chain retailers.
<PAGE>
POPS (POINT OF PURCHASE SERVICES)
The Insignia POPS program is a first-of-its-kind partnership between
retailers and manufacturers which enables coordination and customization of
in-store point-of-purchase promotional programs from a national to local store
level. By utilizing proprietary technology, the Insignia POPS program creates
in-store point-of-purchase media to significantly increase sales while providing
new product message and pricing flexibility for manufacturers at the most
critical consumer decision-making point. The Insignia POPS program links
manufacturers and retailers by providing a central coordination point, ensuring
that in-store media programs reflect the goals and objectives of both, while
helping customers make buying decisions.
The retailers will contract with Insignia POPS to organize and
deliver product messages from the food manufacturer to the retailer's own
computer. The sign, including the retailer's logo, design, color and price in
combination with the manufacturer's selling messages and images, will be created
by the Company, printed by the retailer and placed at the shelf by store
personnel. The Company collects, organizes, formats, and then delivers the sign
electronically directly to the retailer's computer where the retailer-controlled
information is added. The Company will charge the manufacturer on average, $4.75
per sign/per week/per store. The retailer will then receive a percentage of the
revenue paid by the manufacturer to the Company based upon audits and product
movement data provided to Insignia.
STYLUS SOFTWARE
In late 1993, the Company introduced its second major product,
tradenamed Stylus, which is a PC-based software product used by retailers to
produce signs, labels, and posters. The Company believes that the primary market
for the Stylus software is large independent retailers and retail chains. The
Company estimates that there are approximately 350,000 such retail locations in
the U.S.
The Stylus software allows retailers to create signs, labels, and
posters by manually entering the information for the sign or by importing
information from a computer database. Retailers can import barcode and price
information from their point-of-sale system and can add a graphic image of the
product from a CD-ROM containing branded clip-art. They can also create a
database of selling information such as product features and benefits,
nutritional information, or lifestyle-type uses for the product which can be
added to create a more informative sign or label.
A significant portion of the retail marketplace is made up of chain
retailers who require that signs be consistent and controlled from headquarters.
Most still create their signs at their headquarters, duplicate them and then
deliver them to their stores. The headquarters version of the Company's Stylus
software allows chains to create signs and labels centrally to maintain
consistency in appearance, and then transmit to store-level printers. The
Company believes the Stylus software product has significant benefits for chain
retailers.
The current retail price of the Stylus software is $2,495 for the
single store version and $4,990 for the headquarters version. The Company also
sells the sign cards and labels used with the Stylus software in a variety of
sizes, colors, and styles. The Company sells these supplies at competitive
prices, but is not in a proprietary position.
<PAGE>
THE SIGNRIGHT SYSTEM
The Impulse Retail System was developed by an independent product
design and development firm (the "Developer"). In November 1996, the Company
replaced the Impulse Retail System with the SIGNright system. The Company
believes that the primary market for the SIGNright system is medium and large
independent retailers and small retail chains. The Company estimates that there
are approximately 650,000 such retail locations in the United States. Within
this market, the Company initially focused on hardware and do-it-yourself stores
and food and grocery stores because of their number and propensity to use signs.
The Company now sells to customers in nineteen different retail market segments.
In January 1998, the Company ceased marketing the SIGNright system through
direct telemarketing channels, but will continue to market and sell the
SIGNright machine through in-direct channels.
The principal component of the SIGNright system is the sign
production unit (the "SIGNright machine"), which is about the size of an office
typewriter. It contains a custom keyboard, a small display screen, specially
developed hardware and software, and a thermal printhead similar to that of a
facsimile machine. The thermal technology eliminates the need for ink or toner
and enables a retailer to produce a sign that is dry and ready to display
immediately. The SIGNright machine weighs approximately 12 pounds and operates
on standard sign sizes (ranging from 2-1/3" x 3-2/3" to 11" x 14" for the U.S.
market) which are programmed into the SIGNright machine.
To make a sign the retailer selects from a portfolio one of many
pre-designed sign formats, enters the format number and the sign contents via
the keyboard, and inserts a sign card that bears a specially developed barcode.
The SIGNright machine then determines from the barcode whether the size of the
sign card and the sign format selected are compatible, determines the
approximate thermal energy setting on the printhead and prints the sign.
The SIGNright machine has one built-in type font and additional
fonts are available on cartridges for $60 each. Additional cartridges, priced at
$60 each, provide portfolios of sign formats designed specifically for the
various retail market segments. The SIGNright machine has a built-in internal
memory and an available external memory cartridge so that frequently used or
customized sign formats can be easily stored for later use. The current retail
price of the SIGNright system is $795 ($1,195 if an average number of type fonts
and sign format cartridges are included). The SIGNright cartridges are
copyrighted and each cartridge is marked accordingly.
Sign cards are sold by the Company in a variety of sizes, colors and
combinations and can be customized to include pre-printed custom artwork (such
as the retailer's logo) as required by the customer. Approximately 41% of 1997
revenues came from the sale of sign cards and the Company expects that this
percentage will be slightly lower in the future as the Company broadens its
product mix.
MARKETING AND SALES
The Company's marketing strategy is to focus on food manufacturers
and food retailers. By utilizing the Insignia POPS program, food manufacturers
and food retailers can easily accomplish what had previously been either
impossible or extremely difficult: tailoring national promotional programs to
retaional and local needs with minimal effort. In addition to the benefits
provided to manufacturers and retailers, POPS media allows for more information
to be provided to consumers to aid in purchasing
<PAGE>
decisions, and because the POPS media is consistent in format and design,
consumer messages are clearer. In essence, POPS is the most complete in-store
media promotion program available, benefiting consumer, retailer, and
manufacturer.
The Company markets its Stylus software in the United States through
an integrated marketing program that begins with targeted direct mailings,
advertising, participation in trade shows and developing industry relationships.
The marketing program than proceeds to a visit by a direct sales representative
to sell the Stylus software.
The Company believes that retailers who buy the Stylus software do
so for the same reasons listed above that retailers buy the SIGNright system. In
addition, they want the ability to create shelf labels, import information from
an existing database, and add graphic images of the product to their signs and
labels. Chain retailers also want the ability to create signs and labels
centrally to maintain consistency in appearance and content.
Through December 1997, the Company marketed the SIGNright system
through telemarketing by in-house sales personnel or a visit by an independent
sales representative. In January 1998, the Company eliminated the direct sale of
the SIGNright system by in-house telemarketers, but will continue to market the
SIGNright system through its independent sales representatives.
The Company has approximately 50 independent representatives located
throughout the continental United States that sell the SIGNright system and
related supplies, but do not sell the Stylus software. Most of these
representatives have received training at the Company's headquarters and all
have purchased a SIGNright system. The independent representatives both develop
their own prospects and handle referrals from the Company's inside sales
representatives. The Company compensates the independent representatives solely
through commissions and manages their efforts through a separate sales
management group.
The SIGNright system is designed to operate in a variety of
different languages with minimal modifications. In foreign markets, the Company
uses independent distributors, who are currently covering 20 countries. During
1995, 1996 and 1997 foreign sales accounted for approximately 16%, 16% and 14%
of total sales, respectively. The Company expects that sales to foreign
distributors will be approximately 15% of total sales in 1998.
PATENTS AND TRADEMARKS
All intellectual property rights related to the Impulse Retail
System belong to the Developer. The Company's patent counsel has filed on behalf
of the Developer applications for United States and certain foreign patents
covering aspects of the Impulse Retail System, including the use of identifiers
such as barcodes on the sign cards for communicating information to a printer.
The United States Patent and Trademark Office has issued a patent covering the
Impulse Retail System, including the use of sign cards which are encoded for use
with the system. However, competitors may still attempt to market similar
machines using non-infringing technology.
The Developer had granted to the Company an exclusive, worldwide
license to market and sell (but not manufacture) the Impulse Retail System.
However, the Company is no longer marketing and selling the Impulse Retail
System pursuant to this worldwide license agreement. Therefore, the
<PAGE>
Developer could grant the same marketing rights for the Impulse Retail System to
another party. However, the Developer has stated it does not presently intend to
grant similar marketing rights to any other party.
The Developer has entered into a joint venture agreement with a
Japanese firm (the "Supplier") to manufacture and supply the SIGNright system.
The Supplier has entered into an exclusive supplier agreement whereby the
Company will have the exclusive distribution rights of the SIGNright system. The
manufacturing agreement requires the Company to purchase 24,000 units by October
31, 1998. The Developer could grant the same manufacturing rights for the
SIGNright system to another party. However, the Developer has stated it does not
presently intend to grant similar manufacturing rights to any other party.
The Company is not presently aware of any patents of third parties
which the SIGNright system would infringe. There can be no assurance, however,
that such conflicting rights do not exist, in which event the Company would be
unable to sell its product without obtaining a license from others. There is no
assurance the Company would be able to obtain any such license on satisfactory
terms, or at all.
The barcode which the Company uses on the sign cards for the Impulse
and SIGNright systems was also developed by the Developer, which has granted the
Company an exclusive worldwide license of its rights to the barcode. The license
requires the Company to pay a royalty of 1% of the net sales price received by
the Company on each sign card or other supply item that bears the barcode and
used by the Impulse Retail Systems. Although a patent has been issued to the
Developer which covers the use of the barcode, there is no assurance that the
Company will be able to prevent other suppliers of sign cards from copying the
barcode used by the Company. However, the Company believes that the number,
relatively small size and geographic dispersal of Impulse and SIGNright users,
their relationship with the Company, and the Company's retention of its customer
list as a trade secret will discourage other sign card suppliers from offering
barcoded sign cards for use on the Impulse machine.
The Company has obtained trademark registration in the United States
of the trademark "Impulse" for use on sign production machines. The Company is
not obligated to pay any royalty related to this trademark.
The Company has obtained trademark registration in the United States
of the trademark "SIGNright" for use on sign production machines. The Company is
not obligated to pay any royalty related to this trademark.
The Company has obtained trademark registration in the United States
of the trademark "Stylus" for use on sign and label software. The developer of
the DOS version of the Stylus software has granted to the Company an exclusive
worldwide license to market and sell the DOS version of the Stylus software. The
Company no longer sells and markets the DOS version of the Stylus software and
has terminated this license agreement. The Company has developed the Windows
version of the Stylus software which it is now marketing and selling.
The Company is seeking trademark registration in the United States
of the trademark "Insignia POPS" for use on in-store point-of-purchase media.
The Company is not obligated to pay any royalty related to this trademark.
<PAGE>
PRODUCT DEVELOPMENT
The Company's product development activities on the SIGNright system
were primarily conducted by the Developer on a contract basis. The Company
continues to introduce various additional complementary products such as new
fonts and format cartridges, new sign card formats, new colors and new types of
sign cards.
The Stylus software product was initially developed on a contract
basis beginning in 1992 and continuing through 1997. Beginning in 1993, the
Company hired in-house employees to develop and modify portions of the Stylus
software product. The Company plans to continue to develop enhancements to the
Stylus software product using in-house employees and external software
developers. Product development costs of $471,346 for 1993; $473,477 for 1994;
$476,549 for 1995; $448,008 for 1996; and $493,686 for 1997 were primarily
related to development of the Stylus software product.
SUPPLIERS
The Company has no plans to develop an in-house manufacturing
capability for the SIGNright machine and is obligated to purchase the SIGNright
machine from the Supplier. The Company has entered into a supply agreement with
the Supplier and agreed with the Supplier to make its best efforts to purchase
24,000 units from the Supplier by December 31, 1998. Prices under the supply
agreement are fixed in Japanese yen. The Company owns certain tooling for the
SIGNright machine which is used by the Supplier. The Company believes there are
other manufacturers capable of manufacturing and providing the SIGNright machine
on comparable terms. However, the time required to locate and qualify another
supplier could cause a delay in the manufacturing process that might have a
serious adverse effect on the Company.
The thermal paper used by the Company in its sign cards is purchased
exclusively from one supplier. While the Company believes that an alternative
supplier would be available if necessary, any disruption in the relationship
with or deliveries by the current supplier could have a serious adverse effect
on the Company.
COMPETITION
Insignia POPS will be competing for the marketing expenditures of
branded product manufacturers who use various forms of point-of-purchase
marketing methods, such as displays, coupons, and in-store samples.
The competition for the SIGNright system falls into two main
categories: (i) manual systems, primarily handwriting, or to a limited extent
press-on letters or clip-on lettering signs; and (ii) automated systems, such as
large computer system and personal computers with sign making software and laser
printers.
<PAGE>
The Company's patent covers the SIGNright system and the use of sign
card encoded with a complementary barcode. The Company could face competition
from suppliers of sign cards who duplicate the barcode used by the Company.
However, the Company intends to vigorously defend its patent rights. Management
believes that the number, relatively small size, and geographic dispersal of its
customers, their relationship with the Company, and the Company's retention of
its customer list as a trade secret will discourage such competition. However,
there is no assurance that such competition will not develop.
The Stylus Sign and Label Works family of software products has
three major competitors in its' market: Access, Inc. (Access), Electronic Label
Technology, Inc. (ELT), and Retail Technologies, Inc. (RTI). Access offers a
product called dSIGN, which by its very nature of requiring individual
customization is focused more toward large retail chains. ELT sells numerous
versions of LabelMaster. RTI markets Design-R-Labels. The Company believes that
its complete line of Stylus products compares favorably on features, benefits,
cost, performance, and ease of use and implementation to that of its main
competitors. The Company has several products and can provide solutions to
operate in the following environments: UNIX/AIX, AS/400, MD-DOS, Windows
3.1/95/NT, OBDC, or with stand -alone printers. The Company's main strengths, in
relation to its competition are: merchandising, large format printing, high
speed printing, image handling, ease of use, and rapid implementation for their
products, services and offerings.
Unlike the SIGNright system, the Stylus product does not offer the
Company the benefit of proprietary sign card stock. While this leaves customers
free to buy stock from alternate suppliers, the Company believes that it will
capture a significant portion of sign card and label sales due to the wide array
of pre-printed and perforated sign and label stock offered by the Company at
competitive prices.
RESTRUCTURING PROGRAM
During January 1998, the Company implemented a restructuring program
(Program) to achieve a more focused marketing strategy regarding the selling of
SIGNright machines. This marketing strategy eliminates the marketing and selling
of SIGNright machines through direct channels. This resulted in the Company
streamlining and downsizing its operations by reducing its workforce and
consolidating certain employee groups. As a result of this Program, the Company
reduced its workforce from 130 full time employees to 93 full time employees.
The Company took a charge to earnings in December 1997 due to this restructuring
in the amount of $315,000. This $315,000 charge is comprised of a $141,000
charge associated with the writing off of capitalized production tooling costs
of the SIGNright machine, resulting in twelve months of unamortized costs, and
$174,000 of accrued rental costs associated with a portion of the leased
facility which in 1998 will be permanently idle and separate from the remaining
utilized lease space. The Company incurred severance costs in the amount of
$80,000 in January 1998 as a result of this workforce reduction.
EMPLOYEES
As of March 13, 1998, the Company had 93 full-time employees. The
full-time employees included 7 in telemarketing, 32 in other sales and marketing
positions, 43 in operations and customer service, 7 in administration and
accounting functions and 4 in senior management positions. None of the Company's
employees are represented by unions.
<PAGE>
Item 2. Properties
The Company is located in approximately 60,000 square feet of office
and warehouse space in suburban Minneapolis, Minnesota, which has been leased
until December 1998. As a result of the Company's restructuring program in
January 1998, this facility is more than adequate to meet the Company's current
needs and the Company is exploring the opportunity to move into a smaller
facility.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Company's executive officers are as
follows:
Name Age Position
- --------------------------------------------------------------------------------
G. L. Hoffman 48 Chairman and Secretary
Scott F. Drill 45 President and Chief Executive Officer
(Effective February 24, 1998)
Paul A. Moquist 56 Executive Vice President, Sales and Marketing
John R. Whisnant 52 Vice President, Finance and Chief Financial
Officer
G. L. Hoffman, a co-founder of the Company, has been the Chairman
and Secretary of the Company since it was incorporated in January 1990. Prior to
February 24, 1998, Mr. Hoffman also held the positions of President and Chief
Executive Officer. Prior to that time he was a co-founder of Varitronic Systems,
Inc., which develops, manufactures and markets business graphic products. Mr.
Hoffman was employed as Chairman, Executive Vice President and Secretary of
Varitronics from 1983 until January 1990. Mr. Hoffman also had primary
responsibility for developing Varitronics' international marketing and private
label distribution systems.
Scott F. Drill, has been President and Chief Executive Officer of
the Company since February 24, 1998. Since May 1996 Mr. Drill was a partner in
Minnesota Management Partners (MMP), a venture capital firm located in
Minneapolis, Minnesota. He remains a partner in MMP, which completed investment
of its capital in January of this year. From 1983 through March 1996 Mr. Drill
was President and Chief Executive Officer of Varitronic Systems and Chairman
since 1990. Prior to starting Varitronics, Mr. Drill held senior management
positions in sales and marketing at Conklin Company and Kroy, Inc.
<PAGE>
Paul A. Moquist has been Executive Vice President, Sales and Marketing
of the Company since January 1991. Mr. Moquist joined the Company as Director of
Sales in March 1990. From September 1989 to March 1990 he served as Vice
President of Sales for Raster Devices Direct, Inc., a subsidiary of Laser Master
Technologies, Inc. which distributes a series of integrated publishing systems.
From November 1987 to September 1989 Mr. Moquist was a co-owner of Print Galley,
Inc., a printing business located in Hopkins, Minnesota.
John R. Whisnant joined the Company as Vice President of Finance and
Chief Financial Officer of the Company in October 1995. From June 1994 to
September 1995 he was self employed as a franchise consultant. From June 1992 to
June 1994 he served as President of AmericInn, Inc. a motel franchising company.
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information required by Item 5 is incorporated herein by reference to the
section labeled "Stockholder Information" which appears in the registrant's 1997
Annual Report to Shareholders.
Item 6. Selected Financial Data
The information required by Item 6 is incorporated herein by reference to the
section entitled "Financial Highlights" which appears in the registrant's 1997
Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by Item 7 is incorporated herein by reference to the
section entitled "Financial Review" which appears in the registrant's 1997
Annual Report to Shareholders.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
FORWARD LOOKING STATEMENTS IN THIS 10-K REPORT AND IN THE ANNUAL REPORT TO
SHAREHOLDERS WHICH IS INCORPORATED HEREIN BY REFERENCE REFLECT THE COMPANY'S
CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. THESE
FORWARD LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE IDENTIFIED BELOW, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED. THE WORDS "BELIEVE,"
"EXPECT," "ANTICIPATE," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD LOOKING
STATEMENTS. READERS ARE REQUESTED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD
LOOKING STATEMENT, WHICH SPEAK ONLY AS OF THEIR DATES. THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD LOOKING STATEMENTS, WHETHER
AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. THE FOLLOWING
FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS
OR THOSE ANTICIPATED:
<PAGE>
* CHANGES IN THE EXCHANGE RATE FOR JAPANESE YEN
* COST OF THE RAW MATERIAL
* RESULTS OF THE INSIGNIA POPS PROGRAM
* BUSINESS CONDITIONS OF THE GENERAL ECONOMY
* INSTALLATION OF SOFTWARE AND AVAILABILITY OF HARDWARE
* RELIANCE ON LICENSED PROPRIETARY RIGHTS
* SINGLE SOURCE SUPPLIER OF SIGNRIGHT MACHINES
* SIGN CARD REVENUE
* COMPETITION
* DEPENDENCE ON KEY EMPLOYEES
* YEAR 2000
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 is incorporated herein by reference to the
Financial Statements, Notes thereto and Auditors' Report which appear in the
registrant's 1997 Annual Report to Shareholders. See Item 14(a)(1) for an index
of the related financial statements and schedules.
Item 9. Disagreements with Accountants on Accounting and Financial Disclosures
None.
PART III.
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 concerning the executive officers of the
Company is submitted in a separate section of Part I of this Report.
The information required by Item 10 concerning the directors of the Company is
incorporated herein by reference to the Company's proxy statement for its 1998
Annual Meeting of Shareholders which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the close
of the fiscal year for which this report is filed.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference to the
Company's proxy statement for its 1998 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the fiscal year for which this report is
filed.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated by reference to the
Company's proxy statement for its 1998 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the fiscal year for which this report is
filed.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference to the
Company's proxy statement for its 1997 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the close of the fiscal year for which this report is
filed.
PART IV.
Item 14. Exhibits, Financial Statements, Schedule and Reports on Form 8-K
(a) Documents filed as part of this report.
(1) Financial Statements
<TABLE>
<CAPTION>
Pages
<S> <C>
Report of Independent Auditors.................................................................*
Balance Sheets as of December 31, 1997 and 1996................................................*
Statements of Operations for the years ended December 31, 1997, 1996, and 1995.................*
Statement of Changes in Stockholders' Equity for the years ended December 31, 1997,
1996, and 1995...........................................................................*
Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995.................*
Notes to Financial Statements..................................................................*
</TABLE>
- --------------------------------------------
* Incorporated by reference to the registrant's Annual Report to
Shareholders for the year ended December 31, 1997. See Exhibit 13.
Pages in this
Form 10-K
Schedule II: Valuation and Qualifying Accounts............................13
All other schedules are omitted because they are not required or are not
applicable or the information is otherwise shown in the consolidated financial
statements or notes thereto.
(2) Exhibits. See "Exhibits Index" on page following
signatures.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during 1997.
<PAGE>
SCHEDULE II. Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- -------------------------------------- ------------ ---------------------------------------- ----------- -------------
Additions
----------------------------------------
(1) (2)
Balance at Charged to Other
Beginning of Charged to Costs Accounts Deductions Balance at End
Description Period and Expenses Describe Describe of Period
- -------------------------------------- ------------ ----------------- ------------------ ----------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts $135,475 $185,000 -- $116,093(1) $204,382
Provision for normal returns
and rebates 54,485 $65,556 (2) 17,116(3) 102,925
Provision for obsolete inventory 120,162 71,500 63,713(4) 127,949
Year ended December 31, 1996
Allowance for doubtful accounts 88,587 70,000 -- 23,112(1) 135,475
Provision for normal returns
and rebates 99,166 5,069 (2) 49,750(3) 54,485
Provision for obsolete inventory 108,000 47,500 35,338(4) 120,162
Year ended December 31, 1995
Allowance for doubtful accounts 68,418 80,500 -- 60,330(1) 88,587
Provision for normal returns
and rebates 118,681 84,431 (2) 103,946(3) 99,166
Provision for obsolete inventory 98,394 79,616 70,010(4) 108,000
</TABLE>
- --------------------------------------------------
(1) Uncollectable accounts written off, net of recoveries.
(2) Charged against sales.
(3) Rebates paid to customer buying groups.
(4) Inventory scrapped and disposed of.
<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.
By: /s/ G. L. Hoffman
G. L. Hoffman
Chairman
Dated: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Power of Attorney
Each person whose signature appears below constitutes and appoints John R.
Whisnant his true and lawful attorney-in-fact and agent, acting alone, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------- ------------------------------------------------- --------------
<S> <C> <C>
/s/ G. L. Hoffman Chairman and Secretary March 30, 1998
G. L. Hoffman
/s/ Scott F. Drill President and Chief Executive Officer March 30, 1998
Scott F. Drill (principal executive officer)
/s/ John R. Whisnant Vice President of Finance and Chief Financial March 30, 1998
John R. Whisnant Officer (principal financial officer)
/s/ Erwin A. Kelen Director March 30, 1998
Erwin A. Kelen
/s/ Don E. Schultz Director March 30, 1998
Don E. Schultz
/s/ Gordon F. Stofer Director March 30, 1998
Gordon F. Stofer
/s/ Frank D. Trestman Director March 30, 1998
Frank D. Trestman
</TABLE>
<PAGE>
EXHIBIT INDEX TO FORM 10-K
For the year ended December 31, 1997
Commission File No: 0-19380
<TABLE>
<CAPTION>
Exhibit Page Number or Incorporation
Number Description By Reference To
- --------- --------------------------------------------------------- -----------------------------------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of Registrant, as amended to Exhibit 3.1 of the Registrant's Registration Statement of
date Form S-18, Reg. No. 33-40765C
3.2 Bylaws, as amended to date Exhibit 3.2 of the Registrant's Registration Statement of
Form S-18, Reg. No. 33-40765C
4.1 Specimen Common Stock Certificate of Registrant Exhibit 4.1 of the Registrant's Registration Statement of
Form S-18, Reg. No. 33-40765C
10.1 License Agreement between Thomas and Lawrence McGourty Exhibit 10.1 of the Registrant's Registration Statement of
and the Company dated January 23, 1990, as amended Form S-18, Reg. No. 33-40765C
10.2 Barcode License and Support Agreement between Thomas and Exhibit 10.2 of the Registrant's Registration Statement of
Lawrence McGourty and the Company dated January 23, 1990 Form S-18, Reg. No. 33-40765C
Exhibit 10.3 of the Registrant's Annual Report on Form 10-K
10.3 The Company's 1990 Stock Plan, as amended for the year ended December 31, 1995
10.4 Sign Printer Sales Agreement between the Company and Exhibit 10.4 of the Registrant's Registration Statement of
Creative Machineries International, Inc. dated January Form S-18, Reg. No. 33-40765C
29, 1990, as amended
10.6 Lease Agreement between R. L. Johnson Investment Company, Exhibit 10.6 of the Registrant's Annual Report on Form 10-K
Inc. and the Company, dated October 22, 1992 for the year ended December 31, 1992
10.7 Common Stock Warrant dated September 28, 1990 issued to Exhibit 10.7 of the Registrant's Registration Statement of
Erwin Kelen Form S-18, Reg. No. 33-40765C
<PAGE>
10.8 Non competition and Consulting Agreement between Exhibit 10.12 of the Registrant's Registration Statement of
Varitronics and G. L. Hoffman dated January 12, 1990 Form S-18, Reg. No. 33-40765C
10.9 Employee Stock Purchase Plan Exhibit 10.14 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994
10.10 Loan and Security Agreement between FBS Business Finance Exhibit 10.15 of the Registrant's Annual Report on Form
Corporation and the Company dated July 31, 1995 10-K for the year ended December 31, 1995
10.11 Loan Agreement between Republic Acceptance Corporation Exhibit 10.16 of the Registrant's Annual Report on Form
and the Company dated December 20, 1997 10-K for the year ended December 31, 1997
13 Registrant's Annual Report to Shareholders for 1997 17
23 Consent of Ernst & Young LLP 39
25 Power of Attorney (See signature page of this Form 10-K) 14
27 Financial Data Schedule 40
</TABLE>
FINANCING AGREEMENT
THIS FINANCING AGREEMENT, dated as of December 29, 1997 is by and between
INSIGNIA SYSTEMS, INC. a Minnesota corporation (the "Borrower"), and REPUBLIC
ACCEPTANCE CORPORATION, a Minnesota corporation (the "Lender").
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
Section 1.1 Defined Terms. As used in this Agreement the following terms
shall have the following respective meanings:
"Accounts": Each and every right to payment of Borrower, whether such right
to payment arises out of a sale or lease of goods by Borrower, or other
disposition of goods or other property of Borrower, out of a rendering of
services by Borrower, out of a loan by Borrower, out of damage to or loss of
goods in the possession of a railroad or other carrier or any other bailee, out
of overpayment of taxes or other liabilities of Borrower, or which otherwise
arises under any contract or agreement, or from any other cause, whether such
right to payment now exists or hereafter arises and whether such right to
payment is or is not yet earned by performance and howsoever such right to
payment may be evidenced, together with all other rights and interest (including
all liens and security interests) which Borrower may at any time have by law or
agreement against any account debtor (as defined in the Uniform Commercial Code
in effect in the State of Minnesota) or other obligor obligated to make any such
payment or against any of the property of such account debtor or other obligor;
specifically (but without limitation), the term includes all present and future
instruments, documents, chattel papers, accounts and contract rights of
Borrower.
"Accounts Advance": As defined in Section 2.1(a).
"Advance": An Accounts Advance and/or an Inventory Advance, as the context
may require.
"Affiliate": When used with reference to any Person, (a) each Person that,
directly or indirectly, controls, is controlled by or is under common control
with, the Person referred to, (b) each Person which beneficially owns or holds,
directly or indirectly, five percent or more of any class of voting stock of the
Person referred to (or if the Person referred to is not a corporation, five
percent or more of the equity interest), (c) each Person, five percent or more
of the voting stock (or if such Person is not a corporation, five percent or
more of the equity interest) of which is beneficially owned or held, directly or
indirectly, by the Person referred to, and (d) each of such Person's officers,
directors, joint venturers and partners. The term control (including the terms
"controlled by" and "under common control with") means the possession, directly,
of the power to direct or cause the direction of the management and policies of
the Person in question.
"Borrowing Base Certificate": As defined in Section 2.2.
"Business Day": Any day (other than a Saturday, Sunday or legal holiday in
the State of where the Lender is located).
"Change in Control": The occurrence, after the Closing Date, of any one
entity owning, directly or indirectly, securities of the Borrower representing
25% of the securities of the Borrower entitled to vote in the election of
directors.
<PAGE>
"Closing Date" The date of this Agreement; provided that all the conditions
precedent to the making of the initial Advance, as set forth in Article III,
have been, or, on such Closing Date, will be, satisfied. The Borrower shall give
the Lender not less than one Business Day's prior notice of the day selected as
the Closing Date.
"Eligible Accounts": Accounts owned by the Borrower which the Lender, in its
sole and absolute discretion, deems eligible for Advances, but which, at a
minimum, are subject to a first priority perfected security interest in favor of
the Lender and not subject to any assignment, claim or Lien other than the Lien
in favor of the Lender and other Liens consented to by the Lender in writing,
but specifically excluding (a) Accounts which are not earned; (b) Accounts which
are unpaid more than ninety (90) days after the original invoice date, except
dated Accounts with payment terms beyond sixty (60) days are ineligible
thirty-one (31) days past the due date; (c) Accounts owed by debtors 10% or more
of whose Accounts owed are otherwise ineligible; (d) Accounts representing
progress billings, or retainages, or for work covered by any payment or
performance bond; (e) Accounts owed by any of the Borrower' s Affiliates; (f)
Accounts owed by debtors not located in the United States, unless supported by
(i) a letter of credit issued by a U.S. bank in favor of the Borrower which has
been delivered to the Lender, or (ii) or credit insurance acceptable to Lender
in its sole discretion; (g) Accounts as to which any warranty or representation
contained in any security agreement or other agreement of the Borrower with or
given to the Lender with respect to any such Receivable is untrue in any
material respect; (h) Accounts as to which the account debtor has disputed
liability, or made any claim with respect to any other Receivable due from such
account debtor to the Borrower; (i) Accounts subject to setoff; Ci) Accounts as
to which the account debtor has filed a petition for bankruptcy or any other
petition for relief under the Bankruptcy Code, assigned any assets for the
benefit of creditors, or if any petition or other application for relief under
the Bankruptcy Code has been filed against the account debtor, or if the account
debtor has failed, suspended business, become insolvent, or has had or suffered
a receiver or a trustee to be appointed for all or a significant portion of its
assets or affairs; (k) Accounts owed by any government or government agency; (1)
Accounts evidenced by a promissory note or other instrument; and (m) Accounts as
to which the Lender believes that collection of any such Receivable is insecure
or that any such Receivable may not be paid by reason of the account debtor's
financial inability to pay.
"Eligible Inventory": Inventory of the Borrower which the Lender, in its sole
and absolute discretion, deems eligible for Advances, but which meets the
following minimum requirements: (a) it is owned by the Borrower, is subject to a
first priority perfected security interest in favor of the Lender, and is not
subject to any assignment, claim or Lien other than (i) a Lien in favor of the
Lender and (ii) Liens consented to by the Lender in writing; (b) it consists of
raw materials or finished product (not including work in process and supplies);
(c) if held for sale or lease or furnishing under contracts of service, it is
(except as the Lender may otherwise consent in writing) new and unused; (d)
except as the Lender may otherwise consent, it is not stored with a bailee,
warehouseman or similar party; if so stored with the Lender's consent, such
bailee, warehouseman or similar party has issued and delivered to the Lender, in
form and substance acceptable to the Lender, such documents and agreements as
the Lender may require, including, without limitation, warehouse receipts
therefor in the Lender's name; (e) the Lender has determined, in its sole and
absolute discretion, that it is not unacceptable due to age, type, category,
quality and/or quantity; (f) it is not held by the Borrower on consignment and
is not subject to any other repurchase or return agreement; (g) it is not held
by a customer of the Borrower or any other Person on consignment; (h) it
complies with all standards imposed by any governmental agency having regulatory
authority over such goods and/or their use, manufacture or sale; and (i) the
warranties, representations and covenants contained in any security agreement or
other agreement of the Borrower with or given to the Lender relating directly or
indirectly to the Borrower's Inventory are applicable to it without exception.
<PAGE>
"GAAP": Generally accepted accounting principles set forth in the opinions
and pronouncements of the Accounting Principles Board of the American Institute
of Certified Public Accountants and statements and pronouncements of the
Financial Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting profession,
which are applicable to the circumstances as of any date of determination.
"Inventory": Any and all of the Borrower's goods, including, without
limitation, goods in transit, wherever located which are or may at any time be
leased by the Borrower to a lessee, held for sale or lease, furnished under any
contract of service or held as raw materials, work in process, or supplies or
materials used or consumed in the Borrower's business, or which are held for use
in connection with the manufacture, packing, shipping, advertising, selling or
finishing of such goods, and all goods, the sale or other disposition of which
has given rise to a Receivable, which are returned to and/or repossessed and/or
stopped in transit by the Borrower or the Lender, or at any time hereafter in
the possession or under the control of the Borrower or the Lender, or any agent
or bailee of either thereof, and all documents of title or other documents
representing the same.
"Inventory Advance": As defined in Section 2.l(b).
"Landlord's Waiver": That Waiver to be executed by Duke Realty Investments in
form and substance satisfactory to the Lender.
"Loan Documents": This Agreement, the Security Agreement, and any documents
described in Section 3.l(a).
"Lien": With respect to any Person, any security interest, mortgage, pledge,
lien, charge, encumbrance, title retention agreement or analogous instrument or
device (including the interest of each lessor under any capitalized lease), in,
of or on any assets or properties of such Person, now owned or hereafter
acquired, whether arising by agreement or operation of law.
"Person": Any natural person, corporation, partnership, limited partnership,
joint venture, firm, association, trust, unincorporated organization, government
or governmental agency or political subdivision or any other entity, whether
acting in an individual, fiduciary or other capacity.
"Reference Rate": The rate of interest from time to time publicly announced
by First Bank NationalAssociation as its "reference rate"; First Bank National
Association may lend to its customers at rates that are at, above or below the
Reference Rate. For purposes of determining any interest rate hereunder which is
based on the Reference Rate, such interest rate shall change as and when the
Reference Rate changes.
"Security Agreement": That Security Agreement to be executed by the Borrower
in form and substance satisfactory to the Lender.
Section 1.2 Accounting Terms and Calculations. Except as may be expressly
provided to the contrary herein, all accounting terms used herein shall be
interpreted and all accounting determinations hereunder shall be made in
accordance with GAAP.
Section 1.3 Other Definitional Terms Terms of Construction. The words
"hereof", "herein" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement. References to Sections, Exhibits, Schedules and the
like references are to Sections, Exhibits, Schedules and the like of this
Agreement unless otherwise expressly provided. The words "include", "includes"
<PAGE>
and "including" shall be deemed to be followed by the phrase "without
limitation". Unless the context in which used herein otherwise clearly requires,
"or" has the inclusive meaning represented by the phrase "and/or". All
incorporations by reference of covenants, terms, definitions or other provisions
from other agreements are incorporated into this Agreement as if such provisions
were fully set forth herein, and include all necessary definitions and related
provisions from such other agreements. All covenants, terms, definitions and
other provisions from other agreements incorporated into this Agreement by
reference shall survive any termination of such other agreements until the
obligations of the Borrower under this Agreement are irrevocably paid in full.
ARTICLE II
TERMS OF LENDING
Section 2.1 The Advances. On the terms and subject to the conditions hereof,
at the Borrower's request, the Lender, in its absolute and sole discretion and
without any commitment to do so, may make the following Advances available to
the Borrower:
2.l(a) up to seventy-five percent (75%) of the net amount of Eligible
Accounts which are listed in the Borrower's most current Borrowing Base
Certificate and which are deemed eligible for advances by the Lender, or such
greater or lesser percentage at the Lender's sole and absolute discretion, not
to exceed a maximum amount of $3,000,000 (the "Accounts Advances");
2.1(b) up to thirty percent (30%) of Ihe net amount of Eligible Inventory
which is listed in the Borrower's most current Borrowing Base Certificate and
which is deemed eligible for advances by the Lender, or such greater or lesser
percentage at the Lender's sole and absolute discretion, not to exceed a maximum
amount of $500,000 (the "Inventory Advances");
Notwithstanding the previous clauses 2.l(a) and 2.l(b), the maximum aggregate
amount advanced against all Eligible Accounts and all Eligible Inventory from
time to time shall not exceed $3,000,000.
Loans for additional sums requested by the Borrower may be made at the
Lender's sole discretion based upon the Lender's valuation of the Borrower's
collateral or other factors. The Borrower acknowledges and agrees that the
Lender may from time to time, for the Lender's convenience, segregate or
apportion the Borrower's collateral for purposes of determining the amounts and
maximum amounts of Advances which may be made hereunder. Nevertheless, the
Lender's security interest in all such collateral, and any other collateral
rights, interests and properties which may now or hereafter be available to the
Lender, shall secure and may be applied to the payment of any and all Advances
and other indebtedness secured by the Lender's security interest, in any order
or manner of application and without regard to the method by which the Lender
determines to make Advances hereunder.
Section 2.2 Procedure for Advances; Wire Transfer Fees. Any request by the
Borrower for an Advance shall be in writing and must be given so as to be
received by the Lender not later than 10:30 a.m. Central time on the requested
Advance date, or such later time as may be acceptable to the Lender in its sole
discretion. Each request for an Advance shall be irrevocable and shall be deemed
a representation by the Borrower that on the requested Advance date and after
giving effect to such Advance the applicable conditions specified in Article III
have been and will continue to be satisfied and the representations and
warranties set forth in Article IV will continue to be true. Each request for an
Advance shall specify the requested Advance date (which must be a Business Day)
and the amount of such Advance. Each request for an Advance shall be accompanied
by a Borrowing Base Certificate signed by a duly authorized officer of the
Borrower
<PAGE>
in form and substance satisfactory to the Lender (the "Borrowing Base
Certificate"). If the Lender deterrnines, in its absolute and sole discretion,
to make the requested Advance, the Lender will wire transfer to the Borrower's
Account on the requested Advance date the amount of the requested Advance. The
Borrower will pay to the Lender a wire transfer fee of $15 per wire transfer.
Section 2.3 Interest Rates and Interest Payments. Interest shall accrue on
the unpaid balance of the Advances at a floating rate per annum equal to the sum
of the Reference Rate plus 3% provided, however, that in the event that
Borrower's retained earnings for fiscal year end December 31, 1998 (as reported
in the Borrower's audited financial statements for fiscal year end December 31,
1998 as required by and prepared in accordance with, Section 5.1 (a)), exceeds
$500,000, then Interest shall accrue on the Advances at a floating rate per
annum equal to the sum of the Reference Rate plus 2% from and after the first
day of the first calendar month following the date of Lender' s receipt of the
December 31, 1998 audited financial statements (the "Applicable Rate") and shall
be due and payable monthly in arrears on the last day of each calendar month;
provided, further, that upon the occurrence and during the continuance of any
failure by the Borrower to comply with any agreement or covenant of the Borrower
under any Loan Document, the unpaid balance of the Advances shall thereafter
bear interest at a floating rate equal to the sum of (a) the Applicable Rate,
plus (b) 2% and shall be due and payable on demand; and provided further that
the minimum amount of interest due and payable in any month shall not be less
than $7,500.
Section 2.4 RePayment and PrePayment.
ALL ADVANCES SHALL BE DUE AND PAYABLE ON DEMAND. NOTHING SET FORTH IN THIS
AGREEMENT, THE SECURITY AGREEMENT OR ANY OTHER AGREEMENT BETWEEN THE BORROWER
AND THE LENDER SHALL IN ANY WAY LIMIT THE LENDER'S RIGHT TO DEMAND PAYMENT OF
THE ADVANCES IN WHOLE OR IN PART.
Section 2.5 Computation. Interest on the Advances shall be computed on the
basis of actual days elapsed and a year of 360 days.
Section 2.6 Annual Fee. The Borrower shall pay to the Lender an annual fee in
an amount equal to .75 percent of the maximum aggregate amount of the Advances
(the "Annual Fee"). The Annual Fee shall be payable in advance on the Closing
Date and on each anniversary of the date of this Agreement.
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 Conditions Precedent. No Advances shall be made hereunder except
upon the prior or simultaneous fulfillment of each of the following conditions:
3.l(a) Documents. The Lender shall have received the following:
(i) This Agreement executed by a duly authorized officer (or officers) of
the Borrower and dated the Closing Date.
(ii) A copy of the corporate resolutions of the Borrower authorizing the
execution, delivery and performance of this Agreement and containing an
incumbency certificate showing the names and titles, and bearing the
signatures of,
<PAGE>
the officers of the Borrower authorized to execute this Agreement, certified
as of the Closing Date by the Secretary or an Assistant Secretary of the
Borrower.
(iii) A copy of the Articles of Incorporation of the Borrower with all
amendments thereto, certified by the appropriate governmental official of the
jurisdiction of its incorporation as of a recent date acceptable to Lender
and its counsel.
(iv) A certificate of good standing for the Borrower in the jurisdiction
of its incorporation, certified by the appropriate governmental officials as
of a recent date acceptable to Lender and its counsel.
(v) A copy of the bylaws of the Borrower, certified as of the Closing Date
by the Secretary or an Assistant Secretary of the Borrower.
(vi) The Security Agreement, duly executed by the Borrower.
(vii) An initial Borrowing Base Certificate.
(viii) Evidence of insurance required to be maintained under Section 5.3,
naming the Lender as loss payee in form and substance satisfactory to the
Lender.
(ix) The opinion of counsel to the Borrower covering such matters as the
Lender may request.
(x) The Landlord's Waiver, duly executed by Duke Realty Investments.
3.1(b) Other Matters. All organizational and legal proceedings relating to
the Borrower and all instruments and agreements in connection with the
transactions contemplated by this Agreement shall be satisfactory in scope, form
and substance to the Lender and its counsel, and the Lender shall have received
all information and copies of all documents, including records of corporate
proceedings, which it may reasonably have requested in connection therewith,
such documents where appropriate to be certified by proper Borrower or
governmental authorities.
3.1(c) Fees and Expenses. The Lender shall have received all fees and other
amounts due and payable by the Borrower on or prior to the Closing Date,
including the reasonable fees and expenses of counsel to the Lender payable
pursuant to Section 8.2.
3.l(d) Perfection. The Security Agreement and/or any and all financing
statements with respect thereto shall have been appropriately filed to the
satisfaction of the Lender; the Lender shall have received UCC searches and/or
other Lien searches satisfactory to the Lender; and the priority and perfection
of the Lien created thereby shall have been established to the satisfaction of
the Lender.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender:
Section 4.1 Organization; Standing; Etc. The Borrower is a corporation duly
incorporated and validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to carry on its business as now
<PAGE>
conducted, to enter into this Agreement and to perform its obligations hereunder
and thereunder. This Agreement has been duly authorized by all necessary
corporate action and when executed and delivered will be the legal and binding
obligations of the Borrower. The execution and delivery of this Agreement will
not violate the Borrower's Articles of Incorporation or bylaws or any law
applicable to the Borrower. No governmental consent or exemption is required in
connection with the Borrower's execution and delivery of this Agreement.
Section 4.2 Financial Statements and No Material Adverse Change. The
Borrower's audited financial statements as at December 31, 1996 and its
unaudited financial statements as at October 31, 1997, as heretofore furnished
to the Lender, have been prepared in accordance with GAAP. The Borrower has no
material obligation or liability not disclosed in such financial statements, and
there has been no material adverse change in the condition of the Borrower since
the dates of such financial statements.
Section 4.3 Litigation. There are no actions, suits or proceedings pending
or, to the knowledge of the Borrower, threatened against or affecting the
Borrower which, if determined adversely to the Borrower, would have, a material
adverse effect on the condition of the Borrower. The Borrower is not in
violation of any law or regulation (including environmental laws and regulations
and laws relating to employee benefit plans) where such violation could
reasonably be expected to impose a material liability on the Borrower.
Section 4.4 Taxes. The Borrower has filed all federal, state and local tax
returns required to be filed and has paid or made provision for the payment of
all taxes due and payable pursuant to such returns and pursuant to any
assessments made against it or any of its property (other than taxes, fees or
charges the amount or validity of which is currently being contested in good
faith by appropriate proceedings and with respect to which reserves in
accordance with GAAP have been provided on the books of the Borrower).
Section 4.5 Subsidiaries. The Borrower has no subsidiaries.
ARTICLE V
AFFIRMATIVE COVENANTS
Until this Agreement shall have expired or been terminated and all of the
Borrower's other obligations to the Lender under this Agreement shall have been
paid in full, unless the Lender shall otherwise consent in writing:
Section 5.1 Financial Statements and Reports. The Borrower will furnish to
the Lender:
5.1(a) As soon as available and in any event within 120 days after the end of
each fiscal year of the Borrower, financial statements of the Borrower
consisting of at least statements of income, cash flow and changes in
stockholders' equity, and a balance sheet as at the end of such year, setting
forth in each case in comparative form corresponding figures from the previous
annual audit, certified without qualification by independent certified public
accountants selected by the Borrower and acceptable to the Lender.
5.1(b) As soon as available and in any event within 30 days after the end of
each fiscal month, unaudited financial statements for the Borrower for such
month and for the period from the beginning of such fiscal year to the end of
such month, substantially similar to the annual audited statements.
<PAGE>
5.1(c) Concurrently with each request for an Advance, and in any event not
less than weekly, a Borrowing Base Certificate.
5.l(d) As soon as practicable and in any event within fifteen days of the end
of each month, (i) a listing of all accounts, together with an aging of all
accounts and a reconciliation of such accounts against the listing submitted
pursuant hereto for the immediately preceding month, (ii) a list of all
inventory, setting forth the fair market value and cost of such inventory and
all sales, returns and allowances and miscellaneous charges, and (iii) a listing
of all accounts payable, together with an aging of all accounts payable all in
form and substance satisfactory to the Lender.
5.l(e) Within five days after the due date, proof of payment or deposit, when
due, of all withholding and F.I.C.A. taxes owing by the Borrower from time to
time, in form and substance satisfactory to the Lender by a payroll service
satisfactory to the Lender and whose services the Borrower shall at all times
retain.
5.l(f) From time to time, such other information regarding the business,
operation and financial condition of the Borrower as the Lender may reasonably
request.
Section 5.2 Corporate Existence. The Borrower will maintain its corporate
existence in good standing under the laws of its jurisdiction of incorporation
and its qualification to transact business in each jurisdiction where failure so
to qualify would permanently preclude the Borrower from enforcing its rights
with respect to any material asset or would expose the Borrower to any material
liability.
Section 5.3 Insurance. The Borrower will maintain with financially sound and
reputable insurance companies such insurance as may be required by law and such
other insurance in such amounts and against such hazards as is customary in the
case of reputable corporations engaged in the same or similar business and
similarly situated, including without limitation such insurance as may be
required under the Security Agreement.
Section 5.4 Payment of Taxes and Claims. The Borrower will file all tax
returns and reports which are required by law to be filed by it and will pay
before they become delinquent, all taxes, assessments and governmental charges
and levies imposed upon it or its property and all claims or demands of any kind
(including those of suppliers, mechanics, carriers, warehousemen, landlords and
other like Persons) which, if unpaid, might result in the creation of a Lien
upon its property.
Section 5.5 Inspection. The Borrower will permit any Person designated by the
Lender to visit and inspect any of the properties, books and financial records
of the Borrower, to examine and to make copies of the books of accounts and
other financial records of the Borrower, and to discuss the affairs, finances
and accounts of the Borrower with its officers at such reasonable times and
intervals as the Lender may designate. The Borrower shall also allow the Lender
and its agents to conduct periodic collateral audits of the Borrower' s assets
at such intervals as the Lender may choose, and the Borrower shall pay to Lender
a fee in the amount of $750 per day per collateral audit, plus out-of-pocket
costs and expenses incurred in connection with such collateral audits, (provided
that so long as no Event of Default (as that term is defined in the Security
Agreement) has occurredunder the Security Agreement and is continuing, the
Borrower shall not be require to pay for more than 4 collateral audits in any
calendar year).
Section 5.6 Maintenance of Properties. The Borrower will maintain its
properties in good condition, repair and working order, and supplied with all
necessary equipment, and make all necessary repairs, renewals, replacements,
betterments and improvements thereto, all as may be
<PAGE>
necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times.
Section 5.7 Books and Records. The Borrower will keep adequate and proper
records and books of account in which full and correct entries will be made of
its dealings, business and affairs.
Section 5.8 Compliance. The Borrower will comply in all material respects
with all laws, rules and regulations to which it may be subject.
Section 5.9 Notice of Litigation. The Borrower will give prompt written
notice to the Lender of the commencement of any action, suit or proceeding
affecting the Borrower.
Section 5.10 Plans. The Borrower will maintain any employee benefit plans in
compliance with all material requirements of applicable laws and regulations.
Section 5.11 Special Agreements Regarding Accounts.
5.11(a) Collection of Accounts and all other amounts due to the Borrower
shall be subject to the provisions of paragraphs 5 and 6 of the Security
Agreement concerning the Lockbox and Collateral Account (as those terms are
defined in the Security Agreement). The Borrower shall provide to the Lender a
daily collection report of all Accounts collected. All collections received in
the Collateral Account and reported to Republic before 8:00 a.m. (Central time)
on any Business Day that is a Monday through Thurdday, or before 2:00 p.m.
(Central time) on any Business Day that is a Friday, shall be applied to the
payment of the Advances (in such order of application as the Lender may
determine) on the day so received, or otherwise on the next business day;
provided however, that for purposes of determining the interest due and payable
on the unpaid balance of the Advances under Section 2.3, all collections
received in the Collateral Account shall be applied to the unpaid balance of the
Advances when such collections become finally collected funds after allowing not
less than two (2) Business Days for collection. At Lender's request, the
Borrower will deliver all customer billing statements to the Lender for
examination and for mailing in the Borrower's stamped and addressed envelopes.
5.1l(b) Subject to the rights granted to the Lender in paragraph 5 of the
Security Agreement, all ledger sheets or cards, invoices, shipping records,
correspondence, and other writings relating to accounts shall, until delivered
to the Lender or removed by the Lender from the Borrower's premises, be kept on
the Borrower's premises without cost to the Lender in appropriate containers in
safe places.
5.11(c) Upon the Lender's demand for payment, the Lender may remove from the
Borrower's premises all books and records, correspondence, documents and files
relating to accounts; and the Lender may without cost or expense to the Lender
use such of the Borrower's personnel, supplies, space and equipment at the
Borrower's place of business as the Lender may desire for the handling of
collections. The Borrower will pay any and all out of pocket expenses and cost
of collection (including reasonable attorney fees) incurred by the Lender in the
Lender's handling of or effort to enforce collections.
5.11(d) The Borrower warrants that, except as may be disclosed in the
lists of Accounts furnished to the Lender: each customer billing statement
correctly states the subject matter and terms of sale; the merchandise conforms
thereto and is in all respects acceptable to the customer; the date of the
billing statement is not prior to the date of shipment; the Account is not
subject to any dispute, defense, offset or counterclaim; the account debtor is
not a subsidiary or affiliated company; and the Borrower has no reason to
believe the Account will not be paid in the
<PAGE>
regular course of business. The Borrower will notify the Lender promptly of any
event, circumstance or communication with respect to any Account that is
inconsistent with the foregoing representation.
ARTICLE VI
NEGATIVE COVENANTS
Until this Agreement shall have expired or been terminated and all of the
Borrower's other obligations to the Lender under this Agreement shall have been
paid in full, unless the Lender shall otherwise consent in writing:
Section 6.1 Merger. The Borrower will not merge or consolidate or enter
into any analogous reorganization or transaction with any Person or liquidate,
wind up or dissolve itself (or suffer any liquidation or dissolution).
Section 6.2 Sale of Assets. The Borrower will not sell, transfer, lease or
otherwise convey all or any substantial part of its assets except for sales and
leases of inventory in the ordinary course of business.
Section 6.3 Dividends. The Borrower will not pay any dividends or otherwise
make any distributions on, or redemptions of, any of its outstanding stock;
provided, however, that if the Borrower shall be eligible and shall have elected
"S" Corporation status in accordance with Sections 1361 et seq. of the Internal
Revenue Code of 1986, as amended, for any fiscal year, the Borrower may pay
dividends in its capital stock to enable its shareholders to pay income taxes on
income of the Borrower for such fiscal year that it is taxable to the
shareholders].
Section 6.4 Investments. The Borrower will not make any loans, advances or
extensions of credit to any other Person (except for trade and customer accounts
receivable for inventory sold or services rendered in the ordinary course of
business and payable in accordance with customary trade terms) or purchase or
acquire any stock or other debt or equity securities of or any interest in any
other Person or any integral part of any business or the assets comprising such
business or part thereof, except for:
6.4(a) Investments in readily marketable direct obligations issued or
unconditionally guaranteed by the United States government or any agency thereof
and supported by the full faith and credit of the United States.
6.4(b) Certificates of deposit or bankers' acceptances issued by any
commercial Bank organized under the laws of the United States or any State
thereof which has (i) combined capital and surplus of at least $100,000,000, and
(ii) a credit rating with respect to its unsecured indebtedness from a
nationally recognized rating service that is satisfactory to the Lender.
6.4(c) Commercial paper given the highest rating by a nationally recognized
rating service.
6.4(d) Repurchase agreements relating to securities of the kind described in
Section 6.4 (a).
6.4(e) Other readily marketable investments in debt securities which are
reasonably acceptable to the Lender.
6.4(f) Travel advances to officers and employees in the ordinary course of
business. Any investments under clauses (a),(b),(c) or (d) above must mature
within one year of the acquisition thereof by the Borrower.
Section 6.5 Indebtedness. The Borrower will not borrow any money or issue
any bonds, debentures or other debt securities or otherwise become obligated on
any interest-bearing indebtedness except for the Advances under this Agreement
and except for existing indebtedness as disclosed on the most recent financial
statement of the Borrower referred to in Section 4.1.
Section 6.6 Liens. The Borrower will not create, incur, assume or suffer to
exist any Lien, or enter into any arrangement for the acquisition of any
property through conditional sale, lease-purchase or other title retention
agreements except:
6.6(a) Liens granted to the Lender.
6.6(b) Liens existing on the date of this Agreement and disclosed in those
UCC or other Lien searches referred to in Section 3.l(d).
6.6(c) Deposits or pledges to secure payment of workers' compensation,
unemployment insurance, old age pensions or other social security obligations
arising in the ordinary course of business of the Borrower.
6.6(d) Liens for taxes, fees, assessments and governmental charges not
delinquent.
6.6(e) Liens of carriers, warehousemen, mechanics and materialmen, and other
like Liens arising in the ordinary course of business, for sums not due.
6.6(f) Liens incurred or deposits or pledges made or given in connection
with, or to secure payment of, indemnity, performance or other similar bonds.
6.6(g) Encumbrances in the nature of zoning restrictions, easements and
rights or restrictions of record on the use of real property and landlord's
Liens under leases on the premises rented, which do not materially detract from
the value of such property or impair the use thereof in the business of the
Borrower.
Section 6.7 Contingent Obligations. The Borrower will not guarantee or
otherwise become liable on the indebtedness of any other Person.
Section 6.8 Change in Control. The Borrower will not allow a Change in
Control to occur.
ARTICLE VII
TERMINATION BY BORROWER
This agreement shall continue in effect until terminated upon not less than
30 days prior written notice delivered by the Borrower certified mail to Lender
by certified mail.Termination shall not impair or affect the Lender' s rights
existing as of the time notice of
<PAGE>
Termination is given. Borrowers obligations with respect to payment of any
Termination fee shall be fixed and owing as of date such notice is given and not
when such notice becomes effective.
In the event that the Borrower gives notice to the Lender of the termination
of this Agreement under Section VII hereof at any time prior to the second
anniversary of the date of this Agreement, the Borrower will pay to the Lender a
prepayment charge, as additional compensation for the Lender's costs of entering
into this Agreement, in the amount of (i) 3% of the maximum aggregate amount of
the Advances if the notice of termination occurs prior to the first anniversary
of the date of this Agreement; and (ii) 2% of the maximum aggregate amount of
the Advances if the notice of termination occurs after the first anniversary,
but before the second anniversary, of the date of this Agreement, unless the
outstanding amount of Borrower's obligations hereunder are refinanced in full
by an affiliate of U.S. Bancorp after the first anniversary of the date of this
Agreement.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Modifications. Notwithstanding any provisions to the contrary
herein, any term of this Agreement may be amended with the written consent of
the Borrower; provided that no amendment, modification or waiver of any
provision of this Agreement or consent to any departure by the Borrower
therefrom shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such amendment, modifications, waiver or
consent shall be effective only in the specific instance and for the purpose for
which given.
Section 8.2 Costs and Expenses. Whether or not the transactions contemplated
hereby are consummated, the Borrower agrees to reimburse the Lender upon demand
for all reasonable out-of-pocket expenses paid or incurred by the Lender
(including filing and recording costs and fees and expenses of Dorsey & Whitney
LLP, counsel to the Lender) in connection with the negotiation, preparation,
approval, review, execution, delivery, amendment, modification, interpretation,
collection and enforcement of this Agreement including all fees due Lender
incurred pursuant to this Agreement. The obligations of the Borrower under this
Section shall survive any termination of this Agreement. In the event such
costs, fees or expenses are not promptly paid by Borrower on demand Lender may
set off the amount of any such costs, fees or expenses from funds available to
Borrower. If the Borrower elects, the Borrower may treat the amount of any such
costs, fees or expenses as an Advance hereunder.
Section 8.3 Waivers, etc. No failure on the part of the Lender to exercise
and no delay in exercising any power or right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any power or right
preclude any other or further exercise thereof or the exercise of any other
power or right. The rights and remedies of the Lender hereunder are cumulative
and not exclusive of any right or remedy the Lender otherwise has.
Section 8.4 Notices. Except when telephonic notice is expressly authorized
by this Agreement, any notice or other communication to any party in connection
with this Agreement shall be in writing and shall be sent by manual delivery,
telegram, telex, facsimile transmission, overnight courier or United States mail
(postage prepaid) addressed to such party at the address specified on the
signature page hereof, or at such other address as such party shall have
specified to the other party hereto in writing. All periods of notice shall be
measured from the date of delivery thereof if manually delivered, from the date
of sending thereof if sent by telegram, telex or facsimile transmission, from
the first Business Day after the date of sending if sent by overnight courier,
or from four days after the date of mailing if mailed; provided, however, that
any notice to
<PAGE>
the Lender under Article II hereof shall be deemed to have been given only when
received by the Lender.
Section 8.5 Successors and Assigns: Disposition of Loans. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Borrower may not assign its
rights or delegate its obligations hereunder without the prior written consent
of the Lender. The Lender may at any time sell, assign, transfer, grant
participations in, or otherwise dispose of any portion of the Advances to banks
or other financial institutions. The Lender may disclose any information
regarding the Borrower in the Lender's possession to any prospective buyer or
participant.
Section 8.6 Offset. The Borrower hereby irrevocably authorizes the Lender to
set off all sums owing by the Borrower to the Lender against all deposits and
credits of the Borrower with, and any and all claims of the Borrower against,
the Lender. The Borrower further agrees that any bank participating with the
Lender in Advances hereunder may exercise any and all rights of setoff with
respect to such participation as fully as if such participant had lent directly
to the Borrower the amount of such participation.
SECTION 8.7 GOVERNING LAW AND CONSTRUCTION, THE VALIDITY, CONSTRUCTION AND
ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE
STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES
THEREOF,
SECTION 8.8 CONSENT TO JURISDICTION. AT THE OPTION OF THE LENDER, THIS
AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING
IN HENNEPIN COUNTY, MINNESOTA; AND THE BORROWER CONSENTS TO THE JURISDICTION AND
VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT
CONVENIENT, IN THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER
JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR
INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE LENDER AT ITS
OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE
JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE
ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT
PREJUDICE,
SECTION 8.9 WAIVER OF JURY TRIAL, EACH OF THE BORROWER AND THE LENDER
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE ADVANCES AND ANY OTHER LOAN
DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY,
Section 8.10 Indemnification. The Borrower hereby agrees to defend, protect,
indemnify and hold harmless the Lender and its affiliates and the directors,
officers, employees, attorneys and agents of the Lender and its affiliates (each
of the foregoing being an "Indemnitee" and all of the foregoing being
collectively the "Indemnitees") from and against any and all claims, actions,
damages, liabilities, judgments, costs and expenses (including all reasonable
fees and disbursements of counsel which may be incurred in the investigation or
defense of any matter) imposed upon, incurred by or asserted against any
Indemnitee, whether direct, indirect or
<PAGE>
consequential and whether based on any federal, state, local or foreign laws or
regulations (including securities laws, environmental laws, commercial laws and
regulations), under common law or on equitable cause, or on contract or
otherwise: (a) by reason of, relating to or in connection with the execution,
delivery, performance or enforcement of any Loan Document, any commitments
relating thereto, or any transaction contemplated by any Loan Document; or (b)
by reason of, relating to or in connection with any credit extended or used
under the Loan Documents or any act done or omitted by any Person, or the
exercise of any rights or remedies thereunder, including the acquisition of any
collateral by the Lender by way of foreclosure of the Lien thereon, deed or bill
of sale in lieu of such foreclosure or otherwise; provided, however, that the
Borrower shall not be liable to any Indemnitee for any portion of such claims,
damages, liabilities and expenses resulting from such Indemnitee's negligence or
willful misconduct. In the event this indemnity is unenforceable as a matter of
law as to a particular matter or consequence referred to herein, it shall be
enforceable to the full extent permitted by law.
Section 8.11 Captions. The captions or headings herein and any table of
contents hereto are for convenience only and in no way define, limit or describe
the scope or intent of any provision of this Agreement.
Section 8.12 Entire Agreement. This Agreement and the other Loan Documents
embody the entire agreement and understanding between the Borrower and the
Lender with respect to the subject matter hereof and thereof. This Agreement
supersedes all prior agreements and understandings relating to the subject
matter hereof.
Section 8.13 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument, and either of the parties hereto may execute this Agreement by
signing any such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
INSIGNIA SYSTEMS, INC.
By: ILLEGIBLE
Its President
Borrower's Address:
10801 Red Circle Drive
Minnetonka, MN 55343
REPUBLIC ACCEPTANCE CORPORATION
By: Scott Sousek
Its Relationship Manager
Lender's Address:
2338 Central Avenue NE, Suite 200
Minneapolis, MN 55418
Fax: (612) 782-1801
EXHIBIT 13
[LOGO]
INSIGNIA SYSTEMS, INC.
ANNUAL REPORT 1997
- --------------------------------------------------------------------------------
<PAGE>
BUSINESS DESCRIPTION
Insignia Systems, Inc. (the "Company") is the leading marketer of printing
equipment, software and related print media products used by retailers to
produce their promotional and point-of-sale display materials in-store. Today,
Insignia has over 25,000 customers worldwide using Insignia POPS(TM) - the
Company's newest in-store marketing program, SIGNright,(R) the Impulse(R) Retail
System or Stylus(R) Sign & Label Works software to easily create and print
professional point-of-sale signs, labels, posters and flyers. The Company's
mission is to help retailers compete more effectively by providing easy-to-use
systems and high quality print media supplies. The Company obtains revenue from
the sale of signage, sign production equipment and software, and recurring
revenue from the sale of sign and label supplies and accessories used with them.
The Company markets its sign systems through indirect distribution channels, its
accessories and supplies principally through telemarketers and Insignia POPS
through a direct marketing process. Insignia POPS, introduced in July 1997,
combines the Company's expertise in signage and in-store merchandising with its
Stylus software products to provide for a unique sign to be ordered by a brand
manufacturer and placed in a participating super-market. The Company uses
independent distributors in Brazil, Germany, Italy, Singapore and over twenty
other foreign markets.
TABLE OF CONTENTS
Financial Highlights.......................................................... 2
Letter to Shareholders........................................................ 3
Financial Review.............................................................. 4
Balance Sheets................................................................ 8
Statements of Operations...................................................... 9
Statement of Changes in Stockholders' Equity................................. 10
Statements of Cash Flows..................................................... 11
Notes to Financial Statements................................................ 12
Report of Independent Auditors............................................... 19
Stockholder Information...................................................... 20
1
<PAGE>
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended
December 31 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 13,321 $ 14,667 $ 15,547 $ 16,304 $ 14,249
Operating income (loss) (3,393) (999) (1,470) (947) 232
Net income (loss) (3,380) (999) (1,451) (909) 366
Net income (loss) per share:
Basic and diluted $ (.50) $ (.18) $ (.27) $ (.17) $ .07
Shares used in calculation of
net loss per share:
Basic and diluted 6,790 5,404 5,360 5,203 5,254
Working capital $ 3,462 $ 3,512 $ 4,351 $ 4,952 $ 6,094
Total assets 5,754 6,426 6,832 8,107 8,094
Long-term debt and lease obligation 186 289 383 -- 13
Total stockholders' equity 3,795 4,174 5,118 6,413 7,156
</TABLE>
2
<PAGE>
TO OUR SHAREHOLDERS
3
<PAGE>
FINANCIAL REVIEW
The Company was incorporated in January 1990 and from September 1990 until
November 1996 sold its Impulse(R) Retail System. In November 1996, the Company
replaced the Impulse Retail System with the SIGNright(R) system, which performs
essentially the same functions. The SIGNright system was being sold primarily by
in-house telemarketers and independent sales representatives in the United
States and through foreign distributors. As of December 31, 1997, the Company
discontinued direct marketing of the SIGNright machine, but continues to market
the product through indirect channels. During 1993 the Company began selling
Stylus(R), a PC-based sign and label software system.
The following table sets forth, for the periods indicated, certain items in the
Company's statements of operations as a percentage of net sales.
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 51.3 48.2 47.2
- ----------------------------------------------------------------
Gross Profit 48.7 51.8 52.8
Operating Expenses:
Sales and Marketing 53.0 42.5 45.1
Product Development 15.1 12.8 14.0
General and Administrative 3.7 3.3 3.1
Restructuring Charge 2.4 -- --
- ----------------------------------------------------------------
Total Operating Expenses 74.2 58.6 62.2
- ----------------------------------------------------------------
Operating Loss (25.5) (6.8) (9.4)
Other Income 0.1 -- 0.1
- ----------------------------------------------------------------
Net Loss (25.4)% (6.8)% (9.3)%
- ----------------------------------------------------------------
RESULTS OF OPERATIONS:
NET SALES. Net sales for the year ended December 31, 1997 decreased 9% to
$13,321,000 compared to sales of $14,667,000 in 1996. Net sales for 1996
decreased 6% compared to sales of $15,547,000 in 1995.
The decrease in sales in 1997 resulted primarily from a decrease in demand for
the SIGNright machine in 1997 compared to the demand for the Impulse machine in
1996. This decrease in demand resulted in machine revenue of $3,808,000 in 1996
compared to machine revenue of $2,334,000 in 1997. The decrease in sales in 1996
resulted primarily from a decreased demand for the Impulse machine compared to
1995.
GROSS PROFIT. The Company's gross profit decreased 15% in 1997 to $6,489,000 as
compared to 1996. The gross profit decreased 7% in 1996 as compared to 1995.
Gross profit as a percentage of net sales decreased to 48.7% for 1997 compared
to 51.8% for 1996 and 52.8% for 1995. The decrease in 1996 and 1997 was due
primarily to the overall decrease in net sales. Also, the Company's fixed costs
did not decrease in the same proportion as net sales decreased in 1996 and 1997.
The Company's foreign sales were 14% in 1997 and 16% in 1995 and 1996. The
Company expects that sales to foreign distributors will be approximately 15% in
1998.
4
<PAGE>
FINANCIAL REVIEW
OPERATING EXPENSES. Operating expenses increased 15% in 1997 and decreased 11%
in 1996. In 1997 the Company recorded a restructuring charge of $315,000 and
also introduced its Insignia POPS program and incurred $1,007,000 of sales
expenses which accounted for the 15% increase in 1997. Sales expenses increased
27% in 1997 and decreased 8% in 1996. The increase in 1997 was due to the
introduction of the Insignia POPS program and the decrease in 1996 reflected
lower commissions due to decreased sales. Marketing expenses decreased 19% in
both 1997 and 1996 as a result of an expense reduction effort. General and
administrative expenses increased 7% in 1997 and decreased 14% in 1996. The
decrease in general and administrative expenses in 1996 was primarily due to the
expense reduction effort. The increase in 1997 was due primarily to an increase
in rent and bad debt expense. Product development expenses decreased 1% in 1997
and increased 5% in 1996. The Company expects that its operating expenses will
decrease significantly as the Company initiated a restructuring plan in January
1998 and eliminated the direct marketing expenses of the SIGNright machine. The
Company incurred severance costs in the amount of $80,000 resulting from
workforce reductions in 1998.
Operating expenses as a percentage of net sales were 74% in 1997 compared to 59%
in 1996 and 62% in 1995. The increase as a percentage of net sales in 1997 was
due primarily to the low sales volume of the SIGNright machine and Stylus
software. The Company expects its operating expenses as a percentage of net
sales to decrease and its net sales to increase at a faster rate than operating
expenses as the Company is able to leverage its fixed expenses.
NET LOSS. The Company had a net loss of $3,380,000 in 1997 compared to a net
loss of $999,000 in 1996 and a net loss of $1,451,000 in 1995. The loss in 1997
was due to a decrease in margins due to a high proportion of fixed expense
allocated to lower sales, a restructuring charge in the amount of $315,000 and
the costs of introducing the Insignia POPS program.
LIQUIDITY AND CAPITAL RESOURCES:
The Company has financed its operations with proceeds from public and private
equity placements and funds from operations. At December 31, 1997, working
capital was $3,462,000 compared to $3,512,000 at December 31, 1996. Cash, cash
equivalents and marketable securities decreased $133,000 to $465,000 at December
31, 1997.
Net cash used in operating activities increased $2,497,000, primarily due to the
net loss, the decrease in accounts payable, the increase in prepaid expenses and
accounts receivable. Accounts payable decreased $157,000 during 1997 primarily
due to the differences in timing of the Company's inventory purchasing schedule.
Prepaid expenses increased $325,000 during 1997 primarily due to the purchasing
schedule for the SIGNright system. Accounts receivable increased $253,000 during
1997 due to some extended terms for SIGNright and Stylus sales during the last
half of 1997. The Company expects accounts receivable to remain relatively flat
during 1998. The Company also expects inventory levels to remain flat during
1998.
5
<PAGE>
FINANCIAL REVIEW
Net cash of $546,000 was used in investing activities. The net cash decrease was
due to the purchase of marketable securities in the amount of $1,812,000 offset
by the maturity of marketable securities in the amount of $1,497,000 and the
purchase of property and equipment of $231,000.
Net cash of $2,595,000 was provided by financing activities, primarily due to
proceeds from the issuance of common stock of $2,996,000 offset by principal
payments on long term debt of $93,000 and payments to the line of credit in the
amount of $308,000.
The Company anticipates that its working capital needs will continue to increase
due to the expected growth in the Insignia POPS program. In December of 1997,
the Company entered into a loan agreement with a commercial financing division
of a U.S. Bank. The bank issued the Company a line of credit in the amount of
$3,000,000 of which $2,635,000 was available at December 31, 1997. The Company
believes that with this line of credit, it will have sufficient capital
resources to fund its current business operations and anticipated growth for the
foreseeable future.
FORWARD LOOKING STATEMENTS:
Certain statements contained herein and in the following section and like
statements elsewhere in this report are forward looking statements. Actual
results could differ materially from those anticipated as a result of various
factors. Set forth below are the principal factors and risks considered most
likely to cause actual results to differ materially from management's
expectations.
Significant risk factors, while not all inclusive, are:
1. IMPACT OF COSTS OF CONVERTING U.S. DOLLARS TO JAPANESE YEN.
The SIGNright is purchased by the Company from a Japanese manufacturer and
the purchase price is stated in yen. Currency exchange rates could
therefore affect the cost of the SIGNright system to the Company.
2. COST OF THE RAW MATERIAL.
The Company's printing gross margin percentage is a sensitive function of
the cost of the raw paper materials.
3. RESULTS OF INSIGNIA POPS PROGRAM.
It will be necessary to achieve results from the Insignia POPS program that
are comparable to the initial Insingia POPS test program in order to
achieve revenues for the Insingia POPS program at the rate anticipated by
the Company.
4. BUSINESS CONDITIONS OF THE GENERAL ECONOMY.
5. INSTALLATION OF SOFTWARE AND AVAILABILITY OF HARDWARE.
The Company's ability to contract with the planned number of retailers will
depend on a number of factors, including timely installation of software,
locating retailers with adequate hardware, and conducting the necessary
training.
6
<PAGE>
FINANCIAL REVIEW
6. RELIANCE ON LICENSED PROPRIETARY RIGHTS.
All patents on or other proprietary rights to the Impulse and SIGNright
systems, and the associated bar-codes on the sign cards, are held by a
third-party developer (the "Developer"), which is independent of the
Company. The Company has a non-exclusive license to market and sell (but
not manufacture) the Impulse and SIGNright systems. A patent covering
certain aspects of the Impulse and SIGNright systems have been obtained in
the Developer's name by the Company. There is no assurance that any such
patents would offer the Company a meaningful competitive advantage, since
competitors might employ non-infringing technology, and such patents may be
subject to challenge by third parties. Any disruption in the Company's
relationship with the Developer or termination of the Company's license
with the Developer could have a serious adverse effect on the Company.
7. SINGLE SOURCE SUPPLIER OF SIGNRIGHT MACHINES.
The Company does not have, and has no plans to develop, any in-house
manufacturing capability. The Company obtains the SIGNright machine from a
Japanese supplier (the "Supplier") which was designated by the Developer.
Any significant disruption in the Company's relationship with the Supplier,
or failure by the Supplier to make timely deliveries of quality product,
could have a serious adverse effect on the Company.
8. SIGN CARD REVENUE.
The Company derives a significant portion of its revenue from the sale of
the bar-coded sign cards required by the Impulse and SIGNright systems. If
a substantial number of customers discontinue the use of the sign card
there could be a serious adverse effect on the Company's revenue.
9. COMPETITION.
The Company's SIGNright product faces competition from numerous sources,
including handmade signs, large computer systems using customized software,
and personal computers with sign-making software and laser printers. For
the Stylus product, the Company's two major competitors are dSIGN, Inc. (a
privately-held company based in Seattle, WA) and Electronic Label
Technology, Inc. (a privately-held company based in Oklahoma City, OK).
Insignia POPS will be competing for the marketing expenditures of branded
product manufacturers, who use various forms of point-of-purchase marketing
methods, such as displays, coupons, in-store samples, etc. There is no
assurance that Insignia POPS will compete successfully with these
traditional marketing methods.
10. DEPENDENCE ON KEY EMPLOYEES.
The Company is highly dependent upon the services of its present officers,
and the loss of any of them could have a material adverse effect on the
Company. None of the Company's officers are bound by employment or non-
competition agreements with the Company. The success of the Company will
also depend on its ability to attract and retain capable sales and
marketing personnel.
11. YEAR 2000.
The year 2000 is not expected to have a material impact on the Company.
Future developments will be required to be year 2000 compliant and should
not have a material adverse effect on the Company.
7
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 0 $ 448,668
Marketable securities 464,837 149,427
Accounts receivable - net of $204,000 allowance in 1997
and $135,000 in 1996 2,712,505 2,644,851
Inventories 1,617,578 2,015,963
Prepaid expenses 540,028 215,562
- -------------------------------------------------------------------------------------------------
Total Current Assets 5,334,948 5,474,471
PROPERTY AND EQUIPMENT:
Production tooling, machinery and equipment 1,902,704 1,862,311
Office furniture and fixtures 356,099 364,119
Computer equipment 978,952 780,675
Leasehold improvements 312,420 312,420
- -------------------------------------------------------------------------------------------------
3,550,175 3,319,525
Accumulated depreciation and amortization (3,030,500) (2,368,221)
- -------------------------------------------------------------------------------------------------
Total Property and Equipment 519,675 951,304
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,854,623 $ 6,425,775
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 424,361 $ 682,161
Accrued compensation and benefits 234,291 229,019
Accrued expenses 245,028 93,534
Deferred revenue 361,976 93,924
Warranty reserve 98,430 42,840
Other 40,523 54,313
Line of credit 365,447 673,281
Current portion of long-term debt 103,221 93,391
- -------------------------------------------------------------------------------------------------
Total Current Liabilities 1,873,277 1,962,463
LONG-TERM DEBT 186,104 289,326
COMMITMENTS (SEE NOTES 4 & 8)
STOCKHOLDERS' EQUITY:
Common stock, par value $.01:
Authorized shares - 20,000,000
Issued and outstanding shares - 6,857,721 in 1997 and
5,403,858 in 1996 68,578 54,039
Additional paid-in capital 13,083,563 10,102,397
Unearned compensation (2,250) (7,313)
Accumulated deficit (9,354,649) (5,975,137)
- -------------------------------------------------------------------------------------------------
Total Stockholders' Equity 3,795,242 4,173,986
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,854,623 $ 6,425,775
- -------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
8
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 13,321,124 $ 14,667,382 $ 15,546,723
Cost of Sales 6,832,609 7,063,836 7,339,659
- ----------------------------------------------------------------------------------------------------
Gross Profit 6,488,515 7,603,546 8,207,064
OPERATING EXPENSES:
Sales 5,557,557 4,381,247 4,738,794
Marketing 1,501,242 1,845,730 2,280,458
Product development 493,686 498,160 476,549
General and administrative 2,014,322 1,877,411 2,181,165
Restructuring Charge 314,568 -- --
- ----------------------------------------------------------------------------------------------------
Total Operating Expenses 9,881,375 8,602,548 9,676,966
- ----------------------------------------------------------------------------------------------------
Operating Loss (3,392,860) (999,002) (1,469,902)
OTHER INCOME (EXPENSE):
Interest income 84,667 46,751 62,551
Interest expense (56,717) (64,911) (23,828)
Other income (expense) (14,602) 17,936 (20,223)
- ----------------------------------------------------------------------------------------------------
NET LOSS $ (3,379,512) $ (999,226) $ (1,451,402)
- ----------------------------------------------------------------------------------------------------
Net loss per share:
Basic and diluted $ (.50) $ (.18) $ (.27)
- ----------------------------------------------------------------------------------------------------
Shares used in calculation of net loss per share:
Basic and diluted 6,790,484 5,403,741 5,359,918
- ----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
9
<PAGE>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JAN. 1, 1995 5,216,436 $ 52,164 $ 9,921,686 $ (36,188) $(3,524,509) $ 6,413,153
Exercise of stock options 54,077 541 29,459 -- -- 30,000
Employee stock purchase plan 90,493 905 104,972 -- -- 105,877
Amortization of stock grant -- -- -- 20,063 -- 20,063
Net loss -- -- -- -- (1,451,402) (1,451,402)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1995 5,361,006 53,610 10,056,117 (16,125) (4,975,911) 5,117,691
Employee stock purchase plan 42,852 429 46,280 -- -- 46,709
Amortization of stock grant -- -- -- 8,812 -- 8,812
Net loss -- -- -- -- (999,226) (999,226)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1996 5,403,858 54,039 10,102,397 (7,313) (5,975,137) 4,173,986
Sale of common stock 1,373,660 13,737 2,890,471 -- -- 2,904,208
Exercise of stock options 13,768 138 13,630 -- -- 13,768
Employee stock purchase plan 66,435 664 77,065 -- -- 77,729
Amortization of stock grant -- -- -- 5,063 -- 5,063
Net loss -- -- -- -- (3,379,512) (3,379,512)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1997 6,857,721 $ 68,578 $13,083,563 $ (2,250) $(9,354,649) $ 3,795,242
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
10
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,379,512) $ (999,226) $(1,451,402)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 662,279 540,192 647,667
Provision for bad debt expense 185,000 70,000 80,500
Provision for obsolete inventory 71,500 47,500 79,616
Amortization of unearned compensation 5,063 8,812 20,063
Changes in operating assets and liabilities:
Accounts receivable (252,654) (479,477) 5,784
Inventories 326,885 (35,897) (181,208)
Prepaid expenses (324,466) 116,056 102,014
Accounts payable (156,872) (101,890) (347,182)
Accrued compensation and benefits 5,272 6,317 (79,358)
Deferred revenue 268,052 73,047 20,877
Warranty reserve 55,590 (31,160) (10,000)
Accrued expenses and other 137,705 2,789 (31,878)
- ------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (2,497,086) (782,937) (1,144,507)
INVESTING ACTIVITIES:
Purchases of property and equipment (230,651) (341,980) (335,595)
Purchase of marketable securities (1,812,307) (1,114,271) (510,154)
Maturity/sale of marketable securities 1,496,897 1,468,750 1,036,923
- ------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Investing Activities (546,061) 12,499 191,174
FINANCING ACTIVITIES:
Net change in line of credit (307,834) 673,281 --
Proceeds from issuance of long-term debt -- -- 500,000
Proceeds from issuance of Common Stock 2,995,704 46,709 135,877
Principal payments on long-term debt (93,391) (84,497) (32,786)
- ------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 2,594,479 635,493 603,091
- ------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (448,668) (134,945) (350,242)
Cash and Cash Equivalents at Beginning of Year 448,668 583,613 933,855
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 0 $ 448,668 $ 583,613
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS. Insignia Systems, Inc. (the "Company") develops
and markets signage and related products to retail markets. The
SIGNright(R) system, is an easy-to-use, affordable sign making system. The
system produces high quality signs on sign cards provided by the Company.
Through December, 1997 the product was sold primarily by telephone sales
representatives and independent sales representatives. As of December, 1997
the Company discontinued direct marketing of the SIGNright machine, but
will continue to market the product through indirect channels. The
Company's second major product, tradenamed Stylus(R), is a PC-based sign
and label software system. It is sold through direct sales as well as by
telephone sales representatives. Both the SIGNright system and Stylus are
sold through foreign distributors. The Company's third major product,
Insignia POPS(TM) combines the Company's store merchandising expertise with
the Stylus software to provide for a unique sign to be placed in a
participating supermarket. Insignia POPS is sold primarily through direct
sales.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
REVENUE RECOGNITION. The Company recognizes revenue associated with
equipment and sign card sales at the time the products are shipped to
customers. Revenue associated with software sales and maintenance
agreements are recognized over the life of the contract.
MARKETABLE SECURITIES. Marketable securities are composed of debt
securities and are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses,
net of tax, reported as a separate component of stockholders' equity.
Realized gains and losses and declines in value judged to be other than
temporary on available-for-sale securities are included in other income.
INVENTORIES. Inventories are primarily comprised of Impulse(R) machines,
SIGNright machines, sign cards, and accessories. Inventory is valued at
lower of cost or market using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost.
Depreciation and amortization is provided on a straight line basis over
three to five years. Leasehold improvements are amortized over the shorter
of the term of the lease or life of the asset.
PRODUCTION TOOLING COSTS. Expenditures relating to the purchase and
installation of production tooling are capitalized and amortized over the
anticipated useful life of the product.
INCOME TAXES. Income taxes are accounted for under the liability method.
Deferred income taxes are provided for temporary differences between
financial reporting and tax bases of assets and liabilities.
STOCK-BASED COMPENSATION. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 (APB 25) and related interpretations in
accounting for its plans. Under APB25, when the exercise price of employee
stock options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
IMPAIRMENT OF LONG-LIVED ASSETS. The Company will record impairment losses
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount.
USE OF ESTIMATES. The preparation of financial statements in conformity
with general accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
NET LOSS PER COMMON SHARE. In 1997, the Financial Accounting Standards
Board issued Statement No. 128, EARNINGS PER SHARE (Statement 128).
Statement 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings
per share is very similar to fully diluted earnings per share under the
previous rules. All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform to the Statement 128
requirements. Diluted earnings per share is not presented as the effect of
outstanding options and warrants is antidilutive.
ADVERTISING COSTS. Advertising costs are charged to operations as incurred.
Advertising expenses were approximately $677,195, $768,786, and $989,520 in
1997, 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT. Research and development expenditures are charges
to operations as incurred. Statement of Financial Accounting Standards No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility.
Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs
incurred by the Company between completion of the working model and the
point at which the product is ready for general release have been
insignificant. All research and development costs have been expensed.
3. RESTRUCTURING PROGRAM. During January 1998, the Company implemented a
restructuring program (Program) to achieve a more focused marketing
strategy regarding the selling of SIGNright machines. This marketing
strategy eliminated the marketing and selling of SIGNright machines through
direct channels. This resulted in the Company streamlining and downsizing
its operations by reducing its workforce and consolidating certain employee
groups. As a result of this Program, the Company reduced its workforce from
130 full time employees to 93 full time employees. The Company took a
charge to earnings in December 1997 due to this restructuring in the amount
of $315,000. This $315,000 charge is comprised of a $141,000 charge
associated with the writing off of capitalized production tooling costs of
the SIGNright machine, resulting in twelve months of unamortized costs, and
$174,000 of accrued rental costs associated with a portion of the leased
facility which in 1998 will be permanently idle and separate from the
remaining utilized lease space. The Company incurred severance costs in the
amount of $80,000 in January 1998 as a result of this workforce reduction.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
4. MARKETABLE SECURITIES. Marketable securities consist of U.S. Treasury Debt
Securities which mature in October, 1998. Approximately $140,000 of these
notes are pledged as collateral for the loan agreement (see Note 7).
Investments are classified as available-for-sale and are stated at
amortized cost which approximates fair market value.
5. COMMITMENTS.
PRODUCT DESIGN AGREEMENTS. The Company entered into an exclusive agreement
with the developer of the Impulse machine whereby in exchange for all
rights to market the product, the Company would pay royalties of $21 per
machinepurchased by the Company and was to make all reasonable efforts to
purchase 20,000 units by December 31, 1994. Since the Company did not
purchase the required number of units by December 31, 1994, the Company no
longer has a guarantee of exclusivity. However, the developer does not
intend to grant similar rights to another company. The Company could regain
the guarantee of exclusive rights by prepaying royalties on any remaining
units. The Company has ceased selling the Impulse machine as of December
31, 1996.
The Company has an exclusive licensing agreement for a bar-code used with
the Impulse Retail System and SIGNright system. The Company has agreed to
pay royalties totaling 1% of net sales on all paper and supplies using the
bar-code technology.
The Company has the rights to use and distribute certain fontware
technology developed for its Impulse Retail System. The agreement required
a one time payment of $25,000 for source code rights and $1,500 for each
fontware outline licensed. In addition, the Company has agreed to pay
royalties of $3.75 per fontware outline sold.
HARDWARE PURCHASE AGREEMENT. The Company has a purchase agreement with a
Japanese company that holds the rights to supply its SIGNright machine. As
of December 31, 1997, the Company had a purchase commitment for 2,000
SIGNright machines in the approximate amount of $700,000. As of December
31, 1997, the Company had paid $350,000 of this commitment. In addition,
before beginning production, the Company paid for tooling, equipment and
development expenditures of approximately $248,000. The purchase price for
the SIGNright machine is payable in Japanese yen and therefore the dollar
value of such payments may fluctuate with exchange rates.
6. INCOME TAXES. At December 31, 1997, the Company had net operating loss
carryforwards of approximately $7,832,000 which are available to offset
future taxable income through 2012. These carryforwards are subject to the
limitations of Internal Revenue Code Section 382. This section provides
limitations on the availability of net operating losses to offset current
taxable income if significant ownership changes have occurred for federal
tax purposes.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Significant components of the deferred tax assets are as follows:
As of December 31 1997 1996
- ------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Net operating loss carryforwards $ 2,897,600 $ 1,919,100
Depreciation and amortization 106,900 119,200
Accounts receivable allowance 75,600 50,100
Allowance for machine returns 36,400 15,900
Inventory reserve 134,400 66,700
Restructuring reserve 110,500 --
Other 50,000 51,500
- ------------------------------------------------------------------------
Total deferred tax asset 3,411,400 2,222,500
Valuation allowance (3,411,400) (2,222,500)
- ------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
7. STOCK OPTIONS, WARRANTS AND AWARDS.
STOCK OPTION PLAN. The Company has a stock option plan for its employees
and directors. Under the terms of the plan, the Company grants incentive
stock options to employees at an exercise price at or above 100% of fair
market value on the date of grant. The plan also allows the Company to
grant non-qualified options at an exercise price of less than 100% of fair
market value at the date of grant. The stock options expire five years
after the date of grant and typically vest in one-third increments on the
first, second and third anniversaries of the grant date.
The following table summarizes activity under the plan:
Plan Plan Weighted
Shares Options Average Exercise
Available For Grant Outstanding Price Per Share
- --------------------------------------------------------------------------------
Balance at December 31, 1994 56,120 379,900 $ 2.10
Granted (126,500) 126,500 1.42
Cancelled 117,223 (117,223) 1.99
Exercised -- (54,077) 0.53
Balance at December 31, 1995 46,843 335,100 2.16
Shares reserved 300,000 -- --
Granted (223,400) 223,400 1.92
Cancelled 99,300 (99,300) 2.25
Exercised -- -- --
Balance at December 31, 1996 222,743 459,200 1.79
Granted (199,000) 199,000 2.84
Cancelled 5,632 (5,632) 2.86
Exercised -- (13,768) 2.59
Balance at December 31, 1997 29,375 638,800 1.98
The number of options exercisable under the plan were:
December 31, 1995 218,805
December 31, 1996 267,262
December 31, 1997 342,523
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about the stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------------
Weighted Weighted Weighted
Range Of Average Average Number Average
Exercise Number Remaining Exercise Price Exercisable at Exercise Price
Prices Outstanding Contractual Life Per Share Dec. 31, 1997 Per Share
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.50 - $ 3.63 217,000 5 Years $ 2.54 33,000 $ 3.48
1.44 - 1.63 215,200 4 Years 1.37 135,065 1.37
1.00 - 1.88 128,300 3 Years 1.46 97,126 1.46
2.13 - 3.38 16,300 2 Years 3.15 16,300 3.15
1.63 - 3.25 62,000 1 Year 2.67 61,966 2.67
- --------------------------------------------------------------------------------------------------------------------
$ 1.00 - $ 3.63 638,800 3 Years $ 1.98 342,523 $ 1.93
</TABLE>
Options outstanding under the plan expire at various dates during the period
February 1998 through December 2002.
The Company follows Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No.
123, Accounting for Stock-Based Compensation ("Statement 123"), requires
use of option valuation models that were not developed for use valuing
employee stock options.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of Statement 123.
The fair value for these options was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for 1996: risk-free interest rate of 6.0%; volatility factor of
the expected market price of the Company's common stock of .532, and a
weighted-average life of the option of three years; and for 1997: risk-free
interest rate of 6.0%; volatility factor of the expected market price of
the Company's common stock of .882, and a weighted-average life of the
option of three years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
1997 1996 1995
- ----------------------------------------------------------------------------
Pro forma
net loss $(3,508,528) $(1,111,522) $(1,482,027)
Pro forma
net loss per
common
share $ (.52) $ (.21) $ (.28)
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The pro forma effect on the net loss for 1995, 1996 and 1997 is not
representative of the pro forma effect on net loss in future years because
it does not take into consideration pro forma compensation expense related
to grants made prior to 1995.
WARRANTS. During 1995, the Company issued five year warrants to an outside
consultant to purchase 1,000 shares of Common Stock at $1.50 per share.
Prior to 1995, the Company issued five year warrants to consultants to
purchase a total of 17,500 shares of Common Stock exercisable at various
prices between $2.56 per share and $4.00 per share. The warrants expire on
various dates from August 1998 to November 1999.
In connection with the initial public offering of Common Stock in 1991, the
Company issued a five year warrant to the underwriter for the purchase of
140,000 shares of Common Stock at $4.35 per share. This warrant expired in
1996.
During 1990, two non-employee board members provided strategic planning,
financial and general advisory assistance to the Company. In exchange for
their services, the Company granted to each individual a warrant to
purchase 75,000 shares of Common Stock at $2.00 per share for a five year
period. During 1994, these warrants were extended to September 9, 1999.
In 1990, the Company granted a warrant valued at $1,000 for the purchase of
2,500 shares of Common Stock at $2.00 per share to an equipment leasing
company in exchange for lower interest payments on a lease. This warrant
expired in 1995.
During 1997, a non-employee Board member providing strategic planning and
advisory assistance to the Company was granted a warrant to purchase 25,000
shares of common stock at $2.31 per share. The warrant will expire in five
years.
STOCK AWARD. In December 1993, the Company granted 25,000 shares of
restricted stock at no cost to an officer of the Company. The restriction
on the shares is removed as the individual completes employment periods
with the Company through various dates from 1995 through 1998.
8. FINANCING AGREEMENTS AND LONG-TERM DEBT. The Company entered into a $3
million line of credit agreement with a finance corporation against which
$365,000 was outstanding at December 31, 1997. The minimum amount of
interest due and payable in any month under the line of credit agreement
will not be less than $7,500. The line of credit agreement accrues interest
at a rate of 2 percent over the bank's reference rate per annum and expires
on December 29, 1999. The Company pledged as security all inventory,
accounts receivable, equipment and general intangibles. The carrying amount
of the Company's debt instruments approximates fair value. The Company also
has a long-term loan agreement with a finance corporation which accrues
interest at a rate of 10.05 percent per annum and expires on August 1,
2000. In 1995 the Company borrowed $500,000 and pledged certain printing
press assets and U. S. Treasury Debt Securities as collateral against this
facility.
Long-term debt as of December 31, 1997 is as follows:
Obligations under long-term debt $ 289,325
Less current portion 103,221
- ----------------------------------------------------------------
$ 186,104
- ----------------------------------------------------------------
Maturities of long-term debt as of December 31, 1997 are as follows:
1998 $ 103,221
1999 114,087
2000 72,017
- ----------------------------------------------------------------
$ 289,325
- ----------------------------------------------------------------
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Cash paid during the year for interest was $56,166, $51,285, and $20,393 in
1997, 1996, and 1995, respectively.
9. LEASES. The Company leases its office space under a five year operating
lease. The term of the operating lease is January 1, 1994 through December
31, 1998. The future noncancelable lease payments due on the operating
lease as of December 31, 1997 is $555,120. The Company incurred
approximately $506,000, $429,000, and $412,000 in rent expense in 1997,
1996, and 1995, respectively.
10. CUSTOMER SALES. No single customer represented a significant portion of
total sales. Export sales accounted for 14%, 16%, and 16% of total sales in
1997, 1996, and 1995, respectively.
11. EMPLOYEE BENEFIT PLANS. The Company has a Retirement Profit Sharing and
Savings Plan under Section 401(k) of the Internal Revenue Code. The plan
allows employees to defer up to 10% of their income on a pre-tax basis
through contributions to the plan. The Company may make matching
contributions with respect to salary deferral at a percentage to be
determined by the Company each year. In 1997, 1996, and 1995, the Company
made no matching contributions.
The Company adopted an Employee Stock Purchase Plan effective January 1,
1993. The plan enables employees to contribute up to 10% of their
compensation toward the purchase of the Company's Common Stock at 85% of
market value. In 1997, 1996, and 1995, 66,435, 42,852, and 90,493 shares,
respectively, were purchased by employees under the plan. At December 31,
1997, 150,941shares are reserved for future employee purchases of Common
Stock under the plan.
12. SOURCES OF SUPPLY. The Company currently buys the components of its
products from sole suppliers. Although there are a limited number of
manufacturers capable of manufacturing its products, management believes
that other manufacturers could adapt to provide the products on comparable
terms. The time required to locate and qualify other manufacturers,
however, could cause a delay in manufacturing that may be financially
disruptive to the Company.
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors,
Insignia Systems, Inc.
We have audited the accompanying balance sheets of Insignia Systems, Inc. as of
December 31, 1997 and 1996, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Insignia Systems, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 6, 1998
19
<PAGE>
OFFICERS
G. L. HOFFMAN
Chairman and Secretary
SCOTT F. DRILL (Effective February 24, 1998)
President and Chief Executive Officer
PAUL A. MOQUIST
Executive Vice President, Sales and Operations
JOHN R. WHISNANT
Vice President, Finance
BOARD OF DIRECTORS
G. L. HOFFMAN
Chairman and Secretary
Insignia Systems, Inc.
Scott F. Drill (Effective February 24, 1998)
President and Chief Executive Officer
Insignia Systems, Inc.
ERWIN A. KELEN (1, 2)
President
Kelen Ventures
DON E. SCHULTZ (1, 2)
President
Agora, Inc.
GORDON F. STOFER (1, 2)
Managing General Partner
Cherry Tree Ventures
FRANK D. TRESTMAN (1, 2)
President
Trestman Enterprises
(1) Audit Committee
(2) Compensation Committee
STOCKHOLDER INFORMATION
CORPORATE OFFICE: Insignia Systems, Inc.
10801 Red Circle Drive, Minnetonka, MN 55343
Phone: (612) 930-8200; (800) 874-4648
Fax: (612) 930-8222; (800) 347-9216
ANNUAL MEETING:
Thursday, May 21, 1998, 9:00 a.m.
Insignia Systems, Inc. Headquarters
10801 Red Circle Drive, Minnetonka, MN 5534
TRANSFER AGENT AND REGISTRAR:
Norwest Bank Minnesota,
N.A.P.O. Box 64854, St. Paul, MN
55164-0854 (612) 450-4064; (800) 468-9716
LEGAL COUNSEL: Lindquist & Vennum
4200 IDS Center, Minneapolis, MN 55402
INDEPENDENT AUDITORS: Ernst & Young LLP
1400 Pillsbury Center, Minneapolis, MN 55402
INVESTOR INQUIRIES: Inquiries should be directed to: Vice President of Finance,
Insignia Systems, Inc. 10801 Red Circle Drive, Minnetonka, MN 55343
FORM 10-K: Shareholders who wish to obtain a copy of the Company's annual report
on Form 10-K, filed with the Securities and Exchange Commission for the year
ended December 31, 1997, may do so without charge by writing to the Company.
STOCK LISTING: The Company's common stock trades on The Nasdaq Small-Cap Market
System under the symbol ISIG. The following table sets forth the range of high
and low bid prices reported on the Nasdaq System. These quotations represent
prices between dealers and do not reflect retail mark-ups, mark-downs or
commissions.
1997 High Low
- -----------------------------------------------------------------
First Quarter 4 5/8 1 13/16
Second Quarter 4 2 5/16
Third Quarter 3 3/8 2 1/2
Fourth Quarter 2 5/8 1 1/32
1996 High Low
- -----------------------------------------------------------------
First Quarter 1 5/8 1 3/8
Second Quarter 1 3/4 1 5/16
Third Quarter 2 7/16 1 5/16
Fourth Quarter 2 3/16 1 3/4
As of March 17, 1998, the Company had 145 shareholders of record and
approximately 1,050 beneficial owners.
DIVIDEND POLICY: The Company has never paid cash dividends on its common stock.
The Board of Directors presently intends to retain all earnings for use in the
Company's business and does not anticipate paying cash dividends in the
foreseeable future.
20
<PAGE>
[LOGO]
INSIGNIA SYSTEMS, INC.
10801 Red Circle Drive, Minnetonka, MN 55343
Phone: (612) 930-8200 Fax: (612) 930-8222
E-mail: [email protected] Web: www.insigniasystems.com
(C) 1998 Insignia Systems, Inc. All rights reserved. Insignia, Impulse,
SIGNright and Stylus are registered trademarks of Insignia Systems, Inc.
Insignia POPS is a trademark of Insignia Systems, Inc. All other brand names are
trademarks of their respective owners. #2806 3/98
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Insignia Systems, Inc. of our report dated February 6, 1998, included in the
1997 Annual Report to Stockholders of Insignia Systems, Inc.
Our audits also included the financial statement schedule of Insignia Systems,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-47003 and Form S-8 No. 33-92376) pertaining to the 1990 Stock
Plan and in the Registration Statements (Form S-8 No. 33-75372 and Form S-8 No.
33-92374) pertaining to the Employee Stock Purchase Plan of Insignia Systems,
Inc. of our report dated February 6, 1998, with respect to the financial
statements incorporated herein by reference and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of Insignia Systems, Inc.
/s/Ernst & Young LLP
Minneapolis, Minnesota
March 27, 1998
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
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