--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR,
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER 0-27012
------------------------
INSIGNIA SOLUTIONS PLC
(Exact name of Registrant as specified in its charter)
ENGLAND AND WALES NOT APPLICABLE
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
------------------------
41300 CHRISTY STREET INSIGNIA HOUSE
FREMONT THE MERCURY CENTRE
CALIFORNIA 94538-3115 WYCOMBE LANE, WOOBURN GREEN
UNITED STATES OF AMERICA HIGH WYCOMBE, BUCKS HP10 0HH
(510) 360-3700 UNITED KINGDOM
(44) 1628-539500
(Address and telephone number of principal executive offices and principal
places of business)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
(TITLE OF CLASS)
ORDINARY SHARES (L0.20 NOMINAL VALUE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $73,684,000 as of February 22, 2001 based upon the
closing sale price on the Nasdaq National Market reported for such date.
Ordinary shares held by each officer and director and by each person who owns 5%
or more of the outstanding Ordinary share capital have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily conclusive determination for other purposes.
As of February 22, 2001, there were 19,113,994 Ordinary shares of L0.20 each
nominal value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Business.................................................... 3
Item 2. Facilities.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 4A. Executive Officers of the Registrant........................ 15
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Consolidated Financial Data........................ 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Item 8. Consolidated Financial Statements and Supplementary Data.... 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 34
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 35
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 41
Item 13. Certain Relationships and Related Transactions.............. 43
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 44
2
PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT") REGARDING THE COMPANY AND ITS BUSINESS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND PROSPECTS. WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS,"
"PLANS," "BELIEVES," "SEEKS," "ESTIMATES" AND SIMILAR EXPRESSIONS OR VARIATIONS
OF SUCH WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT
THE EXCLUSIVE MEANS OF IDENTIFYING FORWARD-LOOKING STATEMENTS IN THIS REPORT.
ADDITIONALLY, STATEMENTS CONCERNING FUTURE MATTERS SUCH AS THE DEVELOPMENT OF
NEW PRODUCTS, ENHANCEMENTS OR TECHNOLOGIES, PARTICULARLY THE ONGOING DEVELOPMENT
OF THE JEODE-TM- PRODUCT LINE, THE TIMING OF THE AVAILABILITY OF ENHANCEMENTS OF
THE JEODE PLATFORM, THE JEODE PRODUCT AND SERVICE OFFERINGS, THE REVENUE MODEL
AND MARKET FOR THE JEODE PLATFORM, THE FEATURES, BENEFITS AND ADVANTAGES OF THE
JEODE PLATFORM, INTERNATIONAL SALES, THE AVAILABILITY OF LICENSES TO THIRD-PARTY
PROPRIETARY RIGHTS, BUSINESS AND SALES STRATEGIES, MATTERS RELATING TO
PROPRIETARY RIGHTS, COMPETITION, FACILITIES NEEDS, EXCHANGE RATE FLUCTUATIONS
AND THE COMPANY'S LIQUIDITY AND CAPITAL NEEDS AND OTHER STATEMENTS REGARDING
MATTERS THAT ARE NOT HISTORICAL ARE FORWARD-LOOKING STATEMENTS.
ALTHOUGH FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE GOOD FAITH
JUDGMENT OF THE COMPANY'S MANAGEMENT, SUCH STATEMENTS CAN ONLY BE BASED ON FACTS
AND FACTORS CURRENTLY KNOWN BY THE COMPANY. CONSEQUENTLY, FORWARD-LOOKING
STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS
AND OUTCOMES MAY DIFFER MATERIALLY FROM THE RESULTS AND OUTCOMES DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES IN RESULTS AND OUTCOMES INCLUDE WITHOUT LIMITATION THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS REPORT. READERS ARE URGED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE OF THIS REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO
REVISE OR UPDATE ANY FORWARD-LOOKING STATEMENTS IN ORDER TO REFLECT ANY EVENT OR
CIRCUMSTANCE THAT MAY ARISE AFTER THE DATE OF THIS REPORT. READERS ARE URGED TO
REVIEW AND CONSIDER CAREFULLY THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN
THIS REPORT, WHICH ATTEMPTS TO ADVISE INTERESTED PARTIES OF THE RISKS AND
FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ITEM 1--BUSINESS
OVERVIEW
Insignia Solutions plc (the "Company"), which commenced operations in 1986,
develops, markets and supports software technologies that speed the adoption of
Java-based individualized computing in Internet appliances and embedded devices.
In January 1998, the Company announced its intention to launch a new product
line called the Jeode-TM- platform, based on the Company's Embedded Virtual
Machine ("EVM-TM-") technology. This followed a strategic review in late 1997 of
the Company's business. The Company also explored new markets that would
leverage the Company's 15 years of emulation software development experience.
The Jeode platform is the Company's implementation of Sun Microsystems, Inc.'s
("Sun") Java-Registered Trademark- technology tailored for Internet appliances
and embedded devices. It leverages patent-pending intellectual property to
provide these resource-constrained devices with high performance, fully-
compatible Java applet and application support. The product became available for
sale in March 1999. The Jeode platform is now the principal product line of the
Company and will be for the foreseeable future. The Jeode product line revenue
model is based on original equipment manufacturer's ("OEMs") and channel
partners' customer transactions.
The Company's principal product line in past years was SoftWindows-TM-. This
product enabled Microsoft Windows ("Windows-Registered Trademark-") applications
to be run on most Apple Computer Inc. ("Apple-Registered Trademark-") Macintosh
computers and many UNIX workstations. Revenues from this product line grew until
1995, but declined significantly after that date, along with margins. This was
due to a declining demand for
3
Apple Macintosh products and increased competition. The Company also shipped
RealPC, a low cost software product that allowed consumers to play games and
other applications designed for Intel-based PCs on their Power Macintosh
computers. In early 1999 Management took steps to discontinue these product
lines, and on October 18, 1999, the Company signed an exclusive licensing
arrangement with FWB Software, LLC ("FWB"). This arrangement allowed the Company
to focus exclusively on its Jeode platform business strategy.
Between December 1995 and May 1998, the Company shipped NTRIGUE-TM-, a
Windows compatibility client/server product that supported multiple X-terminals,
workstation clients, Macintosh computers, PCs, network computers and Net PCs
from a Windows NT-based server. The Company disposed of its NTRIGUE technology
in February 1998.
PRODUCTS AND SUPPORT
SUMMARY
The Jeode product has been available for sale since March 16, 1999. In 2000,
revenue from the Jeode product line was derived from four main sources: the sale
of a development license, the sale of annual maintenance and support
contracts/services, a commercial use royalty based on shipments of products that
include Jeode technology, and customer-funded engineering activities. The
Company expects future revenues to be derived from the same sources. The Jeode
product line revenue model is based on OEMs customer transactions. Jeode product
line revenues accounted for 98% of total Company revenues in 2000, and 100% of
total Company revenues in the fourth quarter of 2000.
In 2000, the Company derived its SoftWindows revenues from FWB and from
offering support services. SoftWindows revenues accounted for 2% of total
Company revenues in 2000.
JEODE PLATFORM
The Company's Jeode platform allows developers to create applications for
Internet appliances and embedded devices using Java technology. The Java
environment was originally designed by Sun and first unveiled in 1995.
Currently, International Data Corporation estimates there are over 2.5 million
Java software developers, and Sun estimates more than 10,000,000 Java enabled
computer platforms and more than 200 Java licensees. The primary use of the Java
technology, prior to the beta release of the Jeode platform in November 1998,
was for large corporate or enterprise applications.
There is a growing demand in the Internet appliance and embedded device
markets for Java technology because the Java language is simple, robust, object
oriented, and multi-threaded--meaning it supports applications that do more than
one thing at a time. Among the Java platform's biggest advantages are its "write
once, run anywhere" architecture and its ability to deliver virus-free code. In
addition, the Java technology platform is interpreted and dynamically extensible
and is easy to connect to the Internet. Internet appliances and embedded
devices, if programmed in Java technology, could be dynamically downloaded with
new functionality over the Internet instead of requiring consumers to purchase
an entire new device or taking the device to a repair shop.
However, most existing implementations of Java technology are designed for
medium to large computing environments, and do not scale down to meet the
resource constraints of Internet appliances and embedded devices.
Management believes that there is a significant opportunity for Java
technology that can scale down to work within the constraints of an Internet
appliance or embedded device. With the Company's fifteen years of experience
developing virtual machine technology to function under severe systems resource
restrictions, the Company is uniquely suited with its technology to transition
from the PC compatibility market to the Java market. The Company has leveraged
its virtual machine expertise and algorithms and developed its EVM, which is the
Company's brand of a Java embedded virtual machine.
4
This EVM fits within the constraints of an Internet appliance or embedded
device. The Company believes its EVM incorporates unique technologies, including
dynamic adaptive compilation and precise, concurrent garbage collection to
achieve optimal performance and robustness in limited memory Internet appliances
and embedded devices. Consequently, the Company believes it is in a unique
position to take advantage of the opportunity and demand that now exists.
The Company's Jeode platform is comprised of two primary and complementary
components: JeodeRUNTIME and JeodeSUITE. JeodeRUNTIME consists of a highly
configurable Jeode EVM and embedded class libraries called JeodeCLASS. These two
technologies provide the runtime environment for executing the Java application
in the Internet appliance or embedded device. JeodeSUITE is used during the
development of software for Internet appliances or embedded devices, and
consists of JeodeCONFIGURATOR and JeodeMONITOR. These include an event monitor
and memory use analyzer to provide an easy way to tune and configure the EVM for
any device.
A vital component of the Company's Jeode platform is the highly configurable
and tunable EVM, which optimizes the performance of embedded application
software in resource constrained Internet appliances and embedded devices. The
Company believes the Jeode platform addresses the specific requirements of
Internet appliance and embedded developers, making Java technology viable for
the Internet appliance and embedded device markets for the first time.
The Jeode platform is available for ARM, MIPS, x86, Hitachi SuperH-3 and
SuperH-4 and Power PC processors, and Windows CE 2.12 and 3.0, Windows NT4,
VxWorks, Linux, ITRON, Nucleus, BSDi Unix, pSOS and other operating systems,
with additional processor/operating system platforms planned for introduction in
2001. The Company also offers various services and will license technology for
porting the Jeode platform to other platforms to help developers migrate their
applications to their platforms more easily.
The Company has filed applications with the Patent Office of the United
Kingdom and the United States for international protection of innovative
technologies related to the Jeode platform.
SOFTWINDOWS
On October 18, 1999, the Company signed an exclusive licensing arrangement
of its SoftWindows and RealPC product lines to FWB. The proceeds the Company
will receive from the license arrangement are based on an earn-out of FWB's
future revenues from the product line and will be paid to the Company as those
revenues are achieved. Upon achieving a certain revenue threshold, the
SoftWindows and RealPC product lines will be transferred to FWB at no additional
consideration. This threshold has not yet been reached. FWB has assumed all
existing technical support obligations of the Company for SoftWindows Macintosh
customers. The Company continued to provide technical support to its existing
Unix customers that had technical support contracts in place on October 18,
1999. The Company did not renew any of these contracts and as such all of its
obligations ceased in October 2000.
NTRIGUE
In December 1995, the Company introduced and began shipping NTRIGUE, a
Windows compatibility client/server product that supports multiple X-terminals,
workstation clients, Macintosh computers, PCs, network computers and NetPCs from
a Windows NT-based server. NTRIGUE was built upon Citrix Systems Inc.'s
("Citrix") WinFrame product.
In February 1998, the Company sold its NTRIGUE technology to Citrix. Under
the arrangement, Citrix acquired the Company's X-11 technology, Keoke
technology, Macintosh and UNIX ICA clients and all NTRIGUE modifications and
enhancements to WinFrame.
5
The Company discontinued selling NTRIGUE in May 1998, but provided technical
support to its existing NTRIGUE customers through September 1998.
SUPPORT--JEODE PLATFORM
The Company offers both pre and post sales support to its Jeode platform
customers. Pre sales support is provided at no charge. After the sale, each
customer generally commits to at least a one year annual maintenance contract
which will entitle the customer to receive standard support, including:
web-based support, access to FAQs, on-line publications and documentation,
e-mail assistance, limited telephone support, and critical bug fixes and product
updates (collective bug fixes and minor enhancements). Annual maintenance
contracts are also generally required during the time that the customer is
developing and/or shipping products that include any of the Jeode technology.
SUPPORT--SOFTWINDOWS
The Company offered each SoftWindows customer 30 days of free first line
technical support through Startek, a third party support organization. The
Company provided second line support to Startek. The Company also provided free
SoftWindows technical support through on-line services such as America Online
and CompuServe, Internet e-mail, a Worldwide Web server, an electronic bulletin
board and a 24-hour facsimile response service. Under the terms of the Company's
exclusive licensing arrangement with FWB, FWB assumed all existing technical
support obligations of the Company for SoftWindows Macintosh customers. The
Company continued to provide technical support to SoftWindows UNIX customers
that had technical support contracts in place on October 18, 1999. The Company
did not renew any of these contracts as they expired and as such all its
obligations ceased by October 2000.
DEPENDENCE ON JEODE PLATFORM REVENUE
The Company's future performance depends upon sales of products within the
Company's new Jeode product line. During the fourth quarter of 2000, sales of
products in the Jeode product line totaled $3.3 million, which accounted for
100% of the Company's total revenue in such quarter. The Company incurred an
operating loss of $1.1 million in the fourth quarter of 2000. The Jeode platform
may not achieve or sustain market acceptance or provide the desired revenue
levels. At current overhead levels, the Company requires revenues of more than
$5.3 million per quarter to achieve an operating profit. Overhead expenses are
anticipated to increase in 2001. The Jeode product line is the Company's sole
product line and the Company relies and will continue to rely upon sales of
Jeode products for the Company's revenue for the foreseeable future.
Potential customers must generally consider a wide range of issues before
committing to license the Company's product. These issues include product
benefits, infrastructure requirements, ability to work with existing systems,
functionality and reliability. The process of entering into a development
license with a company typically involves lengthy negotiations. As a result of
the Company's sales cycle, it is difficult for the Company to predict when, or
if, a particular prospective licensee might sign a license agreement.
Development license fees may be delayed or reduced as a result of this process.
The Company's success depends upon the use of the Company's technology by
the Company's licensees in their Internet appliances or embedded devices. The
Company's licensees undertake a lengthy process of developing systems that use
the Company's technology. When a licensee enters into a development license with
the Company, the licensee will normally prepay some future commercial use
royalties, typically an amount projected to cover 3 to 6 months of future usage.
Thereafter, until a licensee has sales of its systems incorporating the
Company's technology which generate sufficient commercial use royalties to
surpass any prepayment to the Company, the Company does not receive any further
royalties from that licensee. The Company expects that the period of time
between entering
6
into a development license and actually recognizing further commercial use
royalties to be not only lengthy, but contingent on many factors, which makes it
difficult for the Company to predict when the Company will recognize royalties
from commercial use licenses.
The market for commercially available embedded operating systems is
fragmented and highly competitive. The Jeode product line is targeted at the
emerging Java-based Internet appliance and embedded device marketplaces, which
are rapidly changing and are characterized by an increasing number of new
entrants whose products compete with the Jeode platform. As the industry
continues to develop, the Company expects competition to increase in the future
from existing competitors and from other companies that may enter the Company's
existing or future markets with similar or substitute solutions that may be less
costly or provide better performance or functionality than the Company's
products. Many of the Company's current competitors, as well as potential
competitors, have substantially greater financial, technical, marketing and
sales resources than the Company does, and the Company might not be able to
compete successfully against these companies. If price competition increases
significantly, competitive pressures could cause the Company to reduce the
prices of the Company's products, which would result in reduced profit margins
and could harm the Company's ability to provide adequate service to the
Company's customers. The Company's pricing model for the Company's software
products is based on a range of mid-priced development license packages,
combined with low-priced per-unit royalty payments for each Internet appliance
or embedded device that incorporates the Company's technology, and may be
subject to significant pricing pressures, including buy-out arrangements. Also,
the market may demand alternative pricing models in the future. A variety of
other potential actions by the Company's competitors, including increased
promotion and accelerated introduction of new or enhanced products, could also
harm the Company's competitive position.
The market for Internet appliances and embedded devices is fragmented and is
characterized by technological change, evolving industry standards and rapid
changes in customer requirements. The Company's existing products will be
rendered less competitive or obsolete if the Company fails to introduce new
products or product enhancements that anticipate the features and functionality
that customers demand. The success of the Company's new product introductions
will depend on the Company's ability to accurately anticipate industry trends
and changes in technology standards, timely complete and introduce new product
designs and features, continue to enhance existing product lines, offer products
across a spectrum of microprocessor families used in the Internet appliance and
embedded device systems market, and respond promptly to customers' requirements
and preferences. In addition, the introduction of new or enhanced products also
requires that the Company manage the transition from older products to minimize
disruption in customer ordering patterns.
Development delays are commonplace in the software industry. The Company has
experienced delays in the development of new products and the enhancement of
existing products in the past and is likely to experience delays in the future.
The Company may not be successful in developing and marketing, on a timely basis
or at all, competitive products, product enhancements and new products that
respond to technological change, changes in customer requirements and emerging
industry standards.
SALES AND MARKETING
JEODE PRODUCTS
Jeode platform customers are expected to be OEMs of Internet appliances or
embedded devices located primarily in North America, Europe and Japan. The
Company has established a specialized direct sales force to sell the Jeode
product line in North America, Europe and Japan. The Company has also
established a number of relationships with organizations that will distribute
the Jeode platform, including organizations that will distribute to their
Internet appliance and embedded device
7
customers. The Company is in the process of increasing the number of such
relationships. The Jeode product line revenue model is based on OEM customer
transactions. The timing of such transactions is difficult to predict and
revenues may vary significantly from quarter to quarter as a result. The failure
to conclude a substantial OEM transaction during a particular quarter can have a
material adverse effect on the Company's revenues and results of operations.
The Jeode platform became available in March 1999 and generated 98% of the
Company's total revenues for 2000 and 100% of the Company's total revenues for
the fourth quarter of 2000. The Jeode platform is the Company's principal
product line for the foreseeable future. In 2000, 52% of Jeode platform revenues
were derived from OEM sales, 46% from distributors and 2% from direct sales.
Revenues from OEM customers Index Systems Inc., a subsidiary of Gemstar
International Group Limited, and Quantum Corporation accounted for 18% and 15%,
respectively, of total revenues in the year. Revenues from distributor customers
Wind River Systems, Inc. and Victor Data Systems Company, Ltd. accounted for 22%
and 14%, respectively, of total revenues in the year.
MARKETING. The Company focuses most of its efforts in marketing the Jeode
platform in two primary markets: Internet appliances and embedded devices. There
is overlap between these markets. According to Market research firm
International Data Corporation ("IDC") the number of Internet appliance devices
shipped is estimated to grow from 11 million in 1999 to more than 89 million in
2004. In addition, IDC estimates that total revenue for the Internet appliance
market during this time period will grow from $2.4 billion in 1999 to
$17.8 billion by 2004, and that Internet access devices will surpass consumer
personal computers in shipments by 2002. Many of these Internet appliances are
expected to incorporate Java technology, although IDC has not estimated a
percentage.
The Company is initially concentrating on selling its Jeode product line to
markets that it believes will be early adopters of this technology. These early
adopters include manufacturers of Internet terminals, digital set-top boxes,
personal digital assistants (PDAs), handheld PCs, smart phones, webphones, mass
storage devices, networking infrastructure and car navigation/multimedia
systems.
MARKET ACCEPTANCE. The Company's performance depends upon sales of products
within the Jeode platform, which is a new product. There can be no assurance
that the Company's Jeode platform will achieve or sustain acceptance by the
marketplace or provide the desired revenue levels. The failure of the Jeode
platform to provide an adequate level of performance and functionality, or the
lack of market acceptance of this product for any reason, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company plans to further develop direct sales channels in the Internet
appliance and embedded device markets and to hire and train more direct sales
personnel. Competition for qualified sales personnel is intense and there can be
no assurance that the Company will be able to attract the personnel needed to
market and sell products in the Internet appliance and embedded device markets.
The Company anticipates increased operating expenses as it introduces the
product and develops the organization to market, sell and support the product.
The Company is also leveraging its resources by entering into commercial
relationships with channel partners that would ship Jeode technology as part of
a broader product offering.
SALES CYCLE. The sales cycle for an Internet appliance or embedded device
design-win typically can range from three months to a year. Customers make
product decisions only after extensive product review and hands-on evaluation.
Because customers in the Internet appliance and embedded device markets tend to
remain with the same vendor over time, the Company believes that it must devote
significant resources to each potential sale. To the extent potential customers
do not design the Company's products into their products, the resources the
Company has devoted to the sales prospect would be lost.
8
INTERNATIONAL SALES. Jeode platform sales to customers outside the United
States, derived from customers in Asia and Europe, represented approximately 18%
of total revenues in 2000. The Company opened a sales office in Japan during
1999. Revenues from outside the United States are expected to increase
significantly over time. International operations are subject to a number of
risks, including longer payment cycles, unexpected changes in regulatory
requirements, import and export restrictions and tariffs, difficulties in
staffing and managing operations, greater difficulty or delay in accounts
receivable collection, potentially adverse tax consequences, the burdens of
complying with a variety of laws and political and economic instability. In
addition, fluctuations in exchange rates could affect demand for the Company's
products. If for any reason exchange or price controls or other currency
restrictions are imposed, the Company's business, financial condition and
results of operations could be materially adversely affected. The Company
markets its Jeode product line to Internet appliance and embedded device
manufacturers in Japan. Economic conditions in Japan generally, as well as
fluctuations in the value of the Japanese yen against the U.S. dollar and
British pound sterling could have a negative effect on the Company's revenues
and results of operations. As the Company increases its international sales, its
total revenues may also be affected to a greater extent by seasonal fluctuations
resulting from lower sales that typically occur during the summer months in
Europe and other parts of the world.
SOFTWINDOWS
The Company sold SoftWindows through a multiple channel distribution system
that included distributors and resellers. SoftWindows accounted for 2%, 74% and
92% of total company revenues in 2000, 1999 and 1998, respectively.
On October 18, 1999, the Company signed an exclusive licensing arrangement
of its SoftWindows and RealPC product lines to FWB. The proceeds the Company
will receive from the license arrangement are based on an earn-out of FWB's
future revenues from the product lines and will be paid to the Company as those
revenues are achieved. Upon achieving a certain revenue threshold, which has not
yet been reached, the SoftWindows and RealPC product lines will be transferred
to FWB at no additional consideration.
DISTRIBUTOR AND RETAIL SALES. The Company established a worldwide two-tier
distribution channel for its SoftWindows products. Its distributor relationships
included Sun, Ingram Micro U.S. and Merisel in North America, Sun and HP Germany
in Europe and Mitsubishi Corporation ("Mitsubishi") in Japan. Certain of these
distributors, in turn, sold to major retailers such as CompUSA, Fry's and
MicroCenter. In addition, the Company's products were carried by major national
Macintosh catalog channels, such as MacWarehouse and MacConnection.
During 1998, the Company had a distribution arrangement with Sun, under
which Sun could market and distribute SoftWindows on selected configurations of
its platforms to provide compatibility benefits on these platforms. This
agreement expired on December 31, 1998, and was not renewed.
Sales to SoftWindows distributors represented approximately 2%, 64% and 92%
of the Company's total revenues in 2000, 1999 and 1998, respectively. Sales to
Sun and Ingram Micro U.S. each accounted for 27% of total revenues in 1998. No
other distributor accounted for 10% or more of the Company's total revenues in
2000, 1999 or 1998. In 1999, the majority of the Company's sales through the
distributor channel were Macintosh products. The Company ceased making sales to
distributors in mid 1999, and concentrated its SoftWindows marketing efforts on
achieving sell through of inventories held by distributors to end users via
resellers. The Company believes that it has been successful in these efforts and
that at December 31, 2000, there were no inventory levels held at distributors
and resellers.
OEM BUNDLING. In prior years the Company participated in numerous OEM
bundling arrangements. In 2000 and 1998 the Company did not participate in any
OEM arrangements, and
9
consequently did not receive any revenue from such arrangements. In 1999 the
Company participated in two such arrangements and license revenues from OEMs
represented 30% of the Company's total revenues. Quantum Corporation, a Jeode
platform OEM customer, accounted for 23% of total revenues of the Company in
1999.
INTERNATIONAL SALES. Sales to SoftWindows customers outside the United
States, which were derived mainly from customers in Europe and Asia, represented
approximately 0%, 15% and 24% of total revenues in 2000, 1999 and 1998,
respectively.
The Company offered versions of SoftWindows products in English and
Japanese. The Company had an agreement with Mitsubishi under which Mitsubishi
assisted the Company in localizing its products and distributing the Japanese
language version of SoftWindows for Power Macintosh. In prior years, the Company
has offered versions of SoftWindows products in English, Japanese, French and
German.
STRATEGIC ALLIANCES
JEODE PLATFORM
SUN TECHNOLOGY LICENSE AND DISTRIBUTION AGREEMENT. In the first quarter of
1999, the Company signed a five-year agreement with Sun under which Sun
appointed the Company as a Sun Authorized Virtual Machine Provider. The
agreement authorizes access to the Java compatibility test suite and Java
technology source code. The agreement includes technology sharing and
compatibility verification.
Under the agreement, the Company pays Sun a per unit royalty on each
Jeode-enabled Internet appliance or embedded device shipped by the Company's
customers, plus a royalty on all development licenses put in place between the
Company and its customers.
If the agreement with Sun terminates or expires without renewal, the Company
would not be able to market its Jeode product line. Any disruption in the
Company's relationship with Sun would likely impair its sales of Jeode and
result in a material adverse effect on the Company's business, financial
condition and results of operations.
AI CORPORATION. In September 1999, the Company appointed AI Corporation,
for a one year period as its sole agent in Japan, for the purposes of selling
Jeode products. AI Corporation sold alongside the Company's direct sales force.
As part of the agreement, AI Corporation actively marketed the Jeode product
line in Japan and provided first and second level support to customers of both
AI Corporation and the Company. The agreement expired in September 2000 without
renewal.
BSQUARE DISTRIBUTION AGREEMENT. In February 2000, the Company signed a
three year distribution agreement with BSquare Corporation ("BSquare") under
which BSquare will offer the Jeode platform to customers as a component of its
product and service offerings. In compliance with the terms of the agreement,
the Company did not contract with any other distributor specializing in Windows
CE or NT embedded products during the period from March 1, 2000 to November 30,
2000.
WIND RIVER. In December 2000, the Company signed a three year OEM agreement
with Wind River Systems, Inc. ("Wind River") under which Wind River will offer
the Jeode platform to customers as a component of its product and service
offerings.
SOFTWARE DEVELOPMENT TOOLS. The Company also licenses software development
tool products from other companies to distribute with some of its products.
These third parties may not be able to provide competitive products with
adequate features and high quality on a timely basis or to provide sales and
marketing cooperation. In addition, the Company's products compete with products
produced by some of its licensors. When these licenses terminate or expire,
continued license rights might not be available
10
to the Company on reasonable terms. In addition, the Company might not be able
to obtain similar products to substitute into its tool suites.
SOFTWINDOWS
FWB SOFTWARE. On October 18, 1999, the Company signed an exclusive
licensing arrangement for its SoftWindows and RealPC product lines with FWB. A
key component of the Company's SoftWindows business involved agreements with
Microsoft and major UNIX system vendors. The Company's Distribution Agreement
and Software Trademark License Agreement with Microsoft both expired on
October 31, 1999. FWB has entered into a license and distribution agreement with
Microsoft to distribute Windows in the SoftWindows and RealPC products.
MICROSOFT DISTRIBUTION AGREEMENT. Between 1988 and October 1999, the
Company licensed first MS-DOS, and later Windows from Microsoft ("Microsoft
Distribution Agreement"). Microsoft granted to the Company a non-exclusive,
worldwide license to reproduce, adapt and distribute the then currently
available versions of Windows that were included as a component of the Company's
products. The Company paid Microsoft a per unit royalty for copies of the
Company's products sold that included a version of Windows. The Microsoft
Distribution Agreement expired on October 31, 1999 and there was no attempt to
renew the license by the Company. The Company no longer has any rights to
license or distribute Windows in any of its products.
MICROSOFT SOFTWARE TRADEMARK LICENSE. Microsoft granted the Company a
non-exclusive, non-transferable personal license to use the trademark
"SoftWindows" during the term of the Microsoft Distribution Agreement. This
license expired on October 31, 1999.
COMPETITION
JEODE PRODUCTS
The market for Internet appliances and embedded devices is fragmented and is
characterized by technological change, evolving industry standards and rapid
changes in customer requirements. The Company's existing products will be
rendered less competitive or obsolete if the Company fails to introduce new
products or product enhancements that anticipate the features and functionality
that customers demand. The success of the Company's new product introductions
will depend on the Company's ability to accurately anticipate industry trends
and changes in technology standards, timely complete and introduce new product
designs and features, continue to enhance the Company's existing product lines,
offer the Company's products across a spectrum of microprocessor families used
in the Internet appliance and embedded device markets, and respond promptly to
customers' requirements and preferences.
The introduction of new or enhanced products also requires that the Company
manage the transition from older products to minimize disruption in customer
ordering patterns. Development delays are commonplace in the software industry.
The Company has experienced delays in the development of new products and the
enhancement of existing products in the past and is likely to experience delays
in the future. The Company may not be successful in developing and marketing, on
a timely basis or at all, competitive products, product enhancements and new
products that respond to technological change, changes in customer requirements
and emerging industry standards.
The market for commercially available Internet appliance and embedded device
operating systems is fragmented and highly competitive. The Jeode product line
is targeted at the emerging Java-based Internet appliance and embedded device
marketplaces, which are rapidly changing and are characterized by an increasing
number of new entrants whose products compete with the Jeode platform. As the
industry continues to develop, the Company expects competition to increase in
the future from existing competitors and from other companies that may enter the
Company's existing or
11
future markets with similar or substitute solutions that may be less costly or
provide better performance or functionality than the Company's products. Many of
the Company's current competitors, as well as potential competitors, have
substantially greater financial, technical, marketing and sales resources than
the Company does, and the Company might not be able to compete successfully
against these companies. If price competition increases significantly,
competitive pressures could cause the Company to reduce the prices of the
Company's products, which would result in reduced profit margins and could harm
the Company's ability to provide adequate service to the Company's customers.
The Company's pricing model for the Company's software products is based on a
range of mid-priced development license packages, combined with low-priced
per-unit royalty payments for each that incorporate the Company's technology,
may be subject to significant pricing pressures, including buy-out arrangements.
Also, the market may demand alternative pricing models in the future. A variety
of other potential actions by the Company's competitors, including increased
promotion and accelerated introduction of new or enhanced products, could also
harm the Company's competitive position.
PRODUCT DEVELOPMENT
In January 1998, the Company announced it was developing the Jeode EVM for
the emerging Java-based Internet appliance and embedded device marketplaces. The
Jeode platform is based upon the Company's virtual machine technology and is
geared toward providing current Internet appliance and embedded device
developers with the feature-rich Jeode EVM that is supported by tools compatible
with Internet appliance and embedded device environments, such as configuration
and remote debugging tools. In November 1998, the Company delivered beta
versions of the Jeode platform. The Company released the Jeode platform in
March 1999. The Company developed additional functionality during 2000 and
intends to develop further functionality in 2001, particularly to provide
compatibility with additional processor/operating platforms. Product development
is subject to a number of risks, including development delays, product
definition, marketing and competition. It is possible that development of the
enhancements to the Company's Jeode platform will not be completed in a timely
manner and, even if they are developed, that the product line will not achieve
or maintain customer acceptance. The failure of the Company to commercialize its
virtual machine technology successfully and in a timely manner would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company must continually change and improve its products in response to
changes in operating systems, application software, computer hardware,
networking software, programming tools and computer language technology. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable.
In 2000, 1999 and 1998, the Company spent approximately $6.0 million,
$6.0 million and $6.2 million, respectively, on Company-sponsored research and
development. At December 31, 2000, the Company had 62 full-time employees
engaged in research and development, all of whom were located at the Company's
facility in the United Kingdom. The geographic distance between the Company's
engineering personnel in the United Kingdom and the Company's principal offices
in California and its primary markets in the United States and Japan has in the
past led and could in the future lead to logistical and communication
difficulties. There can be no assurance that the geographic and cultural
differences between the Company's United States, Japanese and United Kingdom
personnel and operations will not result in problems that materially adversely
affect the Company's business, financial condition and results of operations.
Further, because the Company's research and development operations are located
in the United Kingdom, its operations and expenses are directly affected by
economic and political conditions in the United Kingdom.
Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or when new versions are
released. There can be no assurance that,
12
despite testing by the Company and testing and use by current and potential
customers, errors will not be found in the Company's products after commencement
of commercial shipments. The occurrence of such errors could result in loss of
or delay in market acceptance of the Company's products, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ENGLISH CORPORATION
The Company is incorporated under English law. Two of the Company's
executive officers and two of its directors reside in England. All or a
substantial portion of the assets of such persons, and a significant portion of
the assets of the Company, are located outside of the United States. As a
result, it may not be possible for investors to effect service of process within
the United States upon such persons or to enforce against them or against the
Company, in United States courts, judgments obtained in United States courts
predicated upon the civil liability provisions of the federal securities laws of
the United States. There is doubt as to the enforceability in England, in
original actions or in actions for enforcement of judgments of United States
courts, of civil liabilities predicated solely upon United States securities
laws. In addition, the rights of holders of Ordinary Shares and, therefore,
certain of the rights of ADS holders, are governed by English law, including the
Companies Act 1985, and by the Company's Memorandum and Articles of Association.
These rights differ in certain respects from the rights of shareholders in
typical United States corporations.
EMPLOYEES
As of December 31, 2000, the Company employed 106 regular full-time persons,
comprising 22 in sales, marketing and related staff activities, 64 in research
and development and 20 in management, administration and finance. Of these, all
research and development employees, 6 sales and marketing employees and 8
administration and finance employees are located in the United Kingdom. None of
the Company's employees are represented by a labor union, and the Company has
experienced no work stoppages. The Company believes that its employee relations
are good.
The Company's success depends to a significant degree upon the continued
contributions of members of the Company's senior management and other key
research and development, sales and marketing personnel. The loss of any of such
persons could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that its
future success will depend upon its ability to attract and retain highly skilled
managerial, engineering, sales and marketing personnel, the competition for whom
is intense. In particular, the Company must recruit and retain marketing and
sales personnel with expertise in Internet appliances and embedded devices.
There can be no assurance that the Company will be successful in attracting and
retaining such personnel, and the failure to attract and retain key personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Mr. Stephen M. Ambler, the Company's Chief Financial Officer, Company
Secretary and Senior Vice President, has left the employment of the Company. His
last day with the Company was March 15, 2001. However, for a period of six
months following this date, Mr. Ambler will be a part-time consultant to the
Company. The Company has named Mr. Albert Wood as Mr. Ambler's replacement.
Mr. Wood will be the Company's Chief Financial Officer effective April 1, 2001.
The Company does not believe that Mr. Ambler's departure will have a material
adverse effect on the Company's business, financial condition or results of
operations. In the interim, Mr. Richard M. Noling, the Company's President and
Chief Executive Officer, will be serving as the Company's Chief Financial
Officer and Secretary.
13
PROPRIETARY RIGHTS
The Company relies on a combination of copyright, trademark and trade secret
laws and confidentiality procedures to protect its proprietary rights. The
Company has filed in the United Kingdom and the United States applications for
innovative technologies incorporated into its Jeode platform and holds one
United States patent and one European patent on its SoftWindows technology. As
part of its confidentiality procedures, the Company generally enters into
non-disclosure agreements with its employees, consultants, distributors and
corporate partners, and limits access to and distribution of its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise to obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain countries. The Company
licenses technology from Sun and various other third parties.
The Company may, from time to time, receive communications in the future
from third parties asserting that the Company's products infringe, or may
infringe, on their proprietary rights. There can be no assurance that licenses
to disputed third-party technology would be available on reasonable commercial
terms, if at all. In addition, the Company may initiate claims or litigation
against third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Litigation to
determine the validity of any claims could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel from productive tasks, whether or not such litigation is determined in
favor of the Company. In the event of an adverse ruling in any such litigation,
the Company may be required to pay substantial damages, discontinue the use and
sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to infringing technology. In the
event of a successful claim against the Company and the failure of the Company
to develop or license a substitute technology, the Company's business, financial
condition and results of operations would be adversely affected. As the number
of software products in the industry increases and the functionality of these
products further overlaps, the Company believes that software developers may
become increasingly subject to infringement claims. Any such claims against the
Company, with or without merit, as well as claims initiated by the Company
against third parties, can be time consuming and expensive to defend or
prosecute and to resolve.
ITEM 2--FACILITIES
The Company's headquarters and principal management, sales and marketing and
support facility is located in Fremont, California, and consists of
approximately 18,400 square feet under a lease that will expire in
February 2003. The Company's principal European sales, research and development
and administrative facility is located in High Wycombe, in the United Kingdom,
and consists of approximately 10,700 square feet under a lease that will expire
in August 2013. During 1998, the Company sublet until March 2002 facilities it
formerly occupied in the United Kingdom, on substantially the same terms as
those applicable to the Company. The Company's lease on the subleased premises
expires in September 2017, except that with seven months' notice the Company may
elect to terminate the lease in September 2002, 2007 and 2012. During 1997, the
Company vacated its Boston, Massachusetts facility. In January 1998, the Company
sublet this facility through August 2001, the month the Company's lease on the
facility expires. The Company also leases sales offices in Issy-les-Moulineaux,
France and Tokyo, Japan. The Company does not anticipate expanding the size of
its facilities in California, the United Kingdom, France or Japan in the
foreseeable future.
ITEM 3--LEGAL PROCEEDINGS
On January 29, 1999, the Company received an indemnity claim from Citrix
Systems, Inc. ("Citrix") for an amount estimated by Citrix to not exceed
$6.25 million. The claim was made in
14
relation to the Asset Purchase Agreement between the Company and Citrix under
which Citrix purchased the Company's NTRIGUE product line in February 1998.
Citrix's indemnity claim is based on assertions made by GraphOn Corporation
("GraphOn") in January of 1998 that the Company misappropriated unidentified
GraphOn trade secrets. In November of 1998, Citrix filed an action against
GraphOn in the United States District Court, Southern District of Florida,
seeking a declaratory judgment that Citrix does not infringe any GraphOn
proprietary rights and that Citrix has not misappropriated any trade secrets or
breached an agreement to which GraphOn is a party. Citrix filed the action in
response to assertions first made by GraphOn, and disclosed to Citrix in
January 1998, that the Company may have used GraphOn's confidential information
to develop certain of the Company's products, possibly including products the
Company sold to Citrix in February 1998. The Court dismissed the complaint, but
Citrix has subsequently filed an appeal. The Company believes that any
misappropriation or similar assertions by GraphOn are without merit or basis,
and contests Citrix's indemnity claim.
On October 4, 1999, the Company filed a suit against Citrix and GraphOn in
the Superior Court of the State of California, County of Santa Clara, relating
to the misappropriation assertions of GraphOn's and Citrix's refusal to release
funds still remaining in escrow and breach of a Cooperation Agreement between
the parties. Subsequent to the filing of the lawsuit, Citrix agreed to release
$1.3 million from the escrow, leaving a balance of $5.1 million. GraphOn
answered the complaint, and claimed it had not made any claims of
misappropriation against the Company or Citrix. The case is pending.
On March 15, 2000, GraphOn filed a suit against Citrix and the Company in
the Superior Court of the State of California, County of Santa Clara, alleging
trade secret misappropriation and breach of contract arising out of the same
facts and circumstances set forth in the Company's action against GraphOn. The
two Superior Court actions were consolidated. The Company believes GraphOn's
claims are without merit. The case is pending. A mediation is scheduled for
March 22, 2001.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of February 22, 2001 are as
follows:
NAME AGE POSITION
---- -------- --------
Richard M. Noling........... 52 President, Chief Executive Officer, and Director
Stephen M. Ambler*.......... 41 Chief Financial Officer, Company Secretary and a Senior
Vice President
George Buchan............... 48 Senior Vice President of Engineering and UK General
Manager
Jonathan D. Hoskin.......... 43 Chief Technology Officer and a Senior Vice President
Paul O. Livesay............. 33 Senior Vice President Corporate Development and
Strategic Relations
Mark E. McMillan............ 37 Chief Operating Officer
Ronald C. Workman........... 46 Senior Vice President of Marketing
------------------------
* Mr. Ambler has left the employment of the Company and his last day with the
Company was March 15, 2001. However, for a period of six months following
this date, Mr. Ambler will be a
15
part-time consultant to the Company. The Company has hired Mr. Albert Wood
as Mr. Ambler's replacement. Mr. Wood will be the Company's Chief Financial
Officer effective April 1, 2001. In the interim, Mr. Richard M. Noling will
be serving as the Company's Chief Financial Officer and Secretary.
Richard M. Noling was named President and Chief Executive Officer and a
director of the Company in March 1997. Mr. Noling is currently serving as the
Company's Chief Financial Officer and Secretary since the departure of
Mr. Ambler on March 15, 2001. He also served as Chief Financial Officer, Senior
Vice President of Finance and Operations and Company Secretary between
April 19, 1996 and October 1, 1997 and Chief Operations Officer between February
and March 1997. From August 1995 to February 1996, Mr. Noling was Vice President
and Chief Financial Officer at Fast Multimedia, Inc., a German-based computer
software and hardware developer. From November 1994 to August 1995, he was Chief
Financial Officer for DocuMagix Inc., a personal paper management software
company. From June 1991 to October 1994, Mr. Noling served as Senior Vice
President and Chief Financial Officer for Gupta Corporation. He received a
Bachelor of Arts degree in aerospace and mechanical engineering science from the
University of California (San Diego) in 1970. He received an M.A. degree in
theology from the Fuller Theological Seminary in 1972, and an M.S. degree in
business administration in 1979 from the University of California (Irvine).
Stephen M. Ambler served as the Company's Chief Financial Officer, Company
Secretary and a Senior Vice President of the Company until he left the Company's
employment on March 15, 2001. He joined the Company in April 1994 as Director of
Finance and Administration, Europe. In April 1997, he was appointed Worldwide
Corporate Controller and became Chief Financial Officer, Company Secretary and a
Vice President in October 1997. He became a Senior Vice President in
January 1999. Prior to joining the Company Mr. Ambler served as Financial
Controller and Company Secretary at Ampex Great Britain Limited and before that
served as Finance Director at Carlton Cabletime Limited in Newbury, England
between May 1988 and December 1992. Mr. Ambler is a member of the Institute of
Chartered Accountants in England and Wales.
Albert J. Wood will be the Company's Chief Financial Officer effective
April 1, 2001. From June 1999 to March 2001, Mr. Wood was Chief Financial
Officer for Cohera Corporation, a privately held company providing e-commerce
infrastructure and data base management software and consulting services. From
December 1997 to June 1999, Mr. Wood was V.P. Finance & Treasurer for Indus
International Inc., an enterprise management software consulting services
company, where Mr. Wood also served as interim Chief Financial Officer from July
1998 to June 1999. From September 1996 to December 1997, Mr. Wood was Controller
for Prism Solutions, a software and consulting services company. From November
1993 to September 1996, Mr. Wood was Director of Finance/Treasurer and Sales
Controller for Pyramid Technology, a computer manufacturing and consulting
services company.
George Buchan is Senior Vice President of Engineering and UK General Manager
for the Company. He joined the Company in September 1991 as Development Manager,
was appointed Vice President of Engineering in July 1992 and was appointed
Senior Vice President and UK General Manager in September 1993. Before joining
the Company, Mr. Buchan was with Prime Computer UK, a computer systems company,
as Manager of the customer support center from June 1980 to August 1991.
Mr. Buchan has been involved in high technology companies for more than
25 years in general and technical management positions in the project management
and UNIX areas. He graduated from Aberdeen University, Scotland in 1974 with a
Bachelors degree in pure mathematics.
Jonathan D. Hoskin, D. Phil., joined the Company as Engineering Director in
1992, and was promoted to Chief Technology Officer in May 1999. Prior to joining
the Company, Dr. Hoskin held positions at several leading-edge systems software
companies in the U.K., including Glossa, Hipersoft, Unisoft and Oxford Computing
Systems. Dr. Hoskin earned a Bachelor of Arts degree First Class from the
University of Warwick, an advanced degree in mathematics from Churchill College,
Cambridge University and a Doctor of Philosophy degree in mathematics from
Oxford University.
16
Paul O. Livesay is Senior Vice President, Corporate Development and
Strategic Relations for the Company. He joined the Company on January 16, 2001.
Prior to that he was with Privacy Labs, Inc., an Internet commerce company he
founded. Before that, Mr. Livesay was vice president, business development with
Phoenix Technologies, where he was responsible for targeting, negotiating and
closing strategic partner and equity placement relationships in support of the
company's newly-formed Internet division. Before that Mr. Livesay served as
general counsel for RSA Data Security, and was an associate attorney with
Wilson, Sonsini, Goodrich and Rosati, and Poms, Smith, Lande & Rose. He earned a
Juris Doctor from Duke University School of Law, a BS in Engineering from the
Massachusetts Institute of Technology, is a member of the California State Bar
Association and a registered patent attorney.
Mark E. McMillan joined the Company in November 1999 as Senior Vice
President of Worldwide Sales and Marketing, was promoted to Executive Vice
President of Worldwide Sales and Marketing in May, 2000 and Chief Operating
Officer in October 2000. Before joining the Company Mr. McMillan served as Vice
President of Sales, Internet Division, for Phoenix Technologies Ltd. Prior to
that, Mr. McMillan served as Phoenix's Vice President and General Manager of
North American Operations. Before joining Phoenix, he was founder, CEO and
general partner of Vision Technologies, LLC, a manufacturer of segment-zero
personal computers. Prior to that, Mr. McMillan co-founded and served as
President of Softworks Development Corporation, a regional distributor of PC
components that he sold in 1991.
Ronald C. Workman is Senior Vice President of Marketing for the Company. He
joined the Company in July 1998. Before joining the Company, Mr. Workman served
as Vice President of Marketing from January 1998 to June 1998 at Cygnus
Systems, Inc., an embedded systems software tools company. From June 1989 to
December 1997 Mr. Workman was employed at Mentor Graphics Inc., an embedded
systems software tools and real time operating company, serving in several
roles, including Vice President and Business Unit Manager of their run time
solutions business unit and Vice President VAR/OEM sales. Mr. Workman has been
involved in high technology companies for more than 20 years in sales, marketing
and engineering positions. He graduated from California Polytechnic State
University with a Bachelors degree in Biological Sciences in 1977.
17
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF ORDINARY SHARES
The Company's American Depositary Shares ("ADSs"), each ADS representing one
Ordinary Share, have been traded on the Nasdaq National Market under the symbol
INSGY from the Company's initial public offering in November 1995 through to
December 24, 2000, and INSG since then. The following table sets forth, for the
periods indicated, the high and low sales prices for the Company's ADSs as
reported by Nasdaq National Market:
1999 HIGH LOW
---- -------- --------
First Quarter............................................... $ 6.75 $1.88
Second Quarter.............................................. $10.25 $4.63
Third Quarter............................................... $ 8.88 $4.00
Fourth Quarter.............................................. $ 6.31 $4.00
2000 HIGH LOW
---- -------- --------
First Quarter............................................... $27.50 $4.50
Second Quarter.............................................. $15.13 $5.00
Third Quarter............................................... $ 9.50 $5.50
Fourth Quarter.............................................. $13.13 $4.25
The closing sales price of the Company's ADS as reported on the Nasdaq
National Market on February 22, 2001 was $5.00 per share. As of that date, there
were approximately 148 holders of record of the Company's Ordinary Shares and
ADSs, excluding holders of ADSs whose ADSs are held in nominee or street name by
brokers.
DIVIDENDS
The Company has not declared or paid any cash dividends on its Ordinary
Shares. The Company anticipates that it will retain any future earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future. Any payment of dividends would be subject, under English
law, to the Companies Act 1985, and to the Company's Memorandum of Association,
and may only be paid from the retained earnings of the Company, determined on a
pre-consolidated basis. As of December 31, 2000 the Company had a deficit of
$18,922,507 on a pre-consolidated basis.
RECENT SALES OF UNREGISTERED SECURITIES
On December 9, 1999, the Company entered into agreements whereby the Company
issued 1,063,515 Ordinary Shares in ADS form at a price of $4.23 per share to
Castle Creek Technology Partners LLC and four other investors of whom one is a
member of the Company's board of directors. The Company also issued warrants to
the purchasers to purchase a total of 319,054 ADSs at the price of $5.29 per
share. An issuance of ADSs and warrants on November 24, 2000 has had a dilutive
effect on the warrants, resulting in an increase in the number of ADSs issuable
to 353,834, and a decrease of the exercise price to $4.77. The issuance of ADSs
and warrants on February 12, 2001 also triggered the anti-dilution provisions.
However, the effect of such dilution was less than 1% of the exercise price, and
consequently such adjustment is deferred until such time as the accumulation of
the adjustments exceeds at least 1% of the exercise price. The warrants expire
on December 9, 2004. The Company received $4.5 million less offering expenses
totaling $0.4 million. The securities were issued in reliance upon the exemption
from registration provided under Regulation D promulgated under the Securities
Act.
18
During 2000, the Company issued a total of 19,994 Ordinary Shares in ADS
form at various prices, ranging from $6.281 to $16.50 to a director of the
Company, as payment for drawdown fees under a Line of Credit arrangement entered
into in March 2000. The securities were issued in reliance upon the exemption
from registration provided under Section 4 (2) of the Securities Act, based on
the fact that the shares were sold by the issuer in a sale not involving a
public offering.
On November 24, 2000 the Company entered into agreements whereby the Company
issued 3,600,000 Ordinary Shares in ADS form at a price of $5.00 to a total of
23 investors, including Sun Microsystems, BSquare, and a member of the Company's
board of directors. The Company also issued warrants to purchase 1,800,000 ADSs
to the investors at an exercise price of the lower of the average quoted closing
sale price of the Company's ADSs for the ten trading days ending on the day
preceding the date of the warrant holder's intent to exercise less a 10%
discount, and $6.00. The warrants expire on November 24, 2003, however, subject
to certain conditions, if the quoted sale price of the ADSs exceed $9.00 per
share for any thirty consecutive trading days, the Company may cancel the
warrants upon sixty days prior written notice. The Company received
$18.0 million less offering expenses totaling $2.0 million. The Company also
issued warrants to purchase 225,000 ADSs to the placement agent exercisable at a
price of $5.00. These warrants expire on November 24, 2005. The securities were
issued in reliance upon the exemption from registration provided under
Regulation D promulgated under the Securities Act.
On December 31, 2000 the Company issued a total of 251,333 Ordinary Shares
in ADS form to Quantum Peripherals (Europe) SA, at a per share price of $4.23
per share under the terms of a convertible promissory note entered into on
October 20, 1999. The securities were issued in reliance upon the exemption from
registration provided under Section 4 (2) of the Securities Act.
On February 12, 2001 the Company entered into agreements whereby the Company
issued 940,000 Ordinary Shares in ADS form at a price of $5.00 to a total of 4
investors, including Wind River Systems, Inc., and a member of the Company's
board of directors. The Company also issued warrants to purchase 470,000 ADSs to
the investors at an exercise price of the lower of the average quoted closing
sale price of the Company's ADSs for the ten trading days ending on the day
preceding the date of the warrant holder's intent to exercise less a 10%
discount, and $6.00. The warrants expire on February 12, 2004, however, subject
to certain conditions, if the quoted sale price of the ADSs exceed $9.00 per
share for any thirty consecutive trading days, the Company may cancel the
warrants upon sixty days prior written notice. The Company received
$4.7 million less offering expenses totaling $0.5 million. The Company also
issued warrants to purchase 25,000 ADSs to the placement agent exercisable at a
price of $5.00. These warrants expire on February 12, 2006. The securities were
issued in reliance upon the exemption from registration provided under
Regulation D promulgated under the Securities Act.
19
ITEM 6--SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Net revenues.................................. $10,766 $ 6,837 $14,096 $ 38,869 $ 44,246
Cost of net revenues.......................... 3,291 3,800 9,375 17,062 17,415
------- ------- ------- -------- --------
Gross profit................................ 7,475 3,037 4,721 21,807 26,831
------- ------- ------- -------- --------
Operating expenses:
Sales and marketing......................... 5,376 5,542 7,946 15,804 21,782
Research and development.................... 5,960 5,972 6,228 9,129 10,613
General and administrative.................. 3,733 3,178 4,213 6,761 6,268
Restructuring............................... -- -- -- 1,995 --
------- ------- ------- -------- --------
Total operating expenses...................... 15,069 14,692 18,387 33,689 38,663
------- ------- ------- -------- --------
Operating income (loss)....................... (7,594) (11,655) (13,666) (11,882) (11,832)
Interest and other income (expense), net...... (5) 380 15,871 504 1,396
------- ------- ------- -------- --------
Income (loss) before income taxes............. (7,599) (11,275) 2,205 (11,378) (10,436)
Provision (benefit) for income taxes.......... (785) (1,316) 1,783 (720) 330
------- ------- ------- -------- --------
Net income (loss)............................. $(6,814) $(9,959) $ 422 $(10,658) $(10,766)
======= ======= ======= ======== ========
Net income (loss) per share:
Basic....................................... $ (0.47) $ (0.77) $ 0.03 $ (0.91) $ (0.95)
======= ======= ======= ======== ========
Diluted..................................... $ (0.47) $ (0.77) $ 0.03 $ (0.91) $ (0.95)
======= ======= ======= ======== ========
Weighted average number of shares and share
equivalents:
Basic....................................... 14,571 12,883 12,159 11,690 11,342
======= ======= ======= ======== ========
Diluted..................................... 14,571 12,883 12,378 11,690 11,342
======= ======= ======= ======== ========
BALANCE SHEET DATA AT DECEMBER 31, 2000 1999 1998 1997 1996
---------------------------------- -------- -------- -------- -------- --------
Cash, cash equivalents, short-term investments
and restricted cash......................... $17,351 $11,107 $16,334 $ 14,461 $ 21,772
Working capital............................... 11,377 (221) 9,712 7,816 15,777
Total assets.................................. 22,336 13,284 21,011 25,457 34,571
Long-term obligations under capital leases.... -- -- -- 111 259
Mandatorily redeemable capital................ -- 2,619 -- -- --
Mandatorily redeemable warrants............... 1,440 1,440 -- -- --
Total shareholders' equity.................... 15,749 1,980 11,418 10,523 20,215
20
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS THAT REFLECT THE COMPANY'S
CURRENT VIEWS WITH RESPECT TO FUTURE MATTERS SUCH AS GROSS PROFIT, GROSS
MARGINS, SPENDING LEVELS, INTERNATIONAL OPERATIONS, RESTRUCTURING BENEFITS AND
CAPITAL NEEDS. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS AND
OUTCOMES DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES IN RESULTS AND OUTCOMES INCLUDE WITHOUT
LIMITATION THOSE DISCUSSED BELOW AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
REPORT.
OVERVIEW
Insignia Solutions plc (the "Company"), which commenced operations in 1986,
develops, markets and supports software technologies that speed the adoption of
Java-based individualized computing in Internet appliances and embedded devices.
In January 1998, the Company announced its intention to launch a new product
line called the Jeode-TM- platform, based on the Company's Embedded Virtual
Machine ("EVM"-TM-) technology. This followed a strategic review in late 1997 of
the Company's business. The Company also explored new markets that would
leverage the Company's 15 years of emulation software development experience.
The Jeode platform is the Company's implementation of Sun Microsystems, Inc.'s
("Sun") Java-Registered Trademark- technology tailored for Internet appliances
and embedded devices. It leverages patent-pending intellectual property to
provide these resource-constrained devices with high performance,
fully-compatible Java applet and application support. The product became
available for sale in March 1999. The Jeode platform is now the principal
product line of the Company and will be for the foreseeable future. The Jeode
product line revenue model is based on original equipment manufacturer's
("OEMs") and channel partner's customer transactions.
The Company's principal product line in recent years was SoftWindows-TM-.
This product enabled Microsoft Windows ("Windows"-Registered Trademark-)
applications to be run on most Apple Computer Inc.
("Apple"-Registered Trademark-) Macintosh computers and many UNIX workstations.
Revenues from this product line grew until 1995, but declined significantly
after that date, along with margins. This was due to a declining demand for
Apple Macintosh products and increased competition. In early 1999 Management
took steps to discontinue the product line, and on October 18, 1999, the Company
signed an exclusive licensing arrangement with FWB Software, LLC ("FWB"). This
arrangement allows the Company to focus exclusively on its Jeode platform
business strategy.
Between December 1995 and May 1998, the Company shipped NTRIGUE-TM-, a
Windows compatibility client/server product that supported multiple X-terminals,
workstation clients, Macintosh computers, PCs, network computers and Net PCs
from a Windows NT-based server. The Company disposed of its NTRIGUE technology
in February 1998.
The Company's operations outside of the United States are primarily in the
United Kingdom, where the majority of the Company's research and development
operations and its European sales activities are located. The Company
distributes its Jeode platform through OEM's and distributed its SoftWindows
product through independent distributors. The Company's revenues from customers
outside the United States are derived primarily from Europe and Asia and are
generally affected by the same factors as its revenues from customers in the
United States. The operating expenses of the Company's operations outside the
United States are mostly incurred in Europe and relate to its research and
development and European sales activities. Such expenses consist primarily of
ongoing fixed costs and consequently do not fluctuate in direct proportion to
revenues. The Company's revenues and expenses outside the United States can
fluctuate from period to period based on movements in currency exchange rates.
Historically, movements in currency exchange rates have not had a material
effect on the Company's revenues.
21
The Company operates with the United States dollar as its functional
currency, with a majority of revenues and operating expenses denominated in
dollars. Although the Company engages in short-term currency option and forward
exchange contracts in order to hedge short-term pound sterling net cash flows,
pound sterling exchange rate fluctuations against the dollar can cause United
Kingdom expenses, which are translated into dollars for financial statement
reporting purposes, to vary from period-to-period.
DISPOSAL OF NTRIGUE TECHNOLOGY
On February 5, 1998 the Company completed the disposal of its NTRIGUE
technology to Citrix Systems Inc. ("Citrix") for $17.7 million. As part of the
disposal, the Company transferred 45 employees to Citrix, of which 43 were
development engineers.
Under the terms of the disposal agreement $9.0 million was paid to the
Company in cash on February 5, 1998, and the remainder was being held in escrow
for the sole purpose of satisfying any obligations to Citrix arising from or in
connection with an event against which the Company would be required to
indemnify Citrix. Of this amount, $2.5 million, $0.9 million, $1.0 million and
$0.3 million were released to the Company in February 1999, August 1999,
February 2000 and September 2000, respectively.
On January 29, 1999, the Company received an indemnity claim from Citrix
Systems, Inc. ("Citrix") for an amount estimated by Citrix to not exceed
$6.25 million. The claim was made in relation to the Asset Purchase Agreement
between the Company and Citrix under which Citrix purchased the Company's
NTRIGUE product line in February 1998.
Citrix's indemnity claim is based on assertions made by GraphOn Corporation
("GraphOn") in January of 1998 and declaratory relief action that Citrix filed
against GraphOn in November 1998 in the United States District Court, Southern
District of Florida. Citrix's action against GraphOn seeks a declaratory
judgment that Citrix does not infringe any GraphOn proprietary rights and that
Citrix has not misappropriated any trade secrets or breached an agreement to
which GraphOn is a party. Citrix filed the action in response to and to resolve
assertions first made by GraphOn, and disclosed to Citrix in January 1998, that
the Company may have used GraphOn's confidential information to develop certain
of the Company's products, possibly including products the Company sold to
Citrix in February 1998. The Court dismissed the complaint, but Citrix has
subsequently filed an appeal. The Company believes that any misappropriation or
similar assertions by GraphOn are without merit or basis. Accordingly, the
Company contests Citrix's indemnity claim.
On October 4, 1999, the Company filed a suit against Citrix and GraphOn in
the Superior Court of the State of California, County of Santa Clara, relating
to the misappropriation assertions of GraphOn's and Citrix's refusal to release
funds still remaining in escrow and breach of a Cooperation Agreement between
the parties. Subsequent to the filing of the lawsuit, Citrix agreed to release
$1.3 million from the escrow, leaving a balance of $5.1 million. GraphOn
answered the complaint, and claimed it had not made any claims of
misappropriation against the Company or Citrix. The case is pending.
On March 15, 2000, GraphOn filed a suit against Citrix and the Company in
the Superior Court of the State of California, County of Santa Clara, alleging
trade secret misappropriation and breach of contract arising out of the same
facts and circumstances set forth in the Company's action against GraphOn. The
Company believes GraphOn's claims are without merit. The case is pending.
22
REVENUES
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
License revenues.......................................... $ 8,987 $6,471 $12,998
Service revenues.......................................... 1,779 366 1,098
------- ------ -------
Total revenues............................................ $10,766 $6,837 $14,096
======= ====== =======
The Jeode product line was the primary business of the Company for 2000. In
1999, the Company shipped two principal product lines: the Jeode platform and
SoftWindows.
Revenue from the Jeode product line is derived from four main sources: the
sale of a development license, the sale of annual maintenance and support
contract/services, a commercial use royalty based on shipments of products that
include Jeode technology, and customer-funded engineering activities. The
Company derived its SoftWindows revenues from the sale of packaged software
products and annual maintenance contracts, along with royalties received from
bundling agreements with OEMs and customer-funded engineering activities under
OEM contracts. Revenues from the sale of development licenses, packaged products
and royalties received from OEMs are classified as license revenue, while
revenues from customer-funded engineering activities, training, and annual
maintenance contracts are classified as service revenue.
In 2000 and 1999 Jeode platform revenues accounted for 98% and 23%,
respectively, of total revenues. The Jeode platform became available for sale in
1999 and generated no revenue in 1998. The Jeode platform is now the principal
product of the Company and will be the principal source of revenues for the
foreseeable future. The Jeode platform revenue increased 566% in 2000 compared
to 1999 as a result of increased demand. In 2000 and 1999 license revenue from
the sale of Jeode accounted for 83% and 23%, respectively, of total revenues.
Service revenue from the Jeode platform accounted for 17% and less than 1% of
total revenues for 2000 and 1999, respectively.
In 2000, 1999 and 1998 total revenues from SoftWindows accounted for 2%, 74%
and 92%, respectively, of total Company revenues primarily due to reduced demand
for SoftWindows and management's decision to discontinue the product line. In
1999 and 1998, license revenue from the sale of the Company's products for
Macintosh computers accounted for 40% and 52% of total revenues, respectively.
UNIX total revenues declined 58% in 1999 compared to 1998 as a result of reduced
demand and Management's decision to discontinue the product line. In 1999 and
1998 total revenues from the Company's product for UNIX computers accounted for
34% and 40% of total revenues, respectively.
On October 18, 1999, the Company signed an exclusive licensing arrangement
of its SoftWindows and RealPC product lines with FWB. The proceeds the Company
will receive from the license arrangement are based on an earn-out of FWB's
future revenues from the product lines and will be paid to the Company as those
revenues are achieved. Upon achieving a certain revenue threshold, the
SoftWindows and RealPC product lines will be transferred to FWB at no additional
consideration.
In 2000, service revenues increased 386% compared to 1999. The increase is
due to providing customer-funded engineeing activities for the Jeode platform
and additional maintenance. Service revenues in 1999 declined 67% compared to
1998, primarily because the Company performed fewer customer-funded engineering
activities than in the previous year. Similarly, in 1998, service revenues
declined 48% compared to 1997.
In 1998 total revenues from the Company's NTRIGUE products accounted for 7%
of total revenues. The NTRIGUE product line was sold in early 1998 and generated
no revenue in 1999.
23
Overall, total revenues and license revenues declined 51% and 50%,
respectively, in 1999 compared to 1998.
The Company distributed its SoftWindows and RealPC packaged products within
the United States and internationally through distributors, resellers and
OEMs. The Company offered certain return privileges to its customers including
product exchange privileges and price protection. The Company recognized
revenues from packaged products upon shipment with provisions for estimated
future returns, exchanges and price protection being recorded as a reduction of
total revenues. A significant portion of the Company's revenue in 1997 was
derived from large OEM customer transactions, particularly in the UNIX and
NT-related product lines.
Sales to distributors and OEM's representing more than 10% of total revenue
in each period accounted for the following percentages of total revenue.
2000 1999 1998
-------- -------- --------
Distributors:
Ingram Micro.............................................. --% * 27%
Sun Microsystems.......................................... --% * 27%
Mitsubishi................................................ --% * 11%
Victor Data Systems....................................... 14% --% --%
Wind River Systems........................................ 22% --% --%
All Distributors............................................ 46% 64% 92%
OEM's:
Quantum Corporation....................................... 15% 23% --%
Gemstar................................................... 18% --% --%
All OEMs.................................................... 52% 30% *
------------------------
* Less than 10%
Sales to customers outside the United States, derived mainly from customers
in Europe and Asia, represented approximately 18%, 15% and 24% of total revenues
in 2000, 1999 and 1998, respectively. The Company markets Jeode to Internet
appliance and embedded device manufacturers in the United States, Europe and
Japan.
Movements in currency exchange rates did not have a material impact on total
revenues in 2000, 1999 or 1998. Economic conditions in Europe and Japan, as well
as fluctuations in the value of the Euro and Japanese yen against the U.S.
dollar and British pound sterling, could impair the Company's revenues and
results of operations. International operations are subject to a number of other
special risks. These risks include foreign government regulation, reduced
protection of intellectual property rights in some countries where we do
business, longer receivable collection periods and greater difficulty in
accounts receivable collection, unexpected changes in, or imposition of,
regulatory requirements, tariffs, import and export restrictions and other
barriers and restrictions, potentially adverse tax consequences, the burdens of
complying with a variety of foreign laws and staffing and managing foreign
operations, general geopolitical risks, such as political and economic
instability, hostilities with neighboring countries and changes in diplomatic
and trade relationships, and possible recessionary environments in economies
outside the United States.
24
COST OF REVENUES AND GROSS MARGIN
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except percentages)
Cost of license revenues................................. $ 2,826 $ 3,296 $ 8,329
Gross margin: license revenues........................... 69% 49% 36%
------- ------- -------
Cost of service revenues................................. $ 465 $ 504 $ 1,046
Gross margin: service revenues........................... 74% (38%) 5%
------- ------- -------
Total cost of revenues................................... $ 3,291 $ 3,800 $ 9,375
Gross margin: total revenues............................. 69% 44% 33%
======= ======= =======
Cost of license revenue is mainly comprised of royalties to third parties,
along with the costs of documentation, duplication and packaging. Cost of
service revenue includes costs associated with customer-funded engineering
activities and end-user support under maintenance contracts.
The Company believes that the significant factors affecting the Jeode
platform gross margin include pricing of the development license, pricing of the
unit usage and royalties to third parties such as Sun Microsystems, Inc.
("Sun"). In early 1999, the Company signed a five-year agreement with Sun under
which Sun established the Company as an Authorized Virtual Machine Provider.
Under this agreement the Company will pay Sun a per unit royalty on each Jeode
platform-enabled Internet appliance or embedded device shipped by the Company's
customers, plus a royalty on all development licenses put in place between the
Company and its customers.
License gross margins in 2000 increased to 69% from 49% in 1999, due to the
Jeode product line which accounted for 83% of total license revenues in 2000.
License gross margins in 1999 increased to 49% from 36% in 1998 due to the
introduction of the Jeode product line which accounted for 23% of total license
revenues in 1999. The prior year gross margin was lower as a result of
SoftWindows pricing strategies, increased third party royalties for SoftWindows
and high returns on the NTRIGUE product line. There were no sales of Jeode in
1998.
Gross margin for service revenue is impacted by the level of and pricing
terms of customer funded engineering activities, which can vary from customer to
customer, from contract to contract and the level of maintenance contracts sold.
Service gross margins in 2000 were 74% compared to (38%) in 1999. The increase
is due to Jeode customer-funded engineering activities and maintenance
agreements. In 1999 and 1998, the Company earned little revenue from
customer-funded engineering activities. UNIX maintenance agreement revenue
declined in 1999 and 1998. The Company discontinued selling SoftWindows
maintenance in late 1999 as a result of the SoftWindows license arrangement with
FWB. The continued support of existing SoftWindows contracts with no renewal
revenue combined with the high cost of providing support under NTRIGUE
maintenance contracts resulted in the Company achieving service revenue gross
margins of (38%) and 5% in 1999 and 1998, respectively.
In the event that Jeode licenses increase in future periods, service revenue
gross margins are expected to increase due to customer-funded engineering
activities and the required maintenance, and upgrade contracts for each Jeode
product sale.
25
OPERATING EXPENSES
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except percentages)
Sales and marketing...................................... $ 5,376 $ 5,542 $ 7,946
Percentage of total revenues............................. 50% 81% 56%
------- ------- -------
Research and development................................. $ 5,960 $ 5,972 $ 6,228
Percentage of total revenues............................. 55% 87% 44%
------- ------- -------
General and administrative............................... $ 3,733 $ 3,178 $ 4,213
Percentage of total revenues............................. 35% 46% 30%
======= ======= =======
Sales and marketing expenses consist primarily of advertising and
promotional expenses, trade shows, personnel and related overhead costs, and
salesperson commissions. Sales and marketing expenses decreased in 2000 by 3%.
Sales and marketing expenses were reduced in the first half of the year and
began increasing the second half of the year due to staffing new hires. Sales
and marketing expenses decreased in 1999 by 30% as a result of reduced spending
on SoftWindows advertising programs and staffing. The Company anticipates sales
and marketing expenses to increase in 2001 as the Company continues to increase
its marketing and direct sales organization for its Jeode product line. The
Company has established a direct sales force in the United States, Europe and
Japan.
Research and development expenses consist primarily of personnel costs,
overhead costs relating to occupancy and equipment depreciation. Research and
development expenses in 2000 were comparable to 1999. Research and development
expenses decreased in 1999 by 4% over 1998 as a result of reductions in
personnel. During all of 1999 and the last half of 1998, the Company invested
the majority of its development expense in its Jeode technology to accelerate
the release of this product. In accordance with Statement of Financial
Accounting Standards No. 86, software development costs are expensed as incurred
until technological feasibility is established, after which any additional costs
are capitalized. In 2000, 1999 and 1998, no development expenditures were
capitalized. Development costs are expected to increase in 2001 as the Company
further enhances its Jeode technology.
General and administrative expenses consist primarily of personnel and
related overhead costs for finance, information systems, human resources and
general management. General and administrative expenses increased by 17% in 2000
over 1999 as a result of increased legal fees and a large reversal of bad debt
reserves in 1999 not repeated in 2000. Excluding the impact of the bad debt
reserve adjustment, general and administrative expenses increased by 3%. General
and administrative expenses decreased by 25% in 1999 over 1998 as a result of
reduced headcount and reduced legal fees and the bad debt reserve reversal.
General and administrative costs are not expected to change significantly in
2001 compared to 2000 but will increase.
INTEREST INCOME (EXPENSE), NET
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except percentages)
Interest income (expense), net.......................... $ (129) $ 473 $ 984
Percentage of total revenues............................ (1%) 7% 7%
======== ======= =======
Interest income (expense), net decreased in 2000 over 1999 from income of
$473,000 to expense of $129,000. This decrease was primarily due to decreased
interest income earned on the Company's cash and cash equivalents which declined
over the year until November 2000, when the Company completed
26
an $18.0 million private placement, interest expense on debt, and a one time
commitment fee expense of $300,000 incurred under a Line of Credit. The
Company's cash, cash equivalents and amounts held in escrow increased from
$11.1 million at December 31, 1999 to $17.3 million at December 31, 2000.
Interest income, net, decreased in 1999 over 1998 due primarily to reduced
interest income earned on the Company's cash, cash equivalents and amounts held
in escrow, which decreased from $16.3 million at December 31, 1998 to
$11.1 million at December 31, 1999. Interest income is expected to increase in
2001.
OTHER INCOME (EXPENSE), NET
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except percentages)
Other income (expense), net............................. $ 124 $ (93) $14,887
Percentage of total revenues............................ 1% (1%) 106%
======= ======== =======
Other income (expense), net decreased from an expense of $93,000 in 1999 to
income of $124,000 in 2000 and primarily comprised foreign exchange gains
(losses) in both periods. Other income (expense), net decreased from income of
$14.9 million in 1998 to an expense of $93,000 in 1999. The 1998 income was a
result of the gain on disposal of the NTRIGUE product line of $14.7 million.
This gain comprised gross disposal proceeds of $17.7 million, less $3.0 million
of transaction expenses, employment terminations and costs and losses related to
the property and equipment sold or written down in value. Other expense is a
result of foreign exchange losses.
Over 98% of the Company's total revenues and approximately 36% of its
operating expenses are denominated in United States dollars. Most of the
remaining revenues and expenses of the Company are British pound sterling
denominated and consequently the Company is exposed to fluctuations in British
pound sterling exchange rates. To hedge against this currency exposure, the
Company has, in prior years, entered into foreign currency options and forward
exchange contracts for periods and amounts consistent with the amounts and
timing of its anticipated British pound sterling denominated operating cash flow
requirements. Unrealized gains and losses on foreign currency option contracts
are deferred and were not material at December 31, 2000, 1999 and 1998. There
can be no assurance that such fluctuations will not have a material effect on
the Company's results of operations in the future.
The Company has, at times, an investment portfolio of fixed income
securities that are classified as "available-for-sale-securities". These
securities, like all fixed income instruments, are subject to interest rate risk
and will fall in value if market interest rates increase. The Company attempts
to limit this exposure by investing primarily in short-term securities.
PROVISION (BENEFIT) FOR INCOME TAXES
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
(In thousands, except percentages)
Provision (benefit) for income taxes.................... $ (785) $(1,316) $ 1,783
Effective income tax rate............................... (10%) (12%) 81%
======== ======= =======
The Company's benefit for income taxes for 2000 primarily represents a tax
refund from the United Kingdom government on taxes paid in the years
1995 - 1997. The Company's benefit for income taxes for 1999 primarily
represents certain non-U.S. taxes arising from sales to customers in Japan and
the benefit of offsetting net operating losses against provisions arising from
the disposal of the
27
Company's NTRIGUE product line in 1998. The Company recorded a tax provision in
1998 reflecting certain non-U.S. taxes arising upon the disposal of the
Company's NTRIGUE product line, net of offsetting operating losses.
A more complete analysis of the differences between the federal statutory
rate and the Company's effective income tax rates is presented in Note 4 to the
Consolidated Financial Statements. At December 31, 2000, the Company has
recorded a full valuation allowance against all deferred tax assets, primarily
comprising net operating losses, on the basis that significant uncertainty
exists with respect to their realization.
LIQUIDITY AND CAPITAL RESOURCES
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Cash, cash equivalents, investments and restricted
cash................................................. $ 17,351 $ 11,107 $ 16,334
-------- -------- --------
Working capital........................................ $ 11,377 $ (221) $ 9,712
-------- -------- --------
Net cash used in operating activities.................. $(11,738) $(10,617) $(13,687)
======== ======== ========
The Company has transitioned its product focus from compatibility products
to its Jeode product line based on the Company's EVM technology. This change in
product focus has resulted in a redirection of available resources from the
Company's historical revenue base towards the development and marketing efforts
associated with the Jeode platform, which was released for general availability
in March 1999. Cash used in operating activities totaled $11.4 million during
2000.
The Company's cash, cash equivalents and short-term investments, including
restricted cash of $5.1 million held in escrow, were $17.3 million at
December 31, 2000, an increase of $6.2 million from $11.1 million at
December 31, 1999. Working capital increased to $11.7 million at December 31,
2000, from ($0.2) million at December 31, 1999. The principal source of cash
funding came from a private placement funding, a line of credit from a director,
receivable collections and NTRIGUE product line sales proceeds released from
escrow. Capital additions totaled $0.3 million, $0.2 million and $0.9 million
during the years ended December 31, 2000, 1999 and 1998, respectively.
In February 1998, $8.9 million was received from the disposal of the NTRIGUE
product line. Additionally, $2.5 million, $0.9 million, $1.0 million and
$0.3 million were released to the Company in February 1999, August 1999,
February 2000 and September 2000, respectively, and the remaining $5.1 million
is being held in escrow pending resolution of the Citrix indemnity claim.
On October 20, 1999, the Company signed a convertible promissory note in
favor of Quantum Corporation ("Quantum") for $1.0 million. The note is
convertible at Quantum's option to the Company's shares any time during the
lifetime of the note. All unpaid principal and unpaid interest, accrued at 8%
per annum, compounded quarterly, was converted to Ordinary Shares on
December 31, 2000.
On March 20, 2000, the Company entered into a binding agreement with a
director whereby he would provide the Company a $5.0 million line of credit The
interest rate on amounts drawn down is at prime plus 2% until June 30, 2000 and
thereafter at prime plus 4% per annum simple interest, payable in cash at the
repayment date. The Company drew down a total of $3.0 million of the line of
credit during 2000. On November 27, 2000 the Company repaid this sum, along with
all accrued interest and the termination fee due.
The Company believes the existing cash balances will be sufficient to meet
the Company's expected liquidity and capital needs for the coming year.
28
PRIVATE PLACEMENTS AND WARRANTS
In a private placement that closed on November 24, 2000, certain investors
purchased from the Company a total of 3,600,000 units at a price of $5.00 per
unit. Each unit comprises one ADS and one half of one warrant to purchase one
ADS. As described below, the Company may cancel the warrants upon sixty days
prior written notice if the closing sale price of the Company's ADSs exceeds
$9.00 for 30 consecutive trading days following the effectiveness of a
registration statement filed with the Securities and Exchange Commission ("SEC")
for the ADSs issued and the ADSs underlying the warrants. This registration
statement became effective on December 24, 2000. As compensation for services in
connection with the private placement, the Company (i) issued five-year warrants
to purchase 225,000 of the Company's ADSs at an exercise price of $5.00 per
share, and (ii) paid a cash compensation equal to six percent (6%) of the gross
proceeds received by the Company in the private placement to the placement
agent.
The investors that participated in this private placement received warrants
to purchase one ADS for every two ADSs they purchased. The exercise price of the
warrants was set at an exercise price per ADS equal to the lower of $6.00 and
the average quoted closing sale price of the Company's ADSs for the ten trading
days ending on the day preceeding the day the Company is informed of the
investor's intent to exercise, less a 10% discount. These warrants expire on
November 24, 2003.
These investors also have rights under their subscription agreements to be
issued additional ADSs by the Company if the registration statement is suspended
for more than 60 days in any 12 month period by the Company. If the registration
statement is suspended beyond the 60 day limit, the Company must issue, for
payment of the nominal value of L0.20 per share, to these investors 0.07 ADS for
each ADS purchased in the private placement. In addition, the Company must
issue, for payment of the nominal value of L0.20 per share, 0.02 ADS for each
ADS purchased in the private placement for each month thereafter until the
suspension or stop order is lifted. If the Company issues additional ADSs under
these obligations, the ownership interest of existing shareholders will be
substantially diluted.
In a private placement that closed on February 12, 2001, certain investors
purchased from the Company a total of 940,000 units at a price of $5.00 per
unit. Each unit comprises one ADS and one half of one warrant to purchase one
ADS. As described below, the Company may cancel the warrants upon sixty days
prior written notice if the closing sale price of the Company's ADSs exceeds
$9.00 for 30 consecutive trading days following the effectiveness of a
registration statement filed with the SEC for the ADSs issued and the ADSs
underlying the warrants. As compensation for services in connection with the
private placement, the Company (i) issued five-year warrants to purchase 25,000
of the Company's ADSs at an exercise price of $5.00 per share, and (ii) paid a
cash compensation equal to six percent (6%) of the first $2 million and 3% on
the remainder of the gross proceeds received by the Company in the private
placement to the placement agent.
The investors that participated in this private placement received warrants
to purchase one ADS for every two ADSs they purchased. The exercise price of the
warrants was set at an exercise price per ADS equal to the lower of $6.00 and
the average quoted closing sale price of the Company's ADSs for the ten trading
days ending on the day preceeding the day the Company is informed of the
investor's intent to exercise, less a 10% discount. These warrants expire on
February 12, 2004.
These investors also have rights under their subscription agreements to be
issued additional ADSs by the Company if (a) the Company does not register with
the SEC their ADSs and the ADSs underlying the Company's warrants and the SEC
does not declare the registration statement effective by May 14, 2001 or
(b) the registration statement is suspended for more than 60 days in any
12 month period by the Company. If the registration statement the Company files
with the SEC is not declared effective by the deadline, or if the registration
statement is suspended beyond the 60 day limit, the Company must issue, for
payment of the nominal value of L0.20 per share, to these investors 0.07 ADS
29
for each ADS purchased in the private placement. In addition, the Company must
issue, for payment of the nominal value of L0.20 per share, 0.02 ADS for each
ADS purchased in the private placement for each month thereafter until the
registration statement is declared effective by the SEC. If the Company issues
additional ADSs under these obligations, the ownership interest of existing
shareholders will be substantially diluted.
DILUTION ADJUSTMENTS
In December 1999, the Company issued 1,063,515 Ordinary Shares in ADS form
at a price of $4.23 per share through a private placement. The Company received
$4.5 million less offering expenses totaling $0.4 million. Along with ADSs, the
Company also issued to the investors warrants that entitle them to purchase a
total of 319,054 ADSs at an exercise price of $5.29 per ADS. As described below,
the exercise price and the number of ADSs issuable under the warrants were
subject to potential adjustment.
Under the December 1999 private placement, the investors received warrants
to purchase three ADSs for every 10 ADSs they purchased. The exercise price of
the warrants was set at 125% of the original per ADS purchase price, or $5.29.
However, the warrants contain anti-dilution provisions which decrease this
exercise price and increase the number of ADSs purchasable if the Company sells
or is deemed to sell any shares at below market price during the term of the
warrants, which ends on December 9, 2004. The private placement that closed on
November 24, 2000 was a sale which triggered the anti-dilution provisions in the
warrants, and, as a consequence, the exercise price of the warrants has been
decreased from $5.29 to $4.77 per ADS, and the number of ADSs purchasable has
increased to 353,834. The private placement on February 12, 2001 also triggered
the anti-dilution provisions of the issuance of December 9, 1999. However, the
effect of such dilution was less than 1% of the exercise price and consequently
such adjustment is deferred until such time as the accumulation of this
adjustment and future adjustments exceed at least 1% of the exercise price.
As part of their warrant agreements, the investors may be entitled to cash
payments upon the occurrence of certain Major Transactions, as defined in the
warrant agreements, including change of control provisions. Cash payments are
determined in a methodology described in the agreement. Such methodology is
impacted by market price.
Under the December 1999 private placement, the investors were entitled to
additional warrants to purchase ADS's at L0.20 nominal value per share if the
average of the closing bid price of the ADS's over the ten days before an
adjustment date was less than $4.23. The adjustment dates commenced on
March 10, 2000 and occurred on the 10th of each month through March 10, 2001,
inclusive. The rights for an adjustment date to occur would terminate upon
release of at least $4.75 million of the funds held in escrow by Citrix on
December 9, 1999. However, not enough of the funds held were released to trigger
this termination. The calculated average bid price of the Company's ADS's on all
the adjustment dates exceeded $4.23 per share and consequently no adjustment
occurred. The adjustment rights have now expired.
The Company obtained a third-party valuation to allocate fair value to
amounts received from the private placement between the ADSs and the warrants.
In 1999 the amount allocated to mandatorily redeemable warrants totaled
$1.440 million, of which $0.590 million was allocated to the warrants, and
$0.850 million was allocated to the additional warrants. Of the remaining net
proceeds received, $2.619 million was allocated to mandatorily redeemable
capital. The $2.619 million of mandatorily redeemable capital was reclassed when
the registration statement for the ADSs and the ADSs underlying the warrants
issued in the December 1999 private placement became effective on March 28,
2000, of which $0.340 million was classified as Ordinary Shares and
$2.279 million was classified as additional paid-in capital.
30
Limitations in the transaction agreements preclude these investors in
question from achieving certain levels of beneficial ownership. The securities
purchase agreement, the warrants and the additional warrants contain the
restriction that the Company may not issue and a selling investor may not
purchase, and the warrants and additional warrants may not be exercised for any
ADSs if doing so would cause such investor to beneficially own more than 9.9% of
the total ordinary shares in issue as determined in accordance with
section 13(d) of the Securities Exchange Act of 1934. Under the additional
warrants, if such investors are prohibited from exercising the additional
warrant as a result of the 9.9% restriciton, the selling investor may, at its
option and in addition to its other rights under the securities purchase
agreement and the warrant, retain the warrant or demand payment, in cash, from
the Company in an amount calculated by the Black-Scholes formula multiplied by
the number of ADSs for which the additional warrant was exercisable, without
regard to any limits on exercise. The restrictions on the levels of beneficial
ownership in these documents do not, however, restrict those investors from
exercising the warrants or additional warrants up to those limitations, selling
ADSs to decrease their level of beneficial ownership, and exercising the
warrants to receive additional ADSs. This could result in additional dilution to
the holders of the Company's ADSs and a potential decrease in the price of the
ADSs.
Any significant downward pressure on the price of the Company's ADSs as a
result of the exercise of the warrants or additional warrants and the sale of
material amounts of the Company's ADSs could encourage short sales of the
Company's ADSs. Short sales could place further downward pressure on the price
of the Company's ADSs.
YEAR 2000 COMPLIANCE
The Company believes that all of the Company's most current product releases
will not cease to perform nor generate incorrect or ambiguous data or results
solely due to a change in date to or after January 1, 2000, and will calculate
any information dependent on these dates in the same manner, and with the same
functionality, data integrity and performance, as these products did on or
before December 31, 1999. However, all of the Company's customers may not
implement the Year 2000 compliant release of the Company's products in a timely
manner, which could lead to failure of customer systems and product liability
claims against the Company. Even if the Company's products are Year 2000
compliant, the Company may, in the future, be subject to claims based on Year
2000 issues in the products of other companies or issues arising from the
integration of multiple products within a system. The costs of defending and
resolving Year 2000-related disputes, and any liability for Year 2000-related
damages, including consequential damages, could be significant. In addition,
Year 2000 failures could have a negative effect on the Company's competitive
position. If any of the Company's critical suppliers do not successfully and
timely achieve Year 2000 compliance, and the Company is unable to replace them
with new or alternate suppliers, our business would be disrupted.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement becomes effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued Statement of Financial
Accounting Standard No. 137 "Accounting for Derivative Instruments--Deferral of
the Effect Date of SFAS Statement No. 133" ("SFAS 137"). SFAS 137 defers the
effective date of SFAS 133 until June 15, 2000. The Company will adopt SFAS 133
in 2001. The Company expects the adoption of SFAS 133 will not affect results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance for
31
revenue recognition under certain circumstances. The Company does not believe
SAB 101 will have a material impact on the financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25". This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation did not have a material impact on the financial
statements.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company's revenues, margins and operating results are subject to
quarterly and annual fluctuations due to a variety of factors, including demand
for the Company's products, acceptance and demand for Java technology in the
Internet appliance and embedded device markets, the volume and timing of orders
received during the quarter, the mix of and changes in customers to whom the
Company's products are sold, the mix of product and service revenue received
during the quarter, the mix of development license fees and commercial use
royalties received, the timing and acceptance of new products and product
enhancements by the Company or by the Company's competitors, changes in pricing,
buyouts of commercial use licenses, product life cycles, the level of the
Company's sales of third party products, variances in costs associated with
fixed price contracts, purchasing patterns of customers, competitive conditions
in the industry, foreign currency exchange rate fluctuations, business cycles
and economic conditions that affect the markets for the Company's products; and
extraordinary events, such as litigation, including related charges. Although
the Company's primary functional currency is the United States dollar, a
significant portion of the Company's operating expenses are incurred by its
United Kingdom operations and paid in British pound sterling. The Company enters
into short-term currency option and forward exchange contracts to hedge the
short-term impact of exchange rate fluctuations on British pound sterling net
operating cash flows, but there can be no assurance that such fluctuations will
not have a material adverse effect on the Company's business, financial
condition or results of operations in the future. A relatively high percentage
of the Company's expenses is fixed over the short term and, as a result, if
anticipated revenues in any quarter do not occur or are delayed, expenditure
levels could be disproportionately high as a percentage of total revenues and
the Company's operating results for that quarter would be adversely affected. It
is difficult for the Company to predict when, or if, a particular prospect might
sign a license agreement. Development license fees may be delayed or reduced as
a result of this process. The Company's success depends upon the use of the
Company's technology by our licensees in their embedded systems, which makes it
difficult for the Company to predict when the Company will recognize royalty or
revenues from commercial use licenses. An increasing amount of the Company's
sales orders involve products and services that yield revenue over multiple
quarters or upon completion of performance. If license agreements entered into
during a quarter do not meet the Company's revenue recognition criteria, even if
it meets or exceeds the Company's forecast of aggregate licensing and other
contracting activity, it is possible that the Company's revenues would not meet
expectations. If sales forecasted from a specific customer for a particular
quarter are not realized in that quarter, the Company is unlikely to be able to
generate revenue from alternate sources in time to compensate for the shortfall.
As a result, and due to the relatively large size of some orders, a lost or
delayed sale could have a material adverse effect on the Company's quarterly
operating results. Moreover, to the extent that significant sales occur earlier
than expected, operating results for subsequent quarters may be adversely
affected. There can be no assurance that the Company will be able to achieve
profitability on a quarterly or annual basis. The Company intends to make a
significant investment in its marketing, sales, customer support and research
and development infrastructure to support its Jeode product line. The timing of
this expansion and the rate at which the Jeode platform generates revenue could
cause material fluctuations in the Company's results of operations. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications
32
of future performance. Although historically the Company's business has not been
subject to seasonal variations, sales of the Company's products in certain
international markets, such as Europe, are typically slower in the summer
months. Due to all of the foregoing factors, it is possible that in some future
quarters the Company's operating results will be below the expectations of stock
market analysts and investors. In such event, the price of the Company's ADSs
would likely be materially adversely affected.
The prices for the Company's ADSs have fluctuated widely in the past. During
the 12 months ended February 22, 2001, the closing price of a share of the
Company's common stock ranged from a high of $27.50 to a low of $4.25. Under the
rules of The Nasdaq Stock Market, the Company's stock price must remain above
$1.00 per share for continued quotation of the Company's shares on the Nasdaq
National Market. Stock price volatility has had a substantial effect on the
market prices of securities issued by the Company and other high technology
companies, often for reasons unrelated to the operating performance of the
specific companies. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has been
instituted against the Company. The Company may in the future be the target of
similar litigation. Regardless of the outcome, securities litigation may result
in substantial costs and divert Management's attention and resources.
FUTURE OPERATING RESULTS
Except for the historical information contained in this 10-K, the matters
discussed herein are forward-looking statements. These forward-looking
statements concern matters which include, but are not limited to, the revenue
model and market for the Jeode product line, the features, benefits and
advantages of the Jeode platform, international sales, gross margins, the
availability of licenses to third-party proprietary rights, business and sales
strategies, matters relating to proprietary rights, competition, Year 2000
compliance, exchange rate fluctuations and the Company's liquidity and capital
needs and other statements regarding matters that are not historical are
forward-looking statements. These matters involve risks and uncertainties that
could cause actual results to differ materially from those in the forward
looking statements. In addition to the factors discussed above, among other
factors that could cause actual results to differ materially are the following:
the demand for the Jeode platform; the performance and functionality of Jeode
technology; the Company's ability to deliver on time, and market acceptance of
new products or upgrades of existing products; the timing of, or delay in, large
customer orders; continued availability of technology and intellectual property
license rights; product life cycles; quality control of products sold;
competitive conditions in the industry; economic conditions generally or in
various geographic areas; and the risks listed from time to time in the reports
that the Company files with the SEC. There can be no assurance that the Company
will experience growth in revenues and net income in any particular period when
compared to prior periods. Any quarterly or annual shortfall in net revenues
and/or net income from the levels expected by securities analysts and
shareholders would result in a substantial decline in the trading price of the
Company's shares.
The Company continues to face significant risks associated with the
successful execution of its new product strategy. These risks include, but are
not limited to continued technology and product development, introduction and
market acceptance of new products, changes in the marketplace, liquidity,
competition from existing and new competitors which may enter the marketplace
and retention of key personnel. Due to the generally longer sales cycles
expected to be associated with the Jeode platform, the Company does not
currently have accurate visibility of future order rates and demand for its
products generally. There can be no assurance that Jeode platform products will
achieve market acceptance.
The Company has experienced operating losses in each quarter since the
second quarter of 1996. To achieve profitability, the Company will have to
increase its revenue significantly. The Company's ability to increase revenues
depends upon the success of our Jeode product line. The Jeode platform is
33
a relatively new product and it may not achieve market acceptance. If the
Company is unable to generate revenues from Jeode technology in the form of
development license fees, maintenance and support fees, commercial use royalties
and customer-funded engineering services, the Company's current revenue will be
insufficient to sustain its business.
ITEM 8--CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item are set forth at the pages
indicated in Item 14 of Part IV of this Report on Form 10-K.
The following table provides selected quarterly consolidated financial data
(in thousands, except per share data):
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
2000:
Revenues........................................ $ 1,511 $ 3,051 $ 2,890 $ 3,314
Gross profit.................................... 750 2,318 1,562 2,845
Net loss........................................ (3,158) (602) (2,310) (744)
Basic net loss per share........................ (0.22) (0.04) (0.16) (0.05)
Diluted net loss per share...................... (0.22) (0.04) (0.16) (0.05)
1999:
Revenues........................................ $ 2,308 $ 1,507 $ 1,754 $ 1,268
Gross profit.................................... 1,037 555 980 465
Net loss........................................ (3,116) (2,711) (2,030) (2,102)
Basic net loss per share........................ (0.25) (0.21) (0.16) (0.16)
Diluted net loss per share...................... (0.25) (0.21) (0.16) (0.16)
1998:
Revenues........................................ $ 4,982 $ 2,334 $ 3,620 $ 3,160
Gross profit.................................... 2,063 410 1,296 952
Net income (loss)............................... 7,632 (3,677) (667) (2,866)
Basic net income (loss) per share............... 0.63 (0.30) (0.05) (0.23)
Diluted net income (loss) per share............. 0.62 (0.30) (0.05) (0.23)
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
34
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS OF THE COMPANY
The names of the directors of the Company, and certain information about
them as of February 22, 2001, are set forth below:
DIRECTOR
NAME OF DIRECTOR AGE PRINCIPAL OCCUPATION SINCE
---------------- -------- -------------------- --------
Richard M. Noling................. 52 President and Chief Executive 1997
Officer
Nicholas, Viscount Bearsted (1)... 51 Chairman of the Board of the 1988
Company
Albert E. Sisto (2)............... 51 President of Phoenix Technologies 1997
Vincent S. Pino (1)(2)............ 52 President of Alliance Imaging 1998
David G. Frodsham (1)............. 44 Chief Executive Officer of Argo 1999
Interactive Group
John C. Fogelin................... 35 Vice President and Co-General 2001
Manager, Wind River Systems,
Platform Business Unit
------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Richard M. Noling was named President and Chief Executive Officer and a
director of the Company in March 1997. He also served as Chief Financial
Officer, Senior Vice President of Finance and Operations and Company Secretary
between April 19, 1996 and October 1, 1997 and Chief Operations Officer between
February and March 1997. From August 1995 to February 1996, Mr. Noling was Vice
President and Chief Financial Officer at Fast Multimedia, Inc., a German-based
computer software and hardware developer. From November 1994 to August 1995, he
was Chief Financial Officer for DocuMagix Inc., a personal paper management
software company. From June 1991 to October 1994, Mr. Noling served as Senior
Vice President and Chief Financial Officer for Gupta Corporation. He received a
Bachelor of Arts degree in aerospace and mechanical engineering science from the
University of California (San Diego) in 1970. He received an M.A. degree in
theology from the Fuller Theological Seminary in 1972, and an M.S. degree in
business administration in 1979 from the University of California (Irvine).
Nicholas, Viscount Bearsted has served as Chairman of the Board of Directors
of the Company since March 1997 and as a director of the Company since
January 1988. He also served as Chairman of the Board from January 1988 to
March 1995, and he was the Company's Chief Executive Officer from
September 1988 until September 1993. From May 1999 to July 2000 he also served
as Chief Executive Officer of Airpad Ltd., a company based in the United Kingdom
that developed and manufactured peripheral products for the games console and
personal computer market. From January 1996 to May 1996, he served as Chief
Executive Officer and a director, and from April 1994 to January 1996, as Deputy
Chief Executive Officer and a director, of Hulton Deutsch Collection Ltd., a
photographic content provider. He founded Alliance Imaging Inc. in 1984 and
served as a senior executive until 1987 and as a director until 1988. Since
1980, he has been a corporate and computer consultant. He received a Bachelors
degree in chemistry from Oxford University in 1972. He also serves as a Director
of Mayborn Group plc.
35
Albert E. Sisto was appointed as a director of the Company in March 1997. He
is currently President of Phoenix Technologies, Ltd., a company that provides
system enabling software designed into PC's as well as other devices. He served
as Chief Operating Officer of RSA Data Security, Inc., a wholly owned subsidiary
of Securities Dynamics Technologies, Inc., from December 1997 to February 1999.
He served as the President, Chief Executive Officer and Chairman of the Board of
Directors of DocuMagix Inc. from October 1994 until December 1997. From
September 1989 to September 1994, Mr. Sisto served as President and Chief
Executive Officer of PixelCraft, an imaging software and equipment company. He
received a B.E. degree in engineering from the Stevens Institute of Technologies
in 1971.
Vincent S. Pino was appointed a director of the Company in October 1998. He
has served as President of Alliance Imaging, Inc. since February 1998. Alliance
Imaging is a provider of diagnostic imaging and therapeutic services. Mr. Pino
began his association with Alliance in 1988 as Chief Financial Officer. From
1991 through 1993 Mr. Pino held the position of Executive Vice President and
Chief Financial Officer. From 1986 to 1988, Mr. Pino was President of Pacific
Capital, where he provided financial consulting services to corporations and
publicly registered real estate limited partnerships. Prior to joining Pacific
Capital, Mr. Pino held executive staff positions with Petrolane Incorporated, a
diversified services company. Mr. Pino received an MBA and a B.S. degree in
finance from the University of Southern California in 1972 and 1970,
respectively.
David G. Frodsham was appointed a director of the Company in August 1999. He
currently serves as Chief Executive Officer of Argo Interactive Group, a
provider of wireless internet technology, based in the United Kingdom.
Previously he was Chief Operating Officer with Phoenix Technologies Ltd. Prior
to that he founded and was CEO for Distributed Information Processing
Research Ltd., involving software design for the handheld/palmtop market. Before
that he was International Business Manager with Psion PLC, and also held
technical and marketing positions with SEL and Zeneca. He received a B. Sc. from
Kings College, London and an MBA from INSEAD in France.
John C. Fogelin was appointed a director of the Company in January, 2001. He
currently serves as Vice President and General Manager of Wind River Systems
Platforms Business Unit. Mr. Fogelin oversees all aspects of research and
development for the Wind River Tornado tools and VXWorks operating system.
Previously, Mr. Fogelin designed hardware for embedded applications used in
devices ranging from biomedical equipment to arcade games.
(b) EXECUTIVE OFFICERS
The information required by this Item with respect to the executive officers
of the Company is incorporated by reference from "Item 4A--Executive Officers of
the Registrant" in Part I of this Report.
(c) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
officers, and persons who own more than 10% of the Company's Ordinary Shares to
file initial reports of ownership and reports of changes in ownership with the
SEC. Such persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms that they file. Based solely on its review of
the copies of such forms furnished to the Company and written representations
from the executive officers and directors, the Company believes that all
Section 16(a) filing requirements were met.
ITEM 11--EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to or earned or paid
for services rendered in all capacities to the Company and its subsidiaries
during each of 2000, 1999 and 1998 by the Company's Chief Executive Officer and
each of the Company's other executive officers who were serving as executive
officers at the end of 2000, as well as a former Vice President of Sales who
left the
36
Company during 2000 (the "Named Officers"). This information includes the dollar
values of base salaries and bonus awards, the number of shares subject to
options granted and certain other compensation, whether paid or deferred.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#) COMPENSATION($)(2)
---------------------------- -------- --------- ----------- --------------- ------------ ------------------
Richard M. Noling................ 2000 241,032 103,403 -- 20,000 1,080
President and Chief Executive 1999 240,611 83,042 -- -- 1,080
Officer 1998 217,875 75,171 -- 20,000 1,080
Stephen M. Ambler (3)............ 2000 178,008 64,480 -- -- --
Chief Financial Officer, Company 1999 179,382 57,512 -- 25,000 --
Secretary and Senior Vice 1998 145,250 40,345 -- 20,000 --
President
George Buchan.................... 2000 160,387 62,845 20,163(4) -- 16,039
Senior Vice President of 1999 168,000 48,161 21,120(4) 40,000 16,800
Engineering 1998 167,000 54,827 22,044(4) 20,000 16,700
and UK General Manager
Stephen H. Cobb (5).............. 2000 121,633 51,647 -- 90,000 --
Former Senior Vice President of
Sales
Jonathan D. Hoskin (6)........... 2000 114,562 37,055 18,330(4) 25,000 5,728
Chief Technology Officer and 1999 110,400 18,575 18,240(4) 45,000 5,520
Senior Vice President 1998 79,569 14,712 15,558(4) 22,000 3,978
Marshall J. Kwait (7)............ 2000 17,968 -- -- -- --
Former Vice President of Sales 1999 157,937 40,174 -- 47,500 1,080
1998 128,431 81,587 -- 12,000 1,080
Mark E. McMillan (8)............. 2000 179,032 80,121 -- 175,000 1,080
Chief Operating Officer 1999 26,481 19,166 -- 150,000 --
Ronald C. Workman (9)............ 2000 174,756 61,418 -- 25,000 405
Senior Vice President of 1999 174,983 47,746 -- 10,000 1,080
Marketing 1998 82,500 22,442 -- 100,000 405
--------------------------
(1) Bonuses paid to the executive officers are based on a target bonus set for
each officer each quarter, adjusted by the Company's operating results over
plan and the executive officer's performance against quarterly qualitative
goals. All executive officer bonuses are at the discretion of the
Compensation Committee of the Board.
(2) Represents Company contributions to defined contribution employee benefit
plans.
(3) Mr. Ambler joined the Company in April 1994 as Director of Finance and
Administration, Europe. He was appointed Chief Financial Officer, Company
Secretary and Vice President in October 1997. He became a Senior Vice
President in January 1999. Mr. Ambler has left the employment of the
Company. His last day with the Company was March 15, 2001. However, for a
period of six months following this date, Mr. Ambler will be a part-time
consultant to the Company.
(4) Represents the payment of a Company car allowance.
(5) Mr. Cobb joined the Company in May 2000 as Senior Vice President of Sales,
and served in this position until January 2001.
37
(6) Mr. Hoskin joined the Company in June 1992 as Engineering Director. He was
appointed Chief Technology Officer in May 1999, and he became a Senior Vice
President in January 2001.
(7) Mr. Kwait joined the Company in December 1996 as Channel Sales Director. He
was appointed Vice President of Sales in February 1999 and served in this
position until January 2000.
(8) Mr. McMillan joined the Company in November 1999 as Senior Vice President of
Worldwide Sales and Marketing. He was appointed Executive Vice President of
Worldwide Sales and Marketing in April 2000, and Chief Operating Officer in
October 2000.
(9) Mr. Workman joined the Company in July 1998.
The following table sets forth further information regarding individual
grants of rights to purchase Ordinary Shares during 2000 to each of the Named
Officers. In accordance with the rules of the SEC, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective ten-year terms. These gains are based on assumed rates
of annual compounded share price appreciation of 5% and 10% from the dates the
options were granted to the end of the respective option terms. Actual gains, if
any, on option exercises depend upon the future performance of the Ordinary
Shares and ADSs. There can be no assurance that the potential realizable values
shown in this table will be achieved.
OPTION GRANTS IN 2000
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL SHARE PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(1)
OPTIONS GRANTED TO EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME (#) 2000 ($/SH) DATE 5%($) 10%($)
---- --------------- ---------------- -------- ---------- ------------- -------------
Richard M. Noling........ 20,000(2) 2.3% 5.188 01/18/10 65,254 165,366
Stephen M. Ambler........ -- -- -- -- -- --
George Buchan............ -- -- -- -- -- --
Stephen H. Cobb.......... 90,000(3) 10.2% 6.375 05/25/10 360,828 914,410
Jonathan D. Hoskin....... 25,000(2) 2.8% 5.188 01/18/10 81,568 206,708
Marshall J. Kwait........ -- -- -- -- -- --
Mark E. McMillan......... 50,000(4) 5.6% 11.125 04/12/10 349,822 886,519
125,000(2) 14.10% 5.75 10/16/10 452,017 1,145,502
Ronald C. Workman........ 25,000(2) 2.8% 5.188 01/18/10 81,568 206,708
------------------------
(1) The 5% and 10% assumed annual compound rates of share price appreciation are
mandated by rules of the SEC and do not represent the Company's estimate or
projection of future Ordinary Share or ADS prices.
(2) These incentive options were granted pursuant to the Company's 1995
Incentive Stock Option Plan for U.S. Employees. These options vest and
become exercisable at the rate of 2.0833% of the shares for each full month
that the optionee renders service to the Company. The option exercise price
is equal to the fair market value of the Company's Ordinary Shares on the
date of grant and the options expire ten years from the date of grant,
subject to earlier termination upon termination of employment. Upon
termination or constructive termination following a change of control of the
Company, 25% of options granted will be subject to accelerated vesting
subject to a minimum 50% having vested.
(3) These incentive options were granted pursuant to the Company's 1995
Incentive Stock Option Plan for U.S. Employees. These options vest and
become exercisable as to 25% of the shares on the first anniversary of the
date of grant and thereafter at the rate of 2.0833% of the shares for each
full month that the optionee renders services to the Company. The option
exercise price is equal
38
to the fair market value of the Company's Ordinary Shares on the date of
grant and the options expire ten years from the date of grant, subject to
earlier termination upon termination of employment. Upon termination or
constructive termination following a change of control of the Company, 25%
of options granted will be subject to accelerated vesting subject to a
minimum 50% having vested.
(4) These incentive options were granted pursuant to the Company's 1995
Incentive Stock Option Plan for U.S. Employees. These options vest and
become exercisable at the rate of 8.3333% of the shares for each full month
that the optionee renders service to the Company. The option exercise price
is equal to the fair market value of the Company's Ordinary Shares on the
date of grant and the options expire ten years from the date of grant,
subject to earlier termination upon termination of employment. Upon
termination or constructive termination following a change of control of the
Company, 25% of options granted will be subject to accelerated vesting
subject to a minimum 50% having vested.
The following table sets forth certain information concerning the exercise
of options by each of the Named Officers during 2000, including the aggregate
amount of gains on the date of exercise. In addition, the table includes the
number of shares covered by both exercisable and unexercisable rights to acquire
shares as of December 31, 2000. Also reported are values of "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding rights to acquire shares and $4.75 per share, which was
the closing price of the ADSs as reported on the Nasdaq National Market on
December 29, 2000.
AGGREGATED OPTION EXERCISES IN 2000 AND
YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR-END (#) AT YEAR-END($)(2)
SHARES ACQUIRED VALUE REALIZED --------------------------- ---------------------------
NAME ON EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
Richard M. Noling.......... 30,700 187,577 447,946 51,354 926,501 98,062
Stephen M. Ambler.......... -- -- 76,115 36,135 201,164 103,221
George Buchan.............. -- -- 168,646 33,854 511,111 98,389
Stephen H. Cobb............ -- -- -- 90,000 -- --
Jonathan D. Hoskin......... -- -- 46,542 56,208 73,419 34,684
Marshall J. Kwait.......... -- -- -- -- -- --
Mark E. McMillan........... -- -- 79,167 245,833 6,338 17,063
Ronald C. Workman.......... 10,500 57,155 29,815 64,687 87,454 166,534
------------------------
(1) "Value Realized" represents the fair market value of the shares underlying
the options on the date of exercise less the aggregate exercise price of the
options.
(2) For purposes of the table, all amounts in pounds sterling were converted to
U.S. dollars using $1.50 per pound sterling, the exchange rate in effect as
of December 31, 2000.
EMPLOYMENT AGREEMENTS
Effective March 25, 1997, Mr. Noling entered into an employment agreement
with the Company, which is terminable by either party upon six month's notice
and by the Company for cause at any time. In connection with such agreement,
Mr. Noling was granted options to purchase (i) 100,000 Ordinary Shares at an
exercise price of $1.969, such options being 100% vested and immediately
exercisable, (ii) 100,000 Ordinary Shares at an exercise price of $1.969, such
options to vest and become exercisable at the rate of 2.0833% of the shares on
the first day of each month following the date of grant and
39
(iii) 200,000 Ordinary Shares on the day of the 1997 Annual General Meeting,
such options to vest and become exercisable at the rate of 2.0833% of the shares
on the first day of each month following the date of grant. The Annual General
Meeting was held on May 29, 1997 and the options were granted at an exercise
price of $2.375. 100,000 of these options are subject to accelerated vesting and
exercisability should the Company meet certain earnings per share ("EPS")
targets as follows: (a) 25,000 options are accelerated should the EPS exceed
$0.07 for 2 consecutive quarters (b) 37,500 options are accelerated should the
EPS exceed $0.14 for 2 consecutive quarters and (c) 37,500 options are
accelerated should the EPS exceed $0.21 for 2 consecutive quarters, with a
maximum of one early vesting event per quarter. These 100,000 options fully vest
upon a takeover or merger of the Company.
The employment agreement continues through May 31, 2001, and is
automatically extended for an additional year at the end of the term unless
either party gives notice six months prior to November 30, 2000 to terminate
effective upon the expiration of the then current term. In the event of any
business combination resulting in a change of control of the Company or in the
event of disposal of a majority of the assets of the Company, and the
termination or constructive termination of Mr. Noling's employment, Mr. Noling
shall receive his then current full salary for a period of twelve months
following such termination. In addition he shall be entitled to continued
vesting and exercisability of his options for a period of twelve months after
termination and shall be entitled to participate in the Company's employee
benefits on the same basis as if he were an employee.
With effect from April 1, 1997, Nicholas, Viscount Bearsted, Chairman of the
Company, entered into a Consulting Agreement with the Company whereby he acts as
consultant to the Company providing advice and assistance as the Board may from
time to time request. Under the agreement, Nicholas, Viscount Bearsted shall be
available to perform such services as requested during the year and shall
receive a fee of $1,000 for each day services are provided, plus reimbursement
of reasonable expenses. During 2000, he was not requested to provide any advice
or assistance to the Board. The agreement is terminable by either party upon six
month's advance written notice and by the Company for cause at any time. In the
event of any business combination resulting in a change of control of the
Company or in the event of disposal of a majority of the assets of the Company,
and termination or constructive termination of his consultancy, Nicholas,
Viscount Bearsted will be entitled to receive an additional twenty-six week's
consultancy fees.
In January 1993, Mr. Buchan entered into an employment agreement with the
Company, which may be terminated by either party upon six months' notice and by
the Company for cause at any time. In the event of any business combination,
change in control or disposal of a majority of the assets of the Company,
Mr. Buchan's employment may be terminated with three months' notice, and upon
such termination Mr. Buchan will be entitled to a payment equivalent to his
current annual salary plus estimated bonus for the year following termination
and all his outstanding share options will become exercisable.
In June 1992, Mr. Hoskin entered into an employment agreement with the
Company, which may be terminated by either party upon one months' notice and by
the Company for cause at any time.
In the event of any business combination, change in control or disposal of a
majority of the assets of the Company, all executive employees who are
terminated within six months after such an event will be entitled to (i) a one
year severance period; (ii) a certain estimated bonus paid in installments over
the severance period; (iii) full benefits during the severance period; and
(iv) continued stock option vesting over the severance period, with guaranteed
vesting of no less than 50% of all stock options granted to such executive
employee by the end of the severance period.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board (the "Committee") makes all
decisions involving the compensation of executive officers of the Company. The
Committee consists of the following non-employee directors: Vincent S. Pino and
Albert E. Sisto.
40
DIRECTOR COMPENSATION
The Company pays each outside director $1,000 for every regular meeting
attended, $2,500 per quarter of service on the Board, $500 per quarter for
service on each committee, plus $500 for each committee meeting attended, and
reimburses outside directors for reasonable expenses in attending meetings of
the Board. The Chairman of the Board receives an additional $1,500 per quarter.
In addition, each new outside director will be granted an option to purchase
15,000 shares and each outside director will be granted an option to purchase
5,000 shares annually for so long as he serves as an outside director. For
information concerning the compensation of Mr. Noling and Nicholas, Viscount
Bearsted, see "Employment Agreements."
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of February 22, 2001,
with respect to the beneficial ownership of the Company's Ordinary Shares by
(i) each shareholder known by the Company to be the beneficial owner of more
than 5% of the Company's Ordinary Shares, (ii) each director, (iii) each Named
Officer, and (iv) all directors and executive officers as a group.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------------ ----------------------- ----------------
RIT Capital Partners plc (2)............................... 2,012,897 10.5%
Castle Creek Technology Partners LLC (3)................... 1,957,124 9.9%
Nicholas, Viscount Bearsted (4)............................ 835,904 4.3%
Richard M. Noling (5)...................................... 507,522 2.6%
Vincent S. Pino (6)........................................ 482,360 2.5%
George Buchan (7).......................................... 197,137 1.0%
Mark E. McMillan (8)....................................... 118,750 *
Stephen M. Ambler (9)...................................... 87,354 *
Jonathan D. Hoskin (10).................................... 60,323 *
David G. Frodsham (11)..................................... 57,500 *
Albert E. Sisto (12)....................................... 46,042 *
Ronald C. Workman (13)..................................... 41,065 *
John C. Fogelin (14)....................................... 15,000 *
Paul O. Livesay (15)....................................... 0 *
Stephen H. Cobb (16)....................................... 0 *
Marshall J. Kwait (17)..................................... 0 *
All directors and executive officers as a group (12
persons)(18)............................................. 2,448,957 11.9%
------------------------
* Less than 1%
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares subject to options that are currently exercisable or exercisable
within 60 days of February 22, 2001 are deemed to be outstanding and to be
beneficially owned by the person holding such option for the purpose of
computing the percentage ownership of such person but are not treated as
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) The address of RIT Capital Partners plc is 27 St. James's Place, London SW1A
1NR, United Kingdom.
(3) Represents 9.9% of the ordinary shares outstanding as of February 22, 2001
and includes ordinary shares and warrants held by Castle Creek Technology
Partners LLC. Each of the warrants held by Castle Creek cannot be exercised
at any time to the extent that exercise would result in Castle
41
Creek having beneficial ownership of more than 9.9% of the total number of
ordinary shares in issue at the time of exercise. The aggregate number of
shares issuable to Castle Creek under all outstanding warrants exceeds the
number set forth herein. If the total number of ordinary shares in issue
increases, including as a result of issuance of ordinary shares upon
exercise of the warrants, then the number of shares beneficially owned by
Castle Creek may also increase. Castle Creek Technology Partners LLC are
located at 77 West Wacker Drive, Ste. 4040, Chicago, Illinois 60601.
(4) Includes 198,958 shares subject to options that were exercisable within
60 days of February 22, 2001. Nicholas, Viscount Bearsted is Chairman of the
Board of the Company.
(5) Includes 470,758 shares subject to options that were exercisable within
60 days of February 22, 2001. Mr. Noling is the President, Chief Executive
Officer, and a director of the Company.
(6) Represents shares and warrants held by Mr. Pino and his immediate family.
Includes 17,501 shares subject to options that were exercisable within
60 days of February 22, 2001 and warrants entitling Mr. Pino or members of
his family to purchase 132,157 shares within 60 days of February 22, 2001.
Mr. Pino is a director of the Company.
(7) Includes 176,875 shares subject to options that were exercisable within
60 days of February 22, 2001. Mr. Buchan is Senior Vice President of
Engineering and UK General Manager of the Company.
(8) Represents shares subject to options that were exercisable within 60 days of
February 22, 2001. Mr. McMillan is Chief Operating Officer.
(9) Represents shares subject to options that were exercisable within 60 days of
February 22, 2001. Until March 15, 2001, Mr. Ambler was the Chief Financial
Officer, Company Secretary and a Senior Vice President of the Company. On
this date, Mr. Ambler left the employment of the Company. However, for a
period of six months following this date, Mr. Ambler will be a part-time
consultant to the Company.
(10) Includes 54,958 shares subject to options that were exercisable within
60 days of February 22, 2001. Mr. Hoskin is Chief Technology Officer and a
Senior Vice President of the Company.
(11) Includes 17,500 shares subject to options that were exercisable within
60 days of February 22, 2001. Mr. Frodsham is a director of the Company.
(12) Represents shares subject to options that were exercisable within 60 days
of February 22, 2001. Mr. Sisto is a director of the Company.
(13) Represents shares subject to options that were exercisable within 60 days
of February 22, 2001. Mr. Workman is Senior Vice President of Marketing.
(14) Represents shares subject to options that were exercisable within 60 days
of February 22, 2001. Mr. Fogelin is a director of the Company.
(15) Represents shares subject to options that were exercisable within 60 days
of February 22, 2001. Mr. Livesay is the Senior Vice President of Corporate
Development and Strategic Relations.
(16) Represents shares subject to options that were exercisable within 60 days
of February 22, 2001. Mr. Cobb served as Senior Vice President of Sales from
May 2000 to January 2001.
(17) Represents shares subject to options that were exercisable within 60 days
of February 22, 2001. Mr. Kwait served as Vice President of Sales from
February 1999 to January 2000.
(18) Includes the shares indicated as included in footnotes (5) through (15).
42
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 20, 2000, the Company entered into a binding agreement with a
director whereby he would provide the Company a $5.0 million line of credit with
a commitment fee of four points based upon the total amount of the line and
drawdown/termination fee of two points for the first drawdown or termination.
The interest rate on amounts drawn down was at prime plus 2% until June 30, 2000
and thereafter at prime plus 4% per annum simple interest, payable in cash at
the repayment date. The Company drew down a total of $3.0 million of the line of
credit during 2000. A total of 19,994 Ordinary Shares in ADS form were issued to
the director as payment for drawdown fees under the line of credit arrangement.
On November 27, 2000 the Company repaid this sum, along with all accrued
interest and the termination fee due.
On February 13, 2000, the Company entered into a promissory note with
Richard M. Noling, President and Chief Executive Officer of the Company whereby
Mr. Noling borrowed $150,000 from the U.S. based subsidiary of the Company. The
promissory note is due in three equal installments, on each annual anniversary
from the date of the note, beginning on February 13, 2002. Interest accrues on
the unpaid principal balance at a rate per annum equal to the prime lending rate
of interest as listed in the Wall Street Journal plus 1%. Accrued interest is
due and payable monthly in arrears on the last calendar day of each month,
beginning March 31, 2001.
Since January 1, 2000, there has not been, nor is there currently proposed,
any other transaction or series of transactions to which the Company or any of
its subsidiaries was or is to be a party in which the amount involved exceeds
$60,000 and in which any executive officer, director or holder of more than 5%
of the Company's Ordinary Shares had or will have a direct or indirect material
interest other than (i) normal compensation arrangements, which are described
under Item 11 above, (ii) the transactions described under "Compensation
Committee Interlocks and Insider Participation" in Item 11 above, and (iii) the
transactions described under "Employment Agreements" in Item 11 above.
43
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following documents are filed as part of this Annual Report on
Form 10-K:
DOCUMENT PAGE
-------- --------
Consolidated Balance Sheet as of December 31, 2000 and
1999...................................................... 48
Consolidated Statement of Operations for each of the three
years in the period ended December 31, 2000............... 49
Consolidated Statement of Shareholders' Equity for each of
the three years in the period ended December 31, 2000..... 50
Consolidated Statement of Cash Flows for each of the three
years in the period ended December 31, 2000............... 51
Notes to Consolidated Financial Statements.................. 52
Report of Independent Accountants........................... 73
2. Financial Statement Schedule
The following financial statement schedule is filed as a part of this
Annual Report on Form 10-K and should be read in conjunction with the
Financial Statements:
DOCUMENT PAGE
-------- --------
Schedule II--Valuation and Qualifying Accounts.............. 72
All other schedules are omitted because they are not applicable, or
because the required information is included in the financial statements
or notes thereto.
(b) Reports on Form 8-K
The Company filed during the quarter ended December 31, 2000 a Report on
Form 8-K reporting under Item 5 a private placement under a Securities
Purchase Agreement dated November 24, 2000.
(c) Exhibits
The following exhibits are filed as part of this Report:
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- ------------------------------------------------------------
2.01 --Asset Purchase Agreement dated as of January 10, 1998, by
and among Citrix Systems, Inc., Citrix Systems UK Limited
and Registrant. (4)**
2.02 --Amendment No. 1 to Asset Purchase Agreement dated as of
February 5, 1998, by and among Citrix Systems, Inc.,
Citrix Systems UK Limited and Registrant. (4)**
3.02 --Registrant's Articles of Association. (1)
3.04 --Registrant's Memorandum of Association. (1)
4.01 --Form of Specimen Certificate for Registrant's Ordinary
Shares. (1)
4.02 --Deposit Agreement between Registrant and The Bank of New
York. (2)
4.03 --Form of American Depositary Receipt (included in Exhibit
4.02). (2)
10.01 --Registrant's 1986 Executive Share Option Scheme, as
amended, and related documents. (1)*
10.02 --Registrant's 1988 U.S. Stock Option Plan, as amended, and
related documents. (1)*
44
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- ------------------------------------------------------------
10.03 --Registrant's 1995 Incentive Stock Option Plan for U.S.
Employees and related documents, as amended (incorporated
by reference to Exhibit 4.04 to Registrant's Registration
Statement on Form S-8 filed on December 13, 2000 (File No.
333-51760)).*
10.05 --Insignia Solutions Inc. 401(k) Plan. (1)*
10.06 --Registrant's Small Self-Administered Pension Plan
Definitive Deed and Rules. (1)*
10.10 --Executive's Employment Agreement dated January 1, 1993
between Registrant and George Buchan. (1)*
10.14 --Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers. (1)*
10.16 --Lease between Registrant and The Standard Life Assurance
Company dated November 3, 1992 and related documents. (1)
10.28 --Registrant's U.K. Employee Share Option Scheme 1996, as
amended (incorporated by reference to Exhibit 4.05 to
Registrant's Registration Statement on Form S-8 filed on
December 13, 2000 (File No. 333-51760)).*
10.33 --Employment Agreement effective March 25, 1997 between
Registrant and Richard M. Noling. (3)*
10.34 --Consulting Agreement effective April 1, 1997 between
Registrant and Nicholas, Viscount Bearsted. (3)*
10.36 --Source Code License and Binary Distribution Agreement
dated as of September 29, 1997 between Registrant and
Silicon Graphics, Inc. (3)
10.38 --Lease Agreement between Insignia Solutions, Inc. and
Lincoln-Whitehall Pacific, LLC, dated December 22, 1997
(incorporated by reference to the exhibit of the same
number from Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).
10.42 --Registrant's 1995 Employee Share Purchase Plan, as amended
(incorporated by reference to Exhibit 4.06 to Registrant's
Registration Statement on Form S-8 filed on April 12, 2000
(File No. 333-34632)).*
10.44 --Lease agreement between Registrant and Comland Industrial
and Commercial Properties Limited dated August 12th, 1998
for the Apollo House premises and the Saturn House
premises (incorporated by reference to the exhibit of the
same number from Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998).
10.46 --Technology License and Distribution Agreement between Sun
Microsystems, Inc. and Registrant, dated March 3, 1999
(incorporated by reference to the exhibit of the same
number from Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999).
10.50 --License, Distribution, and Asset Purchase Agreement
between Registrant and FWB Software, LLC dated October 6,
1999 (incorporated by reference to the exhibit of the same
number from Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999).
10.51 --Registration Rights Agreement dated as of October 20,
1999, by and between Registrant and Quantum Corporation
(incorporated by reference to Exhibit 4.14 to Registrant's
Registration Statement on Form S-3 filed on February 13,
2001 (File No. 333-55498)).
10.52 --Securities Purchase Agreement dated as of December 9,
1999, between Registrant and Castle Creek Technology
Partners LLC (incorporated by reference to Exhibit 10.50
to Registrant's Current Report on Form 8-K filed on
December 15, 1999).
45
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- ------------------------------------------------------------
10.53 --Securities Purchase Agreement dated as of December 9,
1999, between Registrant and the Purchasers named therein
(incorporated by reference to Exhibit 10.51 to
Registrant's Current Report on Form 8-K filed on December
15, 1999).
10.54 --Registration Rights Agreement dated as of December 9,
1999, between Registrant and Castle Creek Technology
Partners LLC (incorporated by reference to Exhibit 4.05 to
Registrant's Current Report on Form 8-K filed on December
15, 1999).
10.55 --Registration Rights Agreement dated as of December 9,
1999, between Registrant and the Purchasers named therein
(incorporated by reference to Exhibit 4.08 to Registrant's
Current Report on Form 8-K filed on December 15, 1999).
10.56 --ADSs Purchase Warrant issued to Castle Creek Technology
Partners LLC dated December 9, 1999 (incorporated by
reference to Exhibit 4.06 to Registrant's Current Report
on Form 8-K filed on December 15, 1999).
10.57 --ADSs Purchase Reset Warrant issued to Castle Creek
Technology Partners LLC dated December 9, 1999
(incorporated by reference to Exhibit 4.07 to Registrant's
Current Report on Form 8-K filed on December 15, 1999).
10.58 --Form of ADSs Purchase Warrant issued December 9, 1999
(incorporated by reference to Exhibit 4.09 to Registrant's
Current Report on Form 8-K filed on December 15, 1999).
10.59 --Form of ADSs Purchase Reset Warrant issued December 9,
1999 (incorporated by reference to Exhibit 4.10 to
Registrant's Current Report on Form 8-K filed on December
15, 1999).
10.60 --Line of Credit Loan Agreement and Promissory Note dated as
of March 20, 2000 by and between Registrant and Vincent S.
Pino, Rosemary G. Pino, Michael V. Pino and Tiffany R.
Pino (incorporated by reference to Exhibit 4.15 to
Registrant's Registration Statement on Form S-3 filed on
February 13, 2001 (File No. 333-55498)).
10.61 --Form of Subscription Agreement for the Purchase of units
dated November 24, 2000 (incorporated by reference to
Exhibit 10.52 to Registrant's Current Report on Form 8-K
filed on November 29, 2000).
10.62 --Warrant Agreement, dated as of November 24, 2000, between
Registrant and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 10.53 to Registrant's Current Report
on Form 8-K filed on November 29, 2000).
10.63 --Form of ADSs Purchase Warrant issued November 24, 2000
(incorporated by reference to Exhibit 4.11 to Registrant's
Current Report on Form 8-K filed on November 29, 2000).
10.64 --ADSs Purchase Warrant issued to Jefferies & Company, Inc.,
dated November 24, 2000 (incorporated by reference to
Exhibit 4.12 to Registrant's Current Report on Form 8-K
filed on November 29, 2000).
10.65 --OEM Agreement between Wind River Systems, Inc. and
Insignia Solutions, Inc., dated December 22, 2000, as
amended.**
10.66 --Form of Subscription Agreement for the Purchase of units
dated February 12, 2001 (incorporated by reference to
Exhibit 10.54 to Registrant's Current Report on Form 8-K
filed on February 15, 2001).
10.67 --Warrant Agreement, dated as of February 12, 2001, between
Registrant and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 10.55 to Registrant's Current Report
on Form 8-K filed on February 15, 2001).
10.68 --Form of ADSs Purchase Warrant issued February 12, 2001
(incorporated by reference to Exhibit 4.13 to Registrant's
Current Report on Form 8-K filed on February 15, 2001).
46
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- ------------------------------------------------------------
10.69 --ADSs Purchase Warrant issued to Jefferies & Company, Inc.,
dated February 12, 2001 (incorporated by reference to
Exhibit 4.14 to Registrant's Current Report on Form 8-K
filed on February 15, 2001).
21.01 --List of Registrant's subsidiaries. (2)
23.01 --Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.01 --Power of Attorney (included on signature page).
------------------------
* Management contract or compensatory plan.
** Confidential treatment has been granted with respect to certain portions of
this agreement. Such portions were omitted from this filing and filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the exhibit of the same number from
Registrant's Registration Statement on Form F-1 (File No. 33-98230) declared
effective by the Commission on November 13, 1995.
(2) Incorporated by reference to the exhibit of the same number from
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
(3) Incorporated by reference to the exhibit of the same number from
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(4) Incorporated by reference to the exhibit of the same number from
Registrant's Current Report on Form 8-K dated February 5, 1998.
47
INSIGNIA SOLUTIONS PLC
CONSOLIDATED BALANCE SHEET
(amounts in thousands, except share data)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $11,931 $ 4,677
Restricted cash........................................... 120 120
Cash and cash equivalents held in escrow.................. -- 1,000
Accounts receivable, net.................................. 3,385 189
Prepaid and other current assets.......................... 1,088 1,038
------- -------
Total current assets...................................... 16,524 7,024
------- -------
Property and equipment, net............................... 512 625
Cash and cash equivalents held in escrow.................. 5,050 5,060
Restricted cash........................................... 250 250
Other noncurrent assets................................... -- 325
------- -------
$22,336 $13,284
======= =======
LIABILITIES, MANDATORY REDEEMABLE AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,096 $ 707
Accrued liabilities....................................... 1,833 1,674
Accrued royalties......................................... 770 2,327
Income taxes payable...................................... 550 188
Deferred revenue.......................................... 898 1,349
Convertible debt.......................................... -- 1,000
------- -------
Total current liabilities................................. 5,147 7,245
------- -------
Mandatorily redeemable capital............................ -- 2,619
Mandatorily redeemable warrants........................... 1,440 1,440
Total mandatorily redeemable (Note 9)..................... 1,440 4,059
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred shares, L0.20 par value: 3,000,000 shares
authorized; no shares issued............................ -- --
Ordinary shares, L0.20 par value: 30,000,000 shares
authorized; 18,145,190 shares and 14,039,602 shares
issued and outstanding in 2000 and 1999, respectively... 5,876 4,304
Additional paid-in capital................................ 54,117 35,106
Accumulated deficit....................................... (43,783) (36,969)
Accumulated other comprehensive loss...................... (461) (461)
------- -------
Total shareholders' equity................................ 15,749 1,980
------- -------
$22,336 $13,284
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
48
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENT OF OPERATIONS
(amounts in thousands, except per share data)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net revenues:
License................................................... $ 8,987 $ 6,471 $12,998
Service................................................... 1,779 366 1,098
------- -------- -------
Total net revenues...................................... 10,766 6,837 14,096
------- -------- -------
Costs of net revenues:
License................................................... 2,826 3,296 8,329
Service................................................... 465 504 1,046
------- -------- -------
Total cost of net revenues.............................. 3,291 3,800 9,375
------- -------- -------
Gross margin............................................ 7,475 3,037 4,721
------- -------- -------
Operating expenses:
Sales and marketing....................................... 5,376 5,542 7,946
Research and development.................................. 5,960 5,972 6,228
General and administrative................................ 3,733 3,178 4,213
------- -------- -------
Total operating expenses................................ 15,069 14,692 18,387
------- -------- -------
Operating loss.......................................... (7,594) (11,655) (13,666)
Interest income (expense), net.............................. (129) 473 984
Other income (expense), net................................. 124 (93) 14,887
------- -------- -------
Income (loss) before income taxes....................... (7,599) (11,275) 2,205
Provision (benefit) for income taxes........................ (785) (1,316) 1,783
------- -------- -------
Net income (loss)....................................... $(6,814) $ (9,959) $ 422
======= ======== =======
Net income (loss) per share:
Basic..................................................... $ (0.47) $ (0.77) $ 0.03
======= ======== =======
Diluted................................................... $ (0.47) $ (0.77) $ 0.03
======= ======== =======
Weighted average shares and share equivalents:
Basic..................................................... 14,571 12,883 12,159
======= ======== =======
Diluted................................................... 14,571 12,883 12,378
======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements
49
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(amounts in thousands, except share data)
ACCUMULATED
ORDINARY SHARES ADDITIONAL OTHER TOTAL
--------------------- PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT LOSS EQUITY
---------- -------- ---------- ----------- ------------- -------------
Balances, December 31, 1997...... 11,971,213 $3,954 $34,462 $(27,432) $(461) $10,523
Shares issued under employee
stock plans.................. 619,103 210 263 -- -- 473
Net income..................... -- -- -- 422 -- 422
---------- ------ ------- -------- ----- -------
Balances, December 31, 1998...... 12,590,316 4,164 34,725 (27,010) (461) 11,418
Shares issued under employee
stock plans.................. 385,771 140 381 -- -- 521
Shares issued under private
Placement.................... 1,063,515 -- -- -- -- --
Net loss....................... -- -- -- (9,959) -- (9,959)
---------- ------ ------- -------- ----- -------
Balances, December 31, 1999...... 14,039,602 4,304 35,106 (36,969) (461) 1,980
Shares issued under private
Placement.................... -- 340 2,279 -- -- 2,619
Shares issued under employee
stock plans.................. 234,261 73 626 -- -- 699
Shares issued under line of
credit....................... 19,994 6 242 -- -- 248
Shares issued for conversion of
debt......................... 251,333 72 968 -- -- 1,040
Shares issued under private
Placement.................... 3,600,000 1081 14,896 -- -- 15,977
Net loss....................... -- -- -- (6,814) -- (6,814)
---------- ------ ------- -------- ----- -------
Balances, December 31, 2000...... 18,145,190 $5,876 $54,117 $(43,783) $(461) $15,749
========== ====== ======= ======== ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
50
INSIGNIA SOLUTIONS PLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(amounts in thousands)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss)....................................... $(6,814) $(9,959) $ 422
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation............................................ 420 580 767
Other................................................... 40 (58) (14,731)
Net changes in assets and liabilities:
Restricted cash....................................... -- 66 (186)
Accounts receivable, net.............................. (3,196) 1,517 5,048
Prepaid and other current assets...................... (50) 477 142
Other noncurrent assets............................... -- 57 28
Accounts payable...................................... 389 (948) (92)
Accrued liabilities................................... 159 (648) (420)
Accrued royalties..................................... (1,557) (1,982) (4,565)
Income taxes.......................................... 362 (806) 994
Deferred revenue...................................... (451) 1,087 (581)
Customer deposits..................................... -- -- (513)
------- ------- --------
Net cash used in operating activities............... (10,698) (10,617) (13,687)
------- ------- --------
Cash flows from investing activities:
Proceeds from the sale of property and equipment........ 3 140 140
Purchases of property and equipment..................... (310) (213) (937)
Sales of short-term investments, net.................... -- -- 3,820
Proceeds from sale of product line...................... -- -- 15,862
Product line sale proceeds held in escrow............... (290) (320) (9,100)
Product line sale proceeds released from escrow......... 1,300 3,360 --
Proceeds from sale of minority share stock.............. 325 -- --
------- ------- --------
Net cash provided by investing activities........... 1,028 2,967 9,785
------- ------- --------
Cash flows from financing activities:
Payments made under capital leases...................... -- (51) (164)
Proceeds from convertible debt.......................... -- 1,000 --
Proceeds from share issuance for line of credit......... 248 -- --
Proceeds from issuance of shares, net................... 15,977 4,059 --
Proceeds from exercise of stock options................. 699 521 473
------- ------- --------
Net cash provided by financing activities........... 16,924 5,529 309
------- ------- --------
Net increase(decrease) in cash and cash equivalents......... 7,254 (2,121) (3,593)
Cash and cash equivalents at beginning of the year.......... 4,677 6,798 10,391
------- ------- --------
Cash and cash equivalents at the end of the year............ $11,931 $ 4,677 $ 6,798
======= ======= ========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 209 $ 25 $ 22
Supplemental non-cash investing and financing activities:
Conversion from convertible debt.......................... $ 1,040 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
51
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Insignia Solutions plc (the "Company"), which commenced operations in 1986,
develops, markets and supports software technologies that speed the adoption of
Java-based individualized computing in Internet appliances and embedded devices.
In January 1998, the Company announced its intention to launch a new product
line called the Jeode-TM- platform, based on the Company's Embedded Virtual
Machine ("EVM"-TM-) technology. This followed a strategic review in late 1997 of
the Company's business. The Company also explored new markets that would
leverage the Company's 12 years of emulation software development experience.
The Jeode platform is the Company's implementation of Sun Microsystems, Inc.'s
("Sun") Java-Registered Trademark- technology tailored for Internet appliances
and embedded devices. It leverages patent-pending intellectual property to
provide these resource-constrained devices with high performance, fully-
compatible Java applet and application support. The product became available for
sale in March 1999. The Jeode platform is now the principal product line of the
Company and will be for the foreseeable future. The Jeode product line revenue
model is based on original equipment manufacturer's ("OEMs") and channel
partner's customer transactions.
The Company's principal product line in recent years was SoftWindows-TM-.
This product enabled Microsoft Windows ("Windows"-Registered Trademark-)
applications to be run on most Apple Computer Inc.
("Apple"-Registered Trademark-) Macintosh computers and many UNIX workstations.
Revenues from this product line grew until 1995, but declined significantly
after that date, along with margins. This was due to a declining demand for
Apple Macintosh products and increased competition. In early 1999 Company
management took steps to discontinue the product line, and on October 18, 1999,
the Company signed an exclusive licensing arrangement with FWB Software, LLC
("FWB"). Under the arrangement FWB will pay the Company a royalty based on an
earn-out of FWB's future revenues from the product lines and the Company will be
paid as those revenues are achieved. Upon achieving a certain revenue threshold,
the SoftWindows and RealPC product lines will be transferred to FWB at no
additional consideration.
The Company sold its NTRIGUE product line to Citrix Systems Inc. ("Citrix")
in February 1998. NTRIGUE was a Windows compatibility client/server product that
supported multiple X-terminals, workstation clients, Macintosh computers, PCs,
network computers and NetPCs from a Windows NT-based server.
The principal markets for the Company's products are North America, Europe
and Asia. The Company distributes its products through multiple distribution
channels, including direct sales, distributors, resellers and original equipment
manufacturers.
BASIS OF PRESENTATION
The Company follows accounting policies that are in accordance with
principles generally accepted in the United States of America. The Company
conducts most of its business in U.S. dollars. All amounts included in the
financial statements and in the notes herein are in U.S. dollars unless
designated "L", in which case they are in pounds sterling. The exchange rates
between the U.S. dollar and the pound sterling were $1.50, $1.60 and $1.67
(expressed in U.S. dollars per pound sterling) at December 31, 2000, 1999 and
1998, respectively.
52
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash, cash equivalents,
and restricted cash at December 31, 2000 and 1999 are comprised of cash,
restricted cash and certificates of deposit. Restricted cash, including
$5.1 million of cash and cash equivalents held in escrow at December 31, 2000,
aggregated $5.4 million and $6.4 million at December 31, 2000 and 1999,
respectively. Of these amounts $0.4 million at December 31, 1999 and 1998 was
restricted due to obligations under service contracts. The release of the
balance is pending resolution of the indemnity claim from Citrix.
Certificates of deposit aggregated $9.25 million and $1.0 million at
December 31, 2000 and 1999, respectively.
The Company has classified all its securities as "available-for-sale." The
fair value of these securities, comprised primarily of certificates of deposit
with commercial banks, approximates cost. These securities mature within one
year.
REVENUE RECOGNITION
During fiscal 2000, the Company primarily entered into license arrangements
for the sale of the Jeode product to OEM's and distributors. Prior to fiscal
2000, the Company's primary source of revenue was derived from packaged product
licensing fees for the sale of the Company's SoftWindows-TM- products. Service
revenues are derived from customer funded engineering activities, training and
annual maintenance contracts.
Revenue from licenses are recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed and
determinable, and collectibility is probable. For contracts with multiple
elements, and for which vendor-specific objective evidence of fair value for the
undelivered elements exists, the Company recognizes revenue for the delivered
elements using the residual method as prescribed by Statement of Position
No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain Transactions".
If vendor-specific objective evidence does not exist for all undelivered
elements, all revenue is deferred until evidence exists, or all elements have
been delivered. Generally the Company has vendor-specific objective evidence of
fair value for the maintenance element of software arrangements based on the
renewal rates for maintenance in future years as specified in the contracts. In
such cases, the Company defers the maintenance revenue at the outset of the
arrangement and recognizes it ratably over the period, during which the
maintenance is to be provided, which
53
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
generally commences on the date the software is delivered. Vendor-specific
objective evidence of fair value for the service element is determined based on
the price charged when those services are sold separately. The Company
occasionally enters into license agreements with extended payment terms.
Provided all other revenue criteria are met, revenue from these contracts is
recognized at the earlier of when the cash is received from the customer or the
payments become due and payable.
The Company also enters into license agreements with OEMs which provide for
minimum guaranteed royalty payments throughout the term of the agreement.
Provided all other revenue criteria are met, minimum guaranteed royalty revenue
is recognized when the payments become due and payable. Royalty revenue that
exceed the minimum guarantees is recognized as reported.
Revenue from OEMs for customer-funded engineering are recognized on a
percentage of completion basis, which is computed using the input measure of
labor cost. Revenues from training are recognized when the training is
performed.
The Company does not grant return rights or price protection under license
agreements for its Jeode product. The Company did grant return rights and price
protection to certain resellers and distributors related to the sale of the
SoftWindows product line during 1998 and 1999. The Company provided sales return
allowances for distributor and resellers inventories of its SoftWindows products
and certain rights of return and price protection on unsold merchandise held by
those distributors and resellers. The Company provided sales returns allowances
based on the Company's historical rates of return and estimates of expected sell
through by distributors and resellers of its product.
License revenue and services revenue on contracts involving significant
implementation, customization or services which are essential to the
functionality of the software is recognized over the period of each engagement,
using the percentage of completion method. Labor hours incurred is generally
used as the measure of progress towards completion.
Payments from the sale of development licenses, royalties, customer funded
engineering activities, training and maintenance contracts received in advance
of revenue recognition are recorded as deferred revenue.
INVENTORIES
Inventories, principally finished software products, manuals and related
supplies, are stated at the lower of cost or market value. Cost is determined
using the first-in, first-out method. Provisions are made in each period for
excess and obsolete inventories.
EQUIPMENT AND DEPRECIATION
Property and equipment is recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives which range from three
to four years or the lease term if shorter.
FOREIGN CURRENCY TRANSLATION
The Company's primary functional currency for its non-U.S. operations is the
U.S. dollar. Certain monetary assets and liabilities of the non-U.S. operating
companies are denominated in local currencies (i.e. not the U.S. dollar). Upon a
change in the exchange rate between the non-U.S. currency and the
54
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
U.S. dollar, the Company must remeasure the local non-U.S. denominated assets
and liabilities to avoid carrying unrealized gains or losses on its balance
sheet. Non-U.S. dollar denominated monetary assets and liabilities are
remeasured using the exchange rate in effect at the balance sheet date, while
nonmonetary items are remeasured at historical rates. Revenues and expenses are
translated at the average exchange rates in effect during each period, except
for those expenses related to balance sheet amounts which are translated at
historical exchange rates. Remeasurement adjustments and transaction gains or
losses are recognized in the income statement during the period of occurrence.
During its early years of existence, the Company used the pound sterling as the
functional currency for its non-U.S. operations. Accordingly, translation gains
and losses recognized during such periods have been included in the cumulative
currency translation adjustments account.
FOREIGN CURRENCY FINANCIAL INSTRUMENTS
The Company enters into currency option contracts to hedge against exchange
risks associated with the pound sterling denominated operating expenses of its
U.K. operations. The gains and losses on these contracts are generally included
in the statement of operations when the related operating expenses are
recognized. At December 31, 2000 and 1999, there were no outstanding currency
options. From time to time, the Company also enters into short-term forward
exchange contracts. The Company generally does not use hedge accounting for the
forward exchange contracts. Such contracts are marked to market at period ends.
No forward exchange contracts were outstanding at December 31, 2000 and 1999.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internal software development costs incurred after
technological feasibility has been demonstrated. The Company defines
establishment of technological feasibility as the completion of a working model.
Such capitalized amounts are amortized commencing with the introduction of that
product at the greater of the straight-line basis utilizing its estimated
economic life, generally six months to one year, or the ratio of actual revenues
achieved to the total anticipated revenues over the life of the product. At
December 31, 2000 and 1999, capitalized software development costs were fully
amortized.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock option plans and employee stock
purchase plan in accordance with provisions of the Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
complies with the disclosure provision of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") in
these notes to consolidated financial statements. Under APB No. 25, compensation
costs is determined based on the difference, if any, on the grant date between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
Stocks, stock options, and warrants for stock issued to non-employees have
been accounted for in accordance with the provisions of SFAS 123 and Emerging
Issue Task Force Issue No. 96-18, ("EITF 96-18") "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services".
55
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax law or rates.
CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
restricted cash, short-term investments and trade accounts receivable. The
Company places its cash, cash equivalents, restricted cash and short-term
investments primarily in bank accounts and certificates of deposit with high
credit quality financial institutions.
The Jeode platform is the Company's principal product line for the
forseeable future and generated 98% of the Company's total revenues for 2000.
The Company sells its products primarily to original equipment manufacturers
and distributors. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company maintains an allowance for uncollectible accounts
receivable based upon the expected collectibility of all accounts receivable. At
December 31, 2000, two customers accounted for 43% and 25%, respectively, of
gross trade receivables. At December 31, 1999, three customers accounted for
36%, 18% and 12%, respectively, of gross trade receivables.
In the first quarter of 1999, the Company signed a five-year agreement with
Sun Microsystems, Inc. ("Sun"), under which Sun established the Company as a Sun
Authorized Virtual Machine provider. Under the agreement, the Company will pay
Sun a per unit royalty on each Jeode-enabled OEM product shipped by the
Company's customers, plus a royalty on all development licenses between the
Company and its customers. If the agreement with Sun terminates or expires
without renewal, the Company would not be able to market the Company's Jeode
product line.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense
totaled $0.2 million, $0.6 million, and $1.4 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"), requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in an
annual statement that is displayed with the same prominence as other annual
financial statements. FAS 130 also requires that an entity classify items of
other comprehensive earnings by their nature in an annual financial statement.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources.
56
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average
number of ordinary shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of ordinary
shares and ordinary share equivalents outstanding during the period. Ordinary
equivalent shares consist of warrants and stock options (using the treasury
stock method). Ordinary equivalent shares are excluded from the computation if
their effect is antidilutive
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. This
statement becomes effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In June 1999, the FASB issued Statement of Financial
Accounting Standard No. 137 "Accounting for Derivative Instruments--Deferral of
the Effect Date of SFAS Statement No. 133" ("SFAS 137"). SFAS 137 defers the
effective date of SFAS 133 until June 15, 2000. In June 2000, the Financial
Accounting Standards Board issued SFAS 138, "Accounting for Derivative
Instruments and Hedging Activities--An Amendment of FASB Statement 133".
SFAS 138 amends the accounting and reporting standards for certain derivatives
and hedging activities such as net settlement contracts, foreign currency
transactions and intercompany derivatives. The Company will adopt SFAS 133 in
2001. The Company has not engaged in derivatives or hedging activities since
early 1998 and does not expect the adoption of SFAS 133 and SFAS 138 to have a
material impact on the financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 provides guidance for revenue recognition under certain
circumstances. The adoption of SAB 101 did not have a material impact on the
financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25". This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that become effective after June 30, 2000. The
adoption of this interpretation did not have a material impact on the financial
statements.
57
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BALANCE SHEET DETAIL:
The following table provides details of the major components of the
indicated balance sheet accounts (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Accounts receivables, net:
Trade accounts receivable, gross.......................... $ 3,427 $ 280
Less allowance for doubtful accounts.................... (42) (58)
Less allowance for sales returns........................ -- (33)
------- -------
$ 3,385 $ 189
======= =======
Property and equipment, net:
Computers and other equipment............................. $ 2,148 $ 2,277
Leasehold improvements.................................... 488 450
Furniture and fixtures.................................... 132 121
------- -------
2,768 2,848
Less accumulated depreciation........................... (2,256) (2,223)
------- -------
$ 512 $ 625
======= =======
Accrued liabilities:
Accrued legal and professional services................... $ 775 $ 653
Accrued compensation and payroll taxes.................... 750 494
Other..................................................... 308 527
------- -------
$ 1,833 $ 1,674
======= =======
58
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--STOCK PLANS:
The Company has four stock option plans, which provide for the issuance of
stock options to employees of the Company to purchase Ordinary shares. At
December 31, 2000 and 1999, respectively, approximately 641,931 and 909,853
Ordinary shares were available for future grants of stock options. Stock options
are generally granted at prices of not less than 100% of the fair market value
of the Ordinary shares on the date of grant, as determined by the Board of
Directors.
The following table summarizes activity on stock options:
1986 AND 1996 1988 AND 1995
U.K. U.S. WEIGHTED
SHARE OPTION STOCK OPTION AVERAGE
SCHEMES PLANS TOTAL EXERCISE PRICE
------------- ------------- ---------- --------------
Outstanding at December 31, 1997........... 1,026,519 1,944,335 2,970,854 $2.00
Granted.................................... 143,250 888,750 1,032,000 $1.11
Exercised.................................. (396,000) (95,000) (491,000) $0.81
Lapsed..................................... (205,977) (1,033,744) (1,239,721) $2.15
--------- ---------- ---------- -----
Outstanding at December 31, 1998........... 567,792 1,704,341 2,272,133 $1.77
Granted.................................... 171,000 425,000 596,000 $4.52
Exercised.................................. (69,859) (144,459) (214,318) $1.48
Lapsed..................................... (47,470) (255,372) (302,842) $1.57
--------- ---------- ---------- -----
Outstanding at December 31, 1999........... 621,463 1,729,510 2,350,973 $2.52
--------- ---------- ---------- -----
Granted.................................... 88,000 797,400 885,400 $6.81
Exercised.................................. (41,190) (149,888) (191,078) $2.02
Lapsed..................................... (63,995) (153,483) (217,478) $3.65
--------- ---------- ---------- -----
Outstanding at December 31, 2000........... 604,278 2,223,539 2,827,817 $3.81
========= ========== ========== =====
Options granted under the Company's option plans generally vest over a four
year period. Options are exercisable until the tenth anniversary of the date of
grant unless they lapse before that date. Options to purchase 1,406,850 and
1,000,517 shares were exercisable at December 31, 2000 and 1999, respectively.
59
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--STOCK PLANS: (CONTINUED)
The following table summarizes information about the Company's stock
options outstanding and exercisable at December 31, 2000:
Options outstanding at December 31, 2000:
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE
------------------------ ----------- ---------------- ----------------
$0.01 - $2.00........................................ 1,050,819 6.0 years $ 1.40
$2.01 - $4.00........................................ 499,334 6.5 years $ 2.38
$4.01 - $6.00........................................ 786,914 8.7 years $ 5.25
$6.01 - $8.00........................................ 287,250 9.3 years $ 6.68
$8.01 - $10.00....................................... 85,000 9.6 years $ 8.74
$10.01 - $12.00...................................... 118,500 9.5 years $11.20
--------- --------- ------
2,827,817 7.4 years $ 3.81
========= ========= ======
Options exercisable at December 31, 2000:
WEIGHTED
NUMBER AVERAGE EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
------------------------ ----------- ----------------
$0.01 - $2.00........................................ 636,147 $ 1.49
$2.01 - $4.00........................................ 435,258 $ 2.38
$4.01 - $6.00........................................ 263,737 $ 5.31
$6.01 - $8.00........................................ 38,375 $ 6.51
$8.01 - $10.00....................................... -- --
$10.01 - $12.00...................................... 33,333 $11.13
--------- ------
1,406,850 $ 2.85
========= ======
In March 1995, the Company's shareholders adopted the 1995 Employee Share
Purchase Plan (the "Purchase Plan") with 275,000 Ordinary shares reserved for
issuance thereunder. On July 21, 1998 the number of shares reserved for issuance
was increased to 525,000. On May 27, 1999 the number was further increased to
900,000. On The Purchase Plan enables employees to purchase Ordinary shares at
approximately 85% of the fair market value of the Ordinary shares at the
beginning or end of each six month offering period. The Purchase Plan qualifies
as an "employee stock purchase plan" under section 423 of the U.S. Internal
Revenue Code. During 2000, 1999 and 1998 the Company issued 43,183, 171,453 and
128,103 shares under the Purchase Plan, respectively. At December 31, 2000 and
1999 approximately 346,979 and 390,162 ordinary shares were reserved for future
Purchase Plan issuances, respectively.
FAIR VALUE DISCLOSURES
Had the compensation cost for the Company's stock option plans and the
Purchase Plan been determined based on the fair value at the grant dates, as
prescribed in FAS 123, the net income (loss)
60
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--STOCK PLANS: (CONTINUED)
and net income (loss) per share would have been adjusted to the pro-forma
amounts indicated below (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net income (loss):
As reported............................................... $(6,814) $ (9,959) $ 422
Pro forma................................................. (9,134) (11,456) (756)
Basic net income (loss) per share:
As reported............................................... $ (0.47) $ (0.77) $ 0.03
Pro forma................................................. (0.63) (0.89) (0.06)
Diluted net income (loss) per share:
As reported............................................... $ (0.47) $ (0.77) $ 0.03
Pro forma................................................. (0.63) (0.89) (0.06)
In accordance with the disclosure provisions of FAS 123, the fair value of
employee stock options granted during fiscal 2000, 1999 and 1998 was estimated
at the date of grant using the Black-Scholes model and the following weighted
average assumptions:
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
--------- --------- ---------
Volatility range.................................... 118% 113% 171%
Risk-free interest rate range....................... 4.6 - 6.7% 4.6 - 6.2% 4.2 - 5.6%
Dividend yield...................................... 0% 0% 0%
Expected option term................................ 4 yrs 4 yrs 4 yrs
NOTE 4--INCOME TAXES:
The components of income (loss) before income taxes are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
United States............................................... $(3,146) $ (3,705) $(4,241)
United Kingdom and other countries.......................... (4,453) (7,570) 6,446
------- -------- -------
$(7,599) $(11,275) $ 2,205
------- -------- -------
61
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES: (CONTINUED)
The components of the provision (benefit) for income taxes are as follows
(in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Current:
U.S. federal.............................................. $ -- $ -- $ (76)
U.S. state and local...................................... 2 18 100
United Kingdom and other countries........................ (787) (1,334) 1,759
----- ------- ------
Total current........................................... (785) (1,316) 1,783
----- ------- ------
Total provision (benefit)................................... $(785) $(1,316) $1,783
----- ------- ------
The Company's actual provision differs from the provision (benefit) computed
by applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
U.S. federal statutory rate................................. (34.0)% (34.0)% (34.0)%
State and local taxes, net of U.S. federal benefit.......... -- 0.2 4.5
Foreign income taxes at other than U.S. rate................ (10.4) (11.9) 86.4
Utilization of operating loss carryforwards................. -- -- (10.0)
Reserve for net deferred tax assets......................... 34.0 34.0 34.0
----- ----- -----
Effective tax rate........................................ (10.4)% (11.7)% 80.9%
----- ----- -----
The components of net deferred income tax assets are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net operating loss carryforwards............................ $13,959 $ 9,456 $6,947
Tax credit carryforwards.................................... 1,120 1,120 1,082
Sales return allowance...................................... -- 13 384
Accrued expenses, allowance and other temporary
differences............................................... 258 261 657
------- ------- ------
Net deferred tax assets before valuation allowance.......... 15,337 10,850 9,070
Deferred tax asset valuation allowance...................... (15,337) (10,850) (9,070)
------- ------- ------
Net deferred taxes.......................................... $ -- $ -- $ --
======= ======= ======
At December 31, 2000, the Company had available net operating loss
carryforwards of approximately $29 million, $14 million and $10 million for U.S.
Federal, State and United Kingdom tax purposes, respectively. If unutilized,
these net operating loss carryforwards will completely expire in 2011, 2020 and
unlimited, respectively. For U.S. federal and state tax purposes, a portion of
the Company's net operating loss carryforwards may be subject to certain
limitations on annual utilization in case of a change in ownership, as defined
by federal and state tax law.
At December 31, 2000, the Company's deferred tax assets relate primarily to
its United States and United Kingdom operations. Management believes that, based
on such factors as recent and potential
62
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES: (CONTINUED)
fluctuations in operating results, it is more likely than not that the United
States and the United Kingdom operations will not generate sufficient future
taxable income, and thus a full valuation allowance has been recorded at
December 31, 2000. If the Company generates taxable income in future years, the
valuation allowance may be reduced, which correspondingly may reduce the
Company's tax provision.
NOTE 5--EMPLOYEE PENSION PLANS:
The Company has a 401(k) plan covering all of its U.S. employees and a
defined contribution pension plan covering all its United Kingdom employees.
Under both of these plans, employees may contribute a percentage of their
compensation and the Company makes certain matching contributions. Both the
employees' and the Company's contributions are fully vested and nonforfeitable
at all times. The assets of both these plans are held separately from those of
the Company in independently managed and administered funds. The Company's
contributions to these plans aggregated $215,000 in 2000, $202,000 in 1999 and
$182,000 in 1998.
NOTE 6--NET INCOME (LOSS) PER SHARE:
YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
(in thousands, except per share
data)
Net income (loss)........................................... $(6,814) $(9,959) $ 422
======= ======= =======
CALCULATION OF BASIC NET INCOME (LOSS) PER SHARE:
Weighted average number of shares outstanding used in
computation............................................... 14,571 12,883 12,159
======= ======= =======
Basic net income (loss) per share........................... $ (0.47) $ (0.77) $ 0.03
======= ======= =======
CALCULATION OF DILUTED NET INCOME (LOSS) PER SHARE:
Weighted average number of shares outstanding used in
computation............................................... 14,571 12,883 12,159
Net effect of dilutive stock options, warrants and
convertible securities outstanding........................ -- -- 219
------- ------- -------
Weighted average number of shares and share equivalents..... 14,571 12,883 12,378
======= ======= =======
Diluted net income (loss) per share......................... $ (0.47) $ (0.77) $ 0.03
======= ======= =======
NOTE 7--COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS
The Company is party to a number of noncancelable operating and capital
lease agreements.
63
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Computer and other equipment under capital leases were as follows (in
thousands):
YEAR ENDED DECEMBER
31,
--------------------------------
2000 1999 1998
--------- --------- --------
Computer and other equipment, at cost....................... $ -- $ -- $ 593
Less accumulated amortization............................... -- -- (546)
--------- --------- -----
Computer and other equipment, net........................... $ -- $ -- $ 47
--------- --------- -----
Amortization of leased computers and other equipment under capital leases
was $0, $47,000 and $50,000 in 2000, 1999 and 1998, respectively.
The following are future minimum payments under operating leases as of
December 31, 2000 (in thousands):
OPERATING
LEASES
---------
Year ending December 31,
2001........................................................ $ 665
2002........................................................ 937
2003........................................................ 392
2004........................................................ 339
2005........................................................ 339
Thereafter.................................................. 2,585
------
Total minimum lease payments................................ $5,257
======
Operating lease commitments above are net of sublease income of $715,000,
$169,000 and $0 in 2001, 2002 and 2003, respectively. The rental expense under
all operating leases was $709,000, $763,000, and $791,000 in 2000, 1999 and
1998, respectively. Rental expense was net of sublease rental income of $755,000
in 2000, $800,000 in 1999 and $559,000 in 1998.
ROYALTY AGREEMENT
In the first quarter of 1999, the Company signed a five-year agreement with
Sun Microsystems, Inc. ("Sun"), under which Sun established the Company as a Sun
Authorized Virtual Machine provider. The agreement also grants the Company
immediate access to the Java compatibility test suite and the Java technology
source code. The agreement includes technology sharing and compatibility
verification. Under the agreement, the Company will pay Sun a per unit royalty
on each Jeode-enabled OEM product shipped by the Company's customers, plus a
royalty on all development licenses between the Company and its customers. If
the agreement with Sun terminates or expires without renewal, the Company would
not be able to market the Company's Jeode product line.
The Company had a non-exclusive, worldwide license from Microsoft
("Microsoft Distribution Agreement") to reproduce, adapt and distribute the
currently available versions of Windows and MS-DOS that were included as a
component of the Company's SoftWindows products. The Company paid Microsoft a
per unit royalty for copies of the Company's products sold that included a
version of
64
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Windows and MS-DOS. The Microsoft Distribution Agreement expired on October 31,
1999. The Company did not renew the agreement.
EMPLOYMENT AGREEMENTS
The Company has entered into three employment agreements with key executives
which would require the Company to continue to pay salary for up to one year if
any of these employees is terminated under certain circumstances as specified in
the agreements.
NOTE 8--SEGMENT REPORTING:
Statement of Financial Accounting Standards 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), provides for segment
reporting based upon the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers
The Company operates in a single industry segment providing virtual machine
technology which enables software applications to be run on various computer
platforms. In 2000, Wind River Systems, Inc., Gemstar International
Group, Ltd., Quantum Corporation and Victor Data Systems Company Ltd. accounted
for 22%, 18%, 15%, and 14%, respectively, of total revenues. In 1999, Quantum
Corporation accounted for 23% of total revenues. In 1998, Ingram Micro U.S. and
Sun Microsystems Inc. each accounted for 27% of total revenues. No other
customer accounted for 10% or more of the Company's total revenues during 2000,
1999 or 1998.
65
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--SEGMENT REPORTING: (CONTINUED)
GEOGRAPHIC INFORMATION
Financial information by geographical region is summarized below (in
thousands):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues from unaffiliated customers:
United States............................................. $ 10,577 $ 6,203 $ 11,960
International............................................. 189 634 2,136
-------- -------- --------
Consolidated................................................ $ 10,766 $ 6,837 $ 14,096
======== ======== ========
Intercompany revenues:
United States............................................. $ 127 $ 406 $ 1,637
International............................................. 4,931 880 1,280
-------- -------- --------
Consolidated................................................ $ 5,058 $ 1,286 $ 2,917
======== ======== ========
Operating loss:
United States............................................. $ (2,692) $ (3,389) $ (4,168)
International............................................. (4,902) (8,266) (9,498)
-------- -------- --------
Consolidated................................................ $ (7,594) $(11,655) $(13,666)
======== ======== ========
Identifiable assets:
United States............................................. $ 6,108 $ 3,321 $ 4,366
International............................................. 38,271 24,207 26,077
Intercompany items and eliminations....................... (22,043) (14,244) (9,432)
-------- -------- --------
Consolidated................................................ $ 22,336 $ 13,284 $ 21,011
======== ======== ========
Long-lived assets:
United States............................................. $ 135 $ 470 $ 794
International............................................. 22,670 14,974 10,344
Intercompany items and eliminations....................... (22,043) (14,244) (9,432)
-------- -------- --------
Consolidated................................................ $ 762 $ 1,200 $ 1,706
======== ======== ========
All of the international revenues and substantially all of the international
identifiable assets relate to the Company's operations in the United Kingdom.
Intercompany sales are accounted for at prices intended to approximate those
that would be charged to unaffiliated customers.
Financial information by line of product is summarized below (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Jeode....................................................... $10,590 $1,590 $ --
SoftWindows................................................. 176 5,247 14,096
------- ------ -------
Total....................................................... $10,766 $6,837 $14,096
======= ====== =======
Revenues from United States operations included export sales of $1,726,000,
$402,000 and $1,290,000 in 2000, 1999 and 1998, respectively, which were
primarily to customers in Asia and Europe.
66
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--SEGMENT REPORTING: (CONTINUED)
Revenue by geographic area for the year ended December 31, 2000 is as
follows (in thousands):
U.S. U.S. EXPORTS EUROPE TOTAL
-------- ------------ -------- --------
OEM..................................................... $4,931 $ 496 $148 $ 5,575
Distributor............................................. 3,785 1,170 -- 4,955
End user................................................ 135 60 41 236
------ ------ ---- -------
Total................................................... $8,851 $1,726 $189 $10,766
====== ====== ==== =======
Percentage of total revenue............................. 82% 16% 2% 100%
====== ====== ==== =======
Revenue by geographic area for the year ended December 31, 1999 is as
follows (in thousands):
U.S. U.S. EXPORTS EUROPE TOTAL
-------- ------------ -------- --------
OEM...................................................... $2,050 $ -- $ -- $2,050
Distributor.............................................. 3,505 388 506 4,399
End user................................................. 210 14 124 348
Other.................................................... 36 -- 4 40
------ ---- ---- ------
Total.................................................... $5,801 $402 $634 $6,837
====== ==== ==== ======
Percentage of total revenue.............................. 85% 6% 9% 100%
====== ==== ==== ======
Revenue by geographic area for the year ended December 31, 1998 is as
follows (in thousands):
U.S. U.S. EXPORTS EUROPE TOTAL
-------- ------------ -------- --------
Distributor............................................ $ 9,525 $1,306 $2,119 $12,950
End user............................................... 1,033 -- 9 1,042
Other.................................................. 96 -- 8 104
------- ------ ------ -------
Total.................................................. $10,654 $1,306 $2,136 $14,096
======= ====== ====== =======
Percentage of total revenue............................ 76% 9% 15% 100%
======= ====== ====== =======
There were no European countries that accounted for more than 10% of total
revenue.
NOTE 9--PRIVATE PLACEMENT AND WARRANTS:
RECENT SALES OF UNREGISTERED SECURITIES
On December 9, 1999, the Company entered into agreements whereby the Company
issued 1,063,515 Ordinary Shares in ADS form at a price of $4.23 per share to
Castle Creek Technology Partners LLC and four other investors of whom one is a
member of the Company's board of directors. The Company also issued warrants to
the purchasers to purchase a total of 319,054 ADSs at the price of $5.29 per
share. The warrants expire on December 9, 2004. The Company received
$4.5 million less offering expenses totaling $0.4 million. The securities were
issued in reliance upon the exemption from registration provided under
Regulation D promulgated under the Securities Act. An issuance of shares and
warrants on November 24, 2000 has had a dilutive effect on the warrants issued
in the December 9, 1999 placement, resulting in an increase in the number of
ADSs issuable to 353,834, and a decrease of the exercise price to $4.77. An
issuance of shares and warrants on February 12, 2001 also
67
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PRIVATE PLACEMENT AND WARRANTS: (CONTINUED)
triggered the anti-dilution provisions of the placement of December 9, 1999.
However, the effect of such dilution was less than 1% of the exercise price, and
consequently such adjustment is deferred until such time as the accumulation of
this adjustment and future adjustments exceed at least 1% of the exercise price.
During 2000, the Company issued a total of 19,994 Ordinary Shares in ADS
form at various prices, ranging from $6.281 to $16.50 to a director of the
Company, as payment for drawdown fees under a Line of Credit arrangement entered
into in March 2000. The securities were issued in reliance upon the exemption
from registration provided under Section 4 (2) of the Securities Act.
On November 24, 2000 the Company entered into agreements whereby the Company
issued 3,600,000 Ordinary Shares in ADS form at a price of $5.00 to a total of
23 investors, including Sun Microsystems, BSquare, and a member of the Company's
board of directors. The Company also issued warrants to purchase 1,800,000 ADSs
to the investors at an exercise price of the lower of the average quoted closing
sale price of the Company's ADS's for the ten trading days ending on the day
preceding the date of the warrant holder's intent to exercise less a 10%
discount, and $6.00. The warrants expire on November 24, 2003, however, subject
to certain conditions, if the quoted sale price of the ADSs exceed $9.00 per
share for any thirty consecutive trading days, the Company may cancel the
warrants upon sixty days prior written notice. The Company received
$18.0 million less offering expenses totaling $2.0 million. The Company also
issued warrants to purchase 225,000 ADSs to the placement agent exercisable at a
price of $5.00. These warrants expire on November 24, 2005. The securities were
issued in reliance upon the exemption from registration provided under
Regulation D promulgated under the Securities Act.
On December 31, 2000 the Company issued a total of 251,333 Ordinary Shares
in ADS form to Quantum Peripherals (Europe) SA, at a per share price of $4.23
per share under the terms of a convertible promissory note entered into on
October 20, 1999. The securities were issued in reliance upon the exemption from
registration provided under Section 4 (2) of the Securities Act based on the
fact that the shares were sold by the issuer in a sale not involving a public
offering.
DILUTION ADJUSTMENTS
In December 1999, the Company issued 1,063,515 Ordinary Shares in ADS form
at a price of $4.23 per share through a private placement. The Company received
$4.5 million less offering expenses totaling $0.4 million. Along with ADSs, the
Company also issued to the investors warrants that entitle them to purchase a
total of 319,054 ADSs at an exercise price of $5.29 per ADS. As described below,
the exercise price and the number of ADSs issuable under the warrants are
subject to various adjustments. In addition, the Company may issue additional
warrants that entitle the investors to purchase ADSs at the nominal value on
designated adjustment dates in the future.
Under the December 1999 private placement, the investors received warrants
to purchase three ADSs for every 10 ADSs they purchased. The exercise price of
the warrants was set at 125% of the original per ADS purchase price, or $5.29.
However, the warrants contain anti-dilution provisions which decrease this
exercise price and increase the number of ADSs purchasable if the Company sells
or is deemed to sell any shares at below market price during the term of the
warrants, which ends on December 9, 2004. The private placement that closed on
November 24, 2000 was a sale which triggered the anti-dilution provisions in the
warrants, and, as a consequence, the exercise price of the warrants has been
decreased from $5.29 to $4.77 per ADS, and the number of ADSs purchasable has
increased to 353,834. The private placement on February 12, 2001 also triggered
the anti-dilution provisions of
68
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PRIVATE PLACEMENT AND WARRANTS: (CONTINUED)
the issuance of December 9, 1999. However, the effect of such dilution was less
than 1% of the exercise price and consequently such adjustment is deferred until
such time as the accumulation of this adjustment and future adjustments exceed
at least 1% of the exercise price.
As part of their warrant agreements, the investors may be entitled to cash
payments upon the occurrence of certain Major Transactions, as defined in the
warrant agreements, including change of control provisions. Cash payments are
determined in a methodology described in the agreement. Such methodology is
impacted by market price. A major transaction is defined as a merger,
reorganization, or sale of all or substantially all of the assets of the Company
in which the stockholders of the Company immediately prior to the transaction
possess less than 50% of the voting power of the surviving entity (or its
parent) immediately after the transaction.
Under the December 1999 private placement, the investors were entitled to
additional warrants to purchase ADS's at L0.20 nominal value per share if the
average of the closing bid price of the ADS's over the ten days before an
adjustment date was less than $4.23. The adjustment dates commenced on
March 10, 2000 and occurred on the 10th of each month through March 10, 2001,
inclusive. The rights for an adjustment date to occur would terminate upon
release of at least $4.75 million of the funds held in escrow by Citrix on
December 9, 1999. However, not enough of the funds held were released to trigger
this termination. As calculated the average bid price of the Company's ADS's on
all the adjustment dates exceeded $4.23 per share and consequently no adjustment
occurred. The adjustment rights have now expired.
The Company obtained a third-party valuation to allocate fair value to
amounts received from the private placement between the ADSs and the warrants.
In 1999 the amount allocated to mandatorily redeemable warrants totaled
$1.440 million, of which $0.590 million was allocated to the warrant, and
$0.850 million was allocated to the additional warrant. Of the remaining net
proceeds received, $2.619 million was allocated to mandatorily redeemable
capital. The $2.619 million of mandatorily redeemable capital was reclassed,
when the registration statement for the ADSs and the ADSs underlying the
warrants issued in the December 1999 private placement became effective on
March 28, 2000, of which $0.340 million was classified as Ordinary Shares and
$2.279 million was classified as additional paid-in capital.
Amounts classified as warrants will remain outside of shareholders' equity
for the life of the warrant or until they are exercised, whichever occurs first.
This classification reflects certain potential cash payments that may occur,
should the Company complete a major transaction, such as a takeover, during the
life of the warrants.
Limitations in the transaction agreements preclude these investors in
question from achieving certain levels of beneficial ownership. The securities
purchase agreement, the warrants and the additional warrants contain the
restriction that the Company may not issue and a selling investor may not
purchase, and the warrants and additional warrants may not be exercised for any
ADSs if doing so would cause such investor to beneficially own more than 9.9% of
the total ordinary shares in issue as determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934. Under the additional
warrants, if such investors are prohibited from exercising the additional
warrant as a result of the 9.9% restriciton, the selling investor may, at its
option and in addition to its other rights under the securities purchase
agreement and the warrant, retain the warrant or demand payment, in cash, from
the Company in an amount calculated by the Black-Scholes formula multiplied by
the number of ADSs for which the additional warrant was exercisable, without
regard to any limits on exercise. The restrictions on the levels of beneficial
ownership in these documents do not, however, restrict those
69
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--PRIVATE PLACEMENT AND WARRANTS: (CONTINUED)
investors from exercising the warrants or additional warrants up to those
limitations, selling ADSs to decrease their level of beneficial ownership, and
exercising the warrants to receive additional ADSs. This could result in
additional dilution to the holders of the Company's ADSs and a potential
decrease in the price of the ADSs.
NOTE 10--CONVERTIBLE PROMISSORY NOTE:
On October 20, 1999, the Company signed a convertible promissory note in
favor of Quantum Corporation ("Quantum") for $1.0 million. The note is
convertible at Quantum's option to the Company's shares any time during the
lifetime of the note. The initial conversion price is $4.28 per share with
adjustment clauses for stock splits, reverse stock splits and certain offerings.
As a result of the private placement in December 1999 (see note 9) this
conversion price was adjusted to $4.23 per share on December 9, 1999. All unpaid
principal and unpaid interest, accrued at 8% per annum, compounded quarterly,
was converted to Ordinary Shares on December 31, 2000.
NOTE 11--NTRIGUE:
On February 5, 1998 the Company completed the disposal of its NTRIGUE
technology to Citrix Systems Inc. ("Citrix") for $17.7 million. As part of the
disposal, the Company transferred 45 employees to Citrix, of which 43 were
development engineers. The net gain on the disposal was $14.8 million after
deducting $2.9 million of costs associated with the disposal. These costs
included mainly $1.1 million of fixed assets write down, $0.7 million of legal
and transactions costs, $0.3 million of relocation costs, $0.3 million of bonus
payout to leaving employees and $0.5 million of other accrued legal costs.
Under the terms of the disposal agreement $9.0 million was paid to the
Company in cash on February 5, 1998, and the remainder is being held in escrow
for the sole purpose of satisfying any obligations to Citrix arising from or in
connection with an event against which the Company would be required to
indemnify Citrix. Of this amount, $2.5 million, $0.9 million, $1.0 million and
$0.3 million were released to the Company in February 1999, August 1999,
February 2000 and September 2000, respectively. The Company has recorded earned
interest of $159,000, $173,000, and $218,000 for the years ended December 31,
1998, 1999, and 2000, respectively, and such amounts were included in the
accounts held in escrow.
On January 29, 1999, the Company received an indemnity claim from Citrix
Systems, Inc. ("Citrix") for an amount estimated by Citrix to not exceed
$6.25 million. The claim was made in relation to the Asset Purchase Agreement
between the Company and Citrix under which Citrix purchased the Company's
NTRIGUE product line in February 1998.
Citrix's indemnity claim is based on assertions made by GraphOn Corporation
("GraphOn") in January of 1998 and declaratory relief action that Citrix filed
against GraphOn in November 1998 in the United States District Court, Southern
District of Florida. Citrix's action against GraphOn seeks a declaratory
judgment that Citrix does not infringe any GraphOn proprietary rights and that
Citrix has not misappropriated any trade secrets or breached an agreement to
which GraphOn is a party. Citrix filed the action in response to and to resolve
assertions first made by GraphOn, and disclosed to Citrix in January 1998, that
the Company may have used GraphOn's confidential information to develop certain
of the Company's products, possibly including products the Company sold to
Citrix in February 1998. The Court dismissed the complaint, but Citrix has
subsequently filed an appeal. The
70
INSIGNIA SOLUTIONS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--NTRIGUE: (CONTINUED)
Company believes that any misappropriation or similar assertions by GraphOn are
without merit or basis. Accordingly, the Company contests Citrix's indemnity
claim.
On October 4, 1999, the Company filed a suit against Citrix and GraphOn in
the Superior Court of the State of California, County of Santa Clara, relating
to the misappropriation assertions of GraphOn's and Citrix's refusal to release
funds still remaining in escrow and breach of a Cooperation Agreement between
the parties. Subsequent to the filing of the lawsuit, Citrix agreed to release
$1.0 million from the escrow, leaving a balance of $5.1 million. GraphOn
answered the complaint, and claimed it had not made any claims of
misappropriation against the Company or Citrix. The case is pending.
On March 15, 2000, GraphOn announced it had filed a suit against Citrix and
the Company in the Superior Court of the State of California, County of Santa
Clara, alleging trade secret misappropriation and breach of contract arising out
of the same facts and circumstances set forth in the Company's action against
GraphOn. The Company believes GraphOn's claims are without merit. The case is
pending.
The Company is included with certain other litigation matters in the
ordinary course of business. In the opinion of management, the claims are
without merit and no provision has been made.
NOTE 12--LINE OF CREDIT:
On March 20, 2000, the Company entered into a binding agreement with a
director whereby he would provide the Company a $5.0 million line of credit with
a commitment fee of four points based upon the total amount of the line and
drawdown/termination fee of two points for the first drawdown or termination.
The interest rate on amounts drawn down was at prime plus 2% until June 30, 2000
and thereafter at prime plus 4% per annum simple interest, payable in cash at
the repayment date. The Company drew down a total of $3.0 million of the line of
credit during 2000. A total of 19,994 Ordinary Shares in ADS form were issued to
the director as payment for drawdown fees under the line of credit arrangement.
On November 27, 2000 the Company repaid this sum, along with all accrued
interest and the termination fee due.
NOTE 13--SUBSEQUENT EVENTS (UNAUDITED):
On February 12, 2001 the Company entered into agreements whereby the Company
issued 940,000 Ordinary Shares in ADS form at a price of $5.00 to a total of 4
investors, including Wind River Systems, Inc., and a member of the Company's
board of directors. The Company also issued warrants to purchase 470,000 ADSs to
the investors, at an exercise price of the lower of the average quoted closing
sale price of the Company's ADS's for the ten trading days ending on the day
preceding the date of the warrant holder's intent to exercise less a 10%
discount, and $6.00. The warrants expire on February 12, 2004, however, subject
to certain conditions, if the quoted sale price of the ADSs exceed $9.00 per
share for any thirty consecutive trading days, the Company may cancel the
warrants upon sixty days prior written notice. The Company received
$4.7 million less offering expenses totaling $0.5 million. The Company also
issued warrants to purchase 25,000 ADSs to the placement agent exercisable at a
price of $5.00. These warrants expire on February 12, 2006. The securities were
issued in reliance upon the exemption from registration provided under
Regulation D promulgated under the Securities Act.
71
INSIGNIA SOLUTIONS PLC
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING DEDUCTIONS BALANCE AT
OF PERIOD ADDITIONS (WRITE-OFFS) END OF PERIOD
---------- --------- ------------ -------------
(in thousands)
Allowance for doubtful accounts:
Year ended December 31, 2000...................... $ 58 $ -- $ (16) $ 42
Year ended December 31, 1999...................... $ 459 $ 63 $ (464) $ 58
Year ended December 31, 1998...................... $ 344 $ 209 $ (94) $ 459
Allowance for sales return reserve:
Year ended December 31, 2000...................... $ 33 $ -- $ (33) $ --
Year ended December 31, 1999...................... $ 991 $ -- $ (958) $ 33
Year ended December 31, 1998...................... $2,474 $ -- $(1,483) $ 991
72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Insignia Solutions plc:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) and (2) of this Annual Report on Form 10-K
present fairly, in all material respects, the financial position of Insignia
Solutions plc and its subsidiaries (the "Company") at December 31, 2000 and 1999
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with generally
accepted accounting principles in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
---------------------------------
San Jose, California
January 20, 2001
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 19, 2001.
INSIGNIA SOLUTIONS PLC
By: /s/ RICHARD M. NOLING
-----------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Richard M. Noling, as his true and lawful
attorney-in-fact and agent 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 of Insignia Solutions plc,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, grant unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
foregoing, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
President, Chief Executive Officer,
/s/ RICHARD M. NOLING and a Director (Principal
--------------------------------- Executive Officer, Principal March 20, 2001
Richard M. Noling Financial Officer and Director)
/s/ LINDA C. POTTS
--------------------------------- Controller (Principal Accounting March 20, 2001
Linda C. Potts Officer)
ADDITIONAL DIRECTORS:
/s/ ALBERT E. SISTO
--------------------------------- Director March 19, 2001
Albert E. Sisto
/s/ VINCENT S. PINO
--------------------------------- Director March 19, 2001
Vincent S. Pino
/s/ NICHOLAS, VISCOUNT BEARSTED
--------------------------------- Director March 19, 2001
Nicholas, Viscount Bearsted
/s/ DAVID G. FRODSHAM
--------------------------------- Director March 19, 2001
David G. Frodsham
/s/ JOHN C. FOGELIN
--------------------------------- Director March 19, 2001
John C. Fogelin
74
INDEX TO EXHIBITS
The following exhibits are filed as part of this Report:
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- ------------------------------------------------------------
2.01 --Asset Purchase Agreement dated as of January 10, 1998, by
and among Citrix Systems, Inc., Citrix Systems UK Limited
and Registrant. (4)**
2.02 --Amendment No. 1 to Asset Purchase Agreement dated as of
February 5, 1998, by and among Citrix Systems, Inc.,
Citrix Systems UK Limited and Registrant. (4)**
3.02 --Registrant's Articles of Association. (1)
3.04 --Registrant's Memorandum of Association. (1)
4.01 --Form of Specimen Certificate for Registrant's Ordinary
Shares. (1)
4.02 --Deposit Agreement between Registrant and The Bank of New
York. (2)
4.03 --Form of American Depositary Receipt (included in Exhibit
4.02). (2)
10.01 --Registrant's 1986 Executive Share Option Scheme, as
amended, and related documents. (1)*
10.02 --Registrant's 1988 U.S. Stock Option Plan, as amended, and
related documents. (1)*
10.03 --Registrant's 1995 Incentive Stock Option Plan for U.S.
Employees and related documents, as amended (incorporated
by reference to Exhibit 4.04 to Registrant's Registration
Statement on Form S-8 filed on December 13, 2000 (File No.
333-51760)).*
10.05 --Insignia Solutions Inc. 401(k) Plan. (1)*
10.06 --Registrant's Small Self-Administered Pension Plan
Definitive Deed and Rules. (1)*
10.10 --Executive's Employment Agreement dated January 1, 1993
between Registrant and George Buchan. (1)*
10.14 --Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers. (1)*
10.16 --Lease between Registrant and The Standard Life Assurance
Company dated November 3, 1992 and related documents. (1)
10.28 --Registrant's U.K. Employee Share Option Scheme 1996, as
amended (incorporated by reference to Exhibit 4.05 to
Registrant's Registration Statement on Form S-8 filed on
December 13, 2000 (File No. 333-51760)).*
10.33 --Employment Agreement effective March 25, 1997 between
Registrant and Richard M. Noling. (3)*
10.34 --Consulting Agreement effective April 1, 1997 between
Registrant and Nicholas, Viscount Bearsted. (3)*
10.36 --Source Code License and Binary Distribution Agreement
dated as of September 29, 1997 between Registrant and
Silicon Graphics, Inc. (3)
10.38 --Lease Agreement between Insignia Solutions, Inc. and
Lincoln-Whitehall Pacific, LLC, dated December 22, 1997
(incorporated by reference to the exhibit of the same
number from Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998).
10.42 --Registrant's 1995 Employee Share Purchase Plan, as amended
(incorporated by reference to Exhibit 4.06 to Registrant's
Registration Statement on Form S-8 filed on April 12, 2000
(File No. 333-34632)).*
10.44 --Lease agreement between Registrant and Comland Industrial
and Commercial Properties Limited dated August 12th, 1998
for the Apollo House premises and the Saturn House
premises (incorporated by reference to the exhibit of the
same number from Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998).
75
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- ------------------------------------------------------------
10.46 --Technology License and Distribution Agreement between Sun
Microsystems, Inc. and Registrant, dated March 3, 1999
(incorporated by reference to the exhibit of the same
number from Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999).
10.50 --License, Distribution, and Asset Purchase Agreement
between Registrant and FWB Software, LLC dated October 6,
1999 (incorporated by reference to the exhibit of the same
number from Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999).
10.51 --Registration Rights Agreement dated as of October 20,
1999, by and between Registrant and Quantum Corporation
(incorporated by reference to Exhibit 4.14 to Registrant's
Registration Statement on Form S-3 filed on February 13,
2001 (File No. 333-55498)).
10.52 --Securities Purchase Agreement dated as of December 9,
1999, between Registrant and Castle Creek Technology
Partners LLC (incorporated by reference to Exhibit 10.50
to Registrant's Current Report on Form 8-K filed on
December 15, 1999).
10.53 --Securities Purchase Agreement dated as of December 9,
1999, between Registrant and the Purchasers named therein
(incorporated by reference to Exhibit 10.51 to
Registrant's Current Report on Form 8-K filed on December
15, 1999).
10.54 --Registration Rights Agreement dated as of December 9,
1999, between Registrant and Castle Creek Technology
Partners LLC (incorporated by reference to Exhibit 4.05 to
Registrant's Current Report on Form 8-K filed on December
15, 1999).
10.55 --Registration Rights Agreement dated as of December 9,
1999, between Registrant and the Purchasers named therein
(incorporated by reference to Exhibit 4.08 to Registrant's
Current Report on Form 8-K filed on December 15, 1999).
10.56 --ADSs Purchase Warrant issued to Castle Creek Technology
Partners LLC dated December 9, 1999 (incorporated by
reference to Exhibit 4.06 to Registrant's Current Report
on Form 8-K filed on December 15, 1999).
10.57 --ADSs Purchase Reset Warrant issued to Castle Creek
Technology Partners LLC dated December 9, 1999
(incorporated by reference to Exhibit 4.07 to Registrant's
Current Report on Form 8-K filed on December 15, 1999).
10.58 --Form of ADSs Purchase Warrant issued December 9, 1999
(incorporated by reference to Exhibit 4.09 to Registrant's
Current Report on Form 8-K filed on December 15, 1999).
10.59 --Form of ADSs Purchase Reset Warrant issued December 9,
1999 (incorporated by reference to Exhibit 4.10 to
Registrant's Current Report on Form 8-K filed on December
15, 1999).
10.60 --Line of Credit Loan Agreement and Promissory Note dated as
of March 20, 2000 by and between Registrant and Vincent S.
Pino, Rosemary G. Pino, Michael V. Pino and Tiffany R.
Pino (incorporated by reference to Exhibit 4.15 to
Registrant's Registration Statement on Form S-3 filed on
February 13, 2001 (File No. 333-55498)).
10.61 --Form of Subscription Agreement for the Purchase of units
dated November 24, 2000 (incorporated by reference to
Exhibit 10.52 to Registrant's Current Report on Form 8-K
filed on November 29, 2000).
10.62 --Warrant Agreement, dated as of November 24, 2000, between
Registrant and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 10.53 to Registrant's Current Report
on Form 8-K filed on November 29, 2000).
10.63 --Form of ADSs Purchase Warrant issued November 24, 2000
(incorporated by reference to Exhibit 4.11 to Registrant's
Current Report on Form 8-K filed on November 29, 2000).
76
EXHIBIT
NUMBER EXHIBIT TITLE
--------------------- ------------------------------------------------------------
10.64 --ADSs Purchase Warrant issued to Jefferies & Company, Inc.,
dated November 24, 2000 (incorporated by reference to
Exhibit 4.12 to Registrant's Current Report on Form 8-K
filed on November 29, 2000).
10.65 --OEM Agreement between Wind River Systems, Inc. and
Insignia Solutions, Inc., dated December 22, 2000, as
amended.**
10.66 --Form of Subscription Agreement for the Purchase of units
dated February 12, 2001 (incorporated by reference to
Exhibit 10.54 to Registrant's Current Report on Form 8-K
filed on February 15, 2001).
10.67 --Warrant Agreement, dated as of February 12, 2001, between
Registrant and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 10.55 to Registrant's Current Report
on Form 8-K filed on February 15, 2001).
10.68 --Form of ADSs Purchase Warrant issued February 12, 2001
(incorporated by reference to Exhibit 4.13 to Registrant's
Current Report on Form 8-K filed on February 15, 2001).
10.69 --ADSs Purchase Warrant issued to Jefferies & Company, Inc.,
dated February 12, 2001 (incorporated by reference to
Exhibit 4.14 to Registrant's Current Report on Form 8-K
filed on February 15, 2001).
21.01 --List of Registrant's subsidiaries. (2)
23.01 --Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.01 --Power of Attorney (included on signature page).
------------------------
* Management contract or compensatory plan.
** Confidential treatment has been granted with respect to certain portions of
this agreement. Such portions were omitted from this filing and filed
separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the exhibit of the same number from
Registrant's Registration Statement on Form F-1 (File No. 33-98230) declared
effective by the Commission on November 13, 1995.
(2) Incorporated by reference to the exhibit of the same number from
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
(3) Incorporated by reference to the exhibit of the same number from
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(4) Incorporated by reference to the exhibit of the same number from
Registrant's Current Report on Form 8-K dated February 5, 1998.
77